4 5931788210203003021

©The National Board of Accountants and Auditors, 2015
Contents
Questions Page
B1 – Financial Management ………….….…............................... 1
B2 – Financial Accounting …….......……................................ 8
B3 – Auditing Principles and Practice ……………………….. 20
B4 – Public Finance and Taxation I ………………………….. 28
B5 – Performance Management …………………………………. 34
B6 – Management, Governance and Ethics …………………. 42
Suggested Answers Page

B1 – Financial Management ………….….…............................... 48
B2 – Financial Accounting …….......……................................ 60
B3 – Auditing Principles and Practice ……………………….. 76
B4 – Public Finance and Taxation I ………………………….. 90
B5 – Performance Management …………………………………. 100
B6 – Management, Governance and Ethics …………………. 111

EXAMINATION : INTERMEDIATE LEVEL
SUBJECT : FINANCIAL MANAGEMENT
CODE : B1
EXAMINATION DATE : TUESDAY, 3TH NOVEMBER 2015
TIME ALLOWED : THREE HOURS (2:00 P.M. – 5:00 P.M.)
---------------------------------------------------------------------------------------------------------
GENERAL INSTRUCTIONS
1. There are TWO sections in this paper. Sections A and B which comprise
SEVEN questions.
2. Answer question ONE in section A.
3. Answer any FOUR questions in Section B.
4. In total answer FIVE questions.
5. Marks are shown at the end of each question.
6. Calculate your answers to the nearest two decimal points.
7. Show clearly all your workings in respective answers where applicable.
8. This question paper comprises 7 printed pages.
________________________
Intermediate Level, November 20145 1

---------------------------------------------------------------------------------------------------------
SECTION A
Compulsory Question
---------------------------------------------------------------------------------------------------------
QUESTION 1
APEX Co. achieved a turnover of TZS.16 million in the year that has just ended and
expects turnover growth of 8.4% for the next year. Cost of sales in the year that has
just ended was TZS 10.88 million and other expenses were TZS 1.44 million. The
financial statements of APEX Co. for the year that has just ended is as follows:
Statement of financial position
AMOUNT
(TZS Millions)
Assets
Non-Current Assets 22.0
Current Assets
Inventory 2.4
Trade Receivables 2.2
Total Assets 26.6
Equity and Liabilities
Equity Finance
Ordinary Shares 5.0
Reserves 7.5
Long Term Bank Loan 10.0
Trade Payable 1.9
Overdraft 2.2
Total Equity and Liabilities 26.6
The long-term bank loan has a fixed annual interest rate of 8% per year. APEX Co.
pays taxation at an annual rate of 40% per year. The following accounting ratios have
been forecasted for the next three years:
Gross profit margin: 30%

Operating profit margin: 20%
Dividend payout 50%
Inventory turnover 110 days
Trade receivable period: 65 days
Trade payable period: 75 days
Overdraft interest in the next year is forecasted to be TZS 140,000. No change is
expected in the level of non-current assets and depreciation should be ignored.
2 Intermediate Level, November 2015

REQUIRED:
(a) Prepare the following forecasted financial statements for APEX Co.:
(i) A Statement of Income for the next year. (7 marks)
(ii) A Statement of Financial Position at the end of the next year. (7 marks)
(b) Analyze and discuss the working capital financing policy of APEX Company.
(6 marks)
(Total: 20 marks)
---------------------------------------------------------------------------------------------------------
SECTION B
There are SIX questions. Answer ANY FOUR questions
---------------------------------------------------------------------------------------------------------
QUESTION 2
(a) FARANGA Company produces and sells a detergent product, the Faran. To
produce the Faran, the company uses a special raw material, the Farra. The
company wishes to minimize this raw material inventory cost. Annual demand
for the Farra is 6,000 units per year costing TZS.1,200 per unit. Inventory
management costs for this raw materials are as follows:
Ordering cost: TZS.60,000 per order

Holding cost: TZS.500 per unit per year
The supplier of this raw materials has offered a bulk purchase discount of 1%
for orders of 10,000 units or more. If bulk purchase orders are made regularly,
it is expected that annual holding cost for this raw material will increase to
TZS.600 per unit per year.
REQUIRED:
(i) Calculate the total cost of inventory for the raw material when using the
Economic Order Quantity (EOQ). (5 marks)
(ii) Determine whether accepting the discount offered by the supplier will
minimize the total cost of inventory for the raw material. (5 marks)
(b) Discuss the factors to be considered in formulating the dividend policy of a

stock exchange listed company. (10 marks)
(Total: 20 marks)

QUESTION 3
(a) Discuss how an optional investment schedule can be formulated when capital is
rationed and investment projects are either:
(i) Divisible
(ii) Non-divisible (6 marks)
(b) Faluja Company has annual credit sales of TZS.4.2 million and cost of sales of
TZS.1.89 million. Current assets consist of inventory and accounts receivable.
Current liabilities consist of accounts payable and an overdraft with an average
interest rate of 7% per year. The company gives two months’ credit to its
customers and is allowed, on average, one month’s credit by trade suppliers. It
has an operating cycle of three months.
Other relevant information:
Current ratio of Faluja Company 1.4
Cost of long-term finance of Faluja Company 11%
REQUIRED:
(i) Calculate the size of overdraft of Faluja Co., the net working capital of
the company and the total cost of financing its current assets. (8 marks)
(ii)Discuss the key factors which determine the level of investment in
current assets. (6 marks)
(Total: 20 marks)
QUESTION 4
(a) A foreign prospective investor is concerned on the effects of taxation in the
investment decisions. Assume you have been consulted as an expert to advise
on the issue.
REQUIRED:
Assist the prospective investor on identifying and describing the effects that
taxation has on appraising investments. (8 marks)
(b) Malaet Ltd is considering manufacturing a new product. This requires
machinery costing TZS 20 million with a life of four years and a terminal value
of TZS 5 million. Profits before depreciation from the project will be TZS.8
million per annum. An investment of working capital of TZS 2 million will be
required for the duration of the project. Tax allowances on the machine are
25% p.a. on reducing balance. At the end of the project’s life a balancing
charge or allowance will arise equal to the difference between the scrap
proceeds and the tax written down value.
Tax is payable at a rate of 35%. Tax cash flows on profits occur in the same
year as the profits giving rise to the tax charge. The cost of capital is 15%.
REQUIRED:
Evaluate whether the project should be accepted or not. (12 marks)
(Total :20 marks)

QUESTION 5
(a) Compare the ‘dividend growth model’ and ‘the capital asset pricing model’ when
estimating the cost of equity of a company. (6 marks)
(b) PAMELA Co. has a dividend payout ratio of 40% and has maintained this payout
ratio for several years. The current dividend per share of the company is TZS.50
per share and it expects that its next dividend per share, payable in one year’s
time, will be TZS.52 per share.
The capital structure of the company is as follows:

TZS.(million) TZS.(million)
Equity
Ordinary shares (par value TZS 100 per 2,500
share)
Reserve 3,500 6,000
Debt
Bond A (par value TZS 10,000) 2,000
Bond B (par value TZS 10,000) 1,000
3,000
9,000
Bond A will be redeemed at par in ten years’ time and pays annual interest of 9%.
The cost of debt of this bond is 9.83% per year. The current ex interest market
price of the bond is TZS 9,508.
Bond B will be redeemed at par in four years’ time and pays annual interest of
8%. The cost of debt of this bond is 7.82% per year. The current ex interest
market price of the bond is TZS 10,201.
PAMELA Co. has a cost of equity of 12.4%. Ignore taxation.
REQUIRED:
(i) Calculate the following values for PAMELA Co:
a. Ex-dividend share price, using the dividend growth model; (2 marks)

b. Capital gearing (debt divided by debt plus equity) using market values;
and (3 marks)
c. Market value Weighted Average Cost of Capital (WACC). (2 marks)
(ii) Discuss whether a change in dividend policy will affect the share price of
PAMELA Co. (7 marks)
(Total : 20 marks)
QUESTION 6
Angumiliki Ltd has in issue 8 million shares with an ex-dividend market value of
TZS.716 per share. A dividend of TZS.62 per share for 2015 has just been paid. The
pattern of recent dividends is as follows:
Year 2012 2013 2014 2015
Dividends per share TZS 55.1 57.9 59.1 62.0
Angumiliki Ltd also has in issue 8.5% bonds redeemable in five years’ time with a total
nominal value of TZS.500 million. The market value of each TZS.10,000 bond is
TZS.10,342. Redemption will be at nominal value.
Angumiliki Ltd is planning to invest a significant amount of money into a joint venture
in a new business area. It has identified a proxy company with a similar business risk
to the joint venture. The proxy company has an equity beta of 1.038 and is financed
75% by equity and 25% by debt, on a market value basis.
The current risk-free rate of return is 4% and the average equity risk premium is 5%.
Angumiliki Ltd pays profit tax at a rate of 30% per year and has an equity beta of 1.6.
REQUIRED:
(a) Calculate the cost of equity of Angumiliki Ltd using the dividend growth model.
(4 marks)
(b) Discuss whether the dividend growth model or the Capital Asset Pricing Model
(CAPM) should be used to calculate the cost of equity. (5 marks)
(c) Calculate the weighted average after-tax cost of capital of Angumiliki Ltd using
a cost of equity of 12%. (6 marks)
(d) Discuss whether changing the capital structure of a company can lead to a
reduction in its cost of capital and hence, to an increase in the value of the
company. (5 marks)
(Total: 20 marks)

QUESTION 7
(a) Kimolo Company is an all equity financed company with a cost of capital of
19%. The company is considering the following capital investment projects:
Project Outlay now Expected receipt in one year Beta factor

(TZS) (TZS)
A 70 million 76.65 million 0.3
B 70 million 79.10 million 0.5
C 105 million 124.6 million 1.0
D 140 million 168.0 million 2.0
The Treasury bill rate is 8% and the expected return on an average market
portfolio is 15%.
REQUIRED:
(i) Calculate Kimolo’s beta factor. (2 marks)

(ii) Evaluate the economic viability of each project. (8 marks)
(b) It is rightly argued that the principal objective of a corporate firm is maximizing
shareholder’s wealth. However, the actions taken by a company are decided
upon by its managers (directors). Typically, managers will have their own
objectives which could conflict with those of the shareholders and other
interested parties.
REQUIRED:
Enumerate and discuss any five specific examples of the conflicts of interest
that might occur between managers and shareholders. (10 marks)
(Total: 20 marks)
________________  _____________

SUBJECT : FINANCIAL ACCOUNTING000000
CODE : B2
EXAMINATION DATE : WEDNESDAY, 4TH NOVEMBER, 2015
---------------------------------------------------------------------------------------------------------
1. There are TWO sections in this paper. Sections A and B which comprise of
SEVEN questions.
2. Answer question ONE in Section A.
3. Answer ANY FOUR questions in Section B.
6. Calculate your answers to the nearest two decimal points where necessary.
_________________

---------------------------------------------------------------------------------------------------------
SECTION A
Compulsory Question
---------------------------------------------------------------------------------------------------------
QUESTION 1
The draft statements of financial position as at 30th September 2014 and statements of
profit or loss for the year ended 30th September 2014 for three entities, Kilimanjaro,
Kibo and Mawenzi are given below:
Statement of Financial position as at 30th September 2015
Particulars Notes Kilimanjaro Kibo Mawenzi

TZS TZS TZS
Non-Current Assets
Property, Plant and Equipment 219,200,000 92,000,000 68,400,000
Investment (i)
Loan to Kibo (iii) 25,000,000 0 0
Investment in Mawenzi (ii) 38,400,000 0 0
282,600,000 92,000,000 68,400,000
Current Assets
Inventories (iv) 181,000,000 78,200,000 5,200,000
Trade and other receivables 229,200,000 68,600,000 5,700,000
Cash and cash equivalent (iv) 11,300,000 7,000,000 1,900,000
421,500,000 153,800,000 12,800,000
Total Assets 704,100,000 245,800,000 81,200,000
Equity and Liability

Equity
Equity shares of TZS100 each 552,000,000 72,000,000 32,000,000
Retained Earnings 79,600,000 45,700,000 22,900,000
631,600,000 117,700,000 54,900,000
Non-current Liabilities
Long term Loans (iii) 0 65,000,000 0
Current Liabilities
Payables and accruals 72,500,000 63,100,000 26,300,000
Total Equity and Liabilities 704,100,000 245,800,000 81,200,000

Statement of profit and loss for the year ended 30th September 2014
Kilimanjaro Kibo Mawenzi

TZS TZS TZS
Revenue 192,500,000 48,000,000 28,500,000
Cost of sales (92,500,000) (23,000,000) (11,900,000)
Gross profit 100,000,000 25,000,000 16,600,000
Expenses (24,000,000) (5,400,000) (4,200,000)
76,000,000 19,600,000 12,400,000
Interest received 2,500,000 0 0
Finance cost (2,700,000) (4,500,000) 0
75,800,000 15,100,000 12,400,000
Income tax expense (14,700,000) (3,800,000) (2,700,000)
Profit for the year 61,100,000 11,300,000 9,700,000
Notes
(i) Kilimanjaro acquired all of Kibo’s equity shares on 1 st October 2013 by
issuing 600,000 new Kilimanjaro shares. The agreed purchase consideration
was TZS.135,600,000. However, Kilimanjaro has not yet recorded the
acquisition in its accounting records. Kibo’s retained earnings were
st
TZS.31,900,000 on 1 October 2013. The fair value of Kibo’s property, plant
and equipment on 1st October 2013 exceeded its carrying value by
TZS.23,100,000. The excess of fair value over carrying value was attributed to
buildings owned by Kibo. At the date of acquisition these buildings had a
remaining useful life of 21 years. Kilimanjaro’s accounting policy is to
depreciate buildings using the straight line basis with no residual value.
Kilimanjaro carried out an impairment review of goodwill arising on acquisition
of Kibo and found that as at 30th September 2014 the goodwill had been
impaired by 15%.
(ii) Kilimanjaro purchased 96,000 TZS 100 equity shares in Mawenzi on 1st
October 2013 for TZS.38,400,000 when Mawenzi’s retained earnings were
TZS.13,200,000. The fair value of Mawenzi’s net assets was the same as its
carrying value at that date. Kilimanjaro exercises significant influence over all
aspects of Mawenzi’s financial and operating policies.
(iii) On 1st October 2013 Kilimanjaro advanced Kibo a 10 year loan of
TZS.25,000,000 at 10% interest per year. Kibo paid the interest due on 25 th
September 2014.
(iv) Kilimanjaro occasionally trades with Kibo. During September 2014
Kilimanjaro sold Kibo goods for TZS.17,000,000. Kilimanjaro uses a mark-up
of 25% on cost. At 30th September 2014, 50% of the goods remained in Kibo’s
inventory. Kibo paid TZS.9,000,000 to Kilimanjaro on 29th September 2014.
Kilimanjaro did not receive the payment until 2nd October 2014.

REQUIRED:
Prepare:
(a) Journal entry to record the purchase of Kibo in Kilimanjaro’s accounting
records. (3 marks)
(b) Consolidated statement of profit or loss for Kilimanjaro for the year ended 30 th
September 2014. (8 marks)
(c) Consolidated statement of financial position for Kilimanjaro as at 30th
September 2014. (9 marks)
(Total 20 marks)
---------------------------------------------------------------------------------------------------------
SECTION B
---------------------------------------------------------------------------------------------------------
QUESTION 2
(a) There has to be some mechanisms to ensure that accounting work is

performed according to set principles and standards. Furthermore, an assurance
is needed that the assumed professional expertise does actually exist and is
applied to the work in hand. This is achieved by means of a regulatory
framework. Regulatory framework is a structure which helps an entity decides
how to treat items that need to be included in the financial statements.
REQUIRED
(i) Evaluate the reasons why do we need regulatory framework. (6 marks)
(ii) What does the IASBs Conceptual Framework of Financial Reporting

deals with? (4 marks)
(b) The word ‘faithful representation’, indicates truthfulness and fairness in the
financial statements presentations. In the financial statements each element
therein (assets, liability, equity, income and expense) represents something to
us. If all representations regarding these elements are true and fair, we call
them faithful representations. Financial information that faithfully represents
economic phenomena has three characteristics.
REQUIRED:
(i) Explain the three characteristics that make financial statement

presentation being faithfully represented. (6 marks)
(ii) What are the things needed to be observed to ensure the above
characteristics are achieved? (4 marks)
(Total: 20 marks)
QUESTION 3
BESTPACK Limited is a company involved in the manufacture of packaging for the

food industry. The following trial balance was extracted on 31st December 2014.
Dr Cr
Particulars TZS. ‘000 TZS. ‘000
Administrative Expenses 148,600
Allowance for doubtful debts 7,000
Bank 403,400
Distribution costs 214,000
Government grants 100,000
Inventory at 1st January 2014 225,100
Issued share capital 160,000
Long term loan 240,000
Office equipment at cost at 1st January 2014 120,000
Plant and Equipment at cost at 1st January 2014 440,000
Premises at cost at 1st January 2014 800,000
Accumulated depreciation – Office equipment at 1st January 2014 40,000
Accumulated depreciation – Plant and Equipment at 1st January 2014 88,000
Accumulated depreciation – Premises at 1st January 2014 345,000
Purchases 647,000
Retained earnings at 1st January 2013 896,000
Revaluation surplus 20,000
Revenue 1,140,000
Trade payables 86,100
Trade receivables 124,000
3,122,100 3,122,100
The following information based on your investigations, has also come to your
attention, which unless specified, have not been included in the Trial balance above:
(a) Inventory at 31st December 2014 is TZS.243,510,000 This includes

rd
TZS.2,410,000 for items accidentally destroyed on 3 January 2014 and
TZS.1,540,000 which relates to the cost of damaged inventory which can be
reworked at a cost of TZS.200,000 and which can then be sold for
TZS.1,230,000.
(b) Depreciation is to be charged as follows: Plant & Equipment 10% straight line
on cost, Office Equipment 20% reducing balance. Depreciation for the year is
charged in full in the year of sale and none in the year of purchase.
(c) Plant & Equipment expenditure of TZS.90,000,000 and an extension to the

premises costing TZS.250,000,000 were incurred and paid for in late December
2014.

(d) The premises were revalued to TZS.400,000,000 on 1 st January 2014. The
useful life of the revalued premises after revaluation is 40 years and the residual
value of the buildings is expected to be zero.
(e) During the year the company received a government grant towards the cost of
the extension which is recorded in the trial balance. BESTPACK Limited
intends to amortize the grant at the same rate with which it depreciates its
premises.
(f) Tax is estimated at TZS.30,000,000 for the year 2013. A tax payment was
made on 31st December 2014 of TZS.33,000,000.
(g) A customer whose debt had been written off in 2011 contacted BESTPACK
Limited in November 2014 and confirmed that it would pay 80% of it’s debt as
full and final payment in December 2014. The previous amount written off was
TZS.4,000,000. The customer paid 80% of it’s original debt on 31 st December
2014 by cheque.
(h) BESTPACK Limited has decided that the allowance for doubtful debts should
be set at 6% of receivables.
(i) Rent prepaid during the period was TZS.10,000,000 and amounts outstanding at
the year-end amounted to TZS.2,400,000 and TZS.760,000 for Telephone and
Light & Heat respectively.
(j) Expenses are to be allocated evenly between distribution costs and

administrative expenses.
REQUIRED:
Prepare a Statement of Profit or Loss and other comprehensive Income and

Statement of Financial Position for BESTPACK Limited for the financial year
ended 31st December 2014.
(20 marks)

QUESTION 4
(a) A statement of cash flows is one of the components of financial statements
prepared by companies. In this statement, the activities resulting into cash
flows are classified into operating activities, investing activities, and financing
activities.
REQUIRED
State the importance of classifying the activities into operating, investing, and
financing to the users of financial statements. (6 marks)
(b) Below is the consolidated statement of financial position of Chelula Group as at

30th April 2015 and the consolidated statement of profit or loss for the year
ended on that date:
Consolidated Statement of Financial Position as at 30th April

2015 2014
TZS TZS TZS TZS
Million Million Million Million
Assets
Non-Current Assets
Property, Plant and 4,067 3,950
equipment
Current Assets
Inventory 736 535
Trade receivables 605 417
Cash 294 238
1,635 1,190
Total Assets 5,702 5,140
Equity
Share capital 1,000 1,000
Revenue reserves 3,637 3,118
4,637 4,118
Non-controlling 482 512

interest
Total equity 5,119 4,630
Current liabilities
Trade payables 380 408
Current tax payable 203 102
583 510
Total equity and 5,702 5,140
liabilities

Consolidated Statement of profit or loss for the year ended 30th April 2015
TZS Million
Profit from operations 878
Profit on disposal of shares in subsidiary 34
Profit before tax 912
Tax (290)
Profit after tax 622
Attributable to non-controlling interest 103
Attributable to the equity holders of Chelula group 519
You are also given the following information:
(1) Chelula group sold its entire interest in Nyomi on 31 st January 2015 for
TZS.400,000,000. Chelula group acquired an 80% interest in Nyomi on
incorporation several years ago. The net assets at the date of disposal
were:
TZS Million
Property, plant and equipment 390
Inventory 50
Trade receivables 39
Cash 20
Trade payables (42)
457
(2) Depreciation charge for the year was TZS.800,000,000.
(3) There were no disposals of non current assets other than on the disposal
of the subsidiary.
REQUIRED
(i) Calculate the amount that will appear in the statement of cash flows for
the disposal of Nyomi Co. (1 mark)
(ii) Calculate the amount of additions to the property, plant and equipment.
(1 mark)
(iii) Calculate the amount of dividend paid to non-controlling interest.

(2 marks)
(iv) Prepare the Consolidated Statement of Cash Flows for Chelula group for
the year ended 30th April 2015, using the indirect method for the
operating activities cash flows. (10 marks)
(Total: 20 marks)

QUESTION 5
(a) Liquidity is one of the useful aspects in analyzing various financial statements
of entities.
REQUIRED:
State the importance of understanding the liquidity of an entity to different users

of financial statements, giving examples of different ratios of liquidity that can
be computed. (5 marks)
(b) Sarinjo Products plc has a current ratio on 30 th September 2015 of 2:1, before
the following transactions were completed:
 Sold a building for cash

 Exchanged old equipment for new equipment (no cash was involved)
 Declared a cash dividend on preferred stock.
 Sold merchandise on account (at a profit)
 Retired loan notes that would have matured in 2023
 Issued a stock dividend to common stockholders
 Paid cash for a patent
 Temporarily invested cash in government bonds
 Purchased inventory for cash
 Written off an account receivable as uncollectible, uncollectible amount is
less than the balance of the allowance for uncollectible accounts.
 Paid the cash dividend on preferred stock that was declared earlier
 Purchased a computer and gave a two-year promissory note
 Collected accounts receivable
 Borrowed from the bank on a 120-day promissory note
 Discounted a customer’s note, interest expense was involved
REQUIRED:
Considering each transaction independently of all the others:
(i) Indicate whether the amount of working capital will increase, decrease,
or be unaffected by each of the above transactions. (7.5 marks)
(ii) Indicate whether the current ratio will increase, decrease, or be

unaffected by each of the above transactions. (7.5 marks)
(Total:20 marks)
(Use a tabular format to present your answer, one table can suffice answering
both parts (i) and (ii).

QUESTION 6
The information summarized below are of the financial statements of Mbalali Ltd for
the year to 30th September 2014, together with comparative Statement of Financial
Position:
Statement of Profit or Loss

TZS ‘000,000’
Sales revenue 662
Cost of sales (396)
Gross profit 266
Operating expenses (124)
Interest payable (6)
136
Income tax (48)
Profit for the period 88
Statement of Financial Position as at

30th September 2014 30th September 2013
TZS TZS TZS TZS TZS TZS
‘000,000’ ‘000,000’ ‘000,000’ ‘000,000’ ‘000,000’ ‘000,000’
cost / depreciation NBV Cost / depreciation NBV
valuation valuation
Non-current
Assets
Property, plant 650 155 495 615 160 455
and equipment
Current assets
Inventory 86 72
Trade accounts 74 41
receivable
Insurance claim 15 Nil
Bank Nil 175 12 125
Total assets 670 580
Equity and
liabilities
Ordinary shares 120 100
of TZS 1 each
Reserves:
Share premium 38 30
Revaluation 40 15
reserve
Accumulated 294 372 256 301
profits
492 401

Non-current
liabilities
Deferred tax 21 32
10% 30 51 50 82
Redeemable
preference
shares
Current
liabilities
Trade accounts 74 65
payable
Tax payable 40 32
Overdraft 13 127 Nil 97
Total Equity 670 580
and Liabilities
The following information is relevant:
(i) Non-current assets: depreciation of property, plant and equipment during the
year was TZS 45 million included in cost of sales. During the year, plant
with a carrying value of TZS 60 million was sold for TZS 48 million. The
loss was included in cost of sales.
(ii) Share capital: during the year some preference shares were redeemed at a
premium of 10%. The company operates in a country where premiums on
redemption of shares can be charged to an available share premium account.
Mbalali has taken advantage of this allowance. There was no issue of
preference shares during the year. The increase in the ordinary share capital
during the year was due to a cash issues.
(iii) Revaluation reserve: the revaluation reserve was increased during the year
by the surplus on the revaluation of the company’s head office. A transfer
of TZS 4 million was made from the revaluation reserve to accumulated
realized profits representing the realization of previous surpluses.
(iv) Ordinary dividends: the ordinary dividends paid during the year are part of
the movement on the accumulated profits.
(v) Insurance claim: on 1st March 2014 an employee of Mbalali Ltd suffered a
serious accident. Mbalali Ltd accepted responsibility for the accident and
paid compensation of TZS 18 million to the employee and his family. The
company is partly insured against such liabilities and has agreed with the
insurance company a settlement figure of TZS 15 million (payable to
Mbalali Ltd). Mbalali Ltd has accounted for the net cost of the claim as part
of its operating expenses. It has not yet received the settlement from the
insurance company, but it has recorgnized the TZS 15 million receivable.

REQUIRED:
(a) Prepare a statement of cashflows for Mbalali Ltd for the year to 30 th
September 2014 in accordance with IAS 7 Cash Flow Statements using
indirect method. (15 marks)
(b) Explain why IAS 7 encourages companies to disclose additional

information on operating capacity cash flows (included as investing
activities) and segment activity cash flows. (5 marks)
(Total :20 marks)
QUESTION 7
(a) Accounting Standards provide guidance on what is reported

by entities in the financial statements.
REQUIRED
Mention and briefly explain [giving examples] FOUR areas that are covered by
a typical accounting standard dealing with reporting any particular item e.g.
intangible assets, revenue, etc (8 marks)
(b) Your friend, an engineer running a small consulting firm

has read annual reports of different companies in Tanzania and greatly
appreciates the role of some statements such as the statement of financial
position as well as the statement of profit or loss. What he doesn’t really
understand is the role that some components, specifically the director’s report
and the statement of cash flows play in providing useful information to users of
financial statements, especially investors.
REQUIRED
State separately the role of the statement of cash flows and the directors’ report
and how such components are useful in overcoming the limitations of the
statement of financial position and the statement of profit or loss. (12 marks)
(Total: 20 marks)
_______________________

SUBJECT : AUDITING PRINCIPLES AND PRACTICE
CODE : B3
EXAMINATION DATE : THURSDAY, 5TH NOVEMBER, 2015
TIME ALLOWED : THREE HOURS (9:00 A.M. – 12:00 NOON)
---------------------------------------------------------------------------------------------------------
1. There are TWO sections in this paper. Sections A and B which comprise
SEVEN questions.
2. Answer question ONE in section A.
3. Answer ANY FOUR questions in section B.
5. Marks are shown at the end of the each questions.
6. In marking candidates’ scripts, examiners will take into account clarity of

exposition, logic of arguments, proper arrangement and presentation of answers
together with the use of relevant examples.
________________________

---------------------------------------------------------------------------------------------------------
SECTION A
Compulsory Question
---------------------------------------------------------------------------------------------------------
QUESTION 1
(a) Your employer, Kifaru CPAs has just reformed its quality control systems and
the partner has tasked you with the responsibility of being incharge of quality
for all audits carried out by the firm.
In the course of implementing your responsibility for the first time you come
across the audit file of Kiwiko Company Ltd for which the audit for the year
ended 30th June 2015 is underway and you meet the audit team and review the
working papers.
Consequently, the following observations are made:

(i) There is no evidence on file that the pre-audit meeting was held with the
partner as the engagement partner was on leave. Due to this anticipated
absence, the partner had communicated to the audit senior through an email
approving the commencement of the audit and that the meeting will be held
upon his return. To the date of your visit, no meeting had been held.
(ii) There were three staff in the field on the date of your visit, an audit assistant
and two audit trainees. The Audit Assistant has been on this audit for two
consecutive years now. Haika, the Audit incharge, was absent during your
visit and you were informed that she only spends a few hours daily at this
client. A review of the time sheets for the Audit incharge shows that she is
busy on another assignment and she spends more time at this other client.
(iii) She has delegated supervision of the audit to the experienced assistant and
requested him to report any problems to her.
(iv)The audit is nearing completion and there is no evidence of work done

having been reviewed. On enquiry from the Audit incharge, she informs
you that she is aware that the work needs to be reviewed and that she only
needs to spend a day to review the work done and then she will pass on the
working papers to the Audit Manager for further review.
(v) The experienced Audit Assistant was responsible for ensuring that inventory
valuation was carried out in line with the accounting standards. He was not
clear with the valuation of work in progress and the amount involved is
material. His efforts to get the involvement of the Audit incharge failed as
she kept saying that she was busy and would resolve the matter later.
Towards the end of the audit, the Audit incharge could not resolve this
matter and decided to refer the matter to the Audit Manager. The Audit
Manager was on leave and stated that, he would not like to cut short his
leave and asked the Audit incharge to conclude and that she could not bring
this matter to the attention of the Engagement Partner.

REQUIRED:
Identify and comment on the implications of your findings on the quality

control policies and procedures of your firm. (8 marks)
(b) In an audit assignment, auditors are required to comply with International

Standards on Auditing (ISAs) in order for them to carry out an effective audit.
REQUIRED:
Explain the usefulness of International Standards on Auditing in enabling the

auditors conduct an efficient and effective audit of the financial statements of a
client. (4 marks)
(c) Auditors follow a risk based approach in the performance of the audit. This
approach ensures that any possible misstatements are identified and dealt with
appropriately. For this reason, it is necessary that before carrying out an audit,
the auditors assess the risk of material misstatements of the financial statements
on work that has been carried out in relation to risk.
Auditors identify risk through understanding the entity and its environment. It
is important that the auditors record the work that they carry out in the risk
assessment ISA 330, the auditor’s responses to assessed risks, contains a
number of documentation requirements.
REQUIRED:
State any four (4) matters in relation to work carried out during risk assessment
that should be documented. (4 marks)
(d) International Professional Practice Frameworks (IPPF) is

governing the way Internal audit is supposed to be conducted.
REQUIRED:
(i) Explain different types of IPPF. (2 marks)
(ii) Explain the roles of IPPF. (2 marks)

(Total : 20 marks)

---------------------------------------------------------------------------------------------------------
SECTION B
---------------------------------------------------------------------------------------------------------
QUESTION 2
(a) Briefly explain FIVE elements of an assurance engagement. (5 marks)
(b) Mfala has been serving as a Board member of different corporations. Of
recently he was appointed as the Chairman of the National carrier (airline) of
the Republic of Matatizo. The airline was previously being owned 100% by the
Government but through the recent restructuring process the company shaded
off 49% of its shares to private investors. The Board members have been in a
long dialogue and debate as to who should be the external auditors of the
company. Some stating that the Controller and Auditor General (CAG) should
audit while others opposing.
REQUIRED
(i) Explain with reasons whether it is the CAG or the private firm should be
appointed to audit the financial statements of National carrier. (5 marks)
(ii) Differentiate a ‘public audit’ from a ‘private audit’. (8 marks)
(iii) Explain the circumstances under which a private audit firm can be
appointed to audit a public company. (2 marks)
(Total : 20 marks)
QUESTION 3
(a) The senior partner has asked you to explain the importance of audit working
papers to audit trainees who have recently joined your audit firm. It has been
explained that audit working papers are divided into permanent file and current
file.
REQUIRED:
(i) Clearly explain why an auditor must prepare audit working papers in the
course of an audit assignment. (2 marks)
(ii) Identify the owners of the working papers and state the circumstances
under which working papers can be used by other people. (2 marks)

(b) International Standard on Auditing Planning for an Audit of Financial
Statements (ISA 300, paragraph 2) states that ‘The auditor should plan the audit
so that the engagement will be performed in an effective manner”.
REQUIRED:
Explain any five benefits of the auditor planning the audit of Financial
Statements of client. (8 marks)
(c) You are the audit senior in your firm of Certified Accountants. You are about
to commence the final audit of one of your clients. At the pre-audit meeting the
audit manager has emphasized the need for your audit team to carry out tests of
control as part of your audit procedures. He stated that the extent of audit
procedures will largely depend on the results of the internal control tests that
you will undertake.
REQUIRED:
(i) Distinguish the responsibilities of management and the auditors with

regards to internal controls. (4 marks)
(ii) Identify four examples of external confirmations that your firm may
undertake. For each explain one assertion which will be supported and
one which will not be supported by that example of external
confirmation.
(4 marks)
(Total : 20 marks)
QUESTION 4
(a) Gonja Co.’s year end is 31st December, which is traditionally a busy time for
Gonja’s external auditors, Ndesa Associates. Gonja Co. currently has an internal
audit department of five employees but they have been struggling to undertake
the variety and extent of work required by the company. Hence, Gonja Co. is
considering whether to recruit and expand the department or to outsource the
internal audit functions. If outsourced, Gonja Co. would require a team to
undertake monthly visits to test controls at the various shops across the country,
and to perform ad hoc operational reviews at shops and head office.
Gonja Co. is considering using Ndesa Associates to provide the internal audit
services as well as remain as external auditors.
REQUIRED:
Discuss the advantages and disadvantages to both Gonja Co. and Ndesa
Associates of outsourcing internal audit funcions. (10 marks)

(b) You are an audit manager in Melaki & Co. a large audit firm which specializes
in the audit of retailers. The firm currently audits Gogo Co. a food retailer, but
Gogo Co’s main competitor, Masaki Co. has approached your audit firm to
appoint it as their external auditors. Both companies are highly competitive and
Gogo Co. is concerned that if Melaki & Co. audits both companies then
confidential information could pass across to Masaki Co.
REQUIRED:
Explain the safeguards that your firm should implement to ensure that this
conflict of interest is properly managed. (5 marks)
(c) Since the auditor has a responsibility to express an opinion on the financial
statements, it is important that his role regarding going concern is well
explained. This is probably the ‘reason for being’ with ISA 570, whose purpose
is to establish standards and provide guidance on the auditor’s responsibility in
the audit of financial statements with respect to the going concern assumption
used in the preparation of the financial statements.
REQUIRED:
Describe external auditor’s responsibilities and the work that the auditor should
perform in relation to the going concern status of companies. (5 marks)
(Total : 20 marks)
QUESTION 5
(a) The IESBA’s Code of Ethics for Professional Accountants gives the key reason
why accountancy bodies produce ethical guidance.
REQUIRED:
(i) State the key reason why accountants need to have an ethical code?
(2 marks)
(ii) Identify any two advantages of an ethical framework over a
rule based system. (2 marks)
(iii) Identify any four general sources of threats to independence. (4 marks)
(iv) Identify any two general categories of safeguards. (2 marks)
(b) ISA 550 addresses related parties and related party transactions.
REQUIRED:
With reference to this standard:
(i) Explain in your own words the concepts of ‘Related Party’ and ‘Related
Party Transactions.’ (4 marks)
(ii) Explain why, the identification of ‘related parties’ and ‘material related
party transactions’ can be difficult for auditors. (6 marks)
(Total : 20 marks)

QUESTION 6
ISA 500 Audit Evidence requires that ‘The auditor should obtain sufficient appropriate
audit evidence to be able to draw reasonable conclusions on which to base the audit
opinion.’ The explanatory material contained within ISA 500 identifies procedures for
obtaining audit evidence. It also offers guidance as to assessing the reliability of audit
evidence.
REQUIRED:
(a) Identify and describe the procedures for obtaining audit evidence. (5 marks)
(b) For each of the procedures, describe an audit test using that procedure to obtain
evidence as to the balance of plant and equipment including the related balances
of accumulated depreciation and charges to income. (5 marks)
(c) For each of the procedures, discuss considerations affecting your judgement as
to the reliability of the evidence with particular reference to the test described in
answer (b) above. (10 marks)
(Total : 20 marks)
QUESTION 7
(a) It is important to recognize that audit sampling may be constructed on a non-

statistical basis. If the auditor uses statistical sampling, probability theory will
be used to determine sample size and random selection methods to ensure each
item of the population has the same chance of selection. Non-statistical
sampling is more subjective than statistical sampling, typically using haphazard
selection methods and placing no reliance upon probability theory. However, in
certain circumstances statistical sampling techniques may be difficult to use.
The auditor will review the circumstances of each audit before deciding whether
to use statistical or non-statistical sampling.
REQUIRED:
(i) Explain three situations where the auditor would be unlikely to use
sampling techniques. (3 marks)
(ii) Describe the factors which the auditor should consider when
determining the size of a sample. (6 marks)
(b) Indicate and explain each of the following type of control activities as whether
it is preventive or detection control:
(i) Authorisation
(ii) Performance review
(iii) Information processing
(iv) Segregation of duties (4 marks)

(c) For each of the following audit findings identify if they are material, pervasive
or not material:
(i) Inappropriate application of the going concern assumption.
(ii) Inability to audit petty cash balance which accounts for less than 1% of
the total assets.
(iii) Your client is involved in a major litigation which, if they lose, would
result in the loss of their trading licence and inability to continue trading.
The case has not been settled at the date you are signing the report.
(v) Disagreement over appropriateness of the depreciation policy whose

adjustment would reduce profit by 2%.
(vi) Inadequate disclosure of directors’ remuneration in the notes to the

financial statements.
(vii) An error found in the statement of income which will reduce a profit of
TZS.30,000,000 to a loss of TZS.100,000,000 for the year.
(7 marks)
(Total : 20 marks)
________________  _____________

T
SUBJECT : PUBLIC FINANCE AND TAXATION I
CODE : B4
EXAMINATION DATE : THURSDAY, 5TH NOVEMBER, 2015
-------------------------------------------------------------------------------------------------------
2. There are TWO Sections in this paper. Sections A and B which comprise
SEVEN questions.
2. Answer question ONE in Section A
4. In total attempt FIVE questions.
6. Calculate your answers to the nearest two decimal points where necessary.
_________________

-------------------------------------------------------------------------------------------------------
SECTION A
Compulsory Question
-------------------------------------------------------------------------------------------------------
QUESTION 1
(a) State five documents and relevant information that should be forwarded to the
tax office for opening a tax file for a taxable company. (5 marks)
(b) Mzalendo Limited which is engaged in the manufacture of electric appliances
for domestic use and export has provided the following accounts to the
Tanzania Revenue Authority (TRA) for the year ended December 31, 2014.
TZS TZS
Gross Profit for the year 272,960,000
Add: Profit on sale of non current assets 50,000,000
Dividend received 25,500,000 75,500,000
Gross Profit 348,460,000
Deduct: Depreciation 21,550,000
Legal expenses 18,736,000
Provision for doubtful debts 3,030,000
Audit fees 7,200,000
Salaries and wages 28,410,000
Administrative expenses etc 39,020,000
Plant maintenance expenses 8,160,000
Utilities 14,232,000
Stationery 2,400,000
Subscription and donations 22,914,000
Repairs of vehicles, office etc 25,968,000
Rent and rates 17,500,000
Fuel and lubricants 10,500,000 219,620,000
Net profit 128,840,000
The notes to the accounts of the company showed the following details and
breakdowns:
(i) General provision of TZS.2,000,000 is included in the amount declared

as provision for doubtful debts.
(ii) The amount paid in respect of subscriptions and donations is made up of:
TZS
Subscription to Chamber of Commerce 2,900,000
Tumaini orphanage 5,000,000
Malaria Campaign 15,014,000
22,914,000
(iii) Repair of vehicles, office etc includes an amount TZS.15,560,000 spent
on new iron gates for the factory.

(iv) Legal expenses is made up of :
TZS
Income tax appeals 5,700,000
Sale of property 3,200,000
Current company matters 9,836,000
18,736,000
(v) Capital allowances available to the company for the current year
amounts to TZS.25,500,000.
(vi) The company incurred a loss of TZS.38,000,000 in the preceding year.
REQUIRED
Determine the company’s chargeable income as well as tax liability for the 2014
year of assessment. The corporate tax rate is 25%. (15 marks)
(Total : 20 marks)
-------------------------------------------------------------------------------------------------------
SECTION B
-------------------------------------------------------------------------------------------------------
QUESTION 2
(a) Explain the meaning of ‘an employment’. (5 marks)

(b) Mr. Kizu has just been appointed as a financial consultant of MTANASHATI
Ltd for a contract of one year and he will be stationed at MTANASHATI Ltd’s
premises for the whole period of the contract. His terms of the contract include
a weekly remuneration based on hours that Mr. Kizu will be working at
MTANASHATI Ltd.
REQUIRED
Distinguish between ‘a contract of service’ and ‘a contract for service’ using the
information above. (7 marks)

(c) Rabia & Assey Ltd employed Ms. Malaika Mukoba as the company human
resource officer with effect from 1st September 2009. By the time the company
submitted a statement of employment income for year 2010, the following
information was revealed to her as her annual emoluments:
(i) Basic annual salary TZS.6,000,000

(ii) Transport allowance TZS.2,500,000
(iii) Lunch allowance TZS.1,500,000
(iv) Medical allowance TZS.1,000,000
The employer housed her for free. The annual market rental value of that area
was TZS.4,000,000 and the expenditure claimed by the company per annum for
that premise was TZS.1,500,000. The contribution made by the employee was
TZS.500,000 as rent. Besides the emoluments stated above, the employee had
the following benefits:
 A self-driven car for private use, which is 3000 cc, brand new. The
company claims expenditure of car maintenance.
 Other benefits included electricity TZS.30,000 and water TZS.25,000

per month in her office.
Though her employment services were terminated on 31st December 2010, the
company paid her TZS.30,000,000 as termination benefits (compensation for
lost employment). Other income she received in 2010 was TZS.300,000
interest from MBY Bank, TZS.1,500,000 – lease amount from MSK Company
for the building she leased to the company since 2009.
REQUIRED
Calculate the total income for Ms. Malaika Mukoba for the year of income
2009. (8 marks)
(Total : 20 marks)
QUESTION 3
(a) Basically there are four types of supplies for Value Added Tax purposes. These
are standard rated, zero rated, special relief supplies and exempt supplies. VAT
collections depend, to a large extent, on the type of supply made.
REQUIRED
Briefly explain VAT implication of
(i) zero rated supplies
(ii) special relief supplies
(iii) exempt supplies
(8 marks)

(b) Timbwilitimbwili Ltd owns a quarry. It extracts stone from this quarry and sells
the stone to Mchapakazi Ltd for TZS 25 million plus VAT.
Mchapakazi Ltd converts all the stone into paving slabs and sells these slabs to
Sasakazi Ltd for TZS 45 million, plus VAT.
Sasakazi Ltd owns and runs a garden centre, where one third of the slabs are
sold at TZS.65 million plus VAT to the general public in Tanzania and the
remaining part is sold to Kenya for a total of TZS 15 million, plus VAT.
REQUIRED:
Show how VAT is charged and collected at each stage of this process.
(10 marks)
(c) With examples, differentiate between ‘mixed supplies’ and ‘composite

supplies’. (2 marks)
(Total : 20 marks)
QUESTION 4
(a) Explain the meaning of the term “rules of origin” and its importance as
applicable under the East African Customs Union Rules. (6 marks)
(b) Explain four problems of implementing the East African Customs Union Rules.
(6 marks)
(c) Explain in what forms does smuggling occur and the problems associated with
smuggling. (8 marks)
(Total : 20 marks)
QUESTION 5
The problem of tax avoidance and evasion is inherent in all tax systems. In fact, tax
avoidance and evasion are as old as the taxes themselves and the Tanzanian taxation
system is not exception to the fact.
REQUIRED:
(i) Briefly discuss the effects of tax evasion and avoidance in Tanzania.(6 marks)
(ii) With examples, discuss international and national perspective of tax evasion and
avoidance. (5 marks)
(iii) Briefly discuss measures taken by the government of the United Republic of
Tanzania to deal with the problem of tax evasion and avoidance. (9 marks)
(Total : 20 marks)

QUESTION 6
(a) Explain briefly the requirements for filing returns in respect of income of an
individual. (8 marks)
(b) Under the Income Tax Act 2004 in Tanzania, a tax payer who is not satisfied
with the income assessment made upon him by a relevant tax authority may file
an appeal in writing within 30 days.
REQUIRED
State the items to be set out in the Notice of Appeal. (12 marks)
(Total : 20 marks)
QUESTION 7
(a) Differentiate between ‘public goods’ and ‘private goods’. (5 marks)
(b) You are given the following information about the market for motorcycles.
Market Demand: P = 4,000,000 - 4Q
Market Supply P = 4Q
Where P = Price and Q = quantity
REQUIRED:
(i) Find the equilibrium price and quantity in this market. (2 marks)
(ii) Suppose that the government decides to impose an excise tax of

TZS.80,000 per motorcycle on producers in this market. What will be
the number of motorcycles sold in this market once this tax is imposed?
(5 marks)
(iii) Given the tax described in part (ii) above, what will be the tax incidence
on consumers? (8 marks)
(Total : 20 marks)
__________▲____________

SUBJECT : PERFORMANCE MANAGEMENT
CODE : B5
EXAMINATION DATE : FRIDAY, 6TH NOVEMBER, 2015
TIME ALLOWED : THREE HOURS (9.00 A.M. – 12.00 NOON)
---------------------------------------------------------------------------------------------------------
3. There are TWO sections in this paper. Sections A and B which comprise of
SEVEN questions.
4. Answer question ONE in Section A
7. State clearly any assumptions made in your answers.
_________________

---------------------------------------------------------------------------------------------------------
SECTION A
Compulsory Question
---------------------------------------------------------------------------------------------------------
QUESTION 1
Your friend Majimoto, a ticket agent, wants to benefit from your competencies on
performance management to maximize returns from his business. He has an
arrangement with Ngoma Kali hall that holds Bongo flavour music concerts for 60
nights a year whereby he receives discounts per concert as follows:
For purchase of: Receives a discount of:
200 tickets 20%
300 tickets 25%
400 tickets 30%
500 tickets 40%
You are able to establish that:
(i) Purchases must be made in full hundreds and the average price per ticket is
TZS.3,000.
(ii) Majimoto must decide in advance each year the number of tickets he will
purchase. If he has any tickets unsold by the afternoon of the concert he must
return them to the super-agent. If the super-agent sells any of these, Majimoto
receives 60% of their price.
(iii) Majimoto’s sales records for a few years show that for a concert with
extremely popular Bongo artists he can be confident of selling 500 tickets, for
one with lesser known artists 350 tickets, and for one with relatively unknown
artists 200 tickets.
(iv) His records also show that 10% of tickets he returns are sold by the super-
agent.
(v) His administration costs incurred in selling tickets are the same per concert
irrespective of the popularity of the artists.
The frequencies of concerts are estimated to be:
Type of concert Frequency
With popular artists 45%
With lesser known artists 30%
With unknown artists 25%
REQUIRED:
(a) Calculate:
(i) The expected demand for tickets per concert. (4 marks)
(ii) The level of his purchases per concert that will give him the largest
profit over a long period of time. (9 marks)
(iii) The profit per concert that the level of purchases in (ii) above will
yield
(1 mark)
(b) Advise Majimoto on the maximum sum per annum that he should pay to a
Bongo flavour entertainment specialist for 100% correct predictions as to the
likely success of each concert. (6 marks)
(Total : 20 marks)
---------------------------------------------------------------------------------------------------------
SECTION B
---------------------------------------------------------------------------------------------------------
QUESTION 2
The following is a summary of operating data on Ngim manufacturers for the year 2013
TZS ‘000 TZS ‘000

Sales 7,000,000
Cost of goods manufactured and sold:
Direct materials 1,200,000
Direct labour 1,100,000
Variable manufacturing overheads 300,000
Fixed manufacturing overheads 800,000 (3,400,000)
Gross margin 3,600,000
Selling expenses:
Variable 300,000
Fixed 400,000 (700,000)
2,900,000
General and administrative expenses:
Variable 100,000
Fixed 1,200,000 (1,300,000)
Net operating income 1,600,000
Sales volume for 2014 was budgeted at 90% of 2013 sales volume. Prices for both
costs were not expected to change in 2014. Actual operating data for 2014 were as
follows:
TZS ‘000
Sales 5,800,000
Direct labour 1,100,000
Variable manufacturing overheads 300,000
Fixed manufacturing overheads 780,000
Variable selling expenses 270,000
Fixed selling expenses 290,000
Variable general and administrative expenses 110,000
Fixed general and administrative expenses 1,100,000
REQUIRED:
(a) Prepare a budgetary control report comparing the planned operating budget for
2014 with the actual results for that year. (7 marks)
(b) Prepare a budgetary control report that would be useful in pinpointing

responsibility for the different unit section managers in 2014. (10 marks)
(c) Justify the strength of the report prepared in (b) over the one in (a) above.
(3 marks)
(Total 20 marks)
QUESTION 3
Umeme Company uses standard costing partly for departmental evaluation purposes.
Prime costs variances that were presented to the management for departmental
evaluations purpose were presented as follows:
PRICE / RATE EFFICIENCY

VARIANCE IN TZS VARIANCES IN TZS
Raw materials 280,000 adverse 96,000 adverse
Direct labour 58,000 adverse 240,000 favourable
When the meeting deliberations started, the new Management Accountant informed the
meeting that it was improper to evaluate the procurement and the factory performances
based on the traditional variances because these variances conceal a component that
should be attributed to planning errors. He said that when the planning variances are
established, each of the two departments becomes accountable only for the operating
variance component and management becomes accountable for the planning variance
component. His concern was mainly spurred by the events that took place in the month
ended, which must have significantly rendered irrelevant all assumptions that were
made at the time of setting standards and budgets. He explained his concern as follows:
(i) The standard for raw materials equal to TZS.160 per finished unit was based on
the understanding that each finished good would require 2 kilograms and each
kilogram would be purchased at TZS.80. The Procurement Manager purchased
140,000 kilograms at a total cost equal to TZS.11,480,000 because the type of
raw material that was targeted was not available. It has now been established
that the prevailing price for the type of raw material that the Procurement
Manager purchased was TZS.81 per kilogram. It has also been established that
this raw material was of high quality and for this reason, this should have
reduced materials usage by 2% of the quantity that was allowed per finished
unit. The factory used 121,200 kilograms to produce 60,000 finished units.
(ii) The standard for direct labour equal to TZS.12 per finished unit was
based on the assumption that each finished unit would required 0.01 labour
hours and this would have influenced an average rate equal to TZS.12,000 per
hour. This did not take into account the fact that some operations would require
skilled labour whose rate per hour is higher than the assumed average rate. If
what has been said was considered, the average direct labour rate should have
been TZS.12,150 per hour. Apart from this, the mix of skilled and unskilled
labour would have as well increased labour efficiency by 4% of the hours that
were allowed per finished unit. In the period ended, total direct labour cost was
TZS.7,018,000 and this was for 580 labour hours that were used for output of
60,000 finished units that was achieved.
Management was impressed by this presentation and want you to decompose

each variance reported into the planning variance and operating variance.
REQUIRED
Using the information available, analyze each of the raw materials and direct
labour variances into planning and operational variances.
(20 marks)
QUESTION 4
Your General Manager has been cautioned about using absorption costing income
statements for evaluating profit because this will always report relatively hight profit if
the manager produces more output than what that manager has been able to sell due to
planning errors. Following this advise, he asked the Management Accountant to
provide him with information that would assist to verify the validity of the advice he
received:
This is the information received:
YEAR 1 YEAR 2
Production budget 146,880 units 180,000 units
Production attained 161,000 units 153,000 units
Sales attained 153,000 units 160,000 units
TZS. TZS.
Revenue 1,530,000,000 1,600,000,000
Variable factory costs 1,071,000,000 1,120,000,000
Sales commission 61,200,000 64,000,000
Total variable costs 1,132,200,000 1,184,000,000
Contribution margin 397,800,000 416,000,000
Fixed costs:
Production 183,600,000 183,600,000
Administration 120,000,000 120,000,000
Distribution 80,000,000 80,000,000
Total Fixed cost 383,600,000 383,600,000
Operating profit 14,200,000 32,400,000
In a frenzy of anger, the General Manager demoted the Management Accountant for
failing to provide complete report and he has now assigned you to do this job.

REQUIRED:
(a) Identify and explain the missing information that made the General Manager
angry? (2 marks)
(b) Prepare an alternative statement of income and show how its profit differs from
the profit that is reported in the statement of income that was prepared by the
Management Accountant. (12 marks)
(c) Reconcile the income differences and add brief notes that will enable the
General Manager to understand that absorption costing distorts the reported
income if inventory levels change. (6 marks)
(Total : 20 marks)
QUESTION 5
Vipuri Corporation is a highly decentralized company. Each division manager has full
authority for sourcing and selling decisions. The machining division of Vipuri has been
the major supplier of the 2,000 pistons that the assembly division needs each year.
The assembly division, however, has just announced that it plans to purchase all its
pistons in the forthcoming year from two external suppliers at TZS.40,000 per piston.
The machining division of Vipuri recently increased its selling price for the
forthcoming year to TZS.44,000 per unit (from TZS.40,000 per unit in the current
year). Juma, manager of the machining division, feels that the 10% price increase is
justified. It resulted from a higher depreciation charge on some new specialized
equipment used to manufacture pistons and an increase in labour costs. Juma wants the
president of Vipuri Corporation to force the assembly division to buy all its pistons
from the machining division at the price of TZS.44,000.
The following table summarizes the key data:
Number of pistons purchased by assembly division 2000
External supplier’s market price per piston TZS 40,000
Variable cost per piston in machining division TZS 38,000
Fixed cost per piston in machining division TZS 4,000
REQUIRED
(a) Analyse the advantages or disadvantages in terms of annual operating
income to the Vipuri Corporation as a whole if the assembly division buys
pistons internally from the machining division under each of the following
cases:
(i) The machining division has no alternative use for the facilities used to
manufacture pistons. (4 marks)
(ii) The machining division can use the facilities for other production
operations, which will result in annual cash operating savings of
TZS.5,800,000. (4 marks)
(iii) The machining division has no alternative use for its facilities, and the
external supplier drops the price to TZS.37,000 per piston. (4 marks)

(b) As the President of Vipuri, how would you respond to Juma’s request that you
force the assembly division to purchase all of its pistons from the machining
division? Would your responses differ from to the three cases described in (a)
above? Explain. (8 marks)
(Total : 20 marks)
QUESTION 6
Magari Co. specializes in the production of a range of motor vehicles. It is about to
launch a new product, the ‘Kantinka’, a unique motor vehicle which is capable of
providing unprecedented levels of speed using a minimal amount of fuel. The
technology used in the Kantinka is unique, so Magari Co. has patented it so that no
competitors can enter the market within two years. The company’s development costs
have been high and it is expected that the product will only have a five-year life cycle.
Magari Co. is now trying to ascertain the best pricing policy that they should adopt for
the Kantinka’s lauch onto the market. Demand is very responsive to price changes and
research has established that, for every TZS.1,500,000 increase in price, demand would
be expected to fall by 1,000 units. If the company set the price at TZS.73,500,000, only
1,000 units would be demanded.
The cost of producing each motor vehicle are as follows:
TZS
Labour 1,200,000 (15 hours at TZS.80,000 per hour. See note A
below)
Fixed overheads 600,000 (based on producing 50,000 units per annum)
Total cost 6,000,000
Note A
The first motor vehicle took 15 hours to make and labour costs TZS.80,000 per hour.
A 95% learning curve exists, in relation to production of the unit, although the learning
curve is expected to finish after making 100 units. Magari Co’s management have said
that any pricing decisions about the Kantinka should be based on the time it takes to
make the 100th unit of the product. You have been told that the learning coefficient, b =
-0.0740005.
All other costs are expected to remain the same up to the maximum demand levels.
REQUIRED
(a) Establish the demand function (equation) for motor vehicle units. (3
marks)
(b) Calculate the marginal cost for each motor vehicle unit after adjusting the
labour cost as required by note (a) above. (6 marks)
(c) Calculate the optimum price and quantity. (3
marks)

(d) Explain what is meant by a ‘penetration pricing’ strategy and a ‘market
skimming’ strategy and discuss whether either strategy might be suitable for
Magari Co. when launching the ‘Kantinka’. (8 marks)
(Total : 20 marks)
QUESTION 7
Mwanga Manufacturing company is a famous company for manufacturing and
distribution of soap products in all East African countries. The company manufactures
two soap brands known as ‘Red soap’ and ‘Dark soap‘.
According to production manager, the company applies overhead on the bases of direct
labour hours through out the factory and the company anticipate that overhead and
direct time for the upcoming accounting period are TZS.3,200,000 and 50,000 hours
respectively.
Information about the company’s products are as follows:
Red Soap Dark Soap
Estimated production volume 3000 units 4000 units
Direct material cost TZS 56 /unit TZS 84 /unit
Direct labour per unit 6 hours @ TZS 30 per hour 8 hours @ TZS 30 per hour
The company overhead cost of TZS.3,200,000 can be identified with three major
activities: order processing (TZS.500,000), machine processing (TZS.2,400,000), and
product inspection (TZS.300,000). These activities are driven by number of orders
processed, machine hours worked, and inspection hours respectively. Data relevant to
these activities are as follows:
Order Processed Machine Hours worked Inspection Hours
Red Soap 640 32,000 8,000
Dark Soap 360 48,000 12,000
Total 1000 80,000 20,000
REQUIRED:
(a) Compute the overhead absorption rates that would be used for order processing,
machine processing, and product inspection in an activity-based costing system.
(3 marks)
(b) Assuming use of activity-based costing, compute the unit manufacturing costs
of Red soap and Dark soap if the expected manufacturing volume is attained.
(6 marks)
(c) Compute:
(i) How much overhead costs would be applied to a unit of Red soap and
Dark soap if the company would have used traditional costing and
applied overhead solely on the basis of direct labour hours?
(ii) Using the answers in (i) above, show which of the two products would
be undercosted or overcosted by this procedure.
(6 marks)

(d) State the major limitations of activity based costing? (5 marks)
(Total : 20 marks)
_______________________
SUBJECT : MANAGEMENT, GOVERNANCE AND ETHICS
CODE : B6
EXAMINATION DATE : FRIDAY, 6TH NOVEMBER, 2015
---------------------------------------------------------------------------------------------------------
6. There are TWO Sections in this paper. Sections A and B which comprise
SEVEN questions.
2. Answer question ONE in Section A.
_________________

---------------------------------------------------------------------------------------------------------
SECTION A
Compulsory Question
---------------------------------------------------------------------------------------------------------
QUESTION 1
(c) For any business to grow and face the existing and future market challenges it
must have a sound corporate strategy. In order to achieve the intended goals,
organizations must come up with strategies at different levels. However, these
levels do not operate in isolation rather they are interlinked with one another.
REQUIRED:
Analyse how corporate strategies operate at the following three levels:
(i) Corporate level

(ii) Business level
(iii) Operational level (10 marks)
(d) The Directors of the Board are responsible for good corporate governance
practices. They oversee the well being of the organization at large as they are
responsible for creating a vision for the company by exploring new markets for
expansion. The survival of an organization depends entirely on the
effectiveness of the Board. Although Board of Directors have powers above the
Chief Executives and management of organizations at large, their operations
need to be evaluated.
REQUIRED:
Name and explain various issues to look at when assessing the Board of
Directors. (5 marks)
(c) One of the major ethical dilemma at work places is the use of office hours for
personal gains. Since employees tend to spend so much of their weekday hours
on the job, they are often tempted to conduct personal business on company’s
time. This can include setting up doctor’s appointments on company phone
lines, making vacation reservations using their employer’s computers and
internet connections or even making phone calls for a freelance side business
while on company’s time.
REQUIRED:
Suppose you are a Manager of a company where the employees are facing this
type of ethical dilemma, explain how you would control such a dilemma
without distracting working relationship in the organization. (5 marks)
(Total : 20 marks)

---------------------------------------------------------------------------------------------------------
SECTION B
There are SIX questions in this section. Answer ANY FOUR questions
---------------------------------------------------------------------------------------------------------
QUESTION 2
(a) (i) For all businesses being large or small face a certain degree of
competition. Small businesses are more vulnerable to the competitive
market forces.
REQUIRED:
Enumerate with examples at least five ways in which small business
may undergo in order to deal with competitive market forces. (5
marks)
(ii) Assume you have secured a loan from one of the financial institutions
that offer soft loans to businessmen. You would like to establish a
business for selling of home appliances in one of the major cities in
Tanzania. Your friend who has been in business for about ten years
advised you to study the demography before you open a business.
REQUIRED:
Explain five major demographic factors that you would consider before
you establish your business. (5 marks)
(b) Despite various measures taken by governments to combat corruption, the
situation has not improved. In some developing countries corruption is increasing
instead of decreasing.
REQUIRED:
Identify and explain the reasons that lead to an increase of corruption in

developing countries. (5 marks)
(c) One major challenge facing an auditor is the performance of self-review.
REQUIRED:
(i) Define what is ‘self-review’. (1 mark)
(ii) Name and explain at least four examples of self-review threats.

(4 marks)
(Total : 20 marks)

QUESTION 3
(a) An organisation’s structure determines which divisions of the business will
perform which activities or functions and how. But departments in the
organization show the distribution of functions in an organization.
REQUIRED:
Identify five main departments and their functions in a business company.
Mention at least two functions for each department. (10 marks)
(b) The type of Board of Director depends on the nature of the business entity or an
organization.
REQUIRED:
Elaborate different types of Board of Directors. (5 marks)
(c) System of rewards largely affect decision-making of a person. A salesman may
be forced to follow unethical practices in order to increase sales that will result
into an increase of his rewards even if it is going to endanger the life of the end
users.
REQUIRED:
Identify and explain at least five unethical practices performed by sales
managers in business organizations. (5 marks)
(Total : 20 marks)
QUESTION 4
(a) (i) Starting a business without having a business plan is a prove of failure
before the start of the real business. The possibility of its sustainability
is likely to be minimal.
REQUIRED:
Analyse the importance of business plan to any entrepreneur. (6 marks)
(ii) There are various types of power in organizations. One of them is
referent power.
REQUIRED:
Explain at least four ways in which a leader can increase his referent
power. (4 marks)
(b) Some business organizations are reluctant to disclose information about their
business. However, other business organizations disclose their information
voluntarily.
REQUIRED:
Elucidate factors behind voluntary disclosure. (5 marks)

(c) All employees being in public or private sector face some ethical dilemmas.
Explain at least four types of ethical dilemmas facing accountants. (5 marks)
(Total : 20 marks)
QUESTION 5
(a) One of the challenges that face entrepreneurs is how to identify and manage
risks.
REQUIRED:
(i) Elaborate various types of risks that face entrepreneurs. (6 marks)
(ii) Name and explain various ways of managing risks in a business

industry. (4 marks)
(b) One of the major functions of the Board of Directors is to supervise the
management of an organization.
REQUIRED:
Discuss at least four issues involved in supervising the management by the
Board of Directors. (4 marks)
(c) Ethical relativism is described as context-dependent and subjective. Under this

ethical approach it is possible that different solutions taken in two different
cultures could be equally right.
REQUIRED:
Enumerate features of ethical relativism. (6 marks)

(Total : 20 marks)
QUESTION 6
(c) There are many factors that contribute to the collapse of business organizations.
One among the major factors is lack of succession planning.
REQUIRED:
Discuss the importance of succession planning towards the performance of an
organization. (10 marks)
(d) Suppose you are a specialist in business management science. You have been
invited to deliver inaugural lecture to the newly presidential appointees as CEOs
of new parastatals.
REQUIRED:
Discuss five key functions of CEOs you would include in your lecture. (5 marks)
(e) Ethical theories are sometimes divided into two groups; non-consequentialist
and consequentialist theories.

REQUIRED
Give brief explanations about the two theories. 5 marks)

(Total : 20 marks)
QUESTION 7
(c) (i) There are many changes that take place in business organizations. These
changes might be political, economic, social-cultural and technological.
In order to remain in business, organizations are required to face the
challenges that are brought by the changes by adjusting themselves
accordingly. However, managers face various obstacles when they want
to make their organizations to adapt to the changing environment.
REQUIRED:
Analyse the circumstances in which an organization can deal with to
reduce resistance to change in organizations. (5 marks)
(ii) Experience shows that most of management teams in most business
organizations are good in setting organizational strategy. But the main
problem is how to implement the strategies that have been formulated.
REQUIRED:
Discuss any two factors that are important in an organization in
implementing a strategy. (5 marks)
(d) According to Tucker’s 5-question model, everyone is supposed to think before

making any decision to determine whether the decision is ethical or not.
REQUIRED:
Identify the five questions to be answered before making any decision as per
Tucker’s 5-question model. (5 marks)
(e) You are a manager of a public corporation, and you have employed new
employees who have shifted from a private sector. Now you would like to
orient them on how to behave as public servants as per the code of conduct.
REQUIRED:
State the main ethical issues to be included in your organizational code of

ethical conduct manual. (5 marks)
(Total : 20 marks)
___________▲____________

SUGGESTED SOLUTIONS
B1 - FINANCIAL MANAGEMENT
NOVEMBER 2015
ANSWER 1
APEX Co.
(a) Forecast Income Statements for the year:
TSHS (000
Turnover (16m x 1,084) 17,344
Cost of sale (Tshs.17,344 – Tshs.5,203) 12,141
Gross profit (Tshs.17,344 x 30%) 5,2033
Other expenses (Tshs.5,203 – 3,469m) 1,734
Net profit (Tshs.17,344 x 20%) 3, 469
Interest on Term Loan (10m x 0.08) 800
Interest on Bank Overdraft (given) 140
Profit before tax 2,529
Tax (Tshs.2,529m x 40%) 1,011.60
Profit after tax 1,517.40
Dividends (Tshs.1,517.4 x 0.5%) 758.70
Retained profit 758.70
(ii) FORECAST STATEMENT OF FINANCIAL POSITION

TSHS (000) TSHS (000)
Non-current assets 22,000
Current assets
Inventory (Tshs.12,141m x (110/365)) 3,659
Trade receivables (Tshs.17,344 x (65/365)) 3,089 6,748
Total assets 28,748

Equity Finance:
Ordinary shares 5,000.00
Reserves 8,258,70 13,258.70
Long-term bank loan 10,000.00
23,258.70
Current Liabilities:
Trade payables (12.141m x (75/365)) 2.494.73
Overdraft (28,748m – 23,258.70) 2,994.57
5,489.30
28,748

Workings
Inventory = 12,141m x (110/365) = TZS 3.66m
Trade receivables = 17,344m x (65/365) = TZS 3.09m
Trade payables = 12,141m x (75/365) TZS 249m
Reserves = 7.5m + 0.885m = TZS 8.393
Overdraft = 28.75m – 23.39m – 2.49m = TZS 2.87m (balancing figure)
(a) Analysis and Discussion on Working Capital Financing Policy of APEX Co.
Working capital financing policies can be classified into conservative, moderate (or
matching) and aggressive, depending on the extent to which fluctuating current
assets and permanent current assets are financed by short-term sources of finance.
Permanent current assets are the core level of investment in current asset needed to
support a given level of business activity or turnover, while fluctuating current
assets are the changes in the levels of current assets arising from the unpredictable
nature of some aspects of business activity.
A conservative working capital financing policy uses long-term funds to finance

non-current assets and permanent current assets, as well as a proportion of
fluctuating current assets. This policy is less risky and less profitable than an
aggressive working capital financing policy, which use short-term funds to
finance fluctuating current assets and a proportion of permanent current
assets as well. Between these two extreme lies the moderate (or matching) policy,
which uses long-term funds to finance long-term assets (non-current assets and
permanent current assets) and short-term funds to finance short-term assets
(fluctuating current assets).
The current statement of financial position shows that APEX Co uses trade
payables and overdraft as a short-term finance. In terms of the balance between
short-and long-term finance, 89% of current assets (100 x 4.1/4.6) are financed
from short-term sources and only 11% are financed from long-term sources. Since
a high proportion of current assets are permanent in nature, this appears to be a very
aggressive working capital financing policy which carry significant risk. If the
overdraft were called in, for example, APEX Co might have to turn to more
expensive short-term financing.
The forecast statement of financial position shows a lower reliance on short-term

finance, since 79% of current assets (100 x 5.36/6.75) are financed from short-term
sources and 21% are financed from long-term sources. This decreased reliance on
aggressive financing policy is sensible, although with a forecast interest coverage
ratio of only 3.7 times (3.469/0.94). APEX Co has little scope for taking on more
long-term debt. An increase in equity funding to decrease reliance on short-term
finance could be considered.

ANSWER 2
(a) FARANGA Company
(i) The total cost of inventory for the raw material when using EOQ
EOQ = ( )
720,000,000

500
= 1,200units
Number of orders per year = 6,000/1200 = 5 orders
Annual ordering cost = 5 x TZ 60,000 = TZS 300,000
Average inventory held = 1200/2 = 600 units
Annual holding cost = 600 x TZS 500 = TZS 300,000
Inventory cost = 6,000 x TZS 1,200 = TZS 7,200,000
Total cost of inventory using EOQ = TZS 7,200,000 + TZS 300,000 +
TZS 300,000
= TZS 7,800,000
(ii) Decision on Discount Offered
Order size for bulk discounts 1,415
Number of orders per year = 6,000/1,415 = 4
Annual ordering cost = 4 x TZS 60,000 = TZS 240,000
Average inventory = 1,415/2 = 708
Annual holding cost = 708 x TZS 600 = TZS 424,500
Inventory cost = 10,000 x TZS 1,200 x 99% = TZS 11,880,000
Total cost of inventory using EOQ =TZS7,128,000+TZS
300,000+360,000
= TZS 7,780,000
Using the EOQ approach will result in a slightly lower inventory cost
Comments
The exam setter might have erroneously set the question rendering it non
doable by candidates. First of all, the question requires that Discount should
be given for a bulk purchase of 10,000 units or more however this is not the
case as the solution has given discount of 6000 units (annual demand) contrary
to the requirements of the question. There might have been some assumptions
to be made probably to make the question doable however in an ordinary sense
it was not possible for all students to come up with a common assumptions.
Furthermore the offer given exceeds annual demand of the company by 4000
units such that it would become useless to incur unnecessary holding costs in

respect of 4000 units in excess of the current demand. We therefore
recommend that students should be given benefit of doubt.
(b) Factors to be Considered in Formulating the Dividend Policy
Factors to consider in formulating a dividend policy of a stock-exchange listed
company include the following:
Profits and retained earnings
The company needs to remain profitable. Divided are paid out of profits and an
unprofitable company cannot for ever go on paying dividends out of retained
profits made in the past.
Liquidity
Since dividends are cash payments, and a company must have enough cash to
pay the dividends it declares without compromising its day to day operation. If
the company has to repay any debt in the near future then this will also need to
be considered.
Gearing
If gearing is high, then low dividend payments can help to keep retained
earnings high which will then reduce the level of gearing as the level of reserves
will be higher.
The signalling effect
Although the market would like to value shares on the basis of underlying cash
flows on the company’s projects, such information is not readily available to
investors in semi-strong form efficient market. But the directors do has this
information so the information asymmetry exists. The dividends declared can
be interpreted as a signal from directors to shareholders about the strength of
underlying project cash flows. Investors usually expect a consistent dividend
policy from the company, with stable dividend each year or, even better, steady
dividend growth.
The need for finance
Another factor is the ease in which the company could raise extra finance from
sources other than retained earnings. Small companies which will find it hard to
raise finance might have to rely more heavily on retained earnings than large
companies.
ANSWER 3
(a) Formulation of Optimal Investment Schedule when Capital is Rationed

Capital rationing occurs when acompany has a limited amount of capital to
invest in potential projects, such that the different possible investments need to
be compared with one another in order to allocate the capital available most
effectively.
(i) Divisible Projects

Projects are divisible, so that it is possible to undertake, say, half of
project x in order to earn half of the net present value (NPV) of the
whole project. The basic approach is to rank all investment opportunities
so that the PVs can be maximized from the use of available funds.
Ranking is done in terms of the profitability index. This profitability
Index is the ratio that measures the PVs of future flows per TZS 1 of
investment, and so indicates which investments make the best use of the
limited resources available.
(ii) Non-divisible Project

If the projects are not divisible then the profitability index method may
not result in the optimal solution. Another complication is that there is
likely to be a small amount of unused capital with each combination of
the projects. The best way to deal with this situation is to use trials and
error and test the PV available from different combinations of projects.
This can be laborious process if there are a large number of projects
available.
(b) FALUJA Company
(i) The Size of Overdraft; The Net Working Capital and Total of
Financing Current Assets (8 marks)
The Size of Overdraft

Given:
Operating cycle = 3 month
Receivables Collection Period 2 months
Inventory (balancing figure) 2 months
Less: Payables Period 1 month
Operating cycle 3 months
Investment in Current
Level of inventory = 2/12 x TZS 1.89 =TZS 315,000
Account receivables = 2/12 x TZS 4.2 =TZS 700,000
Total =TZS 1,015,000
Accounts payable = 1/12 x TZS 1.89 = TZS 157,500
Current ratio = current assets/current liabilities = 1.4
1.4 = (315,000 + 700,000)/ current liabilities
Current liabilities = (315,000 + 700,000)/1.4 = TZS 725,000
Current liabilities = accounts payable + overdraft
725,000 = 157,000 + overdraft
Thus Overdraft = 725,000 – 157,500 = TZS 567,500
Net Working Capital

Net working capital = current assets – current liabilities
= 315,000 + 700,000 – 725,000
= TZS 290,000
Cost of financing working capital

TZS
Overdraft 7% x TZS 567,500 39,725
Long-term finance 11% x TZS 290,000 31,900

Total Cost 71,625
(ii) Key factors which determine the level of investment in current
assets
The level of investment in current assets (working capital) will depend
on two factors:
 Working Capital Policy of the Organization
 Industry in which the Firm Operates
Working capital policy of the Organisation
Organizations have to decide on the most important risks relating to working
capital, and therefore whether to adopt a conservative or an aggressive
approach.
A conservative approach
A conservative working capital management policy aims to reduce the risk of
operational breakdown by holding high levels of working capital. Customers
are allowed generous payment to stimulate demand, finished inventories are
high to ensure availability for customers, and raw material and work in progress
are high to minimize the risk of running out of inventory and consequent
downtime in the manufacturing process. Suppliers are paid promptly to ensure
their goodwill, again to minimize the chance of stock-outs. However, the
cumulative effect on these policies can be that the firm carries a high burden of
unproductive assets, resulting in a financing cost that can destroy profitability.
An aggressive approach
An aggressive working capital management policy aims to reduce this financing
cost and increase profitability by cutting inventories, speeding up collections
from customers, and delaying payments to suppliers. The potential
disadvantage of this policy is an increase in the chances of system breakdown
through running out of inventory or loss of goodwill with customers and
suppliers.
Industry in which the firm operates
Some industries, such as ship building, will have long operating cycles and high
level of investment in working capital, due to the length of time required to
manufacture goods. Other industries such as supermarkets will have rapid
inventory turnover and have short operating cycles.
ANSWER 4
(a) Taxation has the following effects on an investment appraisal

 Firstly, project cash flows will give rise to taxation which itself has an
impact on project appraisal. Normally we assume that tax paid on
operating flows is due one year after the related cash flow.
 Secondly, organizations benefit from being able to claim capital
allowances. The effect of these is to reduce the amount of tax that
organizations are required to pay.
 Thirdly, the tax relief on interest payments will reduce the effective rate of
interest which a firm pays on its borrowings, and hence the opportunity

cost of capital. Hence normally the discount rates given will be the after
tax cost of capital.
(b) NPV calculation

Year Net cash Discount factor at Present value
flow 15%
TZS ‘000 TZS ‘000 TZS ‘000
0 (22,000) 1.000 (22,000)
1 6,950 0.870 6,047
2 6,513 0.756 4,924
3 6,185 0.658 4,070
4 13,403 0.572 7,667
+ 708
An alternative and common approach on the above solution with the very same
solution
Cash flow Y0 Y1 Y2 Y3 Y4
Initial Investment (20,000)
Working capital (2,000)
Profit before depreciation 8,000 8,000 8,000 8,000
Depreciation (5,000) (3,750) (2,813) (2,109)
Profit before tax 3,000 4,250 5,187 5,891
Taxation (1,050) (1,488) (1,815) (2,062)
Profit after tax 1,950 2,763 3,372 3,829
Add back depreciation 5,000 3,750 2,813 2,109
Cash flow (22,000) 6,950 6,513 6,185 5,938
Add working capital  2,000
recovery
Realizable value 5,000
Total cash flow (22,000) 6,950 6,513 6,185 12,938
Discount Factor (15%) 1,000 0.870 0.756 0.658 0.572
Present value (22,000) 6,047 4,923 4,069 7,400
NPV 564
Since NPV is positive the project should be accepted. NPV = (591)
Advice: The project is worthwhile. However, the NPV is quite small relative to
the size of the capital outlay, and some further risk/uncertainty analysis is
therefore appropriate before a decision is taken whether or not to undertake the
investment.
Workings
W1: capital allowances
Year Written down value at Capital allowance (25%) Tax saving (35%)
start of year (TZS ‘000) (TZS ‘000) (TZS ‘000)
1 20,000 5,000 1,750
2 15,000 3,750 1,313
3 11,250 2,813 985
4 8,437 2,109 738

4 (sales value) 5,000
Balancing 1,328 465
allowance 1,203
Here, the written down value of the machine at the end of year 4 (start of year 5)
is TZS 6,328 million, but the disposal value of the machine is only TZS 1,328
million, giving rise to a further reduction in tax payable of TZS 465,000. If this
tax saving is assumed to occur in year 4, the total tax saving in the final year of
the project is TZS 1.203 million.
W2: Net cash flows for the project
Yea Machine Working Project Tax on profit Tax saved- Net cash
r Capital profit capital flow
allowances
TZS ‘000 TZS ‘000 TZS ‘000 TZS ‘000 TZS ‘000 TZS ‘000
0 (20,000) (2,000) (22,000)
1 8,000 (2,800) 1,750 (6,950)
2 8,000 (2,800) 1,313 6,513
3 8,000 (2,800) 985 6,185
4 5,000 2,000 8,000 (2,800) 1,203 13,403
ANSWER 5
(a) The dividend growth model has several difficulties attendant on its use as a way of
estimating the cost of equity. For example, the model assumes that the future
dividend growth rate is constant in perpetuity, an assumption that is not supported
by the way that dividends change in practice.
Each dividend paid by a company is the result of a dividend decision by managers,
who will consider, but not be bound by, the dividends paid in previous periods.
Estimating the future dividend growth rate is also very difficult.
Historical dividend trends are usually analyzed and on the somewhat risky
assumption that the future will repeat the past, the historic dividend growth rate is
used as a substitute for the future dividend growth rate.
The model also assumes that business risk, and hence business operations and the
cost of equity, are constant in future periods, but reality shows us that companies,
their business operations and their economic environment are subject to constant
change. Perhaps the one certain thing about the future is its uncertainty.
It is sometimes said that the dividend growth model does not consider risk, but risk
is implicit in the share price used by the model to calculate the cost of equity. A
moment’s thought will indicate that share prices fall as risk increases, indicating
that increasing risk will lead to an increasing cost of equity.
What is certainly true is that the dividend growth model does not consider risk
explicitly in the same way as the capital asset pricing model (CAPM). Here, all
investors are assumed to hold diversified portfolios and as a result only seek
compensation (return) for the systematic risk of an investment.
The CAPM represent the required rate of return (i.e. the cost of equity) as the sum
of the risk-free rate of return and a risk premium reflecting the systematic risk of an
individual company relative to the systematic risk of the stock market as a whole.

This risk premium is the product of the company’s equity beta and the equity risk
premium. The CAPM therefore tells us what the cost of equity should be, given an
individual company’s level of systematic risk.
The individual components of the CAPM (the risk-free rate of return, the equity risk
premium and the equity beta) are found by empirical research and so the CAPM
gives rise to a much smaller degree of uncertainty than that attached to the future
dividend growth rate in the dividend growth model.
For this reason, it is usually suggested that the CAPM offers a better estimate of the
cost of equity than the dividend growth model.
(b) PAMELA Co.

(i) (a) Dividend growth rate = 10,000 x ((52/50) – 1) = 100 x (1.04 – 1) = 4%
per year.
Share price using DGM = (50 x 1.04)/(0.124 – 0.04) = 52/0.84 = Tsh 619
(b) Number of ordinary shares = 25 million

Market value of equity = 25 m x 619 = Tshs 15, 475 million
Market value of Bond A issue = 20m x 9,508/100 = Tshs 1,901.6m
Market value of Bond B issue = 10m x 10,201/100 = Tshs. 1,020.1m
Market value of debt = Tshs. 2,921.7m
Market value of capital employed = 15,475m + 2921.7m = Tshs.
18,396.7m
Capital gearing = 100 x 29.217/183.967 = 15.9%
(c) WACC – ((12.4 x 154.75) + (9.83 x 19.016) + (7.82 x 10.201))/183.967 =

11.9%
(ii) Miller and Modigliani showed that, in a perfect capital market, the value
of a company depended on its investment decisions alone, and not on its
dividend or financing decisions. In such a market, a change in dividend
policy by PAMELA Co. would not affect its share price or its market
capitalization. Miller and Modigliani showed that the value of a company
was maximized if it invested in all projects with a positive net present value
(its optimal investment schedule). The company could pay any level of
dividend and if it had insufficient finance, make up the shortfall by issuing
new equity. Since investors had perfect information, they were indifferent
between dividends and capital gains. Shareholders who were unhappy with
the level of dividend declared by a company could gain a ‘home-made
dividend’ by selling some of their shares. This was possible since there are
no transaction costs in a perfect capital market.
Against this view are several arguments for a link between dividend policy
and share prices. For example, it has been argued that investors prefer
certain dividends now rather than uncertain capital gains in the future (the
‘bird-in-the-hand’ argument).
It has also been argued that real-world capital markets are not perfect, but
semi-strong form efficient. Since perfect information is therefore not
available, it is possible for information asymmetry to exist between
shareholders and the managers of a company. Dividend announcements may
give new information to shareholders and as a result, in a semi-strong form
efficient market, share prices may change. The size and direction of the
share price change will depend on the difference between the dividend
announcement and the expectations of shareholders. This is referred to as the
‘signaling properties of dividends’.
It has been found that shareholders are attracted to particular companies as a

result of being satisfied by their dividend policies. This is referred to as the
‘clientele effect’. A company with an established dividend policy is
therefore likely to have an established dividend clientele. The existence of
this dividend clientele implies that the share price may change if there is a
change in the dividend policy of the company, as shareholders sell their
shares in order to reinvest in another company with a more satisfactory
dividend policy. In a perfect capital market, the existence of dividend
clienteles is irrelevant, the existence of dividend clienteles suggests that if
PEMELA Co. changes its dividend policy, its share price could be affected.
ANSWER 6:
(a) Cost of Equity
Do 1  g   g
ke =
Po
621.04   g
=  0.04  13%
716
or
621.25
 0.125  22.24 / 0
716
(b) Dividend Growth Model.

- Difficult to find an accurateValue for g
CPM : - Preferred over Dividend Growth Model

- Problem: Finding suitable value of variables used in the model.
(c) WACC
WACC = weke + wiki
 Cost of Debt (ki) = 5.17% ke = 13% or 22.24%

 Weights:
we = 5728/6245.1 = 0.92
wi = 517.1/624.1 = 0.08
WACC = (0.92) (12%) + (0.08)(5.17%) = 11.04% + 0.4%

= 11.44%

(d) Capital structure and value of the Firm.
Traditional Theorists
 Value of the firm depends on its capital structure
MM:
 Value of the firm is independent of its capital structure.
NPVLR
ki = LR+  HR  LR 
NPVLR  NPVHR
LR = 5% NPVLR = 74
HR = 6% NPVHR = (366)
= 5.17%
ANSWER 7
(a) Kimolo Company
(i) Kimolo’s Beta Factor

βk = wa βa + wb βb + wc βc + wd βd
Total Receipt = 448.35
wa = 76.65/448.35 = 0.17 βa = 0.3
wb = 79.10/448.35 = 0.18 βb = 0.5
wc = 124.6/448.35 = 0.28 βc = 1.0
wd = 168.0/448.35 = 0.37 βa= 2.0
Thus: βk = (0.17)(0.3) + (0.18)(0.5) + (0.28)(0.1) + (0.37)(2.0) = 1.161
(ii) Economic Viability of Projects

Project Expected Return Required Return (CAPM) Comment
A [76.65 – 70]/70 = 9.5% 8% + (15% - 8%) 0.3 = 10.1% REJECT
B [79.10 – 70]/70 = 13.0% 8% + (15% - 8%) 0.5 = 11.5% ACCEPT
C [124.6 – 105]/105 = 18.7% 8% + (15 -8%) 1.0 = 15% ACCEPT
D [168 – 140]/140 = 20% 8% + 15% - 8%) 2.0 = 22% REJECT
Thus: Project B and C are economically viable and can be accepted while
project A and D are not economically viable and should be rejected.

(b) Conflict of Interest
Specific examples of the conflicts of interest that might occur between
managers and shareholders include:
Takeovers
Managers in a target company often devote large amounts of time and money
to ‘defending’ their companies against takeover. However, research has shown
that shareholders in companies that are successfully taken over often earn large
financial returns. On the other hand managers of companies that are taken over
frequently lose their jobs. This is a common example of the conflict of interest
between the two groups.
Time horizon
Managers know that their performance is usually judged on their short-term
achievements. Shareholder wealth on the other hand is affected by the long-
term performance of the firm. Managers can frequently be observed to be
taking a short-term view of the firm which is in their own best interest but not
in that of the shareholders.
Risk
Shareholders appraise risk by looking at the overall risk of their investments in
a wide range of shares. They do not have ‘all their eggs in one basket’ and can
afford a more aggressive attitude toward risk-taking than managers, whose
career prospects and short-term financial remuneration depend on the success
of their individual firm.
Gearing
Gearing is the ratio of a company’s debt finance to its equity finance. The
higher a company’s gearing ratio, the higher the risk faced by the shareholders.
This is covered in considerable detail later in the text. As managers are likely to
be more cautious over risk that shareholders they might wish to adopt lower
levels of gearing than would be optimal for the shareholders.
Rewards
Senior managers might seek to ensure that they are highly rewarded, regardless
of whether their company is doing well or badly. Shareholders are more likely
to want directors to be paid well only if the company achieves a good
performance.
______________  _____________

SUGGESTED SOLUTIONS
B2 - FINANCIAL ACCOUNTING
NOVEMBER 2015
ANSWER 1
(a) Consideration for Kibo paid in shares:

Cost TZS 135,600,000; Kilimanjaro issued 600,000 shares therefore share
premium was TZS 75,600,000 (135,600,000 – 60,000,000).
Journal
Dr Cr
TZS TZS
Investment in Kibo 135,600,000
Equity shares 60,000,000
Share premium 75,600,000
(b) Kilimanjaro Group – Consolidated Statement of Profit or Loss for year

ended 30 September 2014
TZS
Revenue (1,925 + 480 – 170) 223,500,000
Cost of sales (925 + 230 – 170 + 11 + 17) (101,300,000)
Gross profit 122,200,000
Expenses (240 + 54 + 12.9) (30,690,000)
Profit from operations 91,510,000
Share of profit of associated entity (iii) 2,910,000
Finance cost (27 +45 -25) (4,720,000)
Profit before tax 89,700,000
Tax (147 +38) (18,500,000)
Profit for the year 71,220,000
Kilimanjaro Group – Consolidated Statement of Financial Position as at 30 September
2014
TZS TZS
Non-Current Assets
Property, plant and equipment (ix) 333,200,000
Goodwill (ii) 7,310,000
Investment in associate (iii) 41,310,000
381,820,000
Current Assets
Inventory (1,810 + 782 – 17) 257,500,000
Trade receivables (2,292 + 686 – 170) 280,800,000
Cash and cash equivalents (113 + 70 + 90) 27,300,000
565,600,000
Total assets 947,420,000
Equity Shares (5,520 + 600) 612,000,000
Share premium [see part (a)] 75,600,000

Retained Earnings (viii) 92,220,000
779,820,000
Non-current Liabilities
Long term loans (650-250) 40,000,000
Current Liabilities
Trade payables (725 + 631-170+90) 127,600,000
947,420,000
Investment of Kilimanjaro in Kibo
Kilimanjaro purchased all 720,000 shares in Kibo on 1 October 2013.

100% shares purchased therefore treat Kibo as wholly owned subsidiary of Kilimanjaro
from 1 October 2013.
Investment of Kilimanjaro in Mawenzi

Kilimanjaro purchased 96,000 of Mawenzi’s 320,000 shares on 1 October 2013.
This gave Kilimanjaro 30% of Mawezi’s equity.
As Kilimanjaro has in excess of 20% of Mawenzi equity and can exercise significant
influence over all aspects of Mawenzi’s financial and operating policies, Kilimanjaro
will treat Mawenzi as an associated entity from 1 October 2013.
Workings
(i) Fair value of net asset of Kibo at acquisition
Equity Shares 72,000,000

Retained earnings 31,900,000
Fair value adjustment 23,100,000
127,000,000
(ii) Goodwill - Kibo
Cost 135,600,000
Fair value of net assets acquired: 127,000,000
Goodwill 8,600,000
Impairment (15% x 8,600,000) (1,290,000)
Balance at 30 September 2014 7,310,000
(iii) Investment in associate - Mawenzi

Cost 38,400,000
Add group share of post acquisition profits
(22,900,000 – 13,200,000) = 9,700,000x30%= 2,910,000
Investment at 30 September 2014 41,310,000

(iv) Intra-group trading
Mark up on cost 25% = 25/125 or 20% margin on selling price.
Selling price 17,000,000; unrealized profit = 17,000,000 x 20% = 3,400,000
50% of goods remain in inventory, adjust inventory by (3,400,000 x 50%)
1,700,000.
Dr. Cr.
Consolidated cost of sales 1,700,000
Consolidated current assets – inventory 1,700,000
Consolidated revenue 17,000,000
Consolidated cost of sales 17,000,000
Consolidated trade payables 17,000,000
Consolidated trade receivables 17,000,000
(v) Cash transfer
Consolidated cash and cash equivalents 9,000,000
Consolidated trade payables 9,000,000
(vi) Excess depreciation
Fair value adjustment – 23,100,000
Economic life 21 years, straight line basis
Excess depreciation = 23,100,000/21 = 1,100,000
(vii) Consolidated Retained Earnings
Balance– Kilimanjaro at 1 October 2013 [79,600,000-(61,100,000-2,500,000)]=21,000,000
Add consolidated profit for year 71,200,000
Balance 30 September 2014 92,220,000
Alternative calculation:
(viii) Consolidated Retained Earnings
Balance Kilimanjaro 79,600,000
Kibo-group share of post acquisition profits (45,700,000-31,900,000) = 13,800,000
Associate – Mawenzi group share of post acquisition profits (iii) 2,910,000
Excess depreciation (1,100,000)
Goodwill impairment (1,290,000)
Cancel unrealized profit in inventory (iv) (1,700,000)
92,220,000
(ix) Consolidated Property plant and equipment
Kilimanjaro 219,200,000
Kibo 92,000,000
Fair value adjustment 23,100,000
Excess depreciation (1,100,000)
333,200,000

ANSWER 2
(a)
(i) The reasons for the need of regulatory framework:
1. To prevent material manipulations or errors in financial statements
Many important economic decisions are regularly made on the basis of
financial statements. However, financial information is open to
manipulation or errors. In order to avoid manipulation of figures in the
financial accounts, there needs to be a consistent way of deciding which
elements are recognized and measured, and how information is presented in
the financial statements.
2. To ensure that items are treated in a consistent manner or an
explanation is given as to why not
Accounting is not a subject where the results are always the same whoever
does it. For example, in mathematics, 2 plus 2 must always equal 4; but in
accounts, a figure for (say) profit or loss may vary, sometimes vastly,
depending upon the subjective judgments of the person doing the
calculations. It is important that explanations are given to help the user of
financial statements make correct decisions.
3. To help in global harmonization
Unless accounting activities are regulated across the globe, different entities
in different countries will apply their own rules, which are unlikely to be
harmonious.
The process of global harmonization leads to global accounting standards.
Global standards will help global trade and global economic growth as all
users will be able to use the same standards to analyse the financial
statements of any company, whether in the Tanzania, USA or England.
(ii) This IASB’s Conceptual Framework deals with:
(a) The objective of financial statements;

(b) The qualitative characteristics that determine the usefulness of information
in financial statements;
(c) The definition, recognition and measurement of the elements from which
financial statements are constructed; and
(d) Concepts of capital and capital maintenance.
(b)(i)
1. Complete: a complete depiction would include all the information
necessary for the user to understand the phenomenon being depicted along
with all necessary description and explanations.
2. Neutral: a neutral depiction is without bias in the selection or presentation
of financial information. A neutral depiction is not slanted, weighted,
emphasized, de-emphasized or other wise manipulated to increase the
probability that financial information will be received favourably or
unavourably by users.
It should be noted that neutral information does not mean information with
no purpose of no influence on behavior. On the contrary, relevant financial
information is, by definition, capable of making a difference in users’
decisions.
3. Free from errors: this means there are no errors or omissions in the
description of the phenomenon, and the process used to produce the reported
information has been selected and applied with no errors in the process. In
this context, free from error does not mean perfectly accurate in all respects.
Faithful representation, however, is achieved if no errors or omissions affect

the description of economic phenomena and the process applied to produce
reported information has been selected and applied without errors.
(ii) To achieve the above characteristics of Faithful representation one needs to

ensure:
 Compliance with the definitions and recognition criteria set out in the
Framework for assets, liabilities, income and expense.
 Application of IFRSs, with additional disclosures when necessary.
ANSWER 3
BESTPACK Limited Statement of Profit or Loss and Other comprehensive
Income for the year-ended 31st December 2014
Revisit – income tax – note 6, Revaluation loss – note 4
Workings TZS TZS
Revenue 1,140,000
Cost of sales W2 631,510
Gross Profit 508,490
Less Expenses
Amortization of Grants W1.v 2,500
Bad debt recovered W1.vii 3,200
Distribution costs W2 (245,800)
Administrative expenses W2 (180,400)
Other expenses-Revaluation loss W3 (35,000) (455,500)
Profit before tax 52,990
Income tax expense W1.vi (3,000)
Profit for the year 49,990
Revaluation loss W3 (35,000)
Total Comprehensive income for the year 14,990
BESTPACK Limited Statement of Financial Position as at 31st December 2014
Workings TZS TZS
Non-current Asset
Property, Plant and Equipment W3 1,102,000
Total Non-current Asset 1,102,000

Current Assets
Inventories W1.i 240,590
Trade receivables W1.viii 116,560
Prepayments W1.ix 10,000
Other receivables-Income tax Wi.v 3,000
Cash and cash equivalents TB+w1.iii+W1.vi+W1.vii 33,600 403,750
Total Assets 1,505,750
Share Capital 160,000
Retained Earnings W1.ix+W1.viii 918,990
Revaluation surplus W3 - 918,990
Total Equity 1,078,990
Non-Current Liabilities
Long-term loan 240,000
Grants TB+W1.v 97,500
Total Non-current Liabilities 337,500
Current Liabilities
Trade payables 86,100
Accruals W4 3,160
Total current Liabilities 89,260
Total liabilities 426,760
Total Equity and Liabilities 1,505,750
Workings
Closing Inventory
TSHS. TSHS.
Total Inventories at Cost per inventory count 243,510
Accidentally destroyed inventory 2,410
Damaged Inventories-Cost 1,540
NRV-Selling Price less cost of sale (1230-200) 1,030
Inventory write Down 510
Value of Closing Inventory 240,590
TZS TZS
W1i. Dr. Inventory (+Current asset) 240,590
Cr. Closing Inventory (-Cost of Sales) 240,590
W1ii-iv. Dr. Premises-PPE (+Non-current Assets) 250,000
Dr. Plant and Equipment PPE (+Non-current asset) 90,000
Cr. Bank (-Current Asset) 340,000
W1.v. Dr. Grants-Deferred income (-Non-current Liabilities) 2,500
Cr. Amortization of Grants 2,500
(Grants amount is amortized over same period as revalued premises i.e. 40 years 100,000x1/40 =
2,500
W1.vi. Dr. Income tax (+Expenses) 30,000
Cr. Bank (-Current asset) 30,000
Dr. Income tax (+Expenses) 33,000
Cr. Bank (-Current asset) 33,000
W1.vii Dr. Trade receivables (+current assets) 3,200
Cr. Bad debt recovered (4,000Tshs x 80%) 3,200
Dr. Bank (+Current Asset) 3,200
Cr. Trade Receivables (-Current Asset) 3,200
W1.viii Dr. Allowance for Doubtful doubtful debts (_Expenses) 440
Cr. Trade receivables (-Current asset) 440
Trade Receivables
TZS
Balance per trial balance 124,000
Add: Bad debt recovered (W1vii) 3,200
Less: bank receipt – re bad debt recovered (3,200)
Less: Allowance for doubtful debts 5% (7,440)
Revised Trade receivables 116,560

Current Allowance for doubtful debts from trial balance 7,000
New allowance for doubtful debts 7,440
Increase in allowance for doubtful debts 440
TZS TZS
W1.ix Dr. Prepayments (+Current Assets) 10,000
Cr. Rent)-Expenses)
10,000
Dr. Telephone (+Expenses) 2,400
Dr. Light and Heat (+Expenses) 760
Cr. Accruals (Current Liabilities) 3,160

Workings 2(W2): Expenses
Cost of Distribution Administration
Sales Cost Expenses
TZS TZS TZS TZS
Opening Inventory TB+W1.Viii 225,100
Purchases TB 647,000
Closing Inventory W1.i 240,590
Expenses TB 214,000 148,600 362,600
Allowance for Doubtful Debts W1.vii 220 220 440
Rent W1.ix 5,000 5,000 10,000
Telephone W1.ix 1,200 1,200 400
Light and Heat W1.ix 380 380 380
Depreciation-Building W3 (5,000) (5,000) (10,000)
Depreciation-Plant and Equipment’s W3 22,000 22,000 44,000
Depreciation-Office Equipment W3 8,000 8,000 16,000
Total 631,510 245,800 180,400 426,200
W3: Property, Plant and Equipment’s

Premises Plant and Office
Equipment Equipment Total
TZS TZS TZS TZS
Cost PerTB 800,000 440,000 120,000 1,360,000
Accumulated Depreciation PerTB (345,000) (88,000) (40,000) (473,000)
455,000 352,000 80,000 887,000
Revaluation Loss Note 1 (55,000) (55,000)
400,000 352,000 80,000 832,000
Additions W1.iii 250,000 90,000 340,000
650,000 442,000 80,000 1,172,000
Depreciation-Premises Note2 (10,000) (10,000)
Depreciation-Plant and Equipment 10% straight line (44,000) (44,000)
Depreciation-Office Equipment-20% of reducing bal (16,000) (16,000)
Carrying Value c/d at 31 December 2014 640,000 398,000 64,000 1,102,000
Note 1 – Revaluation Loss

The treatment of the revaluation loss is as follows:
1. Revaluation Loss is netted against the revaluation surplus brought forward of
20,000Tshs.
2. Any balance i.e. 55,000 – 20,000 = 35,000Tshs is taken to expenses.
Note 2 – Depreciation of Premises
(Revalued Amount of Asset – Residual Value)/Remaining Useful Life in Year =
(400,000 – 0)/40 = 1,000
Ignore addition of 250,000Tshs for depreciation in 2015 due to accounting policy used
by company.
Working 4 – Accruals:
Telephone W1.ix 2,400
Light and Heat W1ix. 760
3,160
ANSWER 4
(A) Cash flow classifications

Importance of classification
 The users of financial statements are not only interested in the historical
information, but the future implications of the present information.
 The classification assists users of information to understand the activities
which influenced cash flows during the year/period.
 Such classification can enable users to develop expectation of future pattern
of cash flows, based on the structure of cash flows made in the current
period, e.g. if a lot was spent on investing activities, or a lot of cash flows
was generated from investing activities one may conclude about future cash
flows as well as going concern issues.
(B) Chelula Group
(i) Investing activities

Proceeds from sale of subsidiary (400,000,000 – 20,000,000,) = TZS
380,000,000
(ii) Investing activities
Purchase of property, plant and equipment
TZS Million
Opening NBV 3,950
Less: fixed assets of sub disposed (390)
3,560
Less: depreciation (800)
2,760
 Additions (balancing figure) 1,307
Closing NBV 4,067
Thus, the amount of PPE acquisitions during the year was TZS
1,307,000,000.
(iii) Financing activities
TZS Million
Opening NCI balance 512
Less: NCI of sub disposed (457 x 20%) (91)
421
Add: NCI share of profit for the year 103
 cash paid (balancing figure) (42)
Closing NCI balance 482
Thus the Dividend paid to Non-controlling interest was TZ 42,000,000.

(iv) Consolidated Statement of Cash flows for the year ending 30 th
April 2015
TZS Million
Operating activities
Net profit before tax 912
Adjustments for:
Depreciation 800
Profit on disposal of subsidiary (34)
Operating profit before working capital changes 1,678
Increase in receivable (605 – (417 – 39)) (227)
Increase in inventory (736 – (535 – 50)) (251)
Increase in payables (380 – (408 – 42)) 14
Cash generated from operations 1,214
Tax paid [102 + 290 – 203] (189)
Net cash inflow from operating activities 1,025
Investing activities
Acquisitions of Property, plant and Equipment (1,307)
Disposal of subsidiary 380
Net cash outflow to investing activities (927)
Financing activities
Dividends paid to non-controlling interest (42)
Net increase in cash and Cash equivalent during the year 56
st
Cash and cash equivalents at 1 May 2014 238
Cash and cash equivalents at 30th April 2015 294

ANSWER 5
(a) Liquidity
Users such as investors, suppliers, providers of credit and even employee are
interested in the liquidity of an entity since this affects the ability of the entity to
meet its obligations for dividends, settling the amounts owing for supplies,
servicing loans, as well as pay the wage bills respectively.
The two most popular ratios of liquidity are:
Current ratio, calculated as current asset/current liabilities.
Quick ratio, calculated as quick asset/current liabilities.
Quick assets are determined as current assets excluding prepayments and stock.
The quick ratio is considered a more robust measure of liquidity.
(b) Effect of the transactions on the working capital and the current ratio.
Effect on Effect on the
working capital current ratio
(i) Sold a building for cash increase Increase
(ii) exchange old equipment for new equipment (no cash was
involved) Unaffected Unaffected
(iii) Declared a cash dividend on preferred stock. Decrease Decrease
(iv) sold merchandise on account (at a profit) Increase Increase
(v) Retired loan notes that would have matured in 2023 Decrease Decrease
(vi) Issued a stock dividend to common stockholders Unaffected Unaffected
(vii) Paid cash for a patent Decrease Decrease
(viii) Temporarily invested cash in government bonds Unaffected Unaffected
(ix) Purchased inventory for cash Unaffected Unaffected
(x) Written off an account receivable as uncollectible, uncollectible
amount is less than the balance of the allowance for Unaffected Unaffected
uncollectible accounts.
(xi) Paid the cash dividend on preferred stock that was declared Increase Increase
earlier.
(xii) Purchased a computer and gave a two-year promissory note Unaffected Unaffected
(xiii) Collected accounts receivable Unaffected Unaffected
(xiv) Borrowed from the bank on a 120-day promissory note Decrease Decrease
(xv) Discounted a customer’s note, interest expense was involved. Decrease Decrease

ANSWER 6
(a)
Mbalali Ltd
Cash flow statement for the year ended 30 September 2014
TZS TZS
‘000,000’ ‘000,000’
Net cash inflow from operating activities 35
Cash flows from investing activities
Purchase of property, plant and equipment (W1) (116)
Proceeds on sale of plant 48
(68)
Cash flows from financing activities
Issues of ordinary shares (W4) 30
Redemption of preference shares ((50 – 0) x 110% (22)
8
Net decrease in cash and cash equivalents (13 + 12) (25)
Reconciliation of operating profit to net cash inflow from operating activities

TZS TZS
‘000,000’ ‘000,000’
Adjustments
Depreciation on property, plant equipment (W1) 45
Loss on disposal of plant (60 – 48) 12
Insurance claim not yet received (15) 42
Increase in inventories (86 – 72) (14)
Increase in account receivable (74 – 41) (33)
Increase in accounts payable (74 – 65) 9 (38)
146
Interest paid (6)
Income tax paid (W2) (51)
Dividends paid (W3) (54)
35

Workings
W1:
Property, plant and equipment
TZS TZS
‘000’ ‘000’
Opening balance 455 Depreciation for year 45
Revaluation surplus (40 – (15 – 4)) 29 Disposal at NBV 60
Cash – additions (bal. fig.) 116 Closing balance 495
600 600
W2:
Income tax
TZS TZS
‘000’ ‘000’
Cash (bal. fig.) 51 Opening balance (32 + 32) 64
Closing balance (40 + 21) 61 Profit & Loss 48
112 112
W3:
Dividends paid (accumulated profit)
TZS TZS
‘000’ ‘000’
Cash (bal. fig. – dividends) 54 Opening balance – acc. Profits 256
Net profit for the period 88
Closing balance – acc. Profits 294 Transfer realized rev. reserves 4
348 348
W4:
Issue of ordinary shares
TZS TZS
‘000’ ‘000’
Premium on preference shares Opening balance (100 + 30) 130
charged to share premium
((50 – 30) x 10% 2 Cash – proceeds 30
Closing balance (120 + 38) 158 ____
160 160
W5:
Movement in revaluation reserve
TZS TZS
‘000’ ‘000’
Transfer to realized profits 4 Opening balance 15
Closing balance 40 Revaluation – year 29
44 44

(b) Additional disclosures
IAS 7 cash Flow Statements is intended to help users gain a better
understanding of the financial position and liquidity of the reporting entity. The
standard encourages cash flows from operations to be separated between cash
flows that maintain capacity and those that increase capacity. The information
permits users to assess whether the company is investing adequately in
maintaining operating capacity; if not, the future performance may be impaired.
IAS 7 also encourages the separate disclosure of segment cash flow

information. This disclosure is consistent with the provision of segment
information within the income statement and statement of financial position. In
order to achieve a better understanding of the cash flows as a whole, it is useful
to analyse the cash flows of its individual parts. Management needs to know
which parts are producing positive cash flows and which are consuming them.
ANSWER 7
(A) The four areas are:
(i) Recognition
This deals with providing guidance on criteria for recognition of an item
in the financial statements. A typical standard will normally state
criteria for recognition of the financial statement item. Recognition
means when an item becomes formally presented in the financial
statement as an asset, liability, expense, revenue or equity, and thus
having its value on the face of the financial statement. Apart from
general recognition criteria, i.e. probable flow of economic benefit, past
event/transaction, and availability of reliable measurement, a standard
may give specific recognition criteria for a specific item.
(ii) Measurement
Measurement deals with determining the amount at which an item shall
be recognized in the financial statements. Different measurement bases
like cost, fair value, etc, are available and are prescribed by standards
depending on what potentially represents true and fair view. Depending
on the type of financial statements element, measurement can be
prescribed both for initial recognition and subsequent measurement. It
is also important to note that measurement can involve estimation e.g.
fair value, useful life, etc.
(iii)
Presentation
Presentation deals with providing guidance on how and where an item
that has met recognition criteria will be presented on the face of the
financial statements. Some items, for example, must have their separate
line items in the face of financial statements, also some order of
presentation may be prescribed, e.g. classifying expenses by nature or
function, or grouping assets into either current/non-current or order of
liquidity.

(iv) Disclosure
Disclosure deals with prescribing the minimum disclosures for an item
that is reported in the financial statements. Disclosures may be made for
an item recognized in the financial statement or for an item that has not
met recognition criteria, e.g. contingent liability asset.
 identifying the item

 explaining what it means
 giving a relevant example
(B) Role of the SoCF and Directors report
(i) Statement of Cash Flows

In literal sense, the statement of cash flows answers the question:
‘Where did cash go?’ and ‘where did cash come from?’ during a
particular accounting period. However, a well organized cash flow
statement [using prescribed format] provides much more information
than just this.
A cash flow statement, when used in conjunction with the rest of the
financial statements, provides information that enables users to evaluate:
(i) The changes in net assets of an entity,
(ii) Its financial structure (including its liquidity and solvency) and
(iii) Its ability to affect the amounts and timing of cash flows in order
to adapt to changing circumstances and opportunities.
Cash flow information is useful in assessing the ability of the entity to
generate cash and cash equivalents and enables users to develop
models to assess and compare the present value of the future cash flows
of different entities. It also enhances the comparability of the
reporting of operating performance by different entities because it
eliminates the effects of using different accounting treatments for the
same transactions and events.
Historical cash flow information often used as an indicator of the
amount, timing and certainty of future cash flows. It is also useful in
checking the accuracy of past assessments of future cash flows and in
examining the relationship between profitability and net cash flow and
the impact of changing prices.
Since the income statement and Statement of financial position are
prepared on accrual basis, the statement of cash flows provide answers
to the ultimate interest of investors, the future cash flow implications of
his/her investment.

(ii) The director’s report
Items entering the income statement and Statement of financial position
are only the ones capable of being measured reliably, since there are a
lot of qualitative information that entities may wish to present to the
investors, the directors report is there to fill the gap. Such information
include information to enable users to, for example.
 Evaluate the quality of management
 Understand the decision making bodies of the
entity
 To understand risk management processes of the
entity
 To understand strategic directions of the entity
 To obtain the view of the management on
different policies etc.
It therefore covers to a great extent the gap that the figures in the
financial statement doesn’t address.
______________  ______________

SUGGESTED SOLUTIONS
B3 – AUDITING PRINCIPLES AND PRACTICE
NOVEMBER, 2015
ANSWER 1
(a) Implications of findings on quality control in Kiwiko Co. Ltd.

Quality control is an important matter in the performance of audits. This ensures
that an audit firm carries out an audit of the highest standards which can be relied
upon as a basis for arriving at an appropriate audit opinion.
The facts given in the scenario are what exists in a specific audit of a client.
Guidance on quality control at an individual audit level is given in ISA 220 Quality
control for an audit of financial statements.
The following observations are made with regard to the audit of the financial
statements:
No pre audit meeting held:

This is a meeting normally held before commencement of the audit and includes all
member of the audit team on a particular assignment.
The fact that no meeting has been held with the partner is indicative of the fact that
there is no proper direction of the audit by the partner. The partner is responsible
for directing the audit and it is at a meeting such as this where important issues
including the following are discussed:
 The responsibilities of the audit team members including issues relating to
objectivity and professional skepticism.
 The objective of the work to be carried out
 Risk related issues
Supervision by the Auditor in charge (Haika)

The fact that Haika is busy on other assignments and is rarely at the premises of the
client is indicative of poor supervision of this audit. The Auditor in charge is
responsible to supervision day to day work and delegating this responsibility to an
audit assistant is not correct.
Review of audit work:

Audit work should be reviewed and finally the audit partner will need to review all
the working papers to enable him form an opinion. Due to deadlines and the fact
that review points may come up, it is expected that work is reviewed as it is done.
Waiting until the audit is nearing completion may result is issues remaining
unresolved.
It will be appropriate for the Auditor in charge to review work as it is completed.
Unresolved issue of inventory valuation:

Audit firms should have in place policies and procedures on consultations during
the performance of audits.
The partner is responsible for enduring that there are procedures to follow in case of
a disagreement or a matter that requires consultations. This incident suggests that
the firm does not have effective procedures in place to resolve any such issue.
Conclusion:
The firm should ensure that it carries out its work and enforces necessary quality
control procedures as stated in ISA 220 Quality control for an audit of financial
statements.
(b) International Standards on Auditing:

 These are standards that are issued by the International Federation of
Accountants after wide consultations.
 The standards give guidance to auditors on the work they should perform during
the audit.
 Because they are applicable in the jurisdictions of most of the countries of the
world they help ensure that the standard of audits is the same worldwide. This
way the accountancy profession is able to provide services of consistently high
quality in the public interest.
 The standards reduce subjectivity and therefore aid the auditor in the conduct of
an audit more efficiently.
 Compliance with ISAs can be used as a defence in an action for negligence.
 ISAs are reviewed as necessary by IFAC and so auditors do not need to worry
about the relevance of the standard. By following auditing standards the
auditors will be using latest and relevant standards thereby reducing the risk of
not detecting material misstatements in the financial statements.
Example:
ISA 230 Audit documentation gives guidance on documentation the auditor is
expected to maintain arising from the audit work carried out.
(c) Documentation requirements – Risk assessment:

 The significant risks identified and any related controls evaluated
 The identified and assessed risks of material misstatement.
 The overall responses to address the risks of material misstatement.
 The nature, extent and timing of further audit procedure linked to the
assessed risks at the assertion level.
 The discussions among the audit team members concerning the
susceptibility of the financial statements to material misstatements,
including any significant decisions reached.
 Key elements of the understanding gained of the entity and the risk
assessment procedures carried out.
(d) (i) Types of IPPF are:

 Attribute Standards all internal auditors should follow – These are
mandatory to all the internal auditors to comply. They are numbered
1xxx i.e. 1000 to 1322
 Performance standards – these are standards that are strongly
recommended to be complied by. Internal Auditors they are numbered
2xxx i.e. 2100 to 2600.

(ii) IPPF is conceptual framework that organizes authoritative guidance
promulgated by the Institute of Internal Auditor (IIA).
Mandatory guidance deal with:-

 Definition of Internal Auditing
 Code of Ethics
 International standards of or the Professional Practice of Internal Auditing
(Standards)
Strong Recommended guidance deals with:-

 Position Papers
 Practice Advisories
 Practice Guidance
QUESTION 2
(a) The following are FIVE elements of an assurance engagement
(i) Parties involved: It will always involve three separate parties; These are:
 The intended user who requires the assurance report
 The responsible party, that is the organization responsible for preparing
the subject matter to be reviewed, and;
 The practitioner (i.e. an accountant) who is the professional who will
review the subject matter and provide the assurance.
(ii) Suitable subject matter: The subject matter is the data that the responsible
party has prepared and which requires verification.
(iii) Suitable criteria are required in an assurance engagement. The subject

matter is compared to the criteria in order for it to be assessed and an opinion
provided.
(iv) Sufficient appropriate evidence has to be obtained by the practitioner in

order to give the required level of assurance.
(v) An assurance report. This is the opinion that is given by the practitioner to
the intended user and the responsible party.
(b) (i) With reasons explain whether it is the CAG or the private firm should be
appointed to audit the financial statements.
The CAG should audit the company because he is the only person eligible to
audit public authority or body. By definition, public authority shall include
any authority or bodies those with the following qualities:
(1) Established by written law or other instrument which is in receipt of a

contribution from, or the operations of which may, under the law or

instrument relating thereto, impose or create a liability upon, public
funds;
(2) Which the Government has invested its monies;
(3) Executing a Government project in respect of which a foreign provides,
any money goods or services, whether or not it is specifically provided in
relevant agreement for the project that the accounts of the public
authority or body are subject to audit by the Controller and Auditor
General;
(4) Whose accounts are, by or under a written law, required to be audited, or
are open to inspection, by the Controller and Auditor General;
(5) In which the Government is the majority shareholder;
(6) Which has, in any of its financial years, received more than half of its
income from public funds.
Since the scenario in question the government has a majority shareholding the
ACG should audit the company.
(ii) Differentiate a public audit from a private audit

These include the following:
(1) Auditor’s independence: private sector auditors are selected by the

management of the companies, (on behalf of the shareholders) they are
auditing. However, public sector auditors are appointed by the
Government, and thus, generally have a higher level of independence.
(2) Wider audit scope: private sector auditors generally concentrate on

financial audit and provide reasonable assurance on the true and fair
nature of financial statements.
However, public sector auditors also:

 Carry out value for money audit which involves determining whether
the entity has ensured economy, efficiency and effectiveness in the
public-sector services provided.
 Confirm that grants sanctioned by the Government have been
applied for the purposes for which the grants were sanctioned.
(3) Reporting: private sector auditors report to the shareholders of the

companies they are auditing, whereas public sector auditors report to the
Parliament and the audit reports are made available publicly.
(iii) A private audit firm can be appointed to audit a public company if appointed by
the CAG to conduct the audit in his behalf. This power is conferred to him
through Public Audit Act No. 8 of 2011 section 11(c) which provides that the
power of CAG of authorizing any person eligible to be appointed as an auditor
as the requirements of the Accountants and Auditors (Registration) Act, to
conduct an inquire, examination or audit on his behalf and that person or officer
shall report to him.

ANSWER 3
(a)
(i) Reasons for the auditor to prepare working papers
 They provide the proof that the audit staff properly performed work
assigned to them
 They provide future reference for the work done
 They provide necessary evidence to safeguard auditor in the event of
future charge of negligence brought against him.
(ii) ISA 230 makes clear
(iii) That the working papers are the auditor’s property, with the right of ownership
being subject to ethical limitations pertaining to confidentiality.
Working paper needs not to be given to either clients or third parties except
under legal demands in which the professional auditor’s communication are not
considered limited.
(b) Benefits of the auditor planning the audit of Financial Statements of client are
as follows:
(i) Appropriate attention is devoted to important areas of the audit,
(ii) Potential problems are identified and resolved on a timely basis and
(iii) The audit engagement is properly organized and managed in order to be
performed in an effective and efficient manner.
(iv) Proper assignment of work to engagement team members,
(v) Facilitating the direction and supervision of engagement team members and
the review of their work, and;
(vi) Where applicable, coordination of work done by auditors of components
and experts.
(c)
(i) Management’s responsibilities for internal control:
Management is responsible for putting in place suitable controls in an
entity. Management is responsible for running the company and
protecting the assets of the company.
Auditor’s responsibilities for internal control

Auditors are not responsible for setting up controls in a client company.
In the course of audit they will assess the appropriateness and
effectiveness of the controls put in place by management. Auditors are
concerned about controls because they may wish to rely on the
effectiveness of the controls in performing their substantive tests.

(ii) Examples of external confirmation:
 Bank letter for bank balance:
Provides evidence: On existence of bank balances held by the
client entity because confirmation is received directly from bank.
May not give evidence: of completeness of bank balances

because will not provide evidence of balance held by other
banks.
 Accounts receivable conformation:

Provide evidence on existence of receivables balances at the
period end as it is received directly from the receivables that
have been circulated.
Does not give evidence of valuation because confirmation does
not guarantee that the amount will be received or completeness
because does not give evidence of other receivables not
confirmed.
 Accounts payable confirmation

Provides evidence on the existence of a payables figure at the
end of the period. The reply received from each supplier is their
party evidence which can be relied upon. Does not give
evidence: of the completeness of total accounts payables figures
in the financial statements. There could be payables that exist
but are not recorded as such could not form part of the sample to
circularize.
 Solicitor’s letter on legal matter:

Provide evidence: of existence of any legal claims against the
entity at the period end. Does not give evidence of the valuation
of claims against the entity at the year end because of the
uncertainty of the amount involved because high level of
judgment required to make an assessment of the likely outcome
of the legal matter.
 Inventory held by their party

Provides evidence: of the existence of inventory held at the
period end because confirmation is received from the third party
holding the inventory.
Does not give evidence: of the valuation of the inventory at the
period end because the confirmation will not indicate the
condition and reliability of the inventory.

ANSWER 4
(a) Advantages of outsourcing GonjaCo’s internal audit department
Staffing
Gonja Co. needs to expand its internal audit department form five employees as
it is too small; however, if they out source then there will be no need to recruit
as Ndesamburo& Co. will provide the staff members and this will be an intant
solution.
Skilss and experience

Ndensamburo& Co. is a large firm and so will have a large pool of staff
available to provide the internal audit service. In addition, Gonja Co. has
requested that ad hoc review are performed and, depending on the nature of
these, it may find that the firm has specialist skills that Gonja& Co. may not be
able to afford if the internal audit department continues to be run internally.
Costs
Any associated costs such as training will be eliminated as Ndesamburo& Co.
will train its own employees. In addition, the costs for the internal audit service
will be agreed in advance. This will ensure that Gonja& Co. can budget
accordingly.
As Ndesambure& Co. will be performing both the external and internal audit
there is a possibility that the fees may be reduced.
Flexibility
With the department being outsourced Gonja& Co. will have total flexibility in
its internal audit service. Staff can be requested from Ndesamburo& Co. to suit
GonjaCo’s workloads and requirements. This will ensure that, when required,
extra staff can be used to visit a large number of shops and in quieter times there
may be no internal audit presence.
Additional fees
Ndesamburo& Co. will benefit from the internal audit service being outsourced
as this will generate additional fee income. However, the firm will need to
monitor the fees to ensure that they do not represent too high a percentage of
their total fee income.
Disadvantages of outsourcing Gonja Co. internal audit department

Knowledge of systems
Ndesamburo& Co. will allocate available staff members to work on the internal
audit assignment, this may mean that each month the staff members are
different and hence they may not understand the systems of Gonja Co. This
will decrease the quality of the services provided and increase the time spent by
Gonja Co. employees explaining the system to the auditors.

Independence
If Ndesamburo& Co. continues as external auditor as well as providing the
internal audit service, there may be a self-review threat, where the internal audit
work is relied upon by the external auditors.
Ndesamburo& Co. would need to take steps to ensure that separate teams were
put in place as well as additional safeguards.
Existing internal audit department

Gonja& Co. has an existing internal audit department of five employees. If they
cannot be redeployed elsewhere in the company then they may need to be made
redundant and this could be costly for the company. Staff may oppose the
outsourcing if it results in redundancies.
Cost
As well as the cost of potencial redundancies, the internal audit fee charged by
Ndesamburo& Co. may, over a period of it.
(b) Safeguards to be adopted to address the conflict of interest of auditing both

Gonja& Co. and Mickey Co:
 Both Gonja Co. and Mickey Co. should be notified that Ndesamburo& Co.
would be acting as auditors for each company and, it necessary, consent
obtained.
 Advising one or both clients to seek additional independent advice.
 The use of separate engagement teams, with different engagement partners
and team members; once an employee has worked on one audit such as
Gonja Co. then they would be prevented from being on the audit of Masaki
Co. for a period of time. This separation of teams is known as building a
‘Chinese wall’.
 Procedures to prevent access to information, for example, strict physical
separation of both teams, confidential and secure data filing.
 Clear guidelines for members of each engagement team on issues of security
and confidentiality. These guidelines
 could be included within the audit engagement letters.
 Potentially the use of confidentiality agreements signed by employees and
partners of the firm.
 Regular monitoring of the application of the above safeguards by a senior
individual in Ndesamburo& Co. not involved in either audit.

(c) External auditor responsibilities – going concern
ISA 570 Going Concern deals with this issue.
(i) Auditors are required to consider the going concern status of companies and any
disclosures regarding going concern in forming their audit opinion. Companies
that are listed on stock exchanges may be required to make additional
disclosures in relation to going concern issues.
(ii) Auditors are required to assess the adequacy of the means (the processes)
by
which directors have satisfied themselves that the going concern basis is
appropriate and that adequate disclosures have been made. Auditors conduct an
initial analysis at the planning stage of the audit as well as assessments at later
stages.
(iii) Auditors should make enquiries of the directors and examine appropriate
documentation supporting the company’s going concern status such as budgets
and cash flow forecasts.
(iv) Auditors consider whether the period to which directors have paid
particular
attention is adequate. This should normally be at least 12 months from the
balance sheet date. Auditors also enquire of management as to their knowledge
of events or conditions beyond this period that may cast significant doubt on the
entity’s ability to continue as a going concern.
(v) Auditors need to consider the appropriateness of assumptions which

directors
have made, the sensitivity of assumptions to external and internal changes, any
obligations, guarantees or undertakings arranged with other entities, the
existence and adequacy of borrowing facilities and the director’s plans to deal
with any going concern problems.
(vi) Auditors are required to document the extent of any concerns, taking
account of
matters that have come to their attention during the course of the audit and in
particular, financial, operational, or other indicators concern problems that are
present.
(vii) Indicators of going concern issues would include trading losses,

impairment of
assets, net liabilities, defaults on loans, liquidity problems, an inability to
refinance loans where necessary, fundamental changes in the markets or
technology having an adverse effect on the company, loss of management, staff,
customers or suppliers, or major litigation, for example.
(viii) Auditors should consider the need to obtain written management

representations.

(ix) Auditors should consider the adequacy of any disclosures in the financial
statements.

ANSWER 5
(a) (i) The key reason that accountants should have an ethical code is that
people rely on them and their expertise.
(ii) Advantage of an ethical framework over a rules base system

 A framework of guidance places the onus on the auditor to actively
consider independence for every given situation, rather than just
agreeing a checklist of forbidden items. It also requires him to
demonstrate that a responsible conclusion has been reached about
ethical issues.
 The framework prevents auditors interpreting legalistic requirements

narrowly to get around the ethical requirements. There is an extent
to which rules engender deception, whereas principles encourage
compliance.
 A framework allows for the variations that are found in every

individual situation. Each situation is likely to be different.
(iii) There are five general sources of threats:

 Self-interest threat (for example, having a financial interest in a
client)
 Self-review threat (for example, auditing financial statements
prepared by the firm)
 Advocacy threat (for example, promoting shares in a listed entity
when that entity is a financial statement audit client)
 Familiarity threat (for example, an audit team member having
family at the client)
 Intimidation threat (for example, threats of replacement due to
disagreement)
(iv) Available safeguards

There are three general categories of safeguard:
 Safeguards created by the profession, legislation or regulation
 Safeguards in the environment
 Safeguards created by the individual
(b) Related party: a person or entity that is either

(i) A person or a close member of that person’s family is related to a
reporting entity if that person.
 Has control or joint control over the reporting entity;
 Has significant influence over the reporting entity; or
 Is a member of the key management personnel of the reporting entity
or of a parent of the reporting entity.

An entity is related to a reporting entity if any of the following conditions
applies:
 The entity and the reporting entity are members of the same group (which
means that each parent, subsidiary and fellow subsidiary is related to the
others);
 One entity is an associate or joint venture of the other entity (or an associate
or joint venture of a member of a group of which the other entity is a
member);Both entities are joint ventures of the same their party;
 One entity is a joint venture of a third entity and the other entity is an
associate of the third entity;
 The entity is a post-employment benefit plan for the benefit of employees of
either the reporting entity or an entity related to the reporting entity. If the
reporting entity is itself such a plan, the sponsoring employers are also
related to the reporting entity;
 The entity is controlled or jointly controlled by a person identified above.
(ii) Related party transactions are transfer of resources or obligations between

related parties, regardless of whether a price is charged.
An audit cannot be expected to detect all material related party transactions.

The risk that undisclosed related party transactions will not be detected by the
auditors is especially high when:
 Related party transactions have taken place without charge;

 Related party transactions are not self-evident to the auditors;
 Transactions are with a party that the auditors could not reasonable be
expected to know is a related party;
 Active steps have been taken by management to conceal either the full
terms of a transaction, or that a transaction is, in substance, with a
related party;
 The corporate structure is complex.

ANSWER 6
(a) Procedures for obtaining audit evidence
(i) Inspection – the physical examination of records, documents or tangible

assets
(ii) Observation – looking at the procedures while being performed
(iii) Inquiry- inquiry consist of seeking information of knowledgeable person
inside or outside the entity. The information may be new to the auditor or
may corroborate evidence from other sources.
(iv)Confirmation – confirmation is the response to an inquiry to corroborate
information contained in the accounting records.
(v) Computation – checking the arithmetical accuracy of sources documents and
accounting records or performing independent calculations
(vi)Analytical procedures – the analysis of significant ratios and trends and
investigation of fluctuations and relationships that are inconsistent with other
relevant information or deviate from predicted amounts.
(b) Audit tests of Plant and Equipment

(i) Inspections- physically y inspect additions to plant and equipment agreeing
details such as model number and serial number with the purchase invoice
and asset register.
(ii) Observation- observe entity staff comparing the physical existence of plant
and equipment with the items recorded in the asset register.
(iii) Inquiry and confirmation- obtain written confirmation of the existence
of plant and equipment recorded as being leased to customers
(iv)Computation-check the computation of depreciation for the year
(v) Analytical procedures – compare the total depreciation charge for plant and
equipment with the comparable charge for the previous year and consider the
reasonableness of any difference.
(vi)Performance
(c) Reliability of evidence

(i) Inspection – the reliability of the inspection depends on nature and source of
the documents. Original documents are more reliable to than photocopies.
With the inspection of tangible assets, the reliability depends on the ability
of the auditor to be certain the asset examined is the one recorded in the
records. It may be increased by get the services of an expert in identifying
the asset.
(ii) Observation – the reliability of this method depends on whether entity’s
staff were warned in advance that their performance was to be observed by
the auditors. In observing comparison of plant and equipment, the
reliability depends on the auditors’ judgment as to whether the performance
of procedures by entity staff might differ when they are not being observed.
(iii) Inquiry and Confirmation – the reliability depends on the independence
of the other party and whether the reply is written or oral. Confirmations
from customers as to the existence of plant and equipment on hire to them is
highly reliable, being third parties, they are independent of the entity.

(iv)Computation – being entirely auditor created, computational evidence, such
as verifying the calculation of the depreciation charge, is highly reliable.
(v) Analytical procedures – as auditor created evidence the procedures are
reliable but limited by the ability of the auditor to assess its reasonableness.
In comparing the total depreciation charge for the year, the effect of
additions and disposals of assets with different depreciation rates can only
be approximated unless a full computation is performed. Where the
procedure involves non-financial data or data from outside the entity,
reliability is limited by the reliability of the other data.
ANSWER 7
(a) (i) The auditor would be unlikely to use audit sampling techniques in the
following situations:
 Where the population size is so small that the statistical sampling will
create unacceptable margins of error.
 Where transactions or balances are small in number and material in
relation to the financial statements e.g. acquisition of non-current assets.
 Where population is not homogeneous and requires stratification. For
example inventory and work in progress may need stratifying because
of the diverse nature of the population and the need to increase the
precision of the sampling unit.
 Where the population has not been maintained in a manner suitable for
audit sampling. For example sales invoices may have been filed in
customer order and not numerically.
(ii) The factors which the auditor should consider in determining the
sample size are as follows:
 The efficiency and effectiveness of the internal control systems to
process transactions without error.
 The expected error rate. The expectation depends upon the
evaluation of internal control.
 The level of assurance which the auditor and the client require-this
is based on the auditor determination of the amount of the risk he is
prepared to accept.
 The result of previous audit work-if the rate of error was high in the
previous year it may cause the auditor to use large sample to reduce
the risk of error.
(b) (i) Authorization: This is a type of preventive control. Transaction should be

authorized and approved before they occur.
(ii) Performance review: Reviewing work and monitoring performance are

forms of detection controls.

(iii) Information processing: Controls that ensure that only authorized,
genuine, accurate and complete data is recorded are preventive controls.
However the arithmetic and accounting controls such as bank reconciliation
and batch control are detection controls.
(iv) Segregation of Duties: This is an example of a prevention control.

Segregating duties within the company should help prevent an individual from
committing a fraud or error. Segregation may also detect fraud or error, when
a different person becomes involved in a transaction and finds mistakes, or
attempts to falsify documentation. This could therefore be a detection control
as well.
(c) (i) Pervasive – likely that most assets and liabilities will be incorrectly stated;
(ii) Not material;
(iii) Pervasive – if your client loses that trading license it will affect the going
concern status. Where the going concern status is in doubt it is likely to
affect most assets and liabilities in the financial statements;
(iv) Not material;
(v) Pervasive – although only a few balances affected the main balance
affected inventory accounts for a substantial portion of the net assets and
therefor inability to audit this balance prevents the auditor from being able
to form an opinion as the overall financial statements could be seriously
misleading.
(vi) Material – by its nature director’s remuneration is material however few

other balances will be affected and unlikely to cause the overall financial
statements to be seriously misleading therefore not pervasive;
(vii) Pervasive – although not affecting many items the disagreement would
move the balance from a profit to a loss which will affect the overall
financial statements and would cause them to be seriously misleading
without the adjustment.
______________  ______________

SUGGESTED SOLUTIONS
B4 – PUBLIC FINANCE AND TAXATION I
NOVEMBER 2015
ANSWER 1
(a) Documents and relevant information that should be forwarded to the tax
office are:
 Certificate of incorporation
 Signed copy of Memorandum and Articles of Association
 Statement of estimated income
 Nature of business of the company
 Date of commencement of business
 Letter of appointment of auditors
 Names and addresses of directors
 Registered address of the company
 Accounting year of the company
(b) Mzalendo Limited

Determination of Chargeable Income and Tax Liability 2014
Year of Assessment Basic Period: 1/01/2014 – 31/12/2014
Tshs. Tshs.
Net Profit per accounts 128,840,000/=
Less: Profit on sale of fixed assets 50,000,000/=
Dividend received 25,500,000/= 75,500,000/=
53,340,000/=
Add Back: Depreciation 21,550,000/=
Legal Expenses on: Income Tax Appeals 5,700,000/=
Sale of Property 3,200,000/=
General provision for doubtful debts 2,000,000/=
Subscriptions and donations to: Tumaini orphanage 5,000,000/=
Malaria campaign 15,014,000/=
New iron gates for factory 15,560,000/= 68,024,000/=
Assessable Income 121,364,000/=
Deduct: Loss brought forward from 2004 38,000,000/=
83,364,000/=
Less: Capital allowances 25,500,000/=
Chargeable Income 57,864,000/=
Tax thereon @ 25% of 57,864,000 14,466,000/=
==========
NOTE: TREATMENT OF CURRENT MATTERS IF ASSUMED TO BE REVENUE

IN NATURE ALLOWABLE, BUT IF CAPITAL IN NATURE ADD BACK
TSHS 9,836,000/=

ANSWER 2
(a)
 Employment includes in particular:
 A position of an individual in the employment of another person;
 A position of an individual as manager of an entity other than as partner
of a partnership;
 A position of an individual entitling the individual to a periodic
remuneration in respect of services performed; or
 A public office held by an individual, and includes past, present and
prospective employment.
 Any explanation on contract of service.

(b)
 Employment is determined by the presence of contract of service or
employment. The contract of service exists when an employer dictates what
an employee should do and how, in return for periodic payments.
 The contract of service might exist when:

 An employee agrees that, in consideration of a wage or other
remuneration, he will provide his own work and skill in the
performance of some service for his master.
 An employee agrees, expressly or impliedly, that in the performance of
that service he will be subject to the other’s control in a sufficient
degree to make that other master.
 The other provisions of the contract are consistent with its being a
contract of service
 On the other hand, a contract for service occurs when a contractee hires his
own employees, provides and maintains his own tools or equipment; the
contractor is paid by reference to the volume of work done; has invested in the
enterprise and bear the financial risk; has the opportunities of profit or the risk
of loss; and the relationship is not permanent.
 Therefore Mr. Kizu is an employee of MTANASHATI Ltd. i.e. contract of
service exist.

(c)
Basic salary (6,000,000 x 4/12) 2,000,000

Transport Allowance (2,500,000 x 4/12 833,333.33
Lunch allowance (1,500,000 x 4/12 500,000.00
Medical allowance (1,000,000 x 4/12 333,333.33
Car benefit (1,000,000 x 4/12 333.333.33
Total income before House benefit 4,000,000.00
House benefit:
A: 4,000,000 x 4/12 1,333,333.33
B: The greater of the following
 15% x 4,000,000 = 600,000
 1,500,000 x 4/12 = 500,000
The greater is 600,000 compare with 1,333,333.33 take the
lesser i.e. 600,000
600,000 – 500,000 100,000
Total Taxable Income 4,100,000
=======
ANSWER 3
(a)(i) Zero rated supplies
These are taxable goods/services but at a rate of 0%. First schedule of VATA,
1997 provides the zero rated supplies. Zero rate has a great advantage over
exempt supply, in that zero rate supplies are taxable supplies and traders who
make such supplies (zero rate) can claim the VAT they have been charged on
purchases.
The Tax implications of a supply of goods or services being zero rated are as
follows;
 The supply is taxable supply but the VAT due is calculated at 0%

 A person who makes only zero rated supplies is nonetheless making
taxable supplies and must register as a taxable person if taxable turnover
exceeds the prescribed threshold. Having registered, (and this may be
done voluntarily if taxable turnover is less than the threshold), the person
will then be able to reclaim input tax.
(ii) Special relief

Special reliefs are largely conditional on the status of the consumer and the use to
3rd schedule which the goods/services are put, rather than the nature of the
goods/service involved. Normally, special relief supplies, bear tax, but in certain
circumstances are relieved of tax. Relief is granted only after appropriate
procedures have been followed.

(iii) Exempt supplies
Exempt goods/services bear no tax. There are different reasons for the
government to exempt some goods/services for VAT purposes e.g. economic
reasons, social reasons and political reasons as well. Exempt supplies are as
provided in the second schedule of VATA, 1997.
The tax implications of a supply of goods or services being exempt are as follows:
 VAT cannot be charged on an exempt supplies
 A person who makes only exempt supplies can not register for VAT,
charges no output tax, is not a taxable person and cannot reclaim input
tax
 In effect, a person making only exempt supplies is in an identical
position with regard to VAT as the final consumer at the end of a
distribution chain.
(b)
ITEM/VALUE ADDED COST/PRICE/ INPUT OUTPUT VAT
VAT exclusive TAX TAX@18% PAYABLE
@18%
TIMBWILITIMBWILI LTD
Manufacturing cost 0 0
Value added 25,000,000
Price to MCHAPAKAZI LTD. 25,000,000 4,500,000 4,500,000
MCHAPAKAZI LTD.
Purchases cost 25,000,000 4,500,000
Price to SASAKAZI LTD 45,000,000 8,100,000 3,600,000
SASAKAZI LTD
Purchases cost 45,000,000 8,100,000
Price Consumer 80,000,000 11,700,000** 3,600,000
**18%x65,000,000
(c) A ‘mixed supply’ occurs if a mixture of goods and/or services is invoiced

together at a single inclusive price. If all of the items in the mixture are
chargeable to VAT at the same rate, the value of supply and related output tax
can be calculated in the usual way. Otherwise, it will be necessary to apportion
the price charged between the various elements of the mixture in order to
calculate the output tax due. Example Box of toothpaste and toothbrush packed
together.
A ‘composite supply’ occurs if a mixture of goods and/or services is supplied

together in such a way that it is not possible to split the supply into its component
parts. In this case, the supply as a whole must be considered in order to
determine the rate of tax due, if any. Example A chair (furniture) made up of
various goods.
ANSWER 4
(a) Rules of origin are the criteria needed to determine the national source of a
product. Their importance is derived from the fact that duties and restrictions in
several cases depend upon the source of imports. E.g. EAC.
Rules of origin are used:
 To implement measures and instruments of commercial policy such as anti-

dumping duties and safeguard measures;
 To determine whether imported products shall receive most-favoured-nation
treatment or preferential treatment;
 For the purpose of trade statistics;
 For the application of labelling and marking requirements; and
 For government procurement
(b) Problems of implementing the East African Customs Union

 Membership issues: On a continental basis and also within sub-regions,
many African countries belong to several groupings or sub-groupings that
sometimes compete, conflict or overlap amongst themselves rather than
complement each other. This adds to the burden of harmonization and
coordination, and is wasteful duplication in view of constrained resources.
 Slow ratification of protocols and reluctant implementation of agreed plans:
Due to low political commitment and/or perceived or real losses and sacrifices
involved, a number of countries have been reluctant to fully implement
integration programmes on a timely basis. This has been partly caused by the
lack of prior cost-benefit analysis and broad internal consultations on the part
of the member countries concerned. In some cases, changes in the socio-
economic and political dynamics within the member states involved have also
militated against implementation of regionally agreed programmes, especially
where socio-economic sacrifices are concerned.
 Socio-economic policy divergence: The inconsistency or incoherence at the
macroeconomic level has also been a source of problems for the systematic
implementation and “internalization” of the regional integration agenda into
national programmes. It has been impossible to integrate regionally where
there has been continuously glaring policy, implementation and information
inconsistencies at the national level. There is therefore need for an appropriate
policy mix and coordination at the national level that targets low inflation and
fiscal discipline.
 Limited national and regional capacities: The lack of mechanisms and

resources for effective planning, coordination, implementation, monitoring and
pragmatic adjustment or programmes on the ground have been another
constraint to regional integration.

(c) Forms of smuggling
 Outright avoidance of official customs controls across the borders: e.g. On
Lake Victoria, overland on road, rail and often through the bush ways. This
form of smuggling is generally associated with highly marketable goods,
goods of high tax value, and prohibited or restricted goods.
 Under declaration of goods: This is a circumstance where the importer
declares less quantity on importation documents than the actual goods being
imported. This form of smuggling occurs through customs controls –
usually deliberately, on the side of the importer.
 Undervaluation of goods: This is a situation whereby goods are given a

lower value than they actually have. Undervaluation often happens out of
ignorance, negligence or connivance at the customs control. It aids
smuggling indirectly.
 Misclassification of goods: This means that goods are declared under a

different class of imports particularly to attract lower rates of tax with intent
to reduce the tax liability. This again may happen out of ignorance,
negligence or deliberately. This problem also aids smuggling.
 Falsification of documents.
 Mis declaration of country of origin.

Problems associated with smuggling
(i) Loss of revenue: Smuggling is an act of tax evasion which deprives government
of revenue for public expenditure.
(ii) Distortion of market prices: Goods which are smuggled into the country are often
sold a lot cheaper than goods brought onto market through the right procedures.
Smuggling therefore deprives traders of free competition.
(iii) Collapse of local industries: A country achieves better economic growth by
developing its own industrial base. Smuggling under-cuts prices of the locally
manufactured goods thus destroying the market for local products. This leads to
collapse of local industries.
(iv) Unemployment: When there is unfair competition in the market, compounded by
the collapsing of industries, the labour market (employment base) is eroded.
Many professionals, skilled and unskilled personnel remain jobless.
(v) Loss of lives
(vi) Increased insecurity.

ANSWER 5
(a) Effect of Tax Avoidance and Evasion
Tax avoidance is a practice and technique used by tax payers to minimize the
taxpayer’s tax burden without going against the tax laws. Tax avoidance takes
place within the legal context of the tax system that individuals or firms take
advantage of the tax code and exploit “loopholes”, i.e. engage in activities that
are legal but run counter to the purpose of the tax law. Usually, tax avoidance
encompasses special activities with the sole purpose to reduce tax liabilities.
An example for tax avoidance is strategic tax planning where financial affairs
are arranged such in order to minimize tax liabilities by e.g. using tax
deductions and taking advantage of tax credits.
In contrast evasion on the other hand is a practice and technique used by tax
payers to minimize tax liability by contravening tax laws. In general tax
evasion refers to illegal practices to escape from taxation. To this end, taxable
income, profits liable to tax or other taxable activities are concealed, the
amount and/or the source of income are misrepresented, or tax reducing
factors such as deductions, exemptions or credits are deliberately overstated.
Both tax evasion and avoidance aim at reducing the taxpayer’s tax burden. As
tax can be used to achieve a number of objectives, a high degree of tax
avoidance and evasion may hinder the achievement of taxation objectives,
both revenue and non revenue objectives. This included
 Serious government revenue short falls which may bring about budget
deficits that may ultimately lead into foreign loans grants dependency
causing heavy foreign debt burden plus unfavorable conditions attached
to grants.
 Non realization of other government economic and social development
 Creates inequality in the tax system as some law abiding citizens or

those with no opportunities to evade or avoid tax bear disproportionally
heavier tax burden than others.
(b) International and national perspective of tax evasion and avoidance
The international dimension of tax evasion and avoidance can be divided into
two stylized strands:
 On the one side, one can find – legal or natural – persons taking
advantage of differences in tax laws or rates and the resulting tax
liabilities between countries resulting in attempts to shift tax liabilities to
low-tax countries. This starts with efforts to reduce tax payments in a
private environment, e.g. tax-induced cross-border shopping and tank-
tourism, and ends with the flight of financial capital to low tax
destinations or tax havens.

 On the other side, the international dimension of tax evasion and
avoidance covers all kinds of tax evasion and avoidance activities which
occur as a result of international trade, the international division of
labour, and international competition for foreign investment. In this
field, one can find multinational enterprises’ (MNE) tax driven shifting
of profits, tax evasion and avoidance against the background of
investment incentives and special enterprise zones, as well as various
kinds of VAT and tariff fraud accompanying international trade in goods
and services.
Besides the international perspective there also exists a national dimension.

This relates to all incidents in which individuals or firms evade or mitigate
taxes within their country of residence while no transactions with companies
or individuals abroad are involved. The national perspective comprises
incomes and revenues generated in the domestic informal economy, income
not reported by a legal or natural person and other means of ‘getting around’
solely domestic tax liabilities.
(c) Measures taken by the government of Tanzania to solve tax avoidance and
evasion problem: Due to the negative effects of tax evasion and avoidance, it
is the interest of the government to keep the level of tax avoidance and evasion
to the minimum level possible. This has been reflected, among others, through
the following ways;
 Imposition of disciplinary measures against those evading taxes
 Timely amendments of the tax acts whenever it is detected that certain

provisions of the law allows tax avoidance in the major scale. For example
in the fiscal year 2012/2013 the definition of Income Tax was amended to
include a person with unrelieved loss to pay tax on their turnover.
Definition of the term “exempt amount” has been amended by deleting the
figure “54” appearing in the definition. This is a consequential amendment
emanating from the amendment of Section 54 (2).
 Major tax reforms, for example the VAT Act 1997 has been replaced by
VAT Act 2014 to address weaknesses and loopholes in the previous law.
 The introduction of electronic fiscal devices
 Promotion of voluntary tax compliance to tax payers through education.
 Anti-avoidance provision

ANSWER 6
(a) Requirements for filing returns – (income of an individual)
 The taxable person either resident or non resident required to file return
if liable within the territory of the relevant tax authority.
 The return should be filed within 90 days from the commencement of

every assessment year.
 Withholding agent to file within 30 days after 6 months if liabile.

 The return shall contain a declaration on the fact that a true and correct
statement of incomes had been computed.
 Returns on Income should be done on or before end of six months after

due date.
 A taxable individual should file return of his incomes from all sources
in prescribed form to the relevant tax authority without notice or demand.
 Exception under section 92 (a) should also be considered.
(b) Items to be stated in the Notice of Appeal
 The name and address of the applicant.

 The official date and number of the relevant notice of assessment.
 The amount of the assessable, total or chargeable income and of the tax
charged as shown by the notice and the year of assessment concerned.
 The precise grounds of appeal against the assessment.
 The date on which the applicant was served with notice of refusal by the
relevant tax authority to amend the required assessment.
 The address for service of any notice of other documents for the
applicant.

ANSWER 7
(a) A public good is a good that is non-rivaled and non-excludable. This means,
respectively, that consumption of the good by one individual does not reduce
availability of the good for consumption by others; and that no one can be
effectively excluded from using the good. Example: National defense, sewer
systems and public parks.
A product that must be purchased in order to be consumed, and whose
consumption by one individual prevents another individual from consuming it. It
is referred to as “rivalrous” and “excludable”. If there is competition between
individuals to obtain the good and if consuming the good prevents someone else
from consuming it, a good is considered a private good.
(b)(i) Equilibrium price and quantity in this market.
4,000,000 – 4Q = 4Q
8Q = 4,000,000
Q = 500,000 motorcycles
P = 4 x 500,000 = 2,00,000 per motorcycle
(ii) The new supply curve with the excise tax will be P = 80000 + 4Q. Using this
equation and the demand equation we can solve for the new quantity of
motorcycles sold once the excise tax is imposed.
Thus, 80,000 + 4Q = 4,000,000 – 4Q

8Q = 3,920,000
Q = 490,000
(iii) Tax incidence

When Q = 490,000 motorcycles, the price consumers pay is
P = 4,000,000 – 4Q
P = 4,000,000 – 4(490,000)
P = 2,040,000
The excise tax raises the price to consumers from 2,000,000 to 2,040,000.
Thus, the consumer tax incidence can be calculated as the change in price times
the number of motorcycles sold once the tax is imposed.
Thus, consumers tax incidence = (2,040,000 – 2,000,000) (490,000)

= 19,600,000,000.
______________  ______________

SUGGESTED SOLUTIONS
B5 – PERFORMANCE MANAGEMENT
NOVEMBER 2015
ANSWER 1
(a) Calculations
(i) Expected demand for tickets per concert

Number Probability Product
Popular artists (PA) 500 0.45 225
Less known artists (LKA) 350 0.3 105
Unknown artiste (UA) 200 0.25 50
Expected demand 380
(ii) Advise on the level of purchases

Payoff table (see workings)
PA (Demand 500) LKA (Demand 350) UA (Demand 200)
Tickets 0.45 0.3 0.25 Expected
bought value
200 120,000 120,000 120,000 120,000
300 225,000 225,000 (57,000) 154,500
400 360,000 219,000 (204,000) 176,700
500 600,000 177,000 (246,000) 261,600
As can be seen from the payoff table, the level of purchases that will
give him the largest profit over a period of time is 500 tickets.
(iii) At this level the expected profit is TZS 261,600.
(b) Amount to pay for predictions

This can be obtained by calculating the expected value of the best decision under
each prediction, and see by how much this is better than the expected value in (A)
above. i.e. Expected value with correct predictions – Expected value without
predictions.
If he had known that there would be a popular artist, he would buy 500 tickets
and obtain TZS 600,000 return.
If he had known that there would be a less known artist, he would buy 350 tickets
If he had known that there would be an unknown artist, he would buy 200 tickets

The expected value would then be calculated as follows:
Prediction Tickets Payoff Probability of the Expected

bought prediction value
Popular artiste (PA) 500 600,000 0.45 270,000
Ess known artiste (LKA) 300 225,000 0.3 67,500
Unknown artiste (UA) 200 120,00 0.25 30,000
Expected value 367,500
The maximum sum to pay for correct predictions is thus TZS 367,500 – 261,600
= TZS 105,900.
Workings: Calculation of payoffs
Tickets Demand Cost per Total Revenue Revenue Total Contribution
bought ticket cost standard from super revenue
sale agent
200 500 2,400 480,000 600,000 - 600,000 120,000
350 2,400 480,000 600,000 - 600,000 120,000
200 2,400 480,000 600,000 - 600,000 120,000
300 500 2,250 675,000 900,000 - 900,000 225,000
350 2,250 675,000 900,000 - 900,000 225,000
200 2,250 675,000 600,000 18,000 618,000 (57,000)
400 500 2,100 840,000 1,200,000 - 1,200,000 360,000
350 2,100 840,000 1,050,000 9,000 1,059,000 219,000
200 2,100 840,000 600,000 36,000 636,000 (204,000)
500 500 1,800 900,000 1,500,000 - 1,500,000 600,000
350 1,800 900,000 1,050,000 27,000 1,077,000 177,000
200 1,800 900,000 600,000 54,000 654,000 (246,000)
ANSWER 2
(b) Budgetary control report comparing the planned operating budget for 2014 with
the actual results for that year.
2013 Planned Actual Variance Type
budget 2014
Sales 7,000,000 6.300,000 5,800,000 500,000 Adverse
Direct materials 1,200,000 1,080,000 1,300,000 (220,000) Adverse
Direct labour 1,100,000 990,000 1,100,000 (110,000) Adverse
Variable manufacturing 300,000 270,000 300,000 (30,000) adverse
overheads
Fixed manufacturing 800,000 800,000 780,000 20,000 Favorable
overheads
Total manufacturing costs 3,400,000 3,140,000 3,480,000 (340,000) Adverse
Gross margin 3,600,000 3,160,000 2,320,000 840,000 Adverse
Variable selling expenses 300,000 270,000 270,000 - NA
Fixed selling expenses 400,000 400,000 290,000 110,000 Favorable
Total selling expenses 700,000 670,000 560,000 110,000 Favorable
Variable General and admn. 100,000 90,000 110,000 (20,000) Adverse
Expenses
Fixed General and admn. 1,200,000 1,200,000 1,100,000 100,000 favorable
Expenses
Total general and admn. 1,300,000 1,290,000 1,210,000 80,000 Favorable
Expenses
Net operating income 1,600,000 1,200,000 550,000 650,000 Adverse
(b) Budgetary control report that would be useful in pinpointing responsibility for the
different unit section managers in 2014.
2013 Planned Flexible Actual Variance Type
budget budget
2014
Sales 7,000,000 6.300,000 5,800,000 5,800,000 NA
Direct materials 1,200,000 1,080,000 994,285.71 1,300,000 (305,714) Adverse
Direct labour 1,100,000 990,000 911,428.57 1,100,000 (188,571) Adverse
Variable manufacturing 300,000 270,000 248,571.43 300,000 (51,429) Adverse
overheads
Fixed manufacturing 800,000 800,000 800,000 780,000 20,000 Favorable
overheads
Total manufacturing 3,400,000 3,140,000 2,954,286 3,480,000 (525,714) Adverse
costs
Gross margin 3,600,000 3,160,000 2,845,714 2,320,000 525,714 Adverse
Variable selling 300,000 270,000 248,571.43 270,000 (21,429) Adverse
expenses
Fixed selling expenses 400,000 400,000 400,000 290,000 110,000 Favorable
Total selling expenses 700,000 670,000 648,571 560,000 88,571 Favorable
Variable General and 100,000 90,000 82857.14 110,000 (27,143) Adverse
admn. Expenses
Fixed General and 1,200,000 1,200,000 1,200,000 1,100,000 100,000 Favorable
admn. Expenses
Total general and admn. 1,300,000 1,290,000 1,282,857 1,210,000 72,857 Favorable
Expenses
Net operating income 1,600,000 1,200,000 914,286 550,000 364,286 Adverse
(c) The following down are control of strength that flexible budget have over static
budget:
 Flexible budget are mainly prepared for control purposes. If the actual
results are compared with the static budget (a budget which is not a
flexible budget and prepared for only one level of activity) the
performance evaluation may give misleading results, as a change in the
level of activity has not been considered.
 On the other hand, a flexible budget is prepared for various levels of

activities and according to the actual level of activities achieved, a
comparison if made.

 Flexible budget helps plan for potential changes in production costs or
sales volume; it allows business to respond quickly to changes and
maximize profits by seizing the opportunity.
 Flexible budgets also provide for a greater degree of management control,

by eliminating sales volume as a source of variance, any variances
highlight other causative factors.
ANSWER 3
MATERIAL PRICE VARIANCE LABOUR RATE VARIANCE
ACTUAL FLEXIBLE BUDGETS FLEXIBLE BUDGETS ACTUAL FLEXIBLE BUDGETS FLEXIBLE BUDGETS
RESULTS BASED ON EX POST BASED ON EX ANTE RESULTS BASED ON EX POST BASED ON EX ANTE
STANDARDS STANDARDS STANDARDS STANDARDS
11,480,000 11,340,000 11,200,000 7,018,000 7,047,000 6,960,000
OPERATING PLANNING OPERATING PLANNING

VARIANCE VARIANCE VARIANCE VARIANCE
140,000 A 140,000 A 29,000 F 87,000 A
PRICE VARIANCE RATE VARIANCE
280,000 Adverse 58,000 Adverse
MATERIAL EFFICIENCY VARIANCE LABOUR EFFICIENCY VARIANCE
ACTUAL FLEXIBLE BUDGETS FLEXIBLE BUDGETS ACTUAL FLEXIBLE BUDGETS FLEXIBLE BUDGETS
RESULTS BASED ON EX POST BASED ON EX ANTE RESULTS BASED ON EX POST BASED ON EX ANTE
STANDARDS STANDARDS STANDARDS STANDARDS
9,696,000 9,408,000 9,600,000 6,960,000 6,912,000 7,200,000
OPERATING PLANNING OPERATING PLANNING

VARIANCE VARIANCE VARIANCE VARIANCE
288,000 A 192,000 F 48,000 A 288,000 F

EFFICIENCY VARIANCE EFFICIENCY VARIANCE
96,000 Adverse 240,000 Favourable

Workings
ORIGINAL STANDARDS CHANGES
(EX ANTE) (EX-POST)
Direct material price Tshs.80 per kg Tshs.81 per kg is given
Direct material usage 2 kg per unit (2 kgs)(0.98) = 1.96 kgs per unit
Direct labour rate Tshs.12,000 per hour Tshs.12,150 per hour is given
Direct labor quantity 0.01 hour per unit (0.01)(0.96) = 0.0096 hrs per unit
ACTUAL FLEXIBLE BUDGETS FLEXIBLE BUDGETS
RESULTS BASED ON EX-POST BASED ON EX-ANTE
STANDARDS STANDARDS
Material purchase 11,480,000 (140,000 kg)(sh81) (140,000 kg)(80)
=11,340,000 =11,200,000
Materials usage (121,200 kgs)(shs.80) (60,000)(1.96 kg)(sh80) (60,000)(2 kg)(80)
=9,696,000 =9,408,000 =9,600,000
Labour rate 7,018,000 (580 hrs)(sh12,150) (60,000)(0.01)(sh12,000
=7,047,000 =6,960,000
Labour efficiency (580 hrs)(12,000) (60,000)(0.0096hrs)(12,000) 60,000)(0.10 hrs)(12,000
=6,960,000 6,912,000 =7,200,000
ANSWER 4
(a) The management accountant did not indicate to the General Manager that the
income statement he provided were based on variable costing. Even if he did
this, this would not have been of assistance to the general manager. A complete
report must have included both, variable costing and absorption costing income
statements whose differences should have been highlighted. Following from this
the Management Accountant should have explained that the increase in inventory
level in year one (where units produced are more than the units that are sold)
causes absorption costing to report higher income than what variable costing
reports. This would have confirmed to the General Manager the validity of the
advice that he was given.
(b) Since variable costing income statements are available, only the absorption
income statement that follows is prepared.
ABSORPTION INCOME STATEMENTS
YEAR 1 YEAR 2
Revenue 1,530,000,000 1,600,000,000
Cost of sale 1,262,250,000 1,283,200,000
Volume variance -17,650,000 27,540,000
Adjusted costs of sale 1,244,600,000 1,310,740,000
Gross profit 285,400,000 289,260,000
Operating costs Admin.
Fixed costs 120,000,000 120,000,000
Distrib. Fixed costs 80,000,000 80,000,000
Distrib. Variable costs 61,200,000 64,000,000
141,200,000 144,000,000
Total operating costs 261,200,000 264,000,000
Operating income 24,200,000 25,260,000
(c) Comments
Table 1 below shows that in both, year one where inventory level increased,
absorption costing income is higher than variable costing income. However, in
year 2 where inventory level decreased, absorption costing is less than variable
costing Income. These income differences arise because variable costing charges
total fixed production costs to the income of the year in which this cost was
incurred. Absorption costing on the other hand transfers part of this cost, which
is charged to units not sold to the subsequent year in which these units will be
sold. In order to confirm this, the income differences are reconciled by
multiplying respective inventory level changes by unit fixed factory cost.
TBLE 1: INCOME DIFFERENCES AND THEIR RECONCILIATION

1 2 3 4
YEAR INCOME DIFFERENCES CHANGE IN INVENTORY INCOME DIFFERENCES
LEVELS EXPLAINED BY INVENTORY
LEVELS CHANGE
ABSORPTION VARIABLE INCOME PRODUCTI SALES INCREASE
COSTING COSTING DIFFERENCES ON UNITS UNITS (DECREASE)
INCOME INCOME
1 24,200,000 14,200,000 10,000,000 161,000 153,000 8,000 (8,000)(1,200) = sh10,000,000
2 25,260,000 32,400,000 -7,140,000 153,000 160,000 (7,000) (-7,000)(1,200) = -sh7,140,000
In panel 4, of Table 1, change in inventory level is multiplied by unit fixed factory

cost equal to shs.1,200 in order to reconcile.
Working 4(b)
YEAR 1 YEAR 2
W1 Fixed factory cost rate Sh.183,600,000 ÷ 146,880 unit Sh.183,600,000 ÷ 180,000 units
Sh.1,250 = sh.1,020
W2 Volume variance (146,880 – 161,000)(sh.1,250 (180,000 – 153,000)(sh.1,020)
= -17,650,000 = 27,540,000
W3 Factory absorption costs 1,071,000,000 ÷ 153,000 = 7,000 1,120,000,000 ÷ 160,000 = 7,000
Unit factory variable costs 1,250 1,020
Unit fixed factory costs 8,250 8,020
Total unit absorption costs 153,000 160,000
Unit sold 1,262,250,000 1,283,200,000
Total cost of sale ========== ==========

ANSWER 5
(a) Advantage/Disadvantage
Case i Case ii Case iii

TZS TZS TZS
Purchase cost from external supplier 80,000,000 80,000,000 74,000,000
Incremental costs of purchasing internally (76,000,000) (76,000,000 (76,000,000
Opportunity Costs - (5,800,000)
Advantage to the company’s operating 4,000,000 (1,800,000) (2,000,000)
income
In case (i) it is beneficial to the overall company to purchase internally.

However, it is beneficial for the company as a whole to purchase internally in
case (ii) and (iii).
(b) Vipuri Corporation is a highly decentralized company. If no forced transfer were

made, the Assembly division would use an external supplier, a decision that
would be in the best interest of the company as a hole in case ii and iii of
requirement (a) but not in case i
Suppose in case i, the machining division refuses to meet the price of TZS
40,000. This decision means that the company will be TZS 4,000,000 worse off
in the short run.
Should top management interfere and force a transfer at TZS 40,000? This
interference would undercut the philosophy of decentralization. Many top
managers would not interfere because they would view the TZS 4,000,000 as an
inevitable cost of a suboptimal decision that can occur under decentralization.
But how high must this cost be before the temptation to interfere would be
irresistible? TZS 6,000,000? TZS 8,000,000? Any top management interference
with lower-level decision making weakens decentralization. Of course, Vipuri’s
management may occasionally interfere to prevent costly mistakes. But recurring
interference and constraints would hurt Vipuri’s attempts to operate as a
decentralized company.

ANSWER 6
(a) From P = a - bQ
b = change in price/change in quantity = TZS1,500,000/1,000 = 1500
Given, P = TZS73,500,000, Q = 1,000 units.
Then 73,500,000 = a – 1500Q
Therefore a = TZS75,000,000.
Demand function is therefore P = 75,000,000 – 1500Q
(b) Establish marginal cost
Fist, determine the labour cost of the first 100 units:
From y = ax b
Given a = 15, x = 100 and b = -0740005,

Then y = 15 x 100 0.0740005 = 10.668178
Therefore labour cost per unit = 10.668178 x TZS80,000 = TZS853,450 (approx.)

Total labour cost for 100 units = 853,450 x 100 = TZS85,345,000
Second, determine the labor cost for the first 99 units
Given x = 99, y = 15 x 99 0.0740005 = 10.676115

Labur cost per unit = 10.676115 x 80,000 = TZS854,080
Total labour cost for 99 units = TZS84,555,000
Third, determine the marginal cost;
Marginal cost = Cost of producing 100th unit

Labour cost of 100th unit – TZS85,345,000 – TZS84,555,000 = TZS790,000.
Total marginal cost, MC = TZS4,200,000 + TZS790,000 = TZS4,990,000
(c) Optimal price and quantity
From MR = a – 2bQ
MR = 75,000,000 – 3,000Q
Equate MC and MR
4,990,000 = 75,000,000 – 3,000Q
3,000Q = 70,010,000
Q = 23,337
Find optimum price
P = 75,000,000 – (1,500 x 23,337) = TZS39,995,000

(d) With penetration pricing, a low price would initially be charged for the
Kantinka.
The idea behind this is that the price will make the product accessible to a larger
number of buyers and therefore the high sales volumes will compensate for the
lower prices being charged. A large market share would be gained and possibly,
the Kantinka might become accepted as the only motor vehicle worth buying.
The circumstances that would favour a penetration pricing policy are:
 Highly elastic demand for the Kantinka i.e. the lower the price, the higher
the demand. The preliminary research does suggest that demand is elastic.
 If significant economies of scale could be achieved by Magari Co, then

higher sales volumes would result in sizeable reductions in costs. This is not
the case here, since learning ceases at 100 units.
 If Magari Co ws actively trying to discourage new entrants into the

market. In this case, new entrants cannot enter the market anyway, because
of the patent.
 If Magari Co wished to shorten the initial period of the Kantinka’s life

cycle so as to enter the growth and maturity stages quickly. We have no
evidence that this is the case for Magari Co, although it could be.
From the above, it can be seen that this could be a suitable strategy in some
respects but it is not necessarily the best one.
With market skimming, high prices would initially be charged for the Kantinka
rather than low prices.
This would enable Magari Co to take advantage of the unique nature of the
product, thus maximizing sales from those customers who like to have the latest
technology as early as possible.
The most suitable conditions for this strategy are:
 The product is new and different. This is indeed the case with the Kantinka.
 The product has a short life cycle and high development costs that need to be
recovered quickly. The life cycle is fairly short and high development costs
have been incurred.
 Since high prices attract competitors, there needs to be barriers to entry in order
to deter competitors. In Magari Co’s case, there is a barrier, since it has
obtained a patent for the Kantinka.
 The strength and sensitivity of demand are unknown. Again, this is not the case
here.

Once again, the Kantinka meets only some of the conditions which would suggest
that although this strategy may be suitable the answer is not clear cut. The fact
that high development costs have been incurred and the life cycle is fairly short
are fairly good reasons to adopt this strategy. Whilst we have demand curve data,
we do not really know just how reliable this data really is, in which case a
skimming strategy may be a safer option.
ANSWER 7
(a) Application rates
Activity Activity cost Cost Driver Cost driver rate
(Tshs) (Tshs)
Order processing 500,000 1000 orders 500
Machine processing 2,400,000 80,000 machine hours 30
Production inspections 300,000 20,000 inspection hours 15
(b) Unit manufacturing costs

Overhead allocation
Order processing:
Red Soap = 640 x 500 = 320,000 Tshs
Dark Soap = 360 x 500 = 180,000 Tshs
Machine Processing
Red Soap = 30 x 32000 = 960,000 Tshs
Dark Soap = 30 x 48000 = 1,440,000 Tshs
Production Inspection
Red Soap = 15 x 8000 = 120,000 Tshs
Dark Soap = 15 x 12000 = 180,000 Tshs
Production cost per unit
Red Soap Dark Soap
Direct material cost 168000 336000
Direct labour per unit 540,000 960,000
Overhead allocation
Order processing 320000 180000
Machine processing 960000 1440000
Production inspection 120000 180000
Total cost 2,108,000 3,096,000
Production (unit) 3000 4000
Cost per unit 703 774

(c) Cost per unit under traditional approach
Total overhead cost = 3,200,000

Direct labour hours = 50,000
Overhead absorption rate = 3200000/50000 = 64 Tshs/DLH
Overhead allocation
Red Soap = 64 x 18000 hours = 1,152,000 Tshs
Dar Soap = 64 x 32000 hours = 2,048,000 Tshs
Cost per unit
Red Soap Dark Soap
Direct material cost 168,000 336,000
Direct labour per unit 540,000 960,000
Overhead allocation 1,152,000 2,048,000
Total cost 1,860,000 3,344,000
Production (unit) 3,000 4,000
Cost per unit 620 836
Red Soap is undercosted by this procedure, as the more accurate ABC figure is
703 Tshs as compared to 620 Tshs under traditional approach. In contrast, Dark
Soap is overcosted because the ABC figure for overhead amounts to only 774
Tshs per unit as compared to 836 Tshs per unit under traditional approach.
Red soap is undercosted:

703 – 620 = 83 or (467 – 384) = 83
Dark soap is overcosted:

774 – 836 = 62r 450 – 512 = 62
(d) Limitations of Activity based costing
(i) ABC system needs establishment of activities in detail. This may be a

complex and time taking job. Implementation also requires significant
cost.
(ii) The ABC system is time consuming as analysis of activities, determining
the cost of those activities and identification of appropriate cost drivers
takes a significant amount of time.
(iii) The ABC system may not justify the cost-benefit analysis. Cost incurred
for the implementation and maintenance of ABC may go beyond the
benefits gained from it.
(iv) It is often difficult to identify an appropriate cost driver for an activity in
order to apportion the cost.
______________  ______________

SUGGESTED SOLUTIONS
B6 – MANAGEMENT, GOVERNANCE AND ETHICS
NOVEMBER 2015
ANSWER 1
(a) Strategy may operate at different levels of an organization – corporate

level, business level and functional level. The strategy changes based on the
levels of strategy
(i) Corporate Level Strategy

Corporate level strategy occupies the highest level of strategies decision-
making and covers actions dealing with the objective of the firm,
acquisition and allocation of resources and coordination of strategies of
various Strategic Business Units (SBUs) for optimal performance. Top
management of the organization makes such decisions. The nature of
strategic decisions tends to be value-oriented, conceptual and less concrete
than decisions at the business or functional level.
(ii) Business Level Strategy

Business-Level strategy is – applicable in those organizations, which have
different businesses and each business is treated as strategic business units
(SBU). The fundamental concept in Strategic Business Units (SBU) is to
identify the discrete independent product markets segments saved by an
organization. Since each product market segment has a distinct
environment, a SBU is created for each such segment. For example,
Reliance Industries Limited operates in textile fabric, yarns, fibers and a
variety of petrochemical products. For each product group, the nature of
market in terms of customers, competition, and marketing channel differs.
There-fore, it requires different strategies for its different product groups.

Thus, where SBU concept is applied, each SBU sets its own strategies to
make the best use of its resources (its strategic advantage) given the
environment it faces.
(iii) Functional-Level Strategy/Operational Level

Functional strategy, as is suggested by the title, relates to a single
functional operation and the activities involved therein. Decisions at this
level within the organization are often described as tactical. Such
decisions are guided and constrained by some overall strategic
considerations. Functional strategy deals with relatively restricted plan
providing objectives for specific function, allocation of resources among
different operations within that functional area and corporate-level
objectives. Below the functional-level strategy, there may be operations
level strategies as each function may be divided into several sub functions.
For example, marketing strategy, a functional strategy, can be subdivided
into promotion, sales, distribution, pricing strategies with each sub
function strategy contribution to functional strategy.
(b) Issue to evaluate the board of directors
1. Membership accountability and governance

The board is the representative of the members and the steward of their
interests. However, it is important that an individual board member, and the
board as a whole, does not cater to special interest groups, but considers
what is best for the cooperative (membership) as a whole,
Criteria may include

 Approval of applications for membership;
 Effectiveness of membership meetings (annual meeting);
 Process of director selection;
 Membership communication;
 Membership relations program;
 Annual report is presented to members, it clearly describes the co-op’s
operations and financial status; and
 The co-ops capital plan creates and adequate capital base for the co-op’s
current and future needs.
2. Board of operations
Criteria may include:

 An organizational chart has been established;
 Board job descriptions established;
 Meeting packets that include agenda, clear written reports,
recommendations or options from the general manager or CEO and
committees (mailed prior to meeting);
 Length if board meeting;
 Board discussions and participation;
 Policies regarding board terms, elections, officers, meeting attendance,
committee structure;
 Are decisions made in a timely manner?
 Written record of board policies and decisions;
 Executive sessions;
3. Legal responsibilities
To direct affairs of the organization within the guidelines provided by the
act of incorporation, articles, bylaws, and any regulations governing the
organization.

 Degree in which board members are informed;
 Board members are knowledgeable of articles, bylaws, policies;
 Articles and bylaws are reviewed (annually) by the board;
 Board reads and approves minutes of each meeting; and
 Written policies on board ethics and conflict of interests.

4. Financial overview
To establish financial plans and policies and to monitor the organization’s
operations for soundness and stability.

 Financial policies reviewed and updated;
 Capital and operating budgets approved annually;
 Goals/policies for important financial ratios established;
 Board receives regular financial reports;
 Insurance program reviewed and updated annually’
 Policies established for member equity/redemption; and
 Procedure for annual audit.
5. Planning
To approve the organization’s mission, the goals and objectives, major plans
and programs, capital and operating budgets. Planning is a culmination of
all the board’s responsibilities. IT is the process that pulls all of the
elements together and makes the board’s vision for the co-op become real.
Criterial may include:

 Board approves mission and vision statements;
 Board approves annual business plan;
 Board reviews and approves a 3-to-r year plan;
 Board evaluates the mechanism(s) provided for member input into the
planning process; and
 Board is adequately informed about the business and market
environment in which co-op operates.
6. Board-management relations
The line between board and management roles can be blurred at times.
Board and management responsibilities (delegation from board to
management) often change as co-ops grow and/or boards and management
mature. Established procedures and strong communication are important.

 Written job description of general manager/CEO;
 Procedure established for general manager/CEO annual review and
compensation;
 Manager’s/CEO’s reports to the board;
 Board chair or executive committee’s relationship with manager/CEO;
 Board and management work together to determine the direction of the
co-op;
 Does the board focus on goals and results and leaves day-to-day
decisions, methods, to management? And
 Board provides overall personnel guidelines to management and remains
uninvolved with specific personnel matters.

(c) How to deal with ethical dilemma
(i) Develop a workplace policy based on your company’s philosophy, mission
statement and code of conduct. Incorporate the policy into your
performance management program to hold employees accountable for their
actions and alert them to their responsibilities to uphold professional
standards throughought their job performance and interaction with peers
and supervisors. Revise your employee handbook to include the policy and
provide copies of the revised handbook to employees. Obtain signed
acknowledgement forms from employees that indicate they received and
understand the workplace ethics policy.
(ii) Provide workplace ethics training to employees. Utilize varied instruction
methods to engage employees in learning how to address and resolve
ethical dilemmas. Experiential learning, or role-play, is an effective way to
facilitate workplace ethics training. Examples of workplace ethics
simulations involve scenarios about the misappropriation of company
funds, personal values related to improper workplace relationships and the
organization’s compliance with regulatory controls.
(iii) Designate an ombudsperson in charge of handling employees’ informal
concerns pertaining to workplace ethics. Consider whether your
organization also needs an ethics hotline, which is a confidential service
employees may contact whenever they encounter workplace dilemmas that
put them into uncomfortable or threatening positions. Confidential hotlines
are an effective way to assure employees’ anonymity, which is a concern
for employees whose alerts are considered “whistleblowing” actions.
(iv) Research on employment laws pertaining to whistleblowing. Refrain from
making employment decisions, such as termination or suspension, in
connection with whistleblowing or an employee’s right to protected activity
under whistleblowing laws or public policy.
(v) Apply your workplace policy consistently when addressing workplace
issues and employee concerns about workplace ethics. Use the same
business principles in every circumstances, regardless of the perceived
seriousness or the level of employee involved. Communicate the same
expectations for all employees whether they are in executive positions or
front-line production roles – and approach every issue with equal
interpretation of the company policy.
ANSWER 2
(a)
(i) Ways in which small business may deal with competitions in business
environment
 Know the competition. Find out who your competitors are, what
they are offering and what their unique selling point (USP) is. This
will identify the areas you need to compete in, as well as giving you a
platform for differentiating yourself.
 Know your customers. Customer expectations can change
dramatically when economic conditions are instable. Fund out what
matters to your customers now is it lower price, more flexible service,

the last products? Revise your sales and marketing strategy
accordingly.
 Differentiate. It’s essential to give your customers good reasons to

come to you rather than a rival. Your USP should tap into what
customer want and it should be clear and obvious-no-one should have
to ask what makes you different.
 Stop up your marketing. Make more effort to tell people who you
are, what you sell and why they should buy from you. It doesn’t have
to be expensive. Marketing can range from posters in your window
and leaflet drops through to advertising campaigns in local media.
 Updating your image. Simple steps such as painting the front of

your premises can make your business look more modern and
inviting. But look also at business cards, stationery, your website,
branded packaging clothing and so on. Does your image reflect your
USP?
 Look after your existing customers. They will be your competitors’

target market. Provide better customer service by being more
responsive to their needs and expectations. If feasible, consider
offering low-cost extras such as improved credit terms, discounts or
loyalty schemes – remember, it’s cheaper and easier to keep
customers than to find new ones,
 Target new markets. Selling into a greater number of markets can

increase your customer base and spread your risk. Consider whether
you can sell online or overseas, for example. Are there groups you’ve
never targeted before who might be interested in your offer? Don’t
waste time marketing in people who won’t be interested, however,
 Expand your offer. What related products or services might your

customers be interested in? You might even consider diversifying
into another area – many cafes have successfully offered internet
access for example.
 Be the best employer. Skilled, motivated staff underpin vibrant,

growing business. But attracting them means more than paying a
competitive wage people are often more impressed by a good
working atmosphere and benefits such as flexible working and
structured career development.
 Look to the future. Businesses that plan for growth are more
successful than those that are happy to stay still. Keep up with
developments in your sector, follow consumer trends, invest in new
technology and - crucially –have a clear idea of where you want to be
in one, three and five years’ time.

(ii) Demographic factors to consider
 Age: Consumer needs and wants change with age. The marketing
mix may therefore need to be adopted depending on which age
segment or segments are being targeted.
 Gender: Dividing a market into different groups based on sex, has

long been common for many products including cosmetics, clothing
and magazines.
 Life-cycle stage: Dividing a market into different groups based on

which stage in the life-cycle, reflects the fact that people change the
goods and services they want and need over their lifetime.
 Neighbourhood and dwelling classification: divides the market

into groups, based on the assumption that the type of dwelling and
area a person lives in is a good predictor of their purchasing behavior
including the types of products and brands they might purchase.
 Race
 Population growth rate
 Distribution pattern
(b) Reasons for an increasing corruption in developing countries

(i) Corruption has become a part of life. It has entrenched into government
institutions making it extremely difficult to eradicate.
(ii) Corruption today has become an entrepreneurial. It has now been

structured an formalized.
(iii) Lack of focus on investigating corruption.
(iv) Lack of coordination in internal audit.
(v) Weak oversight bodies
(vi) Insufficient finances, personnel and resources for oversight bodies.
(vii) Lack of political will due to political gains from corruption.
(viii) Lack of protection rules for whistle blowers.

(c) (i) Self-review refers to a situation whereby an auditor is assigned the task
of auditing their own work or the work of a colleague. Such assignment
would make it difficult for the auditor to maintain objectivity as it is a
self review.
(ii) The following are examples of the self review threat:

 Auditors involved in reporting the financial system which they
designed or implemented earlier.
 A member of the assurance team has been director in the client’s

organization.
 Auditor of financial statements performing a valuation service, a

valuation of which is incorporated in the financial statement.
 Auditors of financial statement involved in providing internal audit

services for the same client.
 Auditors performing corporate financial services, advice or

assistance to assurance clients e.g. underwriting or promoting
client’s shares.
 Having ownership of an assurance client’s assets.
ANSWER 3
(a)
(i) Production Department
The production department is responsible for converting inputs into outputs

through the stages of production processes. The Production Manager is
responsible for making sure that raw materials are provided and made into
finished goods effectively. He or she must make sure that work is curried out
smoothly, and must supervise procedures for making work more efficient and
more enjoyable.
There are five production sub-functions

 Production and planning
They will set the standards and targets at each stage of the production
process. The quantity and quality of products coming off a production
line will be closely monitored.
 Purchasing department
This department will provide the materials, components and equipment

required. An essential part of this responsibility is to ensure that stocks
arrive on time and are of good quality.

 stores department
The stores department are responsible for stocking all the necessary
tools, raw materials and equipment required to service the
manufacturing process.
 The design and technical support department
They are responsible for the design and testing of new product processes
and product types, together with the development of prototypes through
to the final product.
 The work department
This department is concerned with the manufacture of products. This

will include the maintenance of the production line and other necessary
repairs. The work department may also have responsibility for quality
control and inspection.
(ii) Human resource department

The role of Human resource department is in charge of recruiting, training,
and the dismissal of employees in an organization.
 Recruitment and selection
 Training programmes
Training programs are held by the HRD to improve the employees skills, as
well as to motivate them.
There are three main types of training:

1. Induction training
2. On-the-job training
3. Off-the-job training
Manpower Planning
The HR department needs to think ahead and establish the number and
skills of the workforce required by the business in the future. Failure to
do this could lead to too few or too many staff or staff with inappropriate
needs.
 Dismissal and Redundancy (retrenchment)
Dismissal is where a worker is told to leave their job due to

unsatisfactory work or behavior. Redundancy is when the business
needs to reduce the number of employees either because it is closing
down a branch or needs to reduce costs due to falling profits. It may
also be due to technological improvements, and the workers are no
longer needed.
(iii) Marketing department
These are the main section of the market department:
 Sales department is responsible for the sales and distribution of
the products to the different regions.
 Research & Department is responsible for market research and

testing new products to make sure that they are suitable to be
sold.
 Promotion department decides on the type of promotion

method for the predicts to make sure that they are suitable to be
sold.
 Distribution department transports the products to the market.
(iv) Finance Department

 Book keeping procedures
Keeping records of the purchases and sales made by a business as well

as capital spending.
 Preparing Final Accounts
Profit and loss account and Balance Sheets
 Providing management information
Managers require ongoing financial information to enable them to make

better decisions.
 Management of wages
The wages section of the finance department will be responsible for

calculating the wages and salaries of employees and organizing the
collection of income tax and national insurance for the Inland Revenue.
 Raising finance
The finance department will also be responsible for the technical details
of how a business raises finance e.g. through loans, and the repayment
of interest on that finance. In addition it will supervise the payment of
dividends to shareholders.

(b) Types of Board of Directors
There are several common types of boards each having distinguishing

characteristics:
Collective
The collective is a group of people with a shared focus or purpose. They make
decisions collectively and each individual represents themselves and their own
interests.
Governing boards
The board leads the organization using authority to direct and control provided
by the owners and the legal act of formation. They se initial direction and have
he full authority to act in the owners’ best interests. Governing boards function
at arm’s length from the operational organization. They focus on the big
picture, future-oriented and act as a single entity.
Working boards
The board leads the organization but also does double duty as the staff. These
are common in very small organizations and community based organizations
that do not have the resources to hire employees. Working boards often get
caught up in project management and set aside the governing function.
Advisory boards
The board serves to provide insight and perspective to any decision maker
including boards . An advisory board typically does not have authority of its
own but works to educate some person or body.
Management boards/Executive boards

A group of people who actually mange the operations as a collective group
(instead of a single CEO). They are not the same as governing board but may
work under one. They make the day to day decisions of what gets done and the
long term decisions about how to organize operations to achieve the
organization’s purpose.
Fund Raising Boards

The board is often only a “board” in name alone. Its real purpose is to use its
members’ connections and influence to solicit resources for the organization.
Policy Board
This is actually more about how the board does its work than a type o board but
since you often hear the name we wanted to describe it. A policy board is any
board, typically a governing board that directs operations by developing policies
which guide operational decisions rather than making the actual yes or no
decision themselves. The CEO is than expected to carry out all policy.

(c) Unethical practices performed by sales managers:
(i) Misleading of customers regarding the quality of the products.
(ii) Misleading of customers regarding certain additional features about the

product sold.
(iii) Influencing customers to buy his products using wrong information.
(iv) Making promises and commitments to customers that your product

development team can not fulfill.
(v) Misrepresenting promotions or products to close a deal with a

prospective customer or up-sell a current customer.
(vi) Leaving customers in the desk about promotion or pricing changes.
(vii) Making sales final before a customer has had ample time to by-out a
product.
ANSWER 4
(a)
(i) The benefits of having a business plan
the time you invest in your business plan will pay off many times over.
Some of the most obvious benefits you can gain from business planning
include:
 An opportunity to test out a new idea to see if it holds real promise

of success.
 A clear statement of your business mission and vision.
 A set of values that can help you steer your business through times of
trouble.
 A blueprint you can use to focus your energy and keep your company
on track.
 Benchmarks you can use to track your performance and make

midcourse corrections.

 A clear-eyed analysis of your industry, including opportunities and
threats.
 A portrait of your potential customers and their buying behaviors.

(ii) Can leader build his/her referent power? Here are four key
suggestions:
 Practise what you preach. Don’t expect others to do what you won’t
do. Live the values you expect from your team. Treat everyone
with respect and courtesy, all the time, no matter what.
 Be honest. Keep your team informed. Be frank about what you

don’t know. If you make a mistake, admit it and correct it. Never
lie.
 Earn trust. Do what you say you will do. Defend your team
members, and make sure they know when you are sticking up for
them. Share credit for wins and take accountability for failures.
 Celebrate wins. Give praise and rewards lavishly for a job well
done. Praise people publicly (if they like it). Bring fun and
celebration into the workplace.
(b) Factors behind voluntary disclosures:
(i) Ethical companies might provide information in their annual report

regarding the various risks that the business faces and the environment
that the company has undertaken since they believe that the shareholders
need to know this.
(ii) Providing voluntary disclosures in the annual reports helps to improve a

company’s communication with its shareholders since it encourages
dialogue and a sense of ownership of the company amongst
shareholders.
(iii) The voluntary disclosures regarding the risks and the opportunities that
the business faces also help to bridge the information asymmetry
between the directors and the shareholders.
(iv) Increased transparency in reporting through various voluntary

disclosures’ can help to attract and retain institution and other major
investors in the company.
(v) The new reporting regime requires companies to address their social
responsibilities and accept corporate accountability for any actions and
decisions they take.
(c) Types of ethical dilemma facing accountants

(i) Pressure From Management:

The burden for public companies to succeed at high levels may place
undue stress and pressure on accountants creating balance sheets and
financial statements. The ethical issue for these accountants becomes
maintaining true reporting of company assets, liabilities and profits
without giving in to the pressure placed on them by management or
corporate officers. Unethical accountants could easily alter company
financial records and maneuver numbers to paint false pictures of
company successes. This may lead to short-term prosperity, but altered
financial records will ultimately spell the downfall of companies when
the Securities and Exchange Commission discovers the fraud.
(ii) Accountant as Whistleblower:

An accountant may face the ethical dimemma of reporting discovered
accounting violations to the Financial Accounting Standards Board.
While it is an ethical accountant’s duty to report such violations, the
dilemma arises in the ramifications of the reporting. Government
review of company financial records and the bad press caused by an
accounting thousands of employees. Executives and other corporate
officers could also face criminal prosecution, leading to heavy fines and
prison time.
(iii) The Effects of Greed:

Greed in the business and finance world leads to shaving ethical
boundaries and stepping around safeguards in the name of making more
money. An accountant can never led the desire to earn a better living
and acquire more possessions get in the way of ensuring that she follows
ethical guidelines for financial reporting. An accountant who keeps her
eyes on her own bank account more than on her company’s balance
sheet becomes a liability to the company and may cause real accounting
violations, resulting in sanctions from the SEC.
(iv) Omission of Financial Records:

A corporate officer or other executive may ask an accountant to omit or
leave out certain financial figures from a balance sheet that may paint
the business in a bad light to the public and investors. Omission may
not seem like a significant breach of accounting ethics to an accountant
because it does not involve direct manipulation of numbers or records.
This is because it does not involve direct manipulation of numbers or
records. This is precisely why an accountant must remain ethically
vigilant to avoid falling into such a trap.

ANSWER 5
(a)
(i) Type of risk in face entrepreneur business
1. Competitive Risk
Competitive risk is the risk of a business facing competition from its
rivals. Every business besides monopolies face competition because
there are substitutes easily available in the market. New business
have to face this risk to a higher degree because they face stiff
competition from already established business. However, reputable
businesses are not immune from this risk either.
In order to minimize this risk one must run a proper SWOT analysis
and come with strategies to counter attacks from competition.
2. Technological Risk
Thanks to the changing times every business has to face technological
risk. This includes change in technology that are taking place at a
rapid, pace. What’s in today goes obsolete tomorrow. It is difficult
for entrepreneurs to be able to gauge the future properly.
The solution in this regard is not to plan for today but tomorrow so
that you are ready with the new technology by the time it goes huge.
3. Political and Legal Risk
This risk is everywhere especially in the case of businesses that run in
uncertain environments. This includes the changing political scenario
including the changes in laws and regulations. Multinationals have to
face this risk to a great degree because they do not only have to worry
about the political and legal situation of their country but of every
country they have a business in.
The right solution in this regard is to have flexible policies so that

changes can be incorporated just in case the government changes any
of its policies.
4. Economical Risk
A good example of this type of risk is the recent economic slump that
was seen globally. This risk includes the changes in the cycle that
includes periods of high prosperity (boom) and recession. These
cannot be predicted correctly and must be taken into account at the
planning stage.
(ii) How to mange risks on business

1. Be cash conscious
2. Insure against specific business
3. Change insurance as business grows
4. Insure key personnel
5. Diversify business

(b) Activities involved in supervising management by the Board of Directors
(i) Overseeing Management Performance:

The board should regularly agree appropriate targets to be achieved by
the orgnisations.
(ii) Monitoring budgetary control:

The board should review progress against budgets qualitatively and
qualitatively examining variance analyses and commentaries and asking
challenging questions.
(iii) Reviewing key business results:

The board has to monitor all key business processes.
(iv) Assessing organizational capability in resources and processes:

The board should assess the existing resources and processes.
(c) Features of ethical relativism
(i) There are no universal rights and wrongs that can be rationally
determined.
(ii) There can be no objective knowledge of moral principle.
(iii) There is no universal truth.
(iv) Since there is no universal truth, all situations can be dealt differently.
ANSWER 6
(a) The Importance of Succession Planning
Succession planning is an on-going dynamic process that identifies, assesses

and develops
Talent to insure that an organization can keep up with changes in the workplace
and marketplace. Succession planning focuses on these key areas:
(i) Succession planning addresses the needs of the organization as senior

management gets older. Many leaders of organizations spent countless
hours and years developing key components of the organization.
Unfortunately, the organization frequently fails to fully develop
individuals that prepared to move into leadership roles. This is especially
the case within small companies, which often times struggle to keep the
doors open after a CEO or founder leaves the organization. Family
businesses areal ways at risk, and very few of them make it into the next
generation. Early planning removes that obstacle.
(ii) Succession planning prepares an organization for an unexpected, undesired

event. Who is prepared for the death or sudden illness of a key leader in
the organization? Key members of the leadership team are not immune to
the sudden events that life sends their way. They struggle with car
accidents, diseases, relationship issues and by other events that take them
away from their roles within the organization. These events cannot be
predicted, but it is entirely possible to have a plan that highlights who is
capable to take over if a key person is lost.
(iii) Succession planning ensures an organization has the right people in place
today, as well as into the future. What more can be said? While many
organizations look at succession planning as a means to define who will
takeover the role of CEO or President, the reality is that all organizations
should use this planning process to determine who has developed the
capabilities and competencies to take over for a manager or supervisor
within the organization. It helps organizations measure the strength of
their pool of talent and also understand where there are gaps in that talent.
(iv) Success planning ensures savings: effective succession planning activities

have a positive impact on performance management not only in terms of
ensuring that key positions will remain filled with competent performers,
but also in terms of saving money on external recruitment and training,
which can be significantly more expensive than promoting from within.
(v) Succession planning is useful in training. While many consider

succession planning to be about training, that is just a piece of the process.
Certainly training must be put into place to provide employees with the
knowledge, skills and abilities they may need to move into future
vacancies, but it is the initial assessment of potential vulnerabilities that
can impact performance management. For instance, a company at risk of
losing a top salesperson without anybody in line to step into that role is
vulnerable. By identifying these vulnerabilities early, organizations can
assess areas that may be at risk and take steps to identify and trail internal
successors.
(vi) Succession plan helps an organization in identification of competence

gaps: An important benefit in strategic succession planning is identifying
in advance where there may be gaps between what employees need to
know and what they currently know-competency gaps. The gap may be
based on current needs for key positions and the lack of employees with
the required skills, and also on a look into the future to determine what
new competencies may be necessary. A focus on the strategic
consideration of these needs will ensure that companies don & 039:1
break their stride in terms of productivity and performance in the event of
a vacancy in a key area.
(vii) Succession planning is critical to an organization in filling key position: at

the top levels of the organization succession planning is critical to ensure
that these key positions. If suddenly vacant-can be filled by qualified
candidates. Identifying the potential for those vacancies and considering
internal talent that can be coached, nurtured and trained to step into these
slots when the time comes is a key function of not only the H.R.
department, but in many organization, of the board as well. According to
Salary com, Coldwater Creek has a committee specifically devoted to
succession planning and development and both Cost Plus and solar Power
Inc. make reference to succession planning for their executive officers in
the section of their proxy devoted to risk oversight. Clearly, the
importance of succession planning from the very top of even publicly held
organizations is rising.

(b) Functions of CEOs
(i) Take full responsibility of accountability towards board.
(ii) Implement proper risk management, financial operational, planning and

internal control systems.
(iii) Plan and manage financial and physical resources.
(iv) Monitor financial operations and results in accordance with budgets.
(v) Act as representative of the company towards major suppliers,

customers, professional bodies and the like.
(vi) Develop and implement policy decisions and executive strategy
(c) (i) Non- consequentialist

These are theories that base the moral judgments on the underlying principles of
the decision maker’s motivation. The answer is right or wrong not because of the
consequences that it brings about but because the principles are morally right or
wrong.
(ii) Consequentialist
These are theories where the moral judgment is based on whether the outcome is
right or wrong.
ANSWER 7
(a) (i) How to deal with resistance to change in an organization
 Education & Communication:

One of the best ways to overcome resistance to change is to
educate people about the change effort beforehand. Up-front
communication and is to educate people about the change effort
beforehand. Up-front communication and education helps
employees see the logic in the change effort. This reduces
unfounded and incorrect rumors concerning the effects of change
in the organization.
 Participation & involvement:

When employees are involved in the change effort they are more
likely to buy into change rather than resist it. This approach is
likely to lower resistance more so than merely hoping people will
acquiesce to change.
 Facilitation & Support:
Managers can head-off potential resistance by being supportive of
employees during difficult times. Managerial support helps
employees deal with fear and anxiety during a transition period.
This approach is concerning with provision of special training,
counseling, time off work.
 Negotiation and Agreement:

Managers can combat resistance by offering incentives to
employees not to resist change. This can be done by allowing
change resistors to veto elements of change that are threatening, or
change resistors can be offered incentives to go elsewhere in the
company in order to avoid having to experience the change effort.
This approach will be appropriate where those resisting change are
in a position of power.
 Manipulation and Cooptation:
“Cooptation” involves the patronizing gesture of bringing a person
into a change management planning group for the sake of
appearances rather than their substantive contribution. This often
involves selecting leaders of the resisters to participate in the
change effort. These leaders can be given a symbolic role in
decision making without threatening the change effort.
 Explicit and Implicit coercion:

Managers can explicitly or implicitly force employees into
accepting change by making clear that resisting change can lead to
losing jobs, firing, or not promoting employees.
(ii) There are several factors that seem to have a major impact on an
organization’s ability to implement a strategy
 Commitment. Commitment starts at the top but it must end there.
Middle management and front line supervisors must have the
commitment needed to communicate the plan and enroll the
employees in the strategy. If they are not committed, the rest of
the organization won’t be either.
 Ability and willingness to change. Strategy implantation requires

change. Some organizations embrace change while others resist
the change.
 An organizational structure that supports the strategy. One of the

most powerful implementation tools available to a company is its
organizational structure. A strategy’s priorities are usually
reflected in its organizational structure. A strategy may require
centralized control or decentralized flexibility. It may be designed
to encourage product development or generate efficiency through
standardization. The organizational structure must be designed to
support the priorities required by the strategy. A significant

change in strategy almost certainly must be accompanied by a
change in structure.

(b) Tucker’s 5 question model
(1) Is the decision profitable?
(2) Is the decision legal?
(3) Is the decision fair?
(4) Is the decision right?
(5) Is the decision environmentally friendly and ensures continuation of

business?
(c) Issues to include in organizational code of ethical conduct:
(i) Caring and respect of others

(ii) Promise keeping
(iii) Honest
(iv) Integrity
(v) Fairness
(vi) Loyalty
(vii) Responsible citizenship
______________  ______________

4 5931788210203003021

Uploaded by

Copyright:

Available Formats

4 5931788210203003021

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

4 5931788210203003021

Uploaded by

Copyright:

Available Formats

©The National Board of Accountants and Auditors, 2015

B1 – Financial Management ………….….…............................... 1

B2 – Financial Accounting …….......……................................ 8

B3 – Auditing Principles and Practice ……………………….. 20

B4 – Public Finance and Taxation I ………………………….. 28

B5 – Performance Management …………………………………. 34

B6 – Management, Governance and Ethics …………………. 42

Suggested Answers Page

B2 – Financial Accounting …….......……................................ 60

B3 – Auditing Principles and Practice ……………………….. 76

B4 – Public Finance and Taxation I ………………………….. 90

B5 – Performance Management …………………………………. 100

B6 – Management, Governance and Ethics …………………. 111

SUBJECT : FINANCIAL MANAGEMENT

EXAMINATION DATE : TUESDAY, 3TH NOVEMBER 2015

TIME ALLOWED : THREE HOURS (2:00 P.M. – 5:00 P.M.)

2. Answer question ONE in section A.

3. Answer any FOUR questions in Section B.

4. In total answer FIVE questions.

5. Marks are shown at the end of each question.

6. Calculate your answers to the nearest two decimal points.

7. Show clearly all your workings in respective answers where applicable.

8. This question paper comprises 7 printed pages.

Intermediate Level, November 20145 1

Gross profit margin: 30%

2 Intermediate Level, November 2015

(i) A Statement of Income for the next year. (7 marks)

Ordering cost: TZS.60,000 per order

(b) Discuss the factors to be considered in formulating the dividend policy of a

Intermediate Level, November 20145 3

4 Intermediate Level, November 2015

The capital structure of the company is as follows:

PAMELA Co. has a cost of equity of 12.4%. Ignore taxation.

(i) Calculate the following values for PAMELA Co:

a. Ex-dividend share price, using the dividend growth model; (2 marks)

c. Market value Weighted Average Cost of Capital (WACC). (2 marks)

Year 2012 2013 2014 2015

Dividends per share TZS 55.1 57.9 59.1 62.0

6 Intermediate Level, November 2015

Project Outlay now Expected receipt in one year Beta factor

(i) Calculate Kimolo’s beta factor. (2 marks)

Intermediate Level, November 20145 7

SUBJECT : FINANCIAL ACCOUNTING000000

EXAMINATION DATE : WEDNESDAY, 4TH NOVEMBER, 2015

TIME ALLOWED : THREE HOURS (2:00 P.M. – 5:00 P.M.)

2. Answer question ONE in Section A.

3. Answer ANY FOUR questions in Section B.

4. In total answer FIVE questions.

5. Marks are shown at the end of each question.

7. Show clearly all your workings in respective answers where applicable.

8. This question paper comprises 11 printed pages.

8 Intermediate Level, November 2015

Particulars Notes Kilimanjaro Kibo Mawenzi

Equity and Liability

Intermediate Level, November 20145 9

Kilimanjaro Kibo Mawenzi

10 Intermediate Level, November 2015

(a) There has to be some mechanisms to ensure that accounting work is

(i) Evaluate the reasons why do we need regulatory framework. (6 marks)