NATIONAL FINANCE OLYMPIAD

MOCK QUESTIONS ROUND 1

TYPE OF QUESTION GRIDSHEET

No.

Section

Selecting
the right
answer

Selecting
the most
relevant

Selecting
the least
relevant

Descriptive
scenario

Basic accounting concepts

Advanced accounting application

Business financial management

Governance and internal controls

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Section 1: Selecting the right answer

Entity A has been in the business of rendering services to its clients. For provision of services, it had
procured many floors of a building, each floor comprising of many apartments provided to its
employees for residence. Entity A is now going into a new business of buying and selling apartments
in various locations of the city. It has also re-negotiated terms of employment with its employees
whereby they will no more be provided with residential apartments. It is decided that the
apartments so vacated will also form part of the new business and will be available for sale in the
ordinary course of business.
These apartments were earlier being carried using revaluation model i.e. carried at revalued amount
less accumulated depreciation and impairment. Considering the new business model, Entity A is
considering following accounting policies in respect of its apartments?
ABCD-

Continue with the existing policy

Cost less accumulated depreciation and impairment
Fair value less cost to sell
Lower of cost and net realisable value

Which of the above accounting policies are now available to Entity A in this respect?
PLEASE SELECT THE RIGHT ANSWER
a)
b)
c)
d)

Choice between A and B

Choice between B and C
C
D

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Section 1 selecting the most relevant

An entity purchases a two-year bond in the market when the bond only has three months
remaining before its redemption date. Assuming that (1) there are no other factors that would
subject the instrument to a significant risk of change in value, and (2) the underlying purpose of
holding the bond is to meet short-term cash commitments rather than for investment or other
purposes. Does the bond qualify as a cash equivalent under IAS 7?
PLEASE SELECT THE MOST RELEVANT ANSWER
a. Yes. An investment normally qualifies as a cash equivalent when it has a maturity of three
months or less from the date of acquisition.
b. Yes, because the bond has liquid market available
c. No. because the original maturity of the bond is two years.
d. No. Bonds are never classified as cash and cash equivalents

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Section 1: Selecting the least relevant

XD Limited is a newly incorporated entity. In the industry in which XD is to operate, a new taxation
legislation has increased the income tax rate applicable to the entity from 33% of taxable profits to
52% of taxable profits. However, considering the impact of such increase, for the initial five years of
application of the new legislation, the payment of 52% will be as follows:
Year from the new
legislation becoming
applicable

Total

Year 1
Year 2
Year 3
Year 4
Year 5
Year 6

52%
52%
52%
52%
52%
52%

-------------------- Year of payment ------------------1

40%

03%
43%

03%
03%
46%

03%
03%
03%
49%

03%
03%
03%
03%
52%

52%

XD Limited has not to date issued any interim financial information and is in the process of preparing
its first annual financial statements for the year 1 including deciding about relevant accounting
policies. Which of the following seems least relevant for recording of current tax liability in respect
of year 1 in these financial statements of XD Limited:
PLEASE SELECT THE LEAST RELEVANT ANSWER
a) Current tax liability will be recorded at the gross amount of income tax payable in respect of
year 1
b) Current tax liability may be recorded at the gross amount of income tax payable in respect of
year 1 as the IFRS guidance does not require discounting
c) Current tax liability may be recorded at the present value of the amount of income tax
payable in respect of year 1 as the amounts are expected to be paid in future
d) Current tax liability may be recorded at the present value of the amount of income tax
payable in respect of year 1 as the amounts are expected to be paid in future and the IFRS
guidance does not restrict discounting

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Section 1: Descriptive scenario

Entity A is reviewing all of its assets for impairment as a result of a fall in the demand for
its products. One item of machinery is 10 years old and has a carrying amount of Rs. 80
million and a value in use of Rs. 75 million (calculated on the basis of revised sales
estimates). The fair value of the machine is Rs. 82 million.
It is estimated that if the machine were to be disposed of, costs attributable to the
disposal would be approximately Rs. 1 million. Management has no intention of selling
the machine.
Should Entity A recognise an impairment loss of Rs. 5 million on the basis of the excess of
the carrying amount over value in use?
PLEASE SELECT THE MOST RELEVANT ANSWER
a. Yes the entity should recognise impairment loss of Rs. 5 million as the value in use is
lower than its carrying amount.
b. No. Entity A should not recognise an impairment loss because the fair value less costs
of disposal of the machine (Rs. 81 million) is higher than its value in use; therefore,
the fair value less costs of disposal represents the machine's recoverable amount. The
carrying amount is less than the recoverable amount; consequently, no impairment
loss should be recognised.
c. No. Because the fair value of the machine (Rs. 82 million) is higher than carrying
amount (Rs. 80 million).
d. No. the entity should record a gain of Rs. 1 million in its profit and loss account as the
fair value less costs of disposal is higher than carrying amount by Rs. 1 million.
Considering the values above, if the asset gets damaged such that the life of the asset is shortened,
but the carrying amount of the asset is still higher than its recoverable amount, should an
impairment loss be recognized?
PLEASE SELECT THE MOST RELEVANT ANSWER
a. Yes. The asset should be impaired as it has been damaged.
b. No. The damage is not an indicator of impairment.
c. No. The damage to the asset is an indication of impairment and, therefore, the asset must
be tested for impairment. However, because the carrying amount of the asset still will be
recovered by the cash flows over the asset's revised useful life, no impairment loss should be
recognised.
d. Yes. The asset should be impaired as its life has been shortened.

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In the recent budget, the sales tax on the products of Entity A has increased from 17% to 18%. Is this
an indicator of impairment?
PLEASE SELECT THE MOST RELEVANT ANSWER
a. No. The increase in sales tax does not impacts the assets of the company
b. Yes. The change in tax rates may affect levels of demand for books and is an impairment
indicator.
c. No. The increase in sales tax is a pass on item
d. No. This will only impact the future years

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Section 2: Selecting the right answer

Acquirer Limited has recently acquired a majority stake (80%) in Number Limited on
November 29, 20X4. The carrying value of the net assets at the date of acquisition as recorded in the
financial statements of Number Limited was Rs 62.5 million. A fair valuation exercise of these assets
and liabilities was underway as at the year end i.e. December 31, 20X4, however, a reasonable
estimate of such net amount was made at about Rs 83 million. The acquisition was made partly in
cash (Rs 50 million) and partly by the issue of 1 for 6 shares being 12 million shares issued at 20%
discount to the market value of the Acquirer. The market price of a share pre-acquisition was Rs 5
per share, which price fell just after acquisition to Rs 4.6 per share.
Based on above information only and considering the Acquirer Limited to have a policy of recording
non-controlling interest at its proportionate share of net assets, the goodwill recognised in the
consolidated financial statements of Acquirer as at December 31, 20X4 should be:
PLEASE SELECT THE RIGHT ANSWER
a)
b)
c)
d)

Rs 41.89 million
Rs 43.60 million
Rs 38.80 million
None of the above

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Section 2: Selecting the most relevant

A levy has been imposed by the government that is triggered if an entity generates revenue in excess
of Rs 50 million in 20X5. The amount of the levy is calculated as 2% of all revenues generated in
20X5.
At start of 20X5, it was expected with reasonable certainty that the Entity Cs revenue will cross this
threshold. Entity Cs revenue reached the threshold of Rs 50 million on July 1, 20X5 and reached
Rs 92.58 million by December 31, 20X5. How should Entity C account for the liability in 20X5?
PLEASE SELECT THE MOST RELEVANT ANSWER
a) The liability should be recognised progressively during 20X5.
b) The liability should be recognised in full on January 1, 20X5.
c) A liability of Rs 1 million should be recognised on July 1, 20X5. Over the 2nd half of the year
the levy should then be recognised progressively as revenue is generated.
d) The liability should be recognised on December 31, 20X5.

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Section 2: Selecting the least relevant

The determination of whether an entity is acting as an agent or principal is very important to
determine the recognition of revenue. IAS 18 provides guidance on how to determine whether an
entity is acting as a principal or as an agent. Which of the following is least relevant in determining
that the entity is acting as a principal.
PLEASE SELECT THE LEAST RELEVANT ANSWER
a. the entity has the primary responsibility for providing the goods or services to the customer
or for fulfilling the order, for example by being responsible for the acceptability of the
products or services ordered or purchased by the customer;
b. the entity does not have inventory risk before or after the customer order, during shipping
or on return;
c. the entity has latitude in establishing prices, either directly or indirectly, for example by
providing additional goods or services;
d. the entity bears the customer's credit risk for the amount receivable from the customer.

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Section 2: Descriptive Scenario

Entity B is carrying tax losses from its prior operations, some of which are expected to be lost in the
near future. The tax law provides for a limited carry forward of upto six tax years succeeding the
year of loss. The expiry table of above loss is:
Within 1 year

Rs 12 million

Within 2 years

Rs 25 million

Within 3 years

Rs 39 million

Within 4 years

Rs 54 million

Within 5 years

Rs 70 million

It is expecting that following future taxable profits will be available to the Entity B:
Year 1

Rs 10 million

Year 2

Rs 15 million

Year 3

Rs 10 million

Year 4

Rs 15 million

Year 5

Rs 10 million

Year 6

Rs 15 million

Considering that some of above taxable profits will not be collected in the same year as earned,
adjusting for the working capital changes, the cash profits after tax is expected to be:
Year 1

Rs 9 million

Year 2

Rs 14 million

Year 3

Rs 12 million

Year 4

Rs 11 million

Year 5

Rs 09 million

Year 6

Rs 20 million

The present value of the cash profits after tax works out to Rs 53.16 million at 10% p.a. which is the
rate at which the company can borrow debt, and Rs 48.48 million at 15% p.a. which is the weighted
average cost of capital to the entity.

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QUESTION 1: Based on above and considering that there are no other taxable temporary
differences or tax planning opportunities, the closest amount in respect of carried forward losses for
which deferred tax would be recorded as at the end of Year 0 is:
PLEASE SELECT THE CLOSEST ANSWER
a)
b)
c)
d)

Rs 48.48 million
Rs 53.16 million
Rs 54.00 million
Rs 58.00 million

Now assume that due to availability of above tax losses, the entity is not envisaging any tax
payments until the year these tax losses are available. Applicable taxation rate is 35%. The cash
profits pre-tax per year for the years beyond Year 6 are presumed to be at the level of taxable profits
for the year 6.
QUESTION 2: Based on the above information, if the entity has a single cash generating unit
(CGU), what is the value in use of the CGU (other than taxation and working capital items comprised
in that CGU)?
PLEASE SELECT THE RIGHT ANSWER
a)
b)
c)
d)

Rs 88.95 million
Rs 91.23 million
Rs 112.17 million
Rs 115.14 million

Assume that the recoverable amount in the above scenario has been worked out as Rs 100 million.
The carrying value of assets of the CGU is Rs 107 million. Included in such carrying value is inventory
of Rs 23 million being carried at lower of cost and net realisable value, and Goodwill of Rs. 8 million.
Also, the entity has a deferred tax asset recorded at Rs 21 million.
QUESTION 3: Considering the above facts, after the allocation of impairment, what is the closest
from the following at which deferred tax asset is expected to stand at?
PLEASE SELECT THE RIGHT ANSWER
a)
b)
c)
d)

Nil
Rs 11 million
Rs 19 million
Rs 21 million

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Section 3: Select the right answer

A company has recently started its operations in a special zone where the income of the company
for the first 20 years is exempt from taxation i.e. neither any tax is payable on the profits of the
company nor are any losses available to be carried forward.
Considering the credit quality of the company, its commercial rate of borrowing is expected to be
about 7% p.a. for medium to long term borrowing, and cost of equity is about 13% p.a. Overall debt
to equity ratio in the competitive industry has been about 40:60, which is also the medium to long
term desired gearing of the company.
The applicable tax rate on similar industries which are not set up in special zone is 33%.
Based on above information only, and considering that the tax exemption is available for the limited
time period only, the long term weighted average cost of capital to the company estimates to:
PLEASE SELECT THE RIGHT ANSWER
a)
b)
c)
d)

About 9.68%
About 10.6%
About 10.42%
None of the above

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Section 3: Selecting the most relevant

P Limited is envisaging purchase of N Limited through acquisition of its 60% controlling shares. P
Limited has an issued share capital of 10 million shares presently priced on Rs 12/- per share. The
market capitalisation of N Limited is Rs 96 million with a share price of Rs 10/- per share. It is
expected that the right shares will be used to raise funding for the purchase.
The option being considered is that sufficient funds be raised to cover the transaction price plus
issue costs of 2% of funds raised. The deal for the shares of N Limited is envisaged at 30% premium
to the market price.
Considering that the assumptions of the controlling share valuation at 30% premium to the market
price are in line with market expectations, and that N Limited can presently issue rights shares at a
discount of 20% to the market value, what is the expected impact of above on the share price of N
Limited (ex-right price) if all the details about the transaction, including issue costs, are publically
disclosed.
PLEASE SELECT THE CLOSEST ANSWER
a)
b)
c)
d)

An increase of Rs 5.60
An increase of Rs 3.48
A decrease of Rs 1.05
A decrease of Rs 1.15

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Section 3: Select the least relevant

Company A is working in a capital intensive industry. Considering this information only, select the
least relevant of the following:
PLEASE SELECT THE LEAST RELEVANT ANSWER
a) Asset based valuations for this business are relevant due to the capital intensive nature of
the business.
b) Relative valuation multiples specifically those based on asset values can be an easy proxy
valuation method for Company A.
c) Cash flow models are relevant for estimating the fair value of Company A as they use the
expected exploitation of the companys earning potential.
d) Considering that the earnings of the capital intensive industry are usually consistently
constant, it is always advisable to use an earning based valuation for such businesses as that
of Company A.

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Section 3: Descriptive scenario

Following is the data in respect of Zee Limiteds inventory management, a company involved in
simple trading of FMCG items:
Ordering cost per order (Rs)

5,000

Holding cost per unit of inventory p.a. (as a %age of cost)

11%

Purchase price per inventory unit (Rs)

100

Sales price per unit (Rs)

110

Recent estimate of annual inventory units to be bought for sales (units)

157,611

Discounts are offered at the various order levels for purchases as follows:
More than 10,000 units but up to 20,000 units

0.50%

More than 20,000 units but up to 30,000 units

0.75%

More than 30,000

1.00%

QUESTION 1:

Considering the above, what is the most economic order quantity?

PLEASE SELECT THE RIGHT ANSWER

a)
b)
c)
d)

10,000 units
20,000 units
30,000 units
None of the above

Further, an enquiry has been made into the delivery periods, and the following probabilities have
been estimated:
Delivery within 7 days (%age of times)
50%
Delivery within 8 days (%age of times)
75%
Delivery within 9 days (%age of times)
90%
Delivery within 10 days (%age of times)
always
QUESTION 2: Considering equal ustilisation of stock during the 365 days of a year, what safety
stock level should be kept by the Zee Limited?
PLEASE SELECT THE RIGHT ANSWER
a)
b)
c)
d)

No safety stock
1 days utilisation
2 days utilisation
3 days utilisation

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QUESTION 3:

What re-order level should be followed by Zee Limited?

PLEASE SELECT THE CLOSEST ANSWER

a)
b)
c)
d)

3,000 units
3,500 units
4000 units
5000 units

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Section 4: Selecting the right answer

The reason preventive controls are preferred over detective controls is:
PLESE SELECT THE RIGHT ANSWER
a.
b.
c.
d.

Preventive controls are less costly

Detective controls do not actually stop unwanted activity
Detective controls require more resources
Preventive controls do not detect unwanted activity

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Section 4: Selecting the most relevant

Is segregation of duties (SOD) a preventive or detective control?
PLEASE SELECT THE MOST RELEVANT
a. Preventive control as SOD prevent an individual from committing errors, fraud, theft, or
other illegal acts, concealing errors or irregularities, or causing the inaccurate or incomplete
reporting of financial information.
b. Detective control as SOD detect errors, etc., by an individual, since another person must be
involved before the transaction is completed and has a chance to affect the accounting
system.
c. Both
d. Segregation of duties is not a control in itself.

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Section 4: Selecting the least relevant

An FMCG Company is more likely to have strict controls over the following.
PLEASE SELECT THE LEAST RELEVANT
a.
b.
c.
d.

Theft of inventory items

Product pricing
Existence of fixed assets
Inventory obsolescence

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Section 4: Descriptive scenario

You are company secretary of a listed company. In order to ensure the compliance of the code of
corporate governance among other declarations, you have asked the directors of the company to
provide the list of companies in which they are directors. In reply one of the directors of the
company informs you that he is serving on the board of 10 listed companies including three listed
subsidiary companies of your company.
QUESTON 1: Is he compliant with the requirement of maximum number of directorships of the
code of corporate governance?
PLEASE SELECT THE RIGHT ANSWER
a. No because code of corporate governance restrict that no person shall be elected or
nominated as a director of more than seven listed companies simultaneously.
b. Yes because maximum number of directorships of seven does not include listed subsidiaries
of a listed holding company.
c. There is no such restriction in the code of corporate governance
In reply to the above, one of the independent director has confirmed that he has served as CEO of
an associated company two years back.
QUESTION 2:

Would he be still considered as an Independent Director?

PLEASE SELECT THE RIGHT ANSWER

a. Yes. There is no restriction in the Code of Corporate Governance that an independent
director cannot be a CEO of an associated company
b. Yes. The Code requires that he/she is or has been the CEO of subsidiaries, associated
company, associated undertaking or holding company in the last two years;
c. No. The Code requires that he/she is not or has not been the CEO of subsidiaries, associated
company, associated undertaking or holding company in the last three years;
d. No. Any person who has served as CEO of an associated company cannot be considered as
independent director

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QUESTION 3: In case the director as mentioned earlier is not considered as independent director,
can you still meet the compliance of code of corporate governance with regards to independent
director if you have one more independent direct out of total seven director.
PLEASE SELECT THE RIGHT ANSWER
a. No. A listed company is required to have at least three independent directors
b. Yes. The requirement of having an independent director is not mandatory. A listed company
is preferred to have at least one independent director. So the company will be in
compliance.
c. No. A listed company is required to have majority of the directors as independent director.
d. Yes. The board of directors of each listed company is required to have at least one and
preferably one third of the total members of the board as independent directors.

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