25
TH
PRIME ACADEMY
SESSION MODEL EXAM
PE-II
Total No. of Questions : 9
Time Allowed : 3 Hours
Total No. of Printed Pages: 5
Maximum Marks : 100
CT
Question Nos 1 and 6 are compulsory. Attempt any three questions out of the remaining 2,3,4
and 5 and attempt two questions from the remaining question numbers 7,8 and 9
Working notes should form part of the answer
1a. The following data are available in respect of process I for March 2007
- Opening stock of work in progress : 800 units at a total cost of Rs.4,000
- Degree of completion
Material - 100 %
Labour - 60%
Overheads – 60%
- Input of materials at a total cost of Rs.36,800 for 9,200 units
- Direct wages incurred Rs.16,740
- Production overhead Rs.8,370
- Units scrapped 1,200 units. The stage of completion of these units are
Material - 100 %
Labour - 80%
Overheads – 80%
- Closing work in progress 900 units. The stage of completion of these units are
Material - 100 %
Labour - 70%
Overheads - 70%
- 7,900 units were completed and transferred to the next process
- Normal loss is 8% of the total input
- Scrap value is Rs.4 per unit.
Compute the following
a) Equivalent production
b) Cost per equivalent unit for each element
c) Calculate the cost of abnormal loss or gain, closing wotk in process and the units
transferred to the next process using the FIFO method
d) Show process account for March 2007
(14 Marks)
1b. Write a brief note on Integrated accounts
Prime/ME/Oct 07
(4 Marks)
1
2a. Ramakrishna owns a luxury bus which runs from Bangalore to Chittor and back for 10 days
in a month. The distance from Bangalore to Chittor is 200 km an d the bus completes the trip
from Bangalore to Chittor and back on the same day. The bus goes another 10 days in a
month towards Mysore. The distance from Bangalore to Mysore is 130 km and the trip is
also completed on the same day. For rest of 4 days of its operation in a month it runs in the
local city. The daily distance covered in the local city is 70 km. Calculate the rate that the
company should charge per passenger when he wants to earn a profit of 25% of his takings.
The other information is given below.
Rs.
Cost of the Bus
10,00,000
Depreciation rate
15% per annum
Salary of the driver
5,000 per month
Salary of conductor
5,000 per month
Salary to part time accountant
2,500 per month
Insurance
18,000 per annum
Diesel consumption 6 km per litre costing
Rs.30 per litre on outside the city trips
Diesel consumption 4 km per litre on within the city trips
Token tax
Rs. 9,000 per annum
Lubricating oil
Rs.200 per 100 km
Repairs & Maintenance
3,000 per month
Permit fees
800 per month
Normal capacity
50 persons
The bus is generally 90% of the capacity when it goes to Chittor and 80% when it goes to
Mysore. It is always full when it runs with in the city. The passenger tax is 25% of the net
takings.
(10 marks)
2b. Explain controllable and non-controllable costs with illustrations.
(4 Marks)
3a. The standard time for a job is 60 hours. The hourly rate of guaranteed wage is Rs.0.75.
Because of saving in time, a worker gets an hourly wage of Rs.0.90 under the Rowan
Premium Bonus plan. For the same saving in time, calculate the hourly rate of wages a
worker B will get under the Halsey-weir Bonus payment system assuming 40% to a worker.
(6 marks)
3b. The purchase department of an organization has received an offer of quantity discounts on its
order of materials as under:
Price per tonne
Tonnes
Rs.1,200
Less than 500
1,180
500 and less than 1,000
1,160
1,000 and less than 2,000
1,140
2,000 and less than 3,000
1,120
3,000 and above.
The annual requirement for the material is 5,000 tonnes. The delivery cost per order is
Rs.1,200 and the stock holding cost is estimated at 20% of material cost per annum. Advise
the purchase department the most economical purchase level
(8 Marks )
Prime/ME/Oct 07
2
4a. A company produces a boat that sells for Rs.1,800. An increase of 7-1/2 % in the cost of
materials and 6-1/4% in the cost of labour is anticipated. What must be the selling price to
produce the same percentage of gross profit as before? The only data available are :
The material cost has been 50% of the cost of sales
The wages cost has been 20 % of the cost of sales
The overhead has been 30% of the cost of sales
The anticipated increased costs in relation to the present sales price would cause a 25%
decrease in the amount of the present gross profit. Prepare a statement of profit and loss per
unit, showing the new selling price desired, and new cost per unit.
(10 marks)
4b. Write four limitations of inter-firm comparison
(4 marks)
5a. A company maintains separate cost and financial accounts and the costing profit for 2006
differed to that revealed in the financial accounts, which was shown as Rs.50,000.
The following information is available
Cost Accounts
Financial accounts
N Opening stock of raw material
Rs.5,000
Rs.5,500
Closing stock of raw material
4,000
5,300
Opening stock of finished goods
12,000
15,000
Closing stock of finished goods
14,000
16,000
Dividend of Rs.1,000 were received by the company
A machine with net book value of Rs.10,000 was sold during the year for Rs.8,000
The company charged 10% interest on its opening capital employed on Rs.80,000 to its
process costs.
Work out the profit figure which was shown in the cost accounts
(8 marks)
5b.How would you treat the following in the Cost Accounts?
(i) Employee welfare costs
(ii) Research and development costs
(iii) Depreciation
(2 marks)
(2 marks)
(2 marks)
6a. A product is currently manufactured on a plant that is not fully depreciated for tax purposes
and has a book value of Rs.60,000 (it was bought for Rs.1,20,000 six years ago). The cost of
the product is as under:
Unit cost (Rs)
Direct costs
24.00
Indirect labour
8.00
Other variable overheads
16.00
Fixed overheads
16.00
64.00
10,000 units are normally produced. It is expected that the old machine can be used
indefinitely into the future, after suitable repairs, estimated to cost Rs.40,000 annually are
Prime/ME/Oct 07
3
carried out. A manufacturer of machinery is offering a new machine with the latest
technology at Rs.3,00,000 after trading off the old plant for Rs.30,000. The project cost of
the product will then be
Per unit Rs.
Direct cost
14.00
Indirect labour
12.00
Other variable overheads
12.00
Fixed overheads
20.00
58.00
The fixed overheads are allocations from other department plus the depreciation of plant and
machinery. The old machine can be sold for Rs.40,000 in the open market. The new machine
is expected to last for 10 years at the end of which, its salvage value will be Rs.20,000. Rate
of corporate taxation is 50%. For tax purposes, the cost of the new machine and that of the
old machine may be depreciated in 10 years. The minimum rate of return expected is 10%. It
is also anticipated that in future the demand for the product will stay at 10,000 units. Advise
whether the new machine can be purchased. Ignore capital gain taxes. The present value of
Re.1 at 10 % for years 1 – 10 are:
0. 909, 0.826, 0.751, 0.683, 0.621, 0.564, 0.513, 0.467, 0.424, and 0.386 respectively.
(12 marks)
6b. What are the limitations of Net present value method
(4 marks)
7a. Company X acquires a company Y on share for share exchange basis. The position before
takeover was as under:
Company X
Company Y
No.of Shares
10,000
5,000
Total Earnings (Rs)
1,00,000
50,000
Market price of share (MPS)
20
18
The shareholders of company Y are offered 3750 shares of company X for 5000 shares (i.e each
shareholder of company Y gets 0.75 share of company X for 1 share of company Y)
Calculate the EPS of the amalgamated company( company X + company Y) vis-à-vis
before takeover position of the two companies and the gain/loss of the shareholders of the
two independent companies consequent to amalgamation.
(6 marks)
7b. A company is evaluating its credit policy. The company sells the product on terms of net 30
days. Cost of goods sold is 87% of sales and fixed cost are further 5% sals. The company
classifies its customers on a scale of 1 to 4. The experience of the company in the past are as
below.
Classification
Default as% of sales
Average collection period in
days for non defaulting accounts
1
0
50
2
3
48
3
8
45
4
18
75
The average rate of interest is 16%. What conclusion do you draw about the company’s
credit policy?
(6 marks)
Prime/ME/Oct 07
4
8a. P ltd sells goods at a uniform rate of gross profit of 25% on sales including depreciation as
part of cost of production. Its annual figures are as under :
Rs.
Sales (At 2 months credit)
26,00,000
Materials consumed (Suppliers credit 2 months)
6,50,000
Wages paid(Monthly at the beginning of the subsequent month
4,80,000
Manufacturing expenses(Cash expenses are paid-one month in arrear) 6,00,000
Administration expenses (Cash expenses are paid – one month in arrear) 1,80,000
Sales promotion expenses (Paid quarterly in advance)
60,000
The company keeps one month stock of raw materials and finished goods. A minimum cash
balance of Rs.80,000 is always kept. The company wants to adopt a 15% safety margin in the
maintenance of working capital. The company has no work in progress. Find out the
requirements of working capital of the company on cash cost basis
(8 marks)
8b. What are the merits and demerits of equity shares as source of finance?
(4 marks)
9a. Sun Ltd gives the following information for the year ended 31st March 2007
(i) Sales for the year totalled Rs.96,00,000. The company sells goods for cash only.
(ii)Cost of goods sold was 60% of sales. Closing inventory was higher than opening
inventory by Rs.43,000. Trade creditors on 31st March 2007 exceeded those on 31st
March 2006 by Rs.23,000
(iii) Net profit before tax was Rs.13,80,000. Tax paid amounted to Rs.7,00,000. Depreciation
on fixed assets for the year was Rs.3,15,000 where as other expenses totalled
Rs.21,45,000. Outstanding expenses on 31st March 2006 and 31st March 2007 totalled
Rs.82,000 and Rs.91,000 respectively
(iv) New machinery and furniture costing Rs.10,27,500 in all were purchased
(v) A rights issue was made of 50,000 equity shares of Rs.10 each at a premium of Rs.3 per
share. The entire money was received with application.
(vi) Dividends and corporate dividend tax totaling Rs.4,70,000 were paid.
(vii)Cash in hand at bank as at 31st March 2006 totalled Rs.2.13,800.
Prepare a cash flow statement for the year ended 31st March 2007 using direct method.
( 8 marks)
9b. Write a note on indifference point
Prime/ME/Oct 07
(4 marks)
5
PRIME ACADEMY
SUGGESTED ANSWERS
PE-II
Cost Accounting and Financial Management
1.(a)
a)
Statement of equivalent production (FIFO method)
Output
Equivalent production
Units Particulars Units
Material
Labour
Overhead
Units % Units % Units %
Opg.stock
Units completed
Of WIP
800 From WIP 800
320 40
320
40
New units 7,100
7,100 100 7,100 100 7,100 40
Units
Closing WIP 900
900 100
630 70
630
70
Introduced 9,200 Normal loss 800
- Abnormal loss 400
400 100
320 80
320
80
10,000
10,000
8,400
8,370
8,370
Input
Particulars
b) Statement of cost per equivalent units for each element
Particulars
Cost
Equivalent units Cost per unit
Material
Rs.36,800
Less: Scrap realization
3,200
33,600
8,400
4.00
Labour
16,740
8,370
2.00
Overheads
8,370
8,370
1.00
c) Statement showing cost of abnormal loss, closing WIP and units transferred to the next
process
Particulars
cost per unit Equivalent unit
Total cost
Abnormal loss
Rs.
Material
4.00
400
1,600
Labour
2.00
320
640
Overhead
1.00
320
320
Total
2,560
Clossng WIP
Material
4.00
900
3,600
Labour
2.00
630
1,260
Overhead
1.00
630
630
Total
5,490
Units transferred to next process
Cost of Opening WIP
4,000
Material
4.00
7,100
28,400
Labour
2.00
7,420
14,840
Overhead
1.00
7,420
7,420
Total
54,660
Prime/ME/Oct 07
6
d)
Process Account for March 2007
Particulars
Units Amount (Rs)
Particulars
Units Amount (Rs)
To opening WIP
800
4,000
By finished goods
7,900
54,660
To Material
9,200
36,800
By
closing WIP
900
5,490
To Labour
16,740
By
Normal loss
800
3,200
To Overheads
8,370
By Abnormal loss
400
2,560
10,000
65,910
10,000
65,910
1b.
a) Integrated Accounts
- In integrated system of accounts both financial and cost accounts are maintained
in the same set of books and there will be no separate costing books.
- The integrated books of accounts give full information so that Profit & Loss account
and Balance sheet can be required according to the requirements of law.
Integrated Accounts provide lot of advantages:
- No duplication of recording of data in separate books
- It facilitates the use of mechanized accounting
- There is no need for reconciliation as there is one figure of profit
- Costing data are available from original set of books which ensures accuracy and
timeliness.
- It faciliates centralized accounting leading to economy.
2a.
Operating Statement of cost for the month of ----Per month
Rs.
Depreciation
10,00,000 x 15
12,500
100 x 12
Salary of Driver
5,000
Salary of conductor
5,000
Salary of Accountant
2,500
Insurance
1,500
Token tax
750
Repairs & Maint
3,000
Permit fees
800
Rs.
31,050
Variable charges
Diesel
Lubricating oil
Total cost per month
Add: Profit 25% on takings
Total net takings
Add: Passenger tax 25%
Total cost
Total passenger kilometer
Rate per passenger kilometer
Prime/ME/Oct 07
35,100
13,760
7
48,860
79,910
19,978
99,888
24,972
1,24,860
2,98,000
0.42
Charge per passenger
Chittor trip = 200 km x 0.42 = Rs.84.00
Mysore trip = 130 km x 0.42 = Rs.54.60
Workings
Diesel cost
Chittor = 10 days x 400 km = 4,000 km
Mysore = 10 days x 260 km = 2,600 km
Total
= 6,600 km
Diesel = (6600/6) x 30
= Rs.33,000
City trips = 4 days x 70 km = 280 km
Diesel = (280/4) x 30
= Rs. 2,100
Total Diesel
= Rs. 35,100
Lubricating oil (6,880/100) x 200 =Rs. 13,760
Total passenger kilometer = 4000 x 50 x 0.9 =
1,80,000
2600x50xx 0.8 =
1,04,000
280 x 50
=
14,000
Total
= Rs 2,98,000
2b. Controllable and Uncontrollable costs
- The costs which can be influenced by the action of a specified member of an undertaking is
controllable costs whereas the costs which cannot be controlled by the specified member of
undertaking is uncontrollable costs.
- For a cost centre direct costs like material , labour are controllable by the members of the cost
centre where as allocated costs to the cost centre are uncontrollable by the members of the cost
centre to which the cost is allocated
- Controllable and uncontrollable cost relate to authority of a person in the organization. Cost
which cannot be controllable by one person in the organization may be controllable by another
person having higher authority.
- Controllability or uncontrollability of an item of cost would depend upon the
area of
managerial responsibility and authority.
Example- Expenses incurred by the Machine shop is controllable by the Machine shop manager
but the share of any other department apportioned to machine shop is not controllable by the
machine shop manager.
3a. Inflated rate is
= Rs.0.90
Guaranteed rate
= Rs.0.75
Difference
= Rs. 0.15
% increase = 0.15/0.75 x 100 = 20%
Since the hourly rate is inflated by 20 % , time saved should be 20%
Time allowed = 60 hours
Time taken
= 48 hours
Time saved
= 12 hours
Under halsey plan wages
Wages for time taken
= 48 x 0.75
= 36.00
Prime/ME/Oct 07
8
Add: Bonus 40 % of time saved
40 x 12
= 4.80 x 0.75
3.60
100
Rs.39.60
Total earnings
= Rs.39.60
Hourly rate of wages = 39.60/ 48 = 0.825
3b. 1. Order size
400
500
2. No.of orders
12.5
10
3. Value of order (Rs.000)
480
590
4.Average Inventory Rs.000
240
295
5.Ordering cost
15,000
12,000
6.Carrying cost
48,000
59,000
7.Annual cost of material 60,00,000 59,00,000
8. Total ( 5 to 7)
60,63,000 59,71,000
1,000
5
1,160
580
6,000
1,16,000
58,00,000
59,22,000
2,000
2.5
2,280
1,140
3,000
2,28,000
57,00,000
59,31,000
3,000
1.67
3,360
1,680
2,000
3,36,000
56,00,000
59,38,000
Rs.59,22,000 is the total minimum cost at 1,000 order size is the most economical order level.
4a. If x is the cost of sales , y is the profit , x + y = 1,800
Cost of sales + profit = sales
Present cost
Anticipated increase
Total
Structure
Materials
50% = 0.5x
7-1/2% of 0.5x = 0.0375x
0.5375x
Wages
20% = 0.2x
6-1/4% 0f 0.2x = 0.0125x
0.2125x
Overhead
30% = 0.3x
0.3000 x
Total cost of sales 100% x
0.0500x
1.0500 x
Increase in cost of sales = 0.500x = 1/20 x
Reduction in profit 25% of Y = ¼ y
Increase in costs is equal to the reduction in the amount of profit
(1/20) x = ¼ Y
x = 5y
Substituting 5y + y = 1,800
y = 300
Profit = Rs.300 original = 20 % of cost of sales
Cost of sales original = Rs.1,500
Anticipated increase = 1/20 x = 1500/20 = 75
Present cost of sales = 1,575
To have 20% on cost of sales = 315
Selling price = Rs.1,575 + 315 = Rs.1,890. Now the selling price should be = Rs.1,890
New cost structure
Material = 750 + 7-1/2 % = 806.25
Wages = 300 + 6-1/4% = 318.75
Overhead
= 450.00
Cost of sales
= 1,575
Profit
315
Sales
= 1,890
% profit on cost
= 20 %
Prime/ME/Oct 07
9
4b.- A sense of complacence on the part of the management who may be
satisfied with the present level of profits and their reluctance to
participate wholeheartedly.
- Reluctance to part with data which the management feels to be of
extremely confidential in nature
- Absense of a proper system of cost accounting so that the costing
data supplied may not be relied upon for comparison purpose.
- Non-availability of a suitable base for comparison.
5a.
Statement showing the profit as per cost accounts
Profit as per financial accounts
Add: Opening stock of raw material over valued
500
Opening stock of finished goods overvalued 3,000
Loss on machine sold (10,000 – 8,000)
2,000
Less: Closing stock of raw material under valued
Closing stock of finished goods undervalued
Income not included in cost accounts
Dividend
Interest
Profit as per cost accounts
Rs.
50,000
5,500
55,500
1,300
2,000
1,000
8,000
12,300
43,200
5b. i)Employee welfare costs :
The welfare costs like canteen, transport subsidy, hospital expenses, washing allowance are some
of the welfare expenses paid to employees. These welfare expenses may be collected under a
separate cost centre and the cost may be allocated to other cost centres on the basis of number of
employees in the respective cost centres.
ii) Research and Development Costs
Cost may be incurred for finding new products, methods , techniques or plants/equipments.
Research cost may be incurred for carrying basic or applied research. Cost of basic research may
be charged to the revenues of the concern. If the amount is large it may be spread over number of
years and charged as deferred revenue expenditure. Cost of applied research relating to all existing
products may be treated as a manufacturing overhead of the period in which it is incurred and
absorbed suitably. Applied research relating to finding new product or methods may be treated
depending on the outcome. If the research is successful the amount may be charged to product
resulted as a outcome of the research. If the research is a failure it may be charged to Costing
Profit & Loss Account , if the amount is large the amount may be spread over a number of years.
The treatment of Development costs is the same as that of applied research.
iii) Depreciation
It represents the fall in the value of the machine due to usage and wear and tear.
The cost of depreciation is clubbed with other expenses relating to the machines and its cost may be
absorbed based on the machine hour rate of the machine worked out. Depreciation is an important
element of cost and without depreciation true cost of the product cannot be found out correctly.
Prime/ME/Oct 07
10
6a.
Cash flows from new machine as well as from old machine
Old machine New Machine
Production (units)
10,000
10,000
Variable cost per unit – Rs.
48
38
Total variable cost - Rs.
4,80,000
3,80,000
Repairs
40,000
Depreciation – old machine 60000/10
6,000
31,000
New machine Rs.3,00,000+30,000 – 20,000/10
Total
5,26,000
4,11,000
Less tax saving 50%
2,63,000
2,05,500
Less : Depreciation (no cash outflow)
6,000
31,000
Net cash flow
2,57,000
1,74,500
Differential cash out flow (Rs.2,57,500 – Rs.1,74,500)
82,500
Present value of saving of Rs.82,500 in 10 years @1%
(Rs.82,500 x 6.145)
5,06,962
Add: present value of sale proceeds from new machine (Rs.20,000)
7,720
Total cash flow (savings)
5,14,682
Total cash outflow now
3,00,000
Net cash flow
2,14,682
Since NPV is positive, it is advisable to purchase the new machine
It is presumed that the present book value of old machine will also be written off in next 10
years.
The fixed overheads constitute allocation from other departments and hence the same are
irrelevant for replacement decision.
6b. - It is difficult to calculate as well understand as compared to ARR method
or pay back method
- This method may not give satisfactory results where two projects having different effective
lives are being compared
- This method emphasis the comparison of net present value and disregards the initial
investment involved.
- Calculation of desired return is problem as it is based on cost of capital the calculation of
which itself is complicated.
7a.
Statement showing the EPS and P/E ratio of the two companies vis-à-vis
Amalgamated companies
Before takeover
Amalgamated Co.
Details
Company X
Company Y
Acquirer
Acquiree _____________________
Number of shares
10,000
5,000
13,750
Total earnings (Rs.)
1,00,000
50,000
1,50,000
EPS (Rs)
10
10
10.91
Market share price
20
15
P/E ratio
2:1
1.5: 1________________________
Prime/ME/Oct 07
11
Gain / loss to the share holders of two independent companies
1. The share price of the Amalgamated Co. = EPS x P/E Ratio = 10.91 x 2 = Rs.21.82
2. The share holders of company X will be benefited by Rs.1.82 (i..e Rs.21.82 – 20.00)
3. Company Y gets 0.75 share of company X for 1 share of company Y. Therefore,
exchange rate = 0.75:1
4. New EPS = Rs.10.91 x 0.75 = Rs.8.18
5. The shareholders of company Y will lose Rs.1.82 i.e (Rs.10.00 – 8.18)
7b.Assuming the revenue generated from each category as 100 as the basis for assessing company’s
credit policy
Classs Gross profit Bad debts
Interest
Total cost Net effect Decision
@ 13% Rs.
Rs.
cost Rs.
Rs.
Rs.
1
13
1.79
1.79
11.21
Accept
2
13
3
1.72
4.72
8.28
Accept
3
13
8
1.61
9.61
3.39
Accept
4
13
18
2.68
20.68
(7.68)
Reject
It appears that the company is allowing liberal credit days in spite selling it on terms of net 30
days. For all category it allows above 30 days as credit period on an average. Up to category 3
total cost is favourable and may be accepted. In the case of category 4 it is un favourable as its
cost is more than gross profit. The company should try to reduce the bad debts in category 4 at
least by 7.68 % so that it can accommodate credit period up to 75 days for increasing the sales.
Working for interest cost
Interest cost = Avg,rate of interest x cost of goods sold x Avg. collection period
365 days
For category 1 = 15% x 87 x 50 = 1.79
365
= 15% x 87 x 48 = 1.72
365
= 15% x 87 x 45 = 1.61
365
= 15% x 87 x 75 = 2.68
365
8a.
Working notes
Sales
Less: Gross profit marging at 25%
Total manufacturing cost
Less: Materials consumed
Wages
Manufacturing expenses
Less: Cash manufacturing expenses
Depreciation
Prime/ME/Oct 07
Rs.
26,00,000
6,50,000
19,50,000
6,50,000
4,80,000
8,20,000
6,00,000
2,20,000
12
Total cash cost
Manufacturing costs
Less: Depreciation
Cash manufacturing costs
Add: Administrative expenses
Add: Sales promotion expenses
Total Cash Costs
19,50,000
2,20,000
17,30,000
1,80,000
60,000
19,70,000
Statement of working capital requirement
Current Assets
Debtors (1/6 th of total cash costs (1/6 x 19,70,000)
3,28,333
Sales promotion expenses (prepaid)
15,000
Stock of raw materials (1 month)
54,167
Finished goods (1/12 of cash manufacturing costs)
1,44,167
Cash in hand
80,000
6,21,667
Less: Current liabilities
Creditors for goods ( 2 months)
1,08,334
Wages 1 month
40,000
Manufacturing expenses (1 month)
50,000
Administration expenses (1 month)
15,000
2,13,334
Net working capital
4,08,333
Add: Safety margin 15%
61,250
Working capital required
4,69,583
8b. Merits
a) It provides a permanent source of finance
b) There is no mandatory payment to equity share holders since they are the owners.
c) New equity shares can always be issued and thus there remains flexibility with the
company regarding choice to be made for raising additional finance.
d) The equity base can always be broadend by making a rights issue.
Demerits
a) The issue of equity shares extends voting rights which could threaten the control over the
company by the existing shareholders.
b) More ordinary shares issued result in the distribution of profits among a wider group of
people.
c) The cost of underwriting and distributing new issue of ordinary shares are usually high.
d) The overall cost of a company’s capital will be raised, if there is a high proportion of
equity finance.
e) Dividends are not tax deductible like interest payments which can reduce profits available
and can increase the cost of equity.
Prime/ME/Oct 07
13
9a. Calculation of cash paid to suppliers and employees:
Rs.
Cost of sales 60% of Rs.96,00,000
57,60,000
Add: Expenses incurred
21,45,000
Outstanding expenses on 31st March 2006
82,000
Excess of closing inventory over opening inventory
43,000
80,30,000
Less: Excess of closing creditors over opening
Creditors
Rs.23,000
Outstanding expenses on
31st March 2007
91,000
1,14,000
79,16,000
Cash flow statement for the year ended 31st March 2007
Cash Flow from Operating Activities
Rs.
Rs.
Cash receipts from customers
96,00,000
Cash paid to suppliers and employees
(79,16,000)
Cash inflow from operations
16,84,000
Tax paid
(7,00,000)
Net cash from operating activities
9,84,000
Cash flow from investing activities
Purchase of fixed assets
(10,27,500)
Net cash used in investing activities
(10,27,500)
Cash Flow from financing activities
Proceeds from issue of share capital
6,50,000
Dividends and corporate dividend tax paid
(4,07,000)
Net cash from financing activities
2,43,000
Net increase in cash and cash equivalents
1,99,500
2,13,800
Cash and cash equivalents as at 31st March 2006
Cash and cash equivalents as at 31st March 2007 (Closing balance)
4,13,300
9b. The capital structure of a firm consist of an optimum mix of equity and debt. In attempting an
optimum mix, one should compare cost of capital with the expected return from the investment.
So long as the cost of financing by debt is less than the rate of return from the investment, add
the difference to the earnings per share. In such a case debt finance is more profitable. The
indifference point in planning the capital structure is that point at which the after tax cost of
acquisition of outside funds is equal to the rate of return from the investment. This point refers to
that EBIT level at which EPS remains the same irrespective of debt equity mix. In other words,
at this point rate of return on capital employed is equal to the rate of interest on debt
Prime/ME/Oct 07
14
25
TH
PRIME ACADEMY
SESSION MODEL EXAM
PE-II
Total No. of Questions : 8
Time Allowed : 3 Hours
Total No. of Printed Pages: 3
Maximum Marks : 100
IX
1. Discuss the following propositions in the context of Central Sales Tax Act, 1956
a) A certificate of registration once granted cannot be amended?
b) Prosecution shall not lie in respect of an offence under certain circumstances?
c) In respect of goods, which are exempt from tax can the cost of packing materials be charged to tax?
d)The location of goods does not, by itself determine the place, where the sales take place. Discuss? (8 marks)
2. X makes a sale during the year 2006-07, of Rs.20,70, 000 to various buyers. We assume in this question that all
the buyers were registered dealers and have obtained form C from their states and sent the same to X. Out of the
total sales, Rs.15,60,000 was @ 4% and 5,10,000 was @ 2%. X has filed the return for the year as per the law
applicable in his appropriate state. At the time of assessment how will we determine the ‘turnover’?
(7 marks)
3. X, of Delhi makes a sale during the year 2006-07, of Rs.20,70,000 to various buyers. We assume in this question
that all the buyers were registered dealers. Out of the total sale, Rs.15,60,000 @ 4% and 5,10,000 was 2%. X has
field the return for the year as per the law applicable in this appropriate state. Out of the sale of 15,60,000 X
could not procure C form from one of the buyers, Z. The amount of such bill (inclusive of CST @4%) is
Rs.1,56,000. The goods sold to Z are taxable as per the general sales tax law of the state of Delhi @9%. At the
time of assessment how will we determine the ‘turnover’?
(10 marks)
4. X’s contract with ABC Ltd, Mumbai is terminated after 6 years 6 months and 1 day. On 1-10-2006 his services
with the company are discontinued. He receives a gratuity of Rs.1,33,000. He had joined the company with
emoluments including basic pay of Rs.13,000, DA being 40% of Basic Pay (25% enters into for provident fund)
Commission @ 1% on purchases made by him during the year amounted to Rs.15,000. He had received a raise of
Rs.5,000 in his basic pay on the 1st of March 2006 and an increment of Rs.2,000 in the basic pay on 1st December
2005. On 15th of January 2007 X joined INT Ltd., Ghaziabad, for a monthly salary of Rs.22,000. Assume that
ABC Ltd is not covered under the payment of gratuity Act, 1972. All his salary is due on the 7th of the following
month. Compute the salary income in the hands of Mr. X for P.Y. 2006-07.
(12 marks)
5 (a). From the following information calculate the income of X, a retailer
Rs.
Total sale made during the year
38,00,000
Sales Tax (not included in the above figure)
1,20,000
Sale of Scrap
1,50,000
Interest on bank deposits
2,00,000
Capital gains on sale of motor car as per Sec.50 (2)
75,000
Goods returned during the year
1,20,000
Expenditure claimed u/s 30-37
31,00,000
Calculate the total income chargeable to tax of the retail trader.
Prime/ME/Oct 07
15
(5 marks)
5(b). The assessee, Mr. X has income from House Property (computed u/s 22) of Rs.40,000 and a STCG on the
transfer of land computed u/s 48 - Rs.20,000, STCG u/s 111A – Rs.15,000, LTCG on transfer of Jewellery –
Rs.20,000, Winnings from lottery 80,000. Calculate the total tax liability of X for the PY 2006-07, assuming
that X is
a) A Resident assessee
b) A Non Resident assessee.
(5 marks)
6(a). X transfers cash, Rs.15,00,000 to his wife on 15th April 2006. His wife buys debentures worth Rs.10,00,000.
Interest for the debentures is due on the 1st of January every year. In whose hands will the interest income be
taxable?
(6 marks)
6(b). X lives with his parents in Chennai. X is suffering from a 80% handicap in the eye. During the PY 2006-07
he has won a prize in a TV game show of Rs.41,000. His grandfather had transferred a house in his name on
1-12-2002. Income from such house property during the current PY is Rs.45,000. He has a long term capital
gain from the transfer of debentures (gifted to him by his father) of Rs.93,000. X is 17 years of age, is a
resident of India for the PY 2006-07. Compute his tax liability for the PY 2006-07.
Further information:
1. Medical insurance premium paid for his mediclaim policy by the father – Rs.12,000.
2. Expenditure on his treatment incurred by his father – Rs.32,000. His father wants to claim a deduction u/s
80DD from his total income
3. X deposits a sum of Rs.12,000 as premium for his life insurance policy.
4. He makes a donation to national institute for mental retardation for Rs.20,000.
(9 marks)
7(a). For Assessment Year 2006-07 the due date of filing the return of income was 31-07-2006 and the return was
not filed up to 31-07-2006. The Assessing Officer issues a notice u/s 142(1) and the assessee is asked to file
the return by 15-12-2006. The assessee files the return of income on 13-12-2006 declaring a loss of
Rs.2,00,000/- from business. The assessee files a revised return on 31-12-2006 declaring a loss of
Rs.6,00,000/- from business. Can the assessee carry forward the loss?
(7 marks)
7(b) Till when can a valid notice under section 143(2) be served in the following cases
a.
For PY ending 31-3-07, the due date for filing the return of income is 31-07-07. The return of income
is filed on 12-11-07 declaring an income of Rs.1,20,000.
b.
If in the above example, the notice u/s 143(2) was issued on 30-11-08 and is received by the assessee
on 2nd December 2008.
(2X4Marks)
Prime/ME/Oct 07
16
8.
Mr. Nathan, a businessman, submits the following profit and loss account to you for the year ended 31st March
2007:Particulars
Rs.
Particulars
Rs.
To Salaries
75,000 By Gross profit b/d
2,50,000
To Traveling expenses
25,800 By Dividend from Indian Cos.
8,500
To Rent and rates
3000 By Discount received
1,500
To Interest on capital
5000
To Administrative charges
25,000
To Depreciation
25,000
To Income-Tax
50,000
To Net Profit
51,200
2,60,000
2,60,000
The following additional information are furnished:
i)
Salaries include payment of Rs.16,000 to Mrs. Nathan, who is holding technical qualification in equality and
acting as supervisor of the quality control department. She does not have any other income during this year.
Till February, 2007, she was employed in M/s. Sanvats Ltd in a similar post for 10 years and was drawing a
monthly salary of Rs.1,500.
ii) Mr. Nathan had gone on a foreign tour in connection with the business. The journey was for 15 days in which
he spent 3 days on visiting tourist spots. Total expenses incurred, which were within RBI norms also, in respect
of this foreign tour was Rs.20,000.
iii) Administrative charges include expenses in respect of donation of Rs.1,000 to the trade association for the
purpose of an advertisement in the souvenir published by it.
iv) Depreciation allowance as per the Income-tax Rules, 1962 is Rs.45,000
v) Mr. Nathan raised a loan from LIC of India on the security of his life Insurance Policy and use the same for the
payment of expenses relating to repairs of machinery. Interest of Rs.2,500 in respect of this loan was paid out
of his drawings.
vi) Birthday gifts presented to his minor son includes cash of Rs.20,000 which was deposited in Nationalized Bank.
Interest accrued up to 31st March, 2007 was Rs.2,500.
vii) Mr. Srinivasan, brother of Mr. Nathan is suffering from heart disease. Since he could not earn money for his
livelihood, Mr. Nathan takes care of him, in respect of all expenses. Expenses incurred during the year in this
connection is Rs.15,000.
viii) During the previous year, Mr. Nathan has paid Rs.10,000 by way of cheque towards medical insurance premia
of himself, his wife and minor son.
From the above particulars, prepare a statement showing the taxable income of Mr. Nathan for the A.Y. 2007-08.
(23 Marks)
Prime/ME/Oct 07
17
PRIME ACADEMY
SUGGESTED ANSWERS
PE-II - INCOME TAX AND CENTRAL SALES TAX
1a) The proposition is wrong. According to section 7[4A]. Registration Certificate can be
amended by the registration authority on an application by the dealer or after due notice to
the dealer for the following reasons:_ Change of name, place or nature of business
- Change of class of goods
- Any other reason.
b) The proposition is correct. According to section 10A, the registration authority can levy
penalty (at one and-a-half times the section 8(2) rate) in lieu prosecution for the following
offences committed by purchasing dealers:1. Falsely declaring that his purchases are covered by R.C.[Section 10(b)]
2. Falsely declaring that he is a registered dealer [Section 10(c)]
3. Failure to use the purchased goods for the purposes specified in the R.C. [Section 10(d)]
c) Supreme Court, in the case of Premier Breweries v. State of Kerala (108 STC 598) held that
the rate of tax applicable for containers shall be the same as the rate applicable for the goods
sold in the container. In view of this, it can be said that the cost of packing materials in
respect of exempt goods should not suffer tax.
d) A sale or purchase of goods shall be deemed to take place inside a state if the goods are
within the state – (a) in the case of specific or ascertained goods, at the time of contract of
sale is made; and (b) in the case of unascertained or future goods, at the time of their
appropriation to the contract of sale by the seller or by the buyer. When a sale or purchase of
goods is determined to take place inside a state, such sale or purchase shall be deemed to
have taken place outside all other states. Thus, location of the goods does not by itself
determine the place of sale; but it is relevant to determine the state which has the jurisdiction
to levy tax in respect of the inter-state sale.
2.
At the time of the assessment the sales tax officer concerned shall determine the sales tax
liability as per the provisions of Sec 8 and 8A. To ascertain the correct amount of central
sales tax leviable, we will first have to remove the sales tax included in the sale price.
4% tax: Deduction from sale price = 4% /104*15,60,000 = 60,000
2% tax: Deduction from sale price = 2%/102* 5,10,000 = 10,000
Turnover = 20,70,000 – 60,000 – 10,000 = Rs. 20,00,000
On this amount the CST will be levied, after making adjustment as prescribed under
section 8A i.e. after adjusting for
Prime/ME/Oct 07
18
•
•
•
3.
*Any goods rejected
Any goods returned within the time period of 6 months
In case where selling dealer is not able to procure any of the forms specified in the act
then the rate will be charged as if the selling dealer had made a sale to an unregistered
dealer
At the time of assessment the sales tax officer concerned shall determine the sales liability as
per the provisions of Section 8 and 8A. To ascertain the correct amount of central sales tax
leviable, we will first have to remove the sales tax included in the sale price.
Deductions from turnover:
Rs
4% Tax Deduction from sale price
4%/104*15,60,000
60,000
2% Tax: Deduction from sale price
2%/102*5,10,000
10,000
10% Tax: turnover for which no FORM C
4%/104*1,56,000
is obtained
Total tax deposited by X as per returns field
70,000
by him
NOTE: No C FORM obtained: when the bill raised the buyer had given the assurance to
issue C form thus X had raised the bill with 4% CST and deposited the same with the
appropriate sate however at the time of assessment, Z did not issue the C form, in this case
the difference or increase in rate will be borne by the selling dealer i.e. X. The rates
applicable will be as if the sale is made to an unregistered dealer.
Turnover:
* 2% - 5,10,000 – 10,000 = 5,00,000
* 4% - 15,60,000 – 60,000 = 15,00,000
* 10% - turnover for which no C form is obtained = 15,60,000 – 60,000
Out of 15,00,000 sales of 1,50,000 are taxable @ 10% since no C form was obtained
Final Tax under central sales tax act, 1956
Rs.
On 13,50,000 (15,00,000 – 1,50,000)*4%
= 54,000
On 1,50,000 *10%
= 15,000
On 5,00,000 *2%
= 10,000
Total Assed Tax
= 79,000
Total tax paid by X during the year
As per the return filed by him
= 70,000
Balance tax payable
= 9,000
4. Name of the assessee : Mr. X
Previous year
: 2006-07
Assessment year : 2007-08
Prime/ME/Oct 07
19
Computation of Income from salary
Amount
(Rs.)
Sec 15:
From ABC Ltd:
- Basic Pay
-Dearness
(D.A.)
Allowance
From INT Ltd:
-Basic Pay
Sec
17(1)
Less:
Less:
20,000 * 7 months
and 1 day
8,000 * 7 months
and 1 day
1,40,645(WN1)
22,000 * 1 month
and 17 days
34,065
For the year given
15,000
1,33,000
(61,050) (WN2)
71,950
56,258(WN1)
Commission
Gratuity Received
Exemption
10(10)(iii)
u/s
GROSS SALALRY
Deductions u/s 16
INCOME
FROM
SALARY
3,17,918
NIL
3,17,918
Working Notes:
WN 1:
Salary is chargeable to tax on due or receipt which ever is earlier. As per the facts of the
question, salary from ABC Ltd. is due on 7th of the following month. So the salary of March
2006 shall be taxable in April 2006.That salary received in April 2006
WN2: Exemption u/s 10(10) (iii)
From the amount of gratuity received – Rs.1,33,000, the least of the following will be
allowable as an exemption u/s 10(10)(iii)
i. Government ceiling – Rs.3,50,000
ii. Amount received – Rs.1,33,000
iii. ½ month average salary for each completed year of service
= ½ * 20,350 * 6 = 61,050
a. Average ‘salary’ – For the purposes of section 10(10)(iii) ‘salary’ for the purpose of
computing the amount of exemption has been defined to include Basic Pay and the entire
amount of DA(only if it enters into calculation for retirement benefits) and commission only
if it is given as a % age of sales effected by the employee.
Prime/ME/Oct 07
20
Average salary has to be computed at an average of 10 months salary received during a
period of 10 months immediately before the month of retirement. Such period of 10 months
need not fall in the relevant previous year for which the taxable salary is being computed.
Average Salary = salary for months of September’ 06, to Dec’ 05.
Month
Basic
D.A (Rs)
Total
Pay(Rs)
(Rs)
September 2006
20,000
2,000
22,000
August 2006
20,000
2,000
22,000
July 2006
20,000
2,000
22,000
June 2006
20,000
2,000
22,000
May 2006
20,000
2,000
22,000
April 2006
20,000
2,000
22,000
March 2006
20,000
2,000
22,000
February 2006
15,000
1,500
16,500
January 2006
15,000
1,500
16,500
December 2005
15,000
1,500
16,500
Total for 10 months
2,03,500
Average (÷ 10)
20,350
* Commission is based on a % age of purchases and not on sales, so it is not considered for
calculating the exemption u/s 10(10) (iii).
* While calculating the 10 months average salary, we do not consider the date the salary
becomes due. We will take the salary for the month in which the services were rendered.
Thus where the salary is increased in the month of March 2006, while computing income
under the head salaries, it will be taken as income of the PY 2006-07 as it becomes due on
the 7th of April 2006. However while computing the exemption under section 10(10) (ii), it
shall be taken as the salary for the month of March 2006.
b. Completed years of service = Completed years = 6 years 6 months and 1 day, the
completed years for section 10(10) (iii) are 6 years. Part of the year is to be ignored for the
purposes of calculation u/s 10(10) (iii).
5(a) Computing Turnover/ Gross receipts for Section 44AF
Rs.
Sales
38,00,000
(+) Sales Tax
1,20,000
(+) Scrap
1,50,000
(-) Goods returned
1,20,000
39,50,000 X 5% = 1,97,500
Since turnover is < 40,00,000 assessee may opt for 44AF
OPTION 1 : Assessee opts for Section 44AF
Rs.
Business Income
1,97,500
Other Sources
2,00,000
Short Term Capital Gains
75,000
Gross Total Income
4,72,500
Prime/ME/Oct 07
21
OPTION 2 : Assessee does not opt for 44AF
Business Income
Rs.
Sales
39,50,000
Less: Expenses u/s 30 – 37
31,00,000
Rs.
8,50,000
Income from other sources
2,00,000
Short Term Capital Gains
75,000
Gross Total Income
11,25,000
• The assessee should opt for section 44AF as it is more beneficial for him. i.e Option 1.
5(b) Computation of total tax liability for P.Y 2006-07:
If Mr. X is a Resident
If Mr. X is a Non resident
Rs.
Rs.
Income from House
40,000
40,000
Property
STCG u/s 111A
15,000
15,000
Winnings from lottery
80,000
80,000
STCG on land
20,000
20,000
LTGG
20,000
20,000
Total Income
1,75,000
1,75,000
Tax: (WN 1)
24,000
29,500
Add: Surcharge
Nil
Nil
24,000
29,500
Add: Education cess @ 2%
480
590
24,480
30,090
Working Note:
WN 1 : Income taxable at normal rate = 60,000
On first 60,000 = Nil
For a resident assessee: Balance unutilized amount of minimum exemption slab (Rs.40,000)
will be set off from STCG u/s 111A and LTCG but not from income covered by section
56(2)(ib).
STCG u/s 111A Rs.15,000 – 15,000 = NIL
LTCG – Rs.20,000 – 20,000 = NIL
Winnings from lottery Rs.80,000 x 30% = 24,000
For a Non resident assessee: Balance unutilized amount of minimum exemption slab
(Rs.40,000) will not be set off from STCG u/s 111A and LTCG or from income covered by
section 56(2)(ib).
STCG u/s 111A Rs.15,000 x 10%
= 1,500
LTCG – Rs.20,000 x 20%
= 4,000
Winning from lottery – Rs.80,000 x 30% = 24,000
29,500
Prime/ME/Oct 07
22
6.(a)
Gifts of Rs.15,00,000 is not covered by the provisions of Section 56(2)(vi), since a wife is a
‘relative’ for the purpose of the said section, Rs.15,00,000 will not be taxable as income of
the wife.
Further the provisions of section 64 (1) (iv) are applicable to the interest earned as the
relationship of husband and wife existed on the date of ‘transfer of the asset’, as well as the
date of accrual of income. Thus the interest income is taxable as income of X as per the
provisions of section 64(1)(iv).
6(b)
Calculation of tax liability of X for the PY 2006-07:
House property
Rs.45,000
Capital Gains
LTCG
Rs.93,000
Other Sources u/s 56(2)(ib)
Rs.41,000
GTI
1,79,000
Less: deductions
Sec 80C
Rs.12,000
Sec 80G
Rs.20,000
Sec 80U (Balancing figure)
Rs.13,000
45,000
Total Income
1,34,000
Tax on total Income
Tax on LTCG – 93,000 – min exemption 93,000
=
Nil
Tax on winnings @ 30% = 41,000 @ 30%
= Rs.12,300
Total tax payable
= Rs.12,300
Add: education cess
= Rs. 246
Total payable
= Rs.12, 546
Working Notes:
¾ Income of X is taxable in his hands only and is not clubbed in the hands of either of his
parents u/s 64(1A), because as per the provisions of section 64(1A) income of minor
handicapped child is taxable in the hands of the minor only.
¾ Provisions of section 27(i) do not apply as the house was transferred by the grand father
and not the father.
¾ Expenditure incurred by the father
• On the mediclaim policy is allowed as a deduction to the father u/s 80D
• On the treatment of X as per the provisions of section 80DD, a deduction can be claimed
either u/s 80U or u/s 80DD and not both, since X has claimed a deduction u/s 80U, his
father cannot claim a deduction u/s 80DD.
¾ Deduction in the hands of X cannot be more than the GTI excluding LTCG and winnings
from lotteries etc i.e. cannot be more than 45,000
¾ Since X is a resident individual, while calculating tax the set off for minimum exemption
is allowed from LTCG but is not allowed from winnings from lotteries, thus minimum
exemption of Rs.93,000 is set off against LTCG, the balance minimum exemption of
Rs.7,000 is not allowable from winnings from lotteries.
Prime/ME/Oct 07
23
7(a)
Since the return of income filed on 13-12-2006 is a return u/s 142(1)(i), it can be revised.
Thus the return of income filed on 31-12-2006 is a valid revised return u/s 139(5).
As per judgment in CIT v Dhampur Sugar Mills - it was held that the revised return
substitutes the return it is revising and is deemed to have been filed on such date. Thus the
return actually filed on 31-12-2006 shall be deemed to have been filed on 13-12-2006 and the
first return will be deemed never to have been filed.
Thus for the assessment year 2006-07 the assessee no longer has loss of Rs.2,00,000 but has
a loss of Rs.6,00,000. However since the return is deemed to have been filed on 13-12-2006
it is still filed after the due date (i.e. 31-07-2006), it does not fulfill the provisions of section
80 and thus the business loss cannot be allowed to be carried forward.
7(b) (a) For a notice u/s 143(2) to be valid it must be served on the assessee within one year from
the end of the month in which the return was filed.
Thus, the return was filed on 12-11-2007, end of this month is 30-11-2007, 12 more
months is 30-11-2008. Thus the notice must be served on or before 30-11-2008 for it to
be valid.
(b)This notice is time barred or invalid, this is because it should have been served on the
assessee on or before 30-11-2008. Even if the notice was issued before the expiry of the
time period, it is invalid, as the condition u/s 143(2) is for service of notice.
8.
Computation of Total Income
Name of the Assessee: Mr. Nathan A.Y. 2007-08.
Rs.
I. Profits and Gains of Business or
Profession
- As per working note 1
79,200
II Income from Other Sources
- As per working note 2
1,000
Gross total Income
80,200
Less: Deductions under chapter VI-A
i) u/s.80D – Medical insurance
premia paid
ii) u/s.80DDB–Medical expenses
on dependent brother
10,000
15,000
25,000
55,200
NET TOTAL INCOME
Prime/ME/Oct 07
Rs.
24
Working note 1 – Profits and Gains of Business
or Profession
Net profit as per profit and loss a/c
Add: Inadmissible expenses
1. Traveling expenses – proportionate expenses
for Days not connected with business 20,000 x
3/15
2. Interest on capital
3. Depreciation charged to P&L a/c
4. Income tax
Rs.
Rs.
51,200
4,000
5,000
25,000
50,000
84,000
1,35,200
Less: Admissible expenses & items considered
under other heads:
8,500
45,000
2,500
1. Dividend from Indian companies
2. Depreciation as per IT Rules, 1962
3. Interest on borrowing from LIC
Income from Business
79,200
Working note 2 – Income from Other Sources
1. Dividend from Indian companies
Rs.
8,500
Less: Deduction u/s. 10(34)
8,500
2. Bank interest of minor son, clubbed by virtue
of se. 64(1A)
2,500
Less: exempt u/s. 10(32)
1,500
Rs.
NIL
1,000
1,000
Taxable Income from Other Sources
Prime/ME/Oct 07
56,000
25
PRIME ACADEMY
25
TH
SESSION MODEL EXAM
PE-II
Total No. of Questions : 7
Time Allowed : 3 Hours
Total No. of Printed Pages: 2
Maximum Marks : 100
IY
Question No.1 is compulsory; Answer any four from the rest
1(a) Convert the following from one system to another along with the working notes
(i)
(ii)
(iii)
(iv)
(v)
(9876) 10
(A2B4
) 16
(7523) 8
=
(
)
=
(
)
=
(
(592F)
=
(
=
(
16
(11011010.1101)2
8
8
)
16
)
10
)10
(5x1=5 Marks)
1(b) Describe briefly the following terms with reference to information technology
(i)
(ii)
(iii)
(iv)
Accumulator
File Allocation Table
Packet Switching
Routers
(v)
Bandwidth
(5x1=5 Marks)
1(c) Give one or two uses for each of the following:
(i)
(ii)
(iii)
(iv)
(v)
Cache Memory in a processor
Integrated Circuits are used for primary memory and not for secondary storage
Disk formatting
Boot strap loader
Need of hub in a network
(5x1=5 Marks)
1(d) Write True or False for each of the following:
(i)
(ii)
(iii)
(iv)
(v)
The Clock speed is the speed at which the processor executes instruction
A dumb terminal has an inbuilt processing capability
A Modem provides the connection between server and work station
In Word Processing , header and footer can be selected from the view menu
A graph created in Excel can be copied and linked to a Power point presentation slide
(5x1=5 Marks)
Prime/ME/Oct 07
26
2. Distinguish between the following: answer any four
a.
b.
c.
d.
Transaction and Master File
Dynamic RAM and Static Ram
PROM and EPROM
System Software and Application Software
e. Local Area Network and Wide Area Network
(4x5=20 Marks)
3.
a.
Explain the Concept of communication protocols
b. Write briefly on Program Library management Systems
c. Define an operating System and discuss various functions
(5+5+10=20 Marks)
4.
a) Communication software is an essential requirement of data communication System.
Explain the various functions of this data communication software
b) Write short note on Storage Area Network
c) Draw a flow chart to accept three given numbers A,B,C and calculate their average and
print the result
(5+5+10=20 marks)
5(a). Define the following functions used in MS-EXCEL
(i)
FV
(ii)
IRR
(iii)
SUM
(iv)
COUNT(range)
(v)
DB
5(b). Explain briefly the various language tools available in MS-WORD
5(c). Explain the uses of using a power point package for making a presentation
(5+10+5=20 Marks)
6. a) What is Generalised Audit Package(GAP).Describe the various facilities to be provided by the GAP
b) What do you understand by audit around the computer and audit through the computer
c) Write short notes on Digital Certificate
d) Explain the applicability of the Information Technology Act 2000
(4x5=20 Marks)
7. Write Short notes on the following: Answer any four
a.
b.
c.
d.
e.
f.
Computer Output Microfilm(COM)
Distributed Databases
Teleconferencing
Webcasting or Push Technology
Multiplexer
Check Digit
Prime/ME/Oct 07
(4x5=20 Marks)
27
PRIME ACADEMY
SUGGESTED ANSWERS
PE-II - INFORMATION TECHNOLOGY
1(a)
(vi)
9876
1234
154
19
2
8
8
8
Thus, (9876) 10
(ii)
(iii)
=
=
=
=
=
=
(v)
=
( 23224 )8
3
2
1
0
10x16 +2x16 +11x16 +4x16
40960+
512+176+4=41652
Hence (A2B4)
16 = (41652)8
=
=
=
(iv)
Remainder
4
2
2
3
=
=
=
=
Prime/ME/Oct 07
111 101 010 011
1111 0101 0011
( F53)16
3
2
1
0
5X16 +9X16 +2X16 +15X16
5X16+256+9X256+2X16+15
20480+2304+32+15
( 22831)10
1X27+126+1X24+1X23+1X21+1X2-1+1X2-2+1X2-4
128+64+8+2+0.5+0.25+0.0625
218+0.8125=218.8125
( 218.8125 )10
28
1 (b)
(vi) Accumulator: It refers to a storage area in memory used to accumulate
totals
of units or of amounts being computed
(vii) File Allocation Table: It is a log that records the location of each file and
the status of each sector. When a file is written to a disk, the operating
system checks the FAT for an open area, stores the file and then identifies
the file and its location in the FAT. The FAT solves common filing problems
with respect to updation of the files on the disk.
(viii) Packet Switching : It is a sophisticated means of data transmission
capacity of networks. In packet switching, all the data coming out of a
machine is broken upto chunks. Each chunk has the address of the location
it came from and also the address of the destination. This technique is used
to move data around on the Internet.
(ix)Routers : Routers are hardware devices used to direct messages across a
network. They also help to administer the data flow by such means as
redirecting data traffic to various peripheral devices or other computers by
selecting appropriate routes in the event of possible network malfunctions or
excessive use.
(x) Bandwidth: Represents the difference between the highest and lowest
frequencies that can be used to transmit data. In other words, it refers to a
channel’s information carrying capacity. It is usually ,measured in bits per
second(bps)
1 (c)
(vi)Cache Memory in a processor :
Processors incorporate their own internal memory called cache. The cache
acts as temporary memory and boosts processing power significantly. The
cache that comes with the processor is called level one or L1 cache. It runs
at the processor’s clock speed, and therefore is very fast.
(vii) Integrated Circuits are used for primary memory and not for
secondary storage
The integrated circuits also called silicon chips do lose their contents when
the computer’s power is shut off. These chips provide volatile storage. Due
to this reason, they are not used for secondary storage since secondary
storage serves as a means of permanent storage device.
Prime/ME/Oct 07
29
(viii) Disk formatting
A new diskette is nothing more than simple coated disk encased in plastic.
Before the computer can use it to store data, it must be magnetically mapped
into tracks and sectors called formatting so that the computer can go directly
to a specific point on the diskette without searching through data.
(ix)Boot strap loader
When a Computer is first turned on or restarted, a special type of absolute
loader called a bootstrap loader is executed. This bootstrap loads the first
program to be run by the computer- usually an operating system. Since no
program can be executed without OS, hence bootstrap loader is the most
essential system software without which the computer cannot be started.
(x) Need of hub in a network
A hub is hardware device that provides a common wiring point in a LAN. Each
node is connected to the hub by means of simple twisted pair wires. The hub
then provides a connection over a higher speed link to other LANs, the
company’s WAN or the internet.
1 (d)
(vi) True
(vii)
False
(viii)
False
(ix) True
(x) True
2
f. Transaction and Master File : Transaction files are temporary files and are
created from source documents for recording events and/or transactions.
Typical source documents from which transaction files are created mare
purchase orders, job cards, invoices, etc. These are detail files and
information stored in records of transactions files are normally used for
updating Master files
Master files on the other hand contains relatively permanent
records for identification and summarizing statistical information.
The information in the master file may include product code,
product description, specifications etc.
Prime/ME/Oct 07
30
Some of the examples of master file are student file, employees file, customer file,
inventory file, etc. these files are used with the transaction files for the purpose of
processing and updation of master records.
If the processing is of batch type, transactions are accumulated for a specified
period of time and transaction file is created. The same is sorted in
accordance to the master file. Later on, the transaction file is used to update
the master file. Once the master file is updated, transaction file may not be
required.
g. Dynamic RAM and Static Ram
The memory system constructed with MOS elements that can be changed is called
RAM. The purpose of RAM is to hold programs and data while they are in use.
Dynamic RAM is the most common type of main memory. It is dynamic because
each memory cell loses its charge so it must be refreshed hundreds of times each
second to prevent data from being lost. The most popular DRAM used in desktop
systems are Extended Data Out DRAM and Rambus DRAM. RDRAM sends data
down at high band width channel.
Static RAM on the other hand is a lot faster, larger and more expensive. It is
static because it need not be continually refreshed . because of it s speed it
is mainly used in cache memory.
The static RAM retains the stored data as long as power remains on whereas
in dynamic RAM the stored information is to be recharged before it
disappears. The power consumption of dynamic RAM is less than static
RAM. In DRAM, the computer does the refreshing process taking time out
from other chores every millisecond. Dynamic RAM is the most common type
of main memory whereas static RAM is faster larger and more expensive than
DRAM. Static RAM is used mainly in a special area of memory called a
cache.
h. PROM and EPROM
Prime/ME/Oct 07
31
Programmable Read only memory is one sort of Read Only Memory which can be
programmed as per user requirements. It is a non-volatile and allows the user to
program the memory chip with a PROM writer. The chip can be programmed only
once thereafter the contents of the program stored on it cannot be altered.
Erasable Programmable Read Only Memory, chip can be electrically
programmed with EPROM programmer. Unlike ROM and PROM , EPROM
chips can be erased and reprogrammed by the user number of times.
Exposing the EPROM chip to ultra violet light erases contents of the EPROM.
Due to this facility, EPROM are mostly used for R&D applications
i.
System Software and Application Software
(a) System Software comprises of those programs , which directs the
computer; Application Software is the software developed for solving
business problems
a. System Software varies from computer to computer; Application software
varies from organization to organization
b. System software is written in low level language; Application software are
usually written in High level language
c. Detailed knowledge of hardware is required; Application software requires
detailed knowledge of organization
d. System software is used to improve the performance and maximum
utilization of system resources; Whereas application software programs
are used to improve the speed and quality of a business activity
e. System software is usually supplied by the manufacturers whereas
application software is developed by individuals or supplied by software
vendors as generalized application software
j. Local Area Network and Wide Area Network
In a LAN, multiple user computers are connected together which are spread
over a small geographic region. The communication channels which are
privately owned are relatively high capacity and error free. It enables multiple
users to share software , data, devices and physical media.
In a WAN , multiple users computers are connected together, which are
spread over a wide geographic region. Communication channels such as
long distance telephone service, satellite transmission are provided by third
party.
Prime/ME/Oct 07
32
Channels are relatively low capacity and error prone. WAN operates at lower
link speed, usually 1 Mbps but does not allow sharing of resources
3
a. Communication protocols are sets of rules or
conventions that must be adhered to by both
communicating parties to ensure that the
information being exchanged between them is
received and interpreted correctly. A protocol
defines the following three aspects of digital
communication
(i) Syntax –
The format of data being exchanged, character set used ,
type of error correction used, type of encoding scheme being used.
(ii) Semantics - Type and order of messages used to ensure reliable and
error free information transfer.
(iii) Timing Define data rate selection and correct timing for various
events during data transfer
Communication protocols are defined in layers, the first of which is the
physical layer or the manner in which node in a network are connected to one
another. Both the network software and network interface card have to
adhere to a network protocol. The RS-232C connector is a standard for some
protocols. Subsequent layers , the number of which vary between protocols,
describe how messages are packaged for transmission, how messages are
displayed.
A number of different protocol codes are in use. The set of most common
protocols used on the internet is called TCP/IP
b.
Program Library Management System (PLMS) is the database of application and
system software used by the organization. It May include
a. Application and system software program code
b. Job Control statements that identify the following which manage processingResources used;
Processes to be performed; and
Processing parameters
PLMS provide several functional capabilities to facilitate effective and efficient management
of the data centre software inventory
PLMS Capabilities:
Prime/ME/Oct 07
33
Integrity: Each source program is assigned a modification number and version number.
Security over libraries is provided through passwords, encryption data compression and
back-up creation
Update: It facilitates the addition, deletions, resequencing, editing and updating of library
members. For example, by creating an automated backup copy prior to changes being made
and maintaining an audit trail of all library activities
Reporting:
List of additions, deletions, modifications, library member attributes can
be prepared for management and auditor review
Interface: library software packages may interface with the operating system, job scheduling
systems, access control systems and online program management
c.
An operating system is defined as an integrated system of programs which(i) supervises the operation of CPU;
(ii) Controls of the input/output functions of the computer system;
(iii) Translates programming languages into machine lanaguages
(iv) And provides various support services
Operation system is a master control program of a computer that manages its
internal function, provides means to control the computer’s operations and file
system
Programs are held in the computer memory, freeing thereby the operator
from inputting a program for each application. The codes of the operating
system of a computer are stored externally in a series of program files on the
computer’s hard disk or external memory
The operating systems are based on the concept of modularity
The operating systems are usually the creation of computer manufacturers,
who design the OS to suit the capabilities of that particular system.
Functions of an operating system include
(a) Scheduling jobs
(b) Managing hardware and software resources
c. Maintaining System security
d. Enabling multiple user resource sharing
e. Handling interrupts and
f. Maintaining usage records
4 a)
Communication software manages the flow of data across a network. They
are written to work with a wide variety of protocols which are rules and
procedures of exchanging data. Following functions are performed by the
communication software
Access Control:
i. Linking and disconnecting different devices
ii. Automatic dialing and answering telephones
iii.
Restricting access to authorized users
Prime/ME/Oct 07
34
iv.
Establishing parameters like speed mode and direction of
transmission
Network Mangement:
v.
vi.
vii.
viii.
ix.
Polling devices to see whether they are ready to send or receive
data
queuing input and output
determining system priorities
Routing messages
Logging network activity use and errors
Data and File transmission: Controlling the transfer of data, files and
messages among the various devices
Error Detection and control: Ensuring that the data sent is indeed the data
received
Data Security: Protecting data during transmission from unauthorized
access
b)
Storage Area Network (SAN) is a dedicated centrally managed secure
information infrastructure which enables any-to-any interconnections of
servers and storage system.
Features
(i) Facilitates universal access and sharing of resource
(ii) Supports unpredictable, explosive information technology growth
(iii) Provides Continuous service
(iv) Improves information protection and disaster tolerance
(v) Enhances security and data integrity of new computing architecture
The need for SAN is more because E-business, Globalization , Zero latency
and the need to transform –the ability to continually adapt , while immediately
accessing and processing information to drive successful business decisions
Benefits of SAN include
x.
increase in overall efficiency
xi.
improved system administration
xii.
improved availability of resources at lowest cost and
xiii.
increased business flexibility
c)
START
INPUT
A, B,C
Prime/ME/Oct 07
35
S=A+B+C
AVG=S/3
PRINT
AVG
STOP
STOP
5 a)
(vi)
FV: It is a financial function, which calculates the future value for a
series of equal investments also called annuity earning a fixed periodic
rate of interest
(vii)
IRR:This function gives the internal rate of return for a series of cash
flows
(viii)
SUM: It is a mathematical function which calculates the sum of values
in a list
(ix)
COUNT(range):It is a statistical function which counts the number of
arrangement values in the specified list. Empty cells are ignored or not
counted
Prime/ME/Oct 07
36
(x)
DB :It returns the depreciation of an asset for a specified period using
the fixed declining balance method
b) MS-WORD Offers several useful tools to aid writing and increase efficiency.
Following language tools are most common:
(i) Auto correct
(ii) Auto text
(iii) Spelling and grammar
(iv) Thesaurus
(v) Find and replace text
c)
6 a)
1. Effective communication : Using a power point to make a presentation
enhances the effectiveness of the communication between the speaker
and the listeners.
2. Effective Presentation: Various audio and visual tools like graphics,
charts , animation , movies etc present in power point makes the
presentation more effective.
3.Used at all places: Power point can also be used for corporate
communications, boardroom discussions , professional seminars and
symposiums other business meets etc
4.Easy to create: The package is simple to handle and the presentation
easier to create in power point.
Generalised Audit Package(GAP) are standard packages developed by
software companies specifically for the purpose of auditors for auditing data
stored on computer. These are standard packages available off the shelf ,
which can be used by auditor for audit through the computer.
GAP should have the following facilities:
™ Should be able to able to run over a wide platform of hardware , operating
systems and database environment
™ Wide access to various types of databases
™ Extract and analyse data s per set of parameters as defined by the auditor
™ Should be able to footings and cross footing of any specified data field
™ Able to do random selection and classification of data as required
™ Should be able t pick up exceptional data based on a pre-defined criteria
™ Should be able to compare current version of a file with the previous year’s
version
™ Should be able to print various reports as required by the auditor
Prime/ME/Oct 07
37
Typical operations which can be performed using GAPs include sampling ,
extraction, totaling of items meeting selection criteria, aging of data,
calculations, file comparisons and production of circularization letters
b)
Auditing around the
Auditing through the computer
Computer(black box approach)
(White box approach)
Computers are treated as mechanical Computers are used as live and
book keeping aids under this dynamic devices which add value to
approach
the process of auditing. They are the
target of auditing
The focus of audit is to take The focus of audit is to peruse the
voluminous reports and outputs, and accounting system and software
compare input vouchers with system used- to ensure that they provide
outputs to obtain audit assurance
audit assurance on the various
aspects of control
Computers are only considered as Computers are used to check
systems which provide legible calculations, to compare the contents
printouts
of
the
accounting of two files to examine files for
transactions.
Auditors
traced missing amounts and to analyse
transactions to black box and picked accounting data by funding ratios, etc
up the trail on the other side by
examining printouts
No
regard
is
paid
to
the CAATs and audit software tools are
transformation of data that takes used to analyse transformation of
place inside the computer
data
c)
Digital certificate means a digital signature certificate u/s35(4) issued by a
certifying authority.
The controller shall be the repository of all digital signature certificates issued
under this Act.
The Controller shall make use of hardware, software and procedures that are
secure from the intrusion and misuse
Observe such other standards to ensure assurance of secrecy and security of the
digital signatures
The controller shall maintain a computerized database of all public keys in such a
manner that such data base and the public keys are available to any member of
the public
Prime/ME/Oct 07
38
d) The Information Technology Act 2000 shall extend to the whole of India unless
otherwise provided in this Act, it applies also to any offence or contravention there
under committed outside India by any person
It came into force on 17th October 2000. Different dates may be appointed for
different provisions of this Act.
The provisions of this ACT shall have effect notwithstanding anything inconsistent
therewith contained in any other law for the time being.
The Act shall not apply to the followingA Negotiable instrument as defined in section 13 of the Negotiable Instrument s
Act 1881
A Power of attorney as defined in section 1a of the Powers of Attorney Act 1882
A Trust as defined in section 3 of the Indian Trusts Act 1882
A will as defined in section 2(h) of the Indian Succession Act 1925 including any
other testamentary disposition by whatever name called
Any contract for the sale or conveyance of immovable property or any interest in
such property
Other documents or transactions as notified by the Central Government in the
official Gazette
7 a.
Computer Output Microfilm(COM): Computer Output Microfilm is an output
technique that records output froma computer as microscopic images on roll or
sheet film. The images stored on COM are the same images, which would be
printed on paper. It reduces characters 24,42, 0r 48 times smaller than the normal
size.
The data to be recorded is displaced on CRT and a camera takes a picture of it
and places it on the film. The film is then processed either in the recorder unit or
separately. After it is processed, it can be retrieved and viewed by the user. It has
the following advantages:
Data can be recorded at a speed of 30,000 lines /minute
Cost of recording is very less compared to printed output
Huge size data can be recorded
Recording space requirement is less
It provides easy access to data, using indexing techniques
b. Distributed Databases: Under the distributed data processing system, the
processing is distributed hence the data to be processed must be located at the
processing site, This means that the data base or parts of the database must be
distributed, There are basically two ways to distribute a data base . The first is to
provide duplicates of all data at all sites, This approach is called a replicated
database. If it is necessary for every location to have frequent access to the same
data, replication of the database may be recommended. However replication of a
database is very expensive in terms of computer system resources and it difficult
Prime/ME/Oct 07
39
to maintain consistency for each data element. Even then, replication provides
some measure of security by providing duplicates of database in case of failure at
one location.
The approach is partitioning of data wherein partitioning is achieved either along
geographical lines of segmenting data based on locations
Distributed databases usually reduce the costs for an organization ; they also
provide faster response time but suffer from problems of security , data
redundancy , loss of control resulting in danger to data integrity.
c. Teleconferencing: Refers to electronic meeting that involves people who are
physically at different sites. Telecommunication technology allow members of the
meeting to interact with one another without traveling to the same location. Three
types of teleconferencing namely audio, video teleconferencing and computer
teleconferencing exist.
Audio teleconferencing is the use of voice communication equipments to establish
audio link between geographically dispersed persons and to conduct a conference.
This does not require a computer but requires two way communication facilities.
Video conferencing is the use of television equipments to link geographically
dispersed participants. Both audio and video is available .it allows for two way
communication.
Lastly computer conferencing is the use of networked computers that allow
participants with some common characteristics to exchange information
concerning a particular topic. It can be used within a single geographic site
d.
Webcasting or Push Technology: It allows users to passively receive
broadcasted information rather than actively search the web for information.
Push technology allows users to choose from a menu of sources, specifying what
kind of information they want to receive. Once selected , the information is
automatically forwarded to the user. Internet news services, which deliver the
day’s activities the user’s desktop are examples of push technology. Users can
also download software, select the frequency with which they will receive
services and subscribe to a variety of information source. There is very little cost
to the user for push services because information is delivered with advertising
and users view their custom-tailored news offline. Push technology is having a
major impact on the internet probably the biggest impact since the emergence of
the web
Prime/ME/Oct 07
40
e. Multiplexer: It is a device that combines a large number of low speed
transmission lines into high speed line
It permits a single transmission link to perform as if it were several separate links
Multiplexing is a form of data transmission in which one communication channel
carries several transmissions at the same time
f.
Check DigitaIs: A digit associated with a word or part of word for the purpose of
checking the existence of the certain class of errors.
It is a software control used by a programmer to ensure the accuracy of the data
fed in the computer
The Check digit the becomes a part of the code and the same arithmetic
procedure is used to check the correctness of the code in all subsequent
processing operations
Prime/ME/Oct 07
41