CHARTERED INSTITUTE OF
STOCKBROKERS
ANSWERS
Examination Paper 2.1
Financial Accounting and Financial Statement Analysis
Economics and Financial Markets
Quantitative Analysis and Statistics
Professional Examination
September 2011
Level 2
1
SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
A
A
B
B
C
B
C
B
C
B
D
A
A
B
A
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
C
A
D
B
A
A
D
A
A
A
D
B
B
C
A
31
32
33
34
35
36
37
38
39
40
D
B
A
A
B
B
C
A
B
C
(60 marks)
SECTION B: SHORT ANSWER QUESTIONS
Question 2 - Financial Accounting and Financial Statement Analysis
2(a)
The practice of recording revenue ahead of sale of goods would impact on the reported
earnings of the firm.
It would result in an inflation of reported earnings.
(1 ½ marks)
2(b)
The practice would have no impact on reported cash flows of the firm.
(1 ½ marks)
Total = 3 marks
2
Question 3 - Economics and Financial Markets
3(a)
For a ‘normal’ good, increase in consumer income results in a complete outward shift of
the demand curve.
This is referred to as change in demand as opposed to change in quantity demanded
(which is caused by a change in price).
All other factors remaining constant, an increase in income would result in an increase in
demand for the good.
This is illustrated in the diagram below.
Price
S1
P2
P1
D2
D1
Q1
Q2
Quantity
Total = 3 marks
Question 4 - Quantitative Analysis and Statistics
The following are the reasons why sample survey is preferable to a population survey
i.
It is faster to process
ii.
Increased accuracy of results
iii.
Variety of sample survey can be embarked upon concurrently, thereby using
resources more effectively
iv.
Practicability – It is the only feasible means when survey involves destruction of
sampled items. etc.
(1 mark for each valid point)
Total = 4 marks
3
SECTION C: COMPULSORY QUESTIONS
Question 5 - Financial Accounting and Financial Statement Analysis
5(a)
Method
Blue Limited
Pink Limited
Green Limited
Orange Limited
Full consolidation
method.
Equity method.
Full
consolidation
method.
It must be stated
at fair value (if
Orange shares are
listed) or at cost (if
Orange shares are
not listed).
Explanation
With more than 50% of the shares, it is
assumed that Alpha controls Beta Ltd.
The investment in Beta Ltd should thus
be consolidated using Full consolidation
method.
As Alpha Ltd holds less than 50% of the
shares and since there is no joint
venture in the Group, Pink Ltd is neither
a subsidiary nor a joint venture. With
30% of the shares, Red is assumed to
have a significant influence on Pink. The
investment in Delta should thus be
consolidated using the Equity method.
Through its interest in Beta, Alpha
indirectly holds 80% of Gamma. Gamma
Ltd is thus a subsidiary of Alpha.
Through its subsidiary Green, Red
indirectly holds 10% of Orange. This
interest is too small to give a significant
influence.
(7 marks)
5(b)
According to IAS 39, investments in equity instruments that do not give control or a
significant influence are stated at cost (for unlisted shares) or at fair value (for listed
shares).
(2 marks)
4
5(c)
Calculation of goodwill
Cost of acquisition of interest
Net assets acquired book (value):
Fair value adjustment
N
3,000,000
500,000
3,500,000
70% thereof acquired
Goodwill
N
3,500,000
(2,450,000)
1,050,000
(2 marks)
According to IFRS 3 and IAS 38, goodwill must not be depreciated.
The following guidelines would apply to its treatment.
i.
ii.
iii.
Goodwill acquired in a business combination as above is recognized as an asset
and is initially measured at cost.
After the initial recognition, Goodwill is measured at cost less any accumulated
impairment losses (it is not amortized).
Goodwill is tested for impairment at least annually in accordance with IAS 36.
(3 marks)
5(d)
The following mistakes could be identified from the consolidated balance sheet:
i.
Negative Goodwill cannot be deducted from assets. According to IFRS 3, if
negative goodwill has been identified one should:
•
reassess the identification and measurement of the acquiree's identifiable
assets, liabilities and contingent liabilities and the measurement of the cost of
the combination; and
•
recognize immediately in profit or loss any excess remaining after that
reassessment.
ii.
Intercompany trade receivables should have been eliminated.
The consolidation procedure requires the elimination of intra-group transactions
and balances, i.e. those transactions and balances between companies included
in the consolidation.
iii.
Blue’s Capital should have been eliminated during the consolidation procedure.
The consolidation procedure involves the elimination of the investment against
the subsidiary's capital, which constitutes the main purpose of consolidation. So
you can't find subsidiaries' capital in the consolidated equity.
(1 mark for each point = 3 marks)
5
5(e)
Unit A
Unit B
Unit C
Fair value less costs to
sell
18,000
1,000
4,000
Value in use
15,000
1,092
5,050
18,000
(0.5 mark)
1,092
(0.5 mark)
5,050
(0.5 mark)
15,000
7,000
4,000
2,027
1,892
1,081
17,027
(0.5 mark)
8,892
(0.5 mark)
5,081
(0.5 mark)
Recoverable amount (A)
18,000
1,092
5,050
Carrying amount (B)
17,027
8,892
5,081
(0.5 mark)
-
7,800
(0.5 mark)
Goodwill
7,000
Other assets
800
31
(0.5 mark)
(0.5 mark)
(0.5 mark)
Recoverable amount (i)
Goodwill
Other assets
Carrying amount
Impairment loss (A-B)
(ii)
Corresponding assets
and
-
allocated amount (iii)
(0.5 mark)
Goodwill 31
(5 marks)
Total = 22 marks
Question 6 - Economics and Financial Markets
6(a)
A recession is a business cycle contraction characterised by a general slowdown in
economic activity. The indicators of the general slowdown are:
I.
Decline in production (GDP).
II.
General unemployment rate which is on the increase.
III.
Low investment spending.
IV.
Low capacity utilization.
V.
Declining household incomes.
VI.
Fall in business profits.
VII.
Fall in general prices (deflation).
VIII.
Rise in bankruptcies.
(1 mark each for any 3 points = 3 marks)
6
6b.
Open market operation (OMO) is a monetary policy instrument which involves purchase
and sales of government securities e.g. bonds in the open market by a central bank. The
usual aim of OMO is to control the short term interest rate, monetary base and thus the
total money supply. Against the backdrop of recessionary situation, the central bank
could decide to buy up bonds in the open market and thus release more money into the
economy. This will go a long way to stimulate aggregate demand components in the
economy.
(3 marks)
6c.
The quantitative easing policy implies expansionary monetary policy. In the context of
the IS-LM Model, the LM curve shifts to the right while the IS remains unchanged.
(1 mark)
Interest
rate
(¡)
LM1
LM2
¡X1
¡2
IS
0
YX1
Y
YX2
Output/Income
(2 marks)
I.
As shown in the diagram, the expansionary monetary policy will result in lower
interest rate levels, which will then reduce the cost of raising new funds for both
private-sector companies and the government.
(2 marks)
II.
The consequent stimulation of investment and government expenditure will bring
about increased productive capacity, employment and output in the economy.
This is shown by the change in output (income) from Y1 to Y2.
(2 marks)
7
6d.
When government decides to use expansionary fiscal policy to stimulate the economy it
is the IS curve that shifts to the right while the LM curve remains unchanged. The shift
in the IS’ curve rightward could either be an increase in government spending;
• a reduction in taxes ; or
• to run a budget deficit.
Interest
rate
¡
LM
2
¡1
IS2
IS1
0
YX1
YX2
Output/input
(2 marks)
i)
The shift in the IS curve, as shown in the diagram, will result in the increase in
the interest rate levels from i1 to i2. This will encourage savings and thus
investible funds; foreign investments will also be attracted into the economy.
(1 mark)
ii)
The increase in government expenditures should be sufficient to cause aggregate
demand to increase, stimulate domestic investment and then restore the
economy to the natural level of real GDP. In other words, the output/income of
the economy rises, as shown in the diagram, from Y1 to Y2..
(1 mark)
(4 marks)
Total = 17 marks
8
Question 7 - Quantitative Analysis and Statistics
7(a)
The relevant equations are:
y = a+bx ;
b= n∑xy-∑x∑y
n∑x2-(∑x)2
And, given the following:
∑x = 60 ; ∑y = 1048
;
a= ∑y _ b∑x
n
n
∑xy = 7092 ; ∑x2 = 440
From the above,
= 10.05
b = 10(7092) – 60(1048)
10(440) – (60)2
a = 1048 10
10.05(60)
10
The equation
=44.5
: y = 44.5 + 10.05 x
(3 marks)
7(b)
Age of vehicle
1
2
3
4
Total maintenance cost
54.55
64.60
74.65
84.70
(3 marks)
7(c)
Substitute into the equation; where x = 12.
(2 marks)
y = 44.5 + 10.05(12) = 165.1
The forecast is an extrapolation beyond the data and may not be reliable.
(3 marks)
Total = 11 marks
9