Paper 1

Advanced
Accounting
Chapter-wise compilation
of RTPs, MTPs and PYPs

Modified as per Applicable for

new scheme Sept’24 & Jan’25

SAMPLE MATERIAL
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 Frequently Asked Questions
1. Why RTP’s, MTP’s and PYP’s?
RTP’s, MTP’s, and PYP’s are extremely important to ensure that you reproduce ICAI language.
These questions train you to understand what is important and what is expected of you.
At least 41% of questions* are asked from previous RTP’s, MTP’s and PYP’s.

2. What is included?
In this compiler, all questions from the last 3, 5 or 11 attempts depending on the one you have
selected will be available. There will be references to the marks and the attempt from which
they were asked. Identical or similar questions have been removed and references for both
attempts are mentioned.

3. What is the benefit of Chapter-wise?

We have categorized each and every question from all Old RTPs, MTP’s, and PYP’s into
chapters. This means that you don't have to wait until you've completed your entire syllabus
to tackle an RTP, MTP, or past paper. You can start solving these questions to check your
conceptual clarity right after finishing a particular chapter.

4. What does amended for the latest attempt mean?

When we reviewed all the questions from the past 11 attempts of RTP, MTP, and PYP’S, we
didn't just segregate them Chapterwise; we also updated them to reflect the latest provisions.
All the answers provided in the compilation are applicable for the May 2024 examination. So,
there's no need to stress about outdated or incorrect information.

5. How are Old RTP’s, MTP’s & PYP’s beneficial for me?
All old RTPs, MTPs, and PYPs have been organized according to the new syllabus issued by ICAI.
This means that if a specific chapter from the old scheme is not included in the new scheme,
it has been omitted. If a particular chapter in the new scheme is based on concepts from two
or more chapters in the old scheme, it has been adapted to align with how the chapter should
be in the new scheme. If a chapter is only partially included in the new scheme, the questions
related to those specific concepts are only included in the corresponding chapter of the new
scheme. A comprehensive reconciliation of the chapters between the new scheme and the old
scheme is provided on the following page.

6. What if a new attempt is added post my purchase?

If you have purchased materials for the May 2024 attempt, you will receive a file with the
questions segregated Chapterwise specifically for that attempt.

7. What does N/A mean?

It could mean any of the following:
1. No questions from that chapter have been included in the selected attempts.
2. The chapter is newly introduced, and as a result, no questions have been previously asked
in RTP’s, MTP’s, or PYP’s.

*This is on an average based on the last 11 attempts

 Advance Accountancy
Reconcilia on of chapters of the new scheme (May’24) with old course
New Chapter Chapter Name as per NEW Syllabus Paper No. Comparison
No. as per Old with chapters
Course of Old Scheme
1 Introduction to Accounting Standards Paper 1 Same
2 Framework for Preparation and Paper 1 Same
Presentation of Financial Statements
3 Applicability of Accounting Standards Paper 1 Same
4 Chapter 4: Presentation & Disclosures Same
Based Accounting Standards
4.1 AS 1- Disclosure of Accounting Policies Paper 1 Same
4.2 AS 3- Cash Flow Statement Paper 1 Same
4.3 AS 17- Segment Reporting Paper 5 Same
4.4 AS 18- Related Party Disclosures Paper 5 Same
4.5 AS 20- EPS Paper 5 Same
4.6 AS 24- Discontinuing Operations Paper 5 Same
4.7 AS 25- Interim Financial Reporting* Not a part of CA
inter syllabus in
the old scheme
5 Asset Based Accounting Standards
5.1 AS 2- Valuation of Inventory Paper 1 Same
5.2 AS 10-Property, Plant & Equipment Paper 1 Same
5.3 AS 13-Accounting for Investments Paper 1 Same
5.4 AS 16-Borrowing Costs Paper 1 Same
5.5 AS 19- Leases Paper 5 Same
5.6 AS 26- Intangible Assets Paper 5 Same
5.7 AS 28- Impairment of Assets* Not a part of CA
inter syllabus in
the old scheme
6 Liabilities based Accounting Standards
6.1 AS 15- Employee Benefits* Not a part of CA
inter syllabus in
the old scheme
6.2 AS 29- Provisions, Contingent Liabilities & Paper 5 Same
Contingent Assets
7 Accounting Standards based on Items
Impacting Financial Statement
7.1 AS 4- Contingencies & Events occuring after Paper 5 Same
the Balancesheet Date
7.2 AS 5- Net Profit or Loss for the period, Prior Paper 5 Same
period items & Changes in Accounting
policies
7.3 AS 11- The Effects of Changes in Foreign Paper 1 Same
Exchange rates
7.4 AS 22- Accounting for Taxes on Income Paper 5 Same
8 Revenue Based Accounting Standards
8.1 AS 7- Construction Contracts Paper 5 Same
8.2 AS 9- Revenue Recognition Paper 5 Same
9 Other Accounting Standards
9.1 AS 12-Accounting for Government Grants Paper 1 Same
9.2 AS 14- Accounting for Amalgamation Paper 5 Same
10 Accounting Standards for Consolidated
Financial Statement
10.1 AS 21- Consolidated Financial Statement Paper 5 Same
10.2 AS 23- Accounting for Investments in Paper 5 Same
Associates in Consolidated Financial
Statements
10.3 AS 27- Financial Reporting of Interests in Paper 5 Same
Joint Ventures
11 Financial Statements of Companies
11.1 Preparation of Financial Statements Paper 1 Same
11.2 Cash Flow Statement Paper 1 Same
12 Buyback of Securities Paper 5 Same
13 Amalgamation of Companies Paper 5 Same
14 Accounting for Reconstruction of Paper 5 Same
Companies
15 Accounting for Branches including Foreign Paper 1 Same
Branches

*These Chapters were earlier a part of CA Final Paper 1: Financial Repor ng

 Table of Contents
Sr. Particulars Page Number
No
1 Introduction to Accounting Standards 1.1
2 Framework for Preparation and Presentation of Financial 2.1 - 2.14
Statements
3 Applicability of Accounting Standards 3.1 – 3.3
4 Presentation & Disclosure Based Accounting Standards
4.1 AS 1- Disclosure of Accounting Policies 4.1-1 – 4.1-5
4.2 AS 3- Cash Flow Statement 4.2-1 – 4.2-12
4.3 AS 17- Segment Reporting 4.3-1 – 4.3-5
4.4 AS 18- Related Party Disclosures 4.4-1 – 4.4-6
4.5 AS 20- Earning Per Share 4.5-1 – 4.5-8
4.6 AS 24- Discontinuing Operations 4.6-1 – 4.6-4
4.7 AS 25- Interim Financial Reporting 4.7-1 – 4.7-5
5 Asset Based Accounting Standards
5.1 AS 2- Valuation of Inventory 5.1-1 – 5.1-12
5.2 AS 10-Property, Plant & Equipment 5.2-1 – 5.2-11
5.3 AS 13-Accounting for Investments 5.3-1 – 5.3-47
5.4 AS 16-Borrowing Costs 5.4-1 – 5.4-14
5.5 AS 19- Leases 5.5-1 – 5.5-8
5.6 AS 26- Intangible Assets 5.6-1 – 5.6-8
5.7 AS 28- Impairment of Assets 5.7-1 -5.7-9
6 Liabilities Based Accounting Standards
6.1 AS 15- Employee Benefits 6.1-1 – 6.1-4
6.2 AS 29- Provisions, Contingent Liabilities & Contingent 6.2-1 – 6.2-11
Assets
7 Accounting Standards Based on Items Impacting Financial Statements
7.1 AS 4- Contingencies & Events occurring after the Balance 7.1-1 – 7.1-7
sheet Date
7.2 AS 5- Net Profit or Loss for the period, Prior period items & 7.2-1 – 7.2-6
Changes in Accounting policies
7.3 AS 11- The Effects of Changes in Foreign Exchange rates 7.3-1 – 7.3-10
7.4 AS 22- Accounting for Taxes on Income 7.4-1 – 7.4-6
8 Revenue Based Accounting Standards
8.1 AS 7- Construction Contracts 8.1-1 – 8.1-9
8.2 AS 9- Revenue Recognition 8.2-1 -8.2-10
9 Other Accounting Standards
9.1 AS 12-Accounting for Government Grants 9.1-1 -9.1-10
9.2 AS 14- Accounting for Amalgamation 9.2-1
10 Accounting Standards for Consolidated Financial Statements
10.1 AS 21- Consolidated Financial Statement 10.1-1 – 10.1-53
10.2 AS 23- Accounting for Investments in Associates in 10.2-1
Consolidated Financial Statements
10.3 AS 27- Financial Reporting of Interests in Joint Ventures *N/A
11 Financial Statements of Companies
11.1 Preparation of Financial Statements 11.1-1 – 11.1-39
11.2 Cash Flow Statement 11.2-1 – 11.2-14
12 Buyback of Securities 12.1-1 – 12.1-29
13 Amalgamation of Companies 13.1 – 13.59
14 Accounting for Reconstruction of Companies 14.1- 14.43
15 Accounting for Branches including Foreign Branches 15.1-15.35
16 Case Scenarios 16.1 – 16.8

MTPs: March’19, April’19, Oct’19, May’20, Oct’20, March’21, April’21, Oct ’21,
Nov ’21, March ’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23,Sep ’23
,Oct ’23,March’24 & April ‘24
PYPs: May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec ’21, May’22, Nov ’22, May’23,
Nov’23
RTPs: May’19, Nov’19, May’20, Nov’20, May’21, Nov ’21, May ’22, Nov ’22,
May ’23, Nov ’23, May’24
 1.1

Chapter 1
Introduction to Accounting Standards
Question 1
"Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements." Discuss and
explain the benefits of Accounting Standards. (MTP 5 Marks, Nov ’21 & Apr’23 , PYP 5 Marks, Nov’18)
Answer 1
Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements. Accounting
Standards provide a set of standard accounting policies, valuation norms and disclosure requirements.
Accounting standards aim at improving the quality of financial reporting by promoting comparability,
consistency and transparency, in the interests of users of financial statements. The following are the
benefits of Accounting Standards:
(i) Standardization of alternative accounting treatments: Accounting Standards reduce to a
reasonable extent confusing variations in the accounting treatment followed for the purpose of
preparation of financial statements.
(ii) Requirements for additional disclosures: There are certain areas where important is not statutorily
required to be disclosed. Standards may call for disclosure beyond that required by law.
(iii) Comparability of financial statements: The application of accounting standards would facilitate
comparison of financial statements of different companies situated in India and facilitate
comparison, to a limited extent, of financial statements of companies situated in different parts of
the world. However, it should be noted in this respect that differences in the institutions, traditions
and legal systems from one country to another give rise to differences in Accounting Standards
adopted in different countries.

Question 2
Explain the objective of 'Accounting Standards’ in brief. State the advantages of setting Accounting
Standards. (PYP 4 Marks, Nov ’22, Old & New SM)
Answer 2
Accounting Standards are the written policy documents issued by Government relating to various
aspects of measurement, treatment, presentation and disclosure of accounting transactions and
events.

Following are the objectives of Accounting Standards:

a) Accounting Standards harmonize the diverse accounting policies and practices followed by
different companies in India.
b) Accounting Standards facilitate the preparation of financial statements and make them
comparable.
c) Accounting Standards give a sense of faith and reliability to the users.
The main advantages of setting accounting standards are as follows:
a) Accounting Standards make the financial statements of different companies comparable which
helps investors in decision making.
b) Accounting Standards prevent any misleading accounting treatment.
c) Accounting Standards prevent manipulation of data by the management.

Question 3
What do you mean by Carve outs/ins in Ind AS? Explain (RTP May’24)(SM)
Answer 3
Certain changes have been made in Ind AS considering the economic environment of the country, which
is different as compared to the economic environment presumed to be in existence by IFRS. These
differences are due to differences in economic conditions prevailing in India. These differences which are
in deviation to the accounting principles and practices stated in IFRS, are commonly known as ‘Carve-outs’.
Additional guidance given in Ind AS over and above what is given in IFRS, is termed as ‘Carve in’.

Chapter 1 Introduction to Accounting Standards

 2.1

Chapter 2
Framework for Preparation and Presentation of Financial Statements
Question 1
Explain in brief, the alternative measurement bases, for determining the value at which an element can
be recognized in the Balance Sheet or Statement of Profit and Loss. (MTP 5 Marks, March ‘19 & April 19,
March ’21 ,Oct ‘23 ,RTP Nov 18)
Answer 1
The Framework for Recognition and Presentation of Financial statements recognizes four alternative
measurement bases for the purpose of determining the value at which an element can be recognized in the
balance sheet or statement of profit and loss. These bases are: (i)Historical Cost; (ii)Current cost (iii)
Realizable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at an amount
of cash or cash equivalent paid or the fair value of the asset at the time of acquisition. Liabilities are
generally recorded at the amount of proceeds received in exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the amount of
cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired
currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be
required to settle the obligation currently.
3. Realizable (Settlement) Value: As per realizable value, assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the assets in an orderly disposal. Liabilities are
carried at their settlement values; i.e. the undiscounted amount of cash or cash equivalents paid to satisfy
the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net cash flows
generated by the concerned assets in the normal course of business. Liabilities under this convention are
carried at present value of future net cash flows that are expected to be required to settle the liability in
the normal course of business.

Question 2
"One of the characteristics of financial statements is neutrality"- Do you agree with this statement?
Comment. [MTP March ‘18, 5 Marks, PYP Nov ’18 5 Marks, Old & New SM ,MTP 4 Marks Apr’24)
Answer 2
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information contained
in financial statement must be neutral, that is free from bias.
Financial Statements are not neutral if by the selection or presentation of information, the focus of analysis
could shift from one area of business to another thereby arriving at a totally different conclusion on the
business results.
For example, if the assets of a company primarily consist of trade receivables and insurance claims and the
financial statements do not specify that the insurance claims have been lying unrealized for a number of
years or that a few key trade receivables have not given balance confirmation certificates, an erroneous
conclusion may be drawn on the liquidity of the company. Financial statements are said to depict the true
and fair view of the business of the organization by virtue of neutrality.
Question 3
Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and equity Rs. 8
lakh, Rs. 3 lakh and Rs. 5 lakh respectively. During accounting period, Mr. A has the following
transactions:
(1) Earned 10% dividend on 2,000 equity shares held of Rs. 100 each
(2) Paid Rs. 50,000 to creditors for settlement of Rs. 70,000
(3) Rent of the premises is outstanding Rs. 10,000

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.2

(4) Mr. A withdrew Rs. 9,000 for his personal use.

You are required to show the effect of above transactions on Balance Sheet in the form of
Assets - Liabilities = Equity after each transaction. (MTP 5 Marks, April 21, April 22, Old & New SM,
MTP 4 Marks Apr’24)
Answer 3
Effects of each transaction on Balance sheet of the trader is shown below:
Transactions Assets - Liabilities = Equity
Rs. lakh Rs. lakh Rs. lakh
Opening 8.00 - 3.00 = 5.00
(1) Dividend earned 8.20 - 3.00 = 5.20
(2) Settlement of Creditors 7.70 - 2.30 = 5.40
(3) Rent Outstanding 7.70 - 2.40 = 5.30
(4) Drawings 7.61 - 2.40 = 5.21

Question 4
State under which head the following accounts should be classified in Balance Sheet, as per Schedule III
of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
(vi) Intangible Assets under development.
(vii) Money received against share warrant.
(viii) Cash equivalents. (MTP 4 Marks, Mar’22, 5 Marks, April’19)
Answer 4
(i) Current Liabilities/Other Current Liabilities
(ii) Shareholders' Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital
(vi) Property, Plant & Equipment
(vii) Shareholders' Fund/Money received against share warrants
(viii) Current Assets

Question 5
How will a company classify its investment in preference shares, which are convertible into equity
shares within one year from the balance sheet date? Will it classify the investment as a current asset or
a non-current asset? Explain. (MTP 5 Marks, March’19, Oct’18, Aug’18, Mar’18)
Answer 5
In accordance with the Schedule III, an investment realizable within 12 months from the reporting date is
classified as a current asset. Such realisation should be in the form of cash or cash equivalents, rather than
through conversion of one asset into another non-current asset. Hence, company must classify such an
investment as a non-current asset, unless it expects to sell the preference shares or the equity shares on
conversion and realise cash within 12 months.

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.3

Question 6
M/s Shyam, a proprietorship firm runs a business of stationary items. It provides you the following
information relating to assets and liabilities:
Assets & Liabilities As on 01.04.2019 As on 31.03.2020
Creditors 20,000 15,000
Outstanding Expenses 600 800
Property, Plant & Equipment 12,000 13,000
Stock 10,000 12,000
Cash in hand 7,500 2,000
Cash at Bank 2,500 10,000
Debtors ? 18,000
Details of the year’s transactions are as follows:
(1) Discounts allowed to Debtor 4,000
(2) Returns from debtors 1,450
(3) Bad debts 500
(4) Total sales (Cash and Credit) 72,000
(5) Discount allowed by creditors 700
(6) Returns to creditors 400
(7) Receipts from debtors paid into Bank 76,000
(8) Cash purchases 1,000
(9) Expenses paid by cash 9,000
(10) Drawings by cheque 500
(11) Purchase of Property, Plant & Equipment by cheque 4,000
(12) Cash deposited into bank 5,000
(13) Cash withdrawn from bank 9,000
(14) Payments to creditors by cheque 60,000
No Property, Plant & Equipment were sold during the year. Any difference in cash account to be
considered as cash sales. You are required to prepare Trading and Profit & Loss Account for the year
ended 31.03.2020 and the Balance Sheet as at 31.03.2020 from the given information. (MTP 16 Marks,
Oct ’21, May’20)
Answer 6
In the books of M/s Shyam Trading and Profit and Loss Account for the year ended 31st March, 2020
Particulars ₹ ₹ Particulars ₹ ₹
To Opening stock 10,000 By Sales:
To Purchases: Cash 500
Cash 1,000 Credit 71,500
Credit (W.N. 3) 56,100 Less: Returns (1,450) 70,550
57,100 By Closing Stock 12,000
Less: Returns (400) 56,700
To Gross Profit c/d 15,850
82,550 82,550
To Discount allowed 4,000 By Gross profit b/d 15,850
To Bad Debts 500 By Discount received 700
To General expenses (W.N. 5) 9,200 By Net Loss (balancing fig.) 150
To Depreciation (W.N. 4) 3,000
16,700 16,700
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.4

Balance Sheet as at 31st March, 2020

Liabilities ₹ Assets ₹
Capital (W.N. 1) 39,850 Property, Plant & Equipment 12,000
Less: Net loss 150 Add: New asset 4,000
39,700 16,000
Less: Drawings 500 39,200 Less: Depreciation 3,000 13,000
Sundry creditors 15,000 Stock in trade 12,000
Expenses outstanding 800 Sundry debtors (W.N. 2) 18,000
Cash in hand 2,000
Cash in Bank 10,000
55,000 55,000
Working Notes:
(1) Ascertainment of Opening Capital - Statement of Affairs as at 1.4.19
Liabilities ₹ Assets ₹
Property, Plant &
Sundry creditors 20,000 12,000
Equipment
Outstanding expenses 600 Stock 10,000
Prasad’s Capital (Balancing figure) 39,850 Debtors 28,450
Cash in hand 7,500
Cash at Bank 2,500
60,450 60,450
(2) Sundry Debtors Account
₹ ₹
To Balance b/d (bal. fig) 28,450 By Cash 76,000
To Sales (72,000 – 500) 71,500 By Discount 4,000
By Returns (sales) 1,450
By Bad debts 500
By Balance c/d (given) 18,000
99,950 99,950
(3) Sundry Creditors Account
₹ ₹
To Bank – Payments 60,000 By Balance b/d 20,000
By Purchases – credit
To Discount 700 56,100
(Balancing figure)
To Returns 400
To Balance c/d (closing balance) 15,000
76,100 76,100
(4) Depreciation on Property, Plant & Equipment
₹
Opening balance of Property, Plant & Equipment 12,000
Add: Additions 4,000
16,000
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.5

Less: Closing balance of Property, Plant & Equipment (13,000)

Depreciation 3,000
(5) Expenses to be shown in profit and loss account
Expenses (in cash) 9,000
Add: Outstanding of 2020 800
9,800
Less: Outstanding of 2019 600
9,200
(6) Cash and Bank Account

Particulars Cash Bank Particulars Cash Bank

₹ ₹ ₹ ₹
To balance b/d 7,500 2,500 By Purchases 1,000 -
To debtors - 76,000 By Expenses 9,000
By Property, Plant
To Banks (C) 9,000 - 4,000
& Equipment
To Cash (C) - 5,000 By Drawings 500
To sales (balancing as
500 - By Creditors 60,000
cash sales)
By Cash (C) 9,000
By Bank (C) 5,000
By Balance c/d 2,000 10,000
17,000 83,500 17,000 83,500

Question 7
The following extract of Balance Sheet of Ram Ltd. (a non-investment company) was obtained:
Balance Sheet (Extract) as on 31st March ,2022
Liabilities ₹
Issued and subscribed capital:
20,000, 14% Preference shares of ₹ 100 each fully paid 20,00,000
1,20,000 Equity shares of ₹ 100 each, ₹ 80 paid-up 96,00,000
Capital reserves (₹ 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Unsecured loans: Public deposits repayable after one year 3,70,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,00,000
You are required to compute Effective Capital as per the provisions of Schedule V to Companies Act, 2013.
(MTP 5 Marks, Sep 22 & Oct ‘23)
Answer 7
Computation of Effective capital
₹
Paid-up share capital-
20,000, 14% Preference shares 20,00,000
1,20,000 Equity shares 96,00,000
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.6

Capital reserves (excluding revaluation reserve) 45,000

Securities premium 50,000
15% Debentures 65,00,000
Public Deposits 3,70,000
(A) 1,85,65,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,00,000
(B) 90,00,000
Effective capital (A–B) 95,65,000

Question 8
Futura Ltd. had the following items under the head “Reserves and Surplus” in the Balance Sheet as on
31st March, 2022:
Amount ₹ in lakhs
Securities Premium Account 80
Capital Reserve 60
General Reserve 90
The company had an accumulated loss of ₹ 250 lakhs on the same date, which it has disclosed under the
head “Statement of Profit and Loss” as asset in its Balance Sheet. Comment on accuracy of this
treatment in line with Schedule III to the Companies Act, 2013. (MTP 4 Marks Oct ’22)
Answer 8
Schedule III to the Companies Act, 2013 provides that debit balance of Statement of Profit and Loss (after all
allocations and appropriations) shall be shown as a negative figure under the head ‘Surplus’. Similarly, the
balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus, shall be shown under the
head ‘Reserves and Surplus’ even if the resulting figure is in the negative. In this case, the debit balance of
profit and loss i.e. ₹ 250 lakhs exceeds the total of all the reserves i.e. ₹ 230 lakhs. Therefore, balance of
‘Reserves and Surplus’ after adjusting debit balance of profit and loss is negative by ₹ 20 lakhs, which should
be disclosed on the face of the balance sheet. Thus the treatment done by the company is incorrect.
Question 9
The following is the Balance Sheet of Manish and Suresh as on 1 st April, 2021:
Equity and Liabilities ₹ Assets ₹
Capital Accounts: Building 1,00,000
Manish 1,50,000 Machinery 65,000
Suresh 75,000 Stock 40,000
Creditors for goods 30,000 Debtors 50,000
Creditors for expenses 25,000 Bank 25,000
2,80,000 2,80,000
They give you the following additional information:
(i) Creditors' Velocity 1.5 month & Debtors' Velocity 2 months. Here velocity indicates the no. of times
the creditors and debtors are turned over a year.
(ii) Stock level is maintained uniformly in value throughout all over the year.
(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the current year.
(iv) Cost price will go up 15% as compared to last year and also sales in the current year will increase by
25% in volume.
(v) Rate of gross profit remains the same.
(vi) Business Expenditures are ₹ 50,000 for the year. All expenditures are paid off in cash.
(vii) Closing stock is to be valued on LIFO Basis.
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.7

(viii) All sales and purchases are on credit basis and there are no cash purchases and sales.
You are required to prepare Trading, Profit and Loss Account, Trade Debtors Account and Trade Creditors
Account for the year ending 31.03.2022.
(MTP 16 Marks April 23 & Nov ‘21)
Answer 9
Trading and Profit and Loss account for the year ending 31st March, 2022
Particulars Rs. Particulars Rs.
To Opening Stock 40,000 By Sales 4,31,250
To Purchases (Working Note) 3,45,000 By Closing Stock 40,000
To Gross Profit c/d
86,250
(20% on sales)
4,71,250 4,71,250
To Business Expenses 50,000 By Gross Profit b/d 86,250
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
To Net profit 24,750
86,250 86,250
Trade Debtors Account
Particulars Rs. Particulars Rs.
To Balance b/d 50,000 By Bank (bal. fig.) 4,09,375
By Balance c/d (1/6 of
To Sales 4,31,250 71,875
4,31,250)
4,81,250 4,81,250
Trade Creditors Account
Particulars Rs. Particulars Rs.
To Bank (Balancing figure) 3,31,875 By Balance b/d 30,000
To Balance c/d/ (1/8 of Rs. 3,45,000) 43,125 By Purchases 3,45,000
3,75,000 3,75,000
Working Note:
Rs.
(i) Calculation of Rate of Gross Profit earned during previous year

A Sales during previous year (= 50,000 x 12/2) 3,00,000

B Purchases (Rs. 30,000 x 12/1.5) 2,40,000
C Cost of Goods Sold (Rs. 40,000 + Rs. 2,40,000 — Rs. 40,000) 2,40,000
D Gross Profit (A-C) 60,000
E 20%
Rate of Gross Profit X 100
(ii) Calculation of sales and Purchases during current year Rs.
A Cost of goods sold during previous year 2,40,000
B Add: Increases in volume @ 25 % 60,000
3,00,000
C Add: Increase in cost @ 15% 45,000
D Cost of Goods Sold during Current Year 3,45,000
E Add: Gross profit @ 25% on cost (20% on sales) 86,250
F Sales for current year [D+E] 4,31,250

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.8

Question 10
What is meant by ‘Measurement’? What are the bases of measurement of Elements of Financial
Statements? Explain in brief. (RTP Nov 21, PYP 5 Marks Dec ’21)
Answer 10
Measurement is the process of determining money value at which an element can be recognized in the
balance sheet or statement of profit and loss. The framework recognizes four alternative measurement
bases for the purpose. These bases can be explained as:
Historical cost This is the Acquisition price. According to this, assets are recorded at an
amount of cash and cash equivalent paid or the fair value of the assets
at time of acquisition.
Current Cost Assets are carried out at the amount of cash or cash equivalent that
would have to be paid if the same or an equivalent asset was acquired
currently. Liabilities are carried at the undiscounted amount of cash or
cash equivalents that would be required to settle the obligation
currently.
Realizable (Settlement) Value For assets, amount currently realizable on sale of the asset in an orderly
disposal. For liabilities, this is the undiscounted amount expected to be
paid on settlement of liability in the normal course of business.
Present Value Assets are carried at present value of future net cash flows generated by
the concerned assets in the normal course of business. Liabilities are
carried at present value of future net cash flows that are expected to be
required to settle the liability in the normal course of business.
In preparation of financial statements, all or any of the measurement basis can be used in varying
combinations to assign money values to financial items.

Question 11
With regard to financial statements, name any five qualitative characteristics and elements. (RTP May’21)
Answer 11
(i) Qualitative Characteristics of Financial Statements: Understandability, Relevance, Comparability, Reliability
& Faithful Representation
(ii) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss

Question 12
Shiva started a business on 1st April 2022 with ₹ 15,00,000 represented by 80,000 units of ₹ 25 each.
During the financial year ending on 31st March, 2023, he sold the entire stock for ₹ 35 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Shiva in the year
2022-23 if Financial Capital is maintained at historical cost. (RTP May’24) (RTP May’21, Nov’19) (Same
concept different figures Old & New SM, RTP Nov’18)
Answer 12
Particulars Financial Capital Maintenance at Historical Cost (₹)
Closing equity (₹ 35 x 80,000 units) 28,00,000 represented by cash
Opening equity 80,000 units x ₹ 25 = 20,00,000
Permissible drawings to 8,00,000 (28,00,000 – 20,00,000)
keep Capital intact

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.9

Question 13
With regard to financial statements name any four.
(i) Users
(ii) Qualitative characteristics
(iii) Elements (RTP Nov 20, RTP May 19, MTP 5 Marks Mar’23)
Answer 13
(i) Users of financial statements:
Investors, Employees, Lenders, Supplies/Creditors, Customers, Government & Public
(ii) Qualitative Characteristics of Financial Statements:
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(iii) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss

Question 14
A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine
Rs.1,00,000. At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of
production. The new method will not require the machine ordered and it will be scrapped after delivery.
The expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-X2.
(RTP May’20, May’23 & Nov ‘23)
Answer 14
A liability is recognized when outflow of economic resources in settlement of a present obligation can be
anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should recognize a
liability of Rs.1,00,000 to Gamma Ltd.
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognized as an expense rather than as an asset. In the present
case, flow of future economic benefit from the machine to the enterprise is improbable. The entire amount
of purchase price of the machine should be recognized as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
(Loss transferred to profit and loss account)

Question 15
What are fundamental accounting assumptions? (RTP May 19)
Answer 15
Fundamental Accounting Assumptions: Accrual, Going Concern and Consistency

Question 16
Explain main elements of Financial Statements. (RTP May 18) (PYP 5 Marks May ’18)

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.10

Answer 16
Elements of Financial Statements
The Framework for preparation and Presentation of financial statements classifies items of financial
statements can be classified in five broad groups depending on their economic characteristics: Asset,
Liability, Equity, Income/Gain and Expense/Loss.
Asset Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow of a resource embodying economic
benefits.
Equity Residual interest in the assets of an enterprise after deducting all its liabilities.
Income/gain Increase in economic benefits during the accounting period in the form of inflows
or enhancement of assets or decreases in liabilities that result in increase in equity
other than those relating to contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrence of liabilities that result in decrease
in equity other than those relating to distributions to equity participants.

Question 17
Summarised Balance Sheet of Cloth Trader as on 31.03.2021 is given below:
Equity & Liabilities Amount (₹) Assets Amount (₹)
Proprietor's Capital 3,00,000 Property, plant and equipment 3,60,000
Profit & Loss Account 1,25,000 Closing Inventory 1,50,000
10% Loan Account 2,10,000 Trade receivables 1,00,000
Trade payables 50,000 Deferred Expenses 50,000

Cash & Bank 25,000

6,85,000 6,85,000
Additional Information is as follows:
(1) The remaining life of Property, plant and equipment is 8 years. The pattern of use of the asset is
even. The net realisable value of Property, plant and equipment on 31.03.2022 was ₹ 3,25,000.
(2) Purchases and Sales in 2021-22 amounted to ₹ 22,50,000 and ₹ 27,50,000 respectively.
(3) The cost and net realizable value of inventory on 31.03.2022 were ₹ 2,00,000 and ₹ 2,50,000
respectively.
(4) Expenses including interest on loan for the year amounted to ₹ 78,000.
(5) Deferred Expenses are amortized equally over 5 years.
(6) Sundry Debtors on 31.03.2022 are ₹ 1,50,000 of which ₹ 5,000 is doubtful. Collection of another ₹
25,000 depends on successful re-installation of certain product supplied to the customer;
(7) Closing Sundry Creditors are ₹ 75,000, likely to be settled at 10% discount.
(8) Cash balance as on 31.03.2022 is ₹ 4,22,000.
(9) There is an early repayment penalty for the loan of ₹ 25,000. You are required to prepare: (Not
assuming going concern)
(1) Profit & Loss Account for the year 2021-22.
(2) Balance Sheet as on 31st March, 2022. (RTP May’22, Nov’22, PYP 5 Marks May’19) (Same concept
different figures PYP 4 Marks Nov’20, Old & New SM)
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.11

Answer 17
Profit and Loss Account for the year ended 2021-22(not assuming going concern)

Particulars Amount ₹ Particulars Amount ₹

To Opening Stock 1,50,000 By Sales 27,50,000

To Purchases 22,50,000 By Closing Stock 2,50,000
To Expenses 78,000 By Trade payables 7,500
To Depreciation 35,000
To Provision for doubtful debts 30,000
To Deferred expenses 50,000
To Loan penalty 25,000
To Net Profit (b.f.) 3,89,500
30,07,500 30,07,500
Balance Sheet as at 31st March, 2022 (not assuming going concern)
Liabilities Amount ₹ Assets Amount ₹
Capital 3,00,000 Fixed Assets 3,25,000
Profit & Loss A/c 5,14,500 Inventory 2,50,000
10% Loan 2,35,000 Trade receivables (less provision) 1,20,000
Trade payables 67,500 Deferred expenses Nil
Bank 4,22,000
11,17,000 11,17,000

Question 18
What are the qualitative characteristics of the Financial Statements which improve the usefulness of the
information furnished therein? (PYP 4 Marks Nov ’20, Old & New SM) (MTP 4 Marks Mar’24)
Answer 18
The qualitative characteristics are attributes that improve the usefulness of information provided in financial
statements. Financial statements are required to show a true and fair view of the performance, financial
position and cash flows of an enterprise. The framework for Preparation and Presentation of Financial
Statements suggests that the financial statements should maintain the following four qualitative
characteristics to improve the usefulness of the information furnished therein.
1. Understandability: The financial statements should present information in a manner as to be readily
understandable by the users with reasonable knowledge of business and economic activities and
accounting.
2. Relevance: The financial statements should contain relevant information only. Information, which is likely to
influence the economic decisions by the users, is said to be relevant. Such information may help the users to
evaluate past, present or future events or may help in confirming or correcting past evaluations. The
relevance of a piece of information should be judged by its materiality. A piece of information is said to be
material if its misstatement (i.e., omission or erroneous statement) can influence economic decisions of a
user.
3. Reliability: To be useful, the information must be reliable; that is to say, they must be free from material
error and bias. The information provided are not likely to be reliable unless transactions and events reported
are faithfully represented. The reporting of transactions and events should be neutral, i.e. free from bias
and be reported on the principle of 'substance over form'. The information in financial statements must be
complete. Prudence should be exercised in reporting uncertain outcome of transactions or events.
4. Comparability: Comparison of financial statements is one of the most frequently used and most effective
tools of financial analysis. The financial statements should permit both inter-firm and intra-firm comparison.
One essential requirement of comparability is disclosure of financial effect of change in accounting policies.

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.12

Question 18
Explain how financial capital is maintained at historical cost? Kishore started a business on 1st April, 2019
with ₹ 15,00,000 represented by 75,000 units of ₹20 each. During the financial year ending on 31st March,
2020, he sold the entire stock for ₹ 30 each. In order to maintain the capital intact, calculate the maximum
amount, which can be withdrawn by Kishore in the year 2019-20 if Financial Capital is maintained at
historical cost. (PYP 4 Marks Jan 21)
Answer 18
Financial capital maintenance at historical cost: Under this convention, opening and closing assets are stated
at respective historical costs to ascertain opening and closing equity. If retained profit is greater than or
equals to zero, the capital is said to be maintained at historical costs. This means the business will have
enough funds to replace its assets at historical costs. This is quite right as long as prices do not rise.
Maximum amount withdrawn by Kishore in year 2019-20 if financial capital is maintained at historical cost
Particulars Financial Capital Maintenance at
Historical Cost (₹)
Closing equity (₹ 30 x 75,000 units) 22,50,000 represented by cash
Opening equity 75,000 units x ₹ 20 = 15,00,000
Permissible drawings to keep Capital intact 7,50,000 (22,50,000 – 15,00,000)
Thus ₹ 7,50,000 is the maximum amount that can be withdrawn by Kishore in year 2019-20 if financial
capital is maintained at historical cost.

Question 19
A trader commenced business on April 1, 2020 with ₹ 120,000, represented by 6000 units of a certain
product at ₹ 20 per unit. During the year 2020-21 he sold these units at ₹ 30/- per unit and had withdrawn
₹ 60,000. The price of the product at the end of financial year was ₹ 25/- per unit. Compute retained profit
of the trader under the concept of physical capital maintenance at current cost. Also, state, whether
answer would be different if the trader had not withdrawn any amount. (PYP July’21, 5 Marks) (MTP 5
Marks Sep ’23)
Answer 19
Physical Capital Maintenance at Current Cost
In the given case, the specific price index applicable to the product is 125 (25/20X100). Current cost of
opening stock = (₹ 1, 20,000 / 100) x 125 Or 6,000 unit’s x ₹ 25 = ₹ 1,50,000
Current cost of closing cash = ₹ 1,20,000 (₹ 1,80,000 – ₹ 60,000) Opening equity at closing current costs
= ₹ 1,50,000
Closing equity at closing current costs = ₹ 1,20,000 Retained Profit = ₹ 1,20,000 – ₹ 1,50,000 = (-) ₹ 30,000
The negative retained profit indicates that the trader has failed to maintain his capital. The available fund of
₹ 1,20,000 is not sufficient to buy 6,000 units again at increased price of ₹ 25 per unit. The drawings should
have been restricted to ₹ 30,000 (₹ 60,000 – ₹ 30,000).
If the trader had not withdrawn any amount, then the answer would have been as below:
Current cost of opening stock = ₹ 1,80,000
Opening equity at closing current costs = ₹ 1,50,000
Retained Profit = ₹ 1,80,000 – ₹ 1,50,000 = ₹ 30,000
If the trader had not withdrawn any amount, then the retained profit would have been₹ 30,000.

Question 20
Mrs. A is showing the consolidated aggregate opening balance of equity, liabilities and assets of ₹ 6 lakh, 4
lakh and 10 lakhs respectively. During the current year Mrs. A has the following transactions:
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.13

1. Received 20% dividend on 10,000 equity shares of ₹ 10 each held as investment.

2. The amount of ₹ 70,000 is paid to creditors for settlement of ₹ 90,000.
3. Salary is pending by ₹ 20,000.
4. Mrs. A’s drawing ₹ 20,000 for her personal use.
You are required to prepare the statement of the effect of aforesaid each transaction on closing balance
sheet in the form of Assets – Liabilities = Equity after each transaction. (PYP 5 Marks, Dec ‘21)
Answer 20
Effect of each transaction on Balance sheet of Mrs. A is shown below:
Transactions Assets - Liabilities = Equity
₹ lakh ₹ lakh ₹ lakh
Opening 10.00 - 4.00 = 6.00
(1) Dividend earned 10.20 - 4.00 = 6.20
[10.00+0.20] [6.00+0.20]
(2) Settlement of Creditors 9.50 - 3.10 = 6.40
[10.20-0.70] [4.00-0.90] [6.20+0.20]
(3) Salary Outstanding 9.50 - 3.30 = 6.20
[3.10+0.20] [6.40-0.20]
(4) Drawings 9.30 - 3.30 = 6.00
[9.50-0.20] [6.20-0.20]

Question 21
As on 1st April, 2021 opening Balance Sheet of Mr. Mohanty is showing the aggregate value of Assets,
Liabilities and Equity ₹ 12 Lakhs, 3 Lakhs and 9 lakhs respectively.
During the accounting period 01/04/2021 to 31/03/2022, Mr. Mohanty has the following transactions:
(1) A liability of ₹ 50,000 was finally settled at a discount of 2%.
(2) Dividend earned @ 15% on 1,000 (F.V 100 each) Equity shares held @ ₹ 12,000.
(3) Rent of the premises paid ₹ 20,000.
(4) Mr. Mohanty withdrew ₹ 10,000 for personal purposes and also withdrew Goods worth
₹ 5,000 for personal purposes.
(5) ₹ 15,000 were received against Bill Receivables.
You are required to show the effect of the above transactions on Balance Sheet in the form of Assets -
Liabilities = Equity equation after each transaction. .(PYP 4 Marks Nov ’22)
Answer 21
Effects of each transaction on Balance sheet of the trader is shown below:
Assets Liabilities Equity
Transactions - =
₹ lakh ₹ lakh ₹ lakh
Opening 12 - 3 = 9
12 – 0.49 3 – 0.50 9.0 + 0.01
(1) Settlement of Creditors - =
11.51 2.5 9.01
11.51 + 0.15 9.01+ 0.15
(2) Dividend earned - 2.5 =
11.66 9.16
11.66 -0.20 9.16 -0.20
(3) Rent paid - 2.5 =
11.46 8.96
11.46 -0.15 8.96 -0.15
(4) Drawings - 2.5 =
11.31 8.81

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.14

(5) *Money received against 11.31+0.15 -0.15

- 2.5 8.81
Bills receivables 11.31
=
*No change as cash received from bills receivable will have impact on individual asset only (will reduce bill
receivables with corresponding increase in cash).
Question 22
Mille started a business on 01.04.2022 with a capital of ₹ 15,00,000. She purchased ₹ 1,500 units of stock
at ₹ 1,000 each. She sold the entire stock for ₹ 1,500 each unit till 31.03.2023.
You are required to calculate the maximum amount which can be withdrawn by Mille in order to keep her
capital intact, if Financial Capital is maintained at:
(i) Historical Cost
(ii) Current Purchasing Power (opening index at 100 and closing index at 125)
(iii) Physical Capital Maintenance
(Price per unit at the end of year is ₹ 1,350) (PYP 5 Marks May ‘23)

Answer 22
Financial Capital Maintenance at historical Costs
Sr. No. Particulars Computation ₹

(i) Opening Equity 1,500 x 1,000 15,00,000

(ii) Closing Equity 1,500 x 1,500 22,50,000

(iii) Maximum Drawing (ii)- (i) 7,50,000

Financial Capital Maintenance at current purchasing power

Sr. No. Particulars Computation ₹

(i) Opening Equity 1,500 x 1,000 x 125/100 18,75,000

(ii) Closing Equity 1,500 x 1,500 22,50,000

(iii) Maximum Drawing (ii)- (i) 3,75,000

Financial Capital Maintenance at Physical Capital Maintenance

Sr. No. Particulars Computation ₹

(i) Opening Equity 1,500 x1,350 20,25,000

(ii) Closing Equity 1,500 x 1,500 22,50,000

(iii) Maximum Drawing (ii)- (i) 2,25,000

Chapter 2 Framework for preparation and presentation of Financial Statements

Paper 2

Corporate
& Other laws
Chapter-wise compilation
of RTPs, MTPs and PYPs

Modified as per Applicable for

new scheme Sept’24 & Jan’25

SAMPLE MATERIAL
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HOW TO GET THE BEST OUT OF OUR MATERIAL?
 Frequently Asked Questions
1. Why RTP’s, MTP’s and PYP’s?
RTP’s, MTP’s, and PYP’s are extremely important to ensure that you reproduce ICAI language.
These questions train you to understand what is important and what is expected of you.
At least 41% of questions* are asked from previous RTP’s, MTP’s and PYP’s.

2. What is included?
In this compiler, all questions from the last 3, 5 or 11 attempts depending on the one you have
selected will be available. There will be references to the marks and the attempt from which
they were asked. Identical or similar questions have been removed and references for both
attempts are mentioned.

3. What is the benefit of Chapter-wise?

We have categorized each and every question from all Old RTPs, MTP’s, and PYP’s into
chapters. This means that you don't have to wait until you've completed your entire syllabus
to tackle an RTP, MTP, or past paper. You can start solving these questions to check your
conceptual clarity right after finishing a particular chapter.

4. What does amended for the latest attempt mean?

When we reviewed all the questions from the past 11 attempts of RTP, MTP, and PYP’S, we
didn't just segregate them Chapterwise; we also updated them to reflect the latest provisions.
All the answers provided in the compilation are applicable for the May 2024 examination. So,
there's no need to stress about outdated or incorrect information.

5. How are Old RTP’s, MTP’s & PYP’s beneficial for me?
All old RTPs, MTPs, and PYPs have been organized according to the new syllabus issued by ICAI.
This means that if a specific chapter from the old scheme is not included in the new scheme,
it has been omitted. If a particular chapter in the new scheme is based on concepts from two
or more chapters in the old scheme, it has been adapted to align with how the chapter should
be in the new scheme. If a chapter is only partially included in the new scheme, the questions
related to those specific concepts are only included in the corresponding chapter of the new
scheme. A comprehensive reconciliation of the chapters between the new scheme and the old
scheme is provided on the following page.

6. What if a new attempt is added post my purchase?

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2. The chapter is newly introduced, and as a result, no questions have been previously asked
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*This is on an average based on the last 11 attempts

 Corporate and Other Laws
Reconciliation of chapters of the new scheme (May’24) with old course

New Chapter Name as per NEW Syllabus Comparison with

Chapter chapters of Old
No. Scheme
1 Preliminary Same
2 Incorporation of Company and Matters Incidental Same
Thereto
3 Prospectus and Allotment of Securities Same
4 Share Capital and Debentures Same
5 Acceptance of Deposits by Companies Same
6 Registration of Charges Same
7 Management & Administration Same
8 Declaration and Payment of Dividend Same
9 Accounts of Companies Same
10 Audit and Auditors Same
11 Companies Incorporated Outside India * Not a part of CA
inter syllabus in the
old scheme
12 The Limited Liability Partnership Act, 2008 NEW addition

Not a part of CA
inter syllabus in the
old scheme
13 The General Clauses Act, 1897 Same
14 Interpretation of Statutes Same
15 The Foreign Exchange Management Act, 1999 * Not a part of CA
inter syllabus in the
old scheme

*These Chapters were earlier a part of CA Final Paper 4: Corporate and Other Laws.
Table of Contents
Sr. No. Particulars Page Number
1 Preliminary 1.1 – 1.10
2 Incorporation of Company and Matters Incidental 2.1- 2.21
Thereto
3 Prospectus and Allotment of Securities 3.1 – 3.15
4 Share Capital and Debentures 4.1 - 4.22
5 Acceptance of Deposits by Companies 5.1 - 5.16
6 Registration of Charges 6.1 – 6.14
7 Management & Administration 7.1 – 7.29
8 Declaration and Payment of Dividend 8.1 – 8.16
9 Accounts of Companies 9.1 – 9.19
10 Audit and Auditors 10.1–10.17
11 Companies Incorporated Outside India 11.1 – 11.21
12 The Limited Liability Partnership Act, 2008 12.1 – 12.2
13 The General Clauses Act, 1897 13.1 – 13.17
14 Interpretation of Statutes 14.1 – 14.15
15 The Foreign Exchange Management Act, 1999 15.1 – 15.23
16 Case Scenarios 16.1 – 16.53

MTPs: March’19, April’19, Oct’19, May’20, Oct’20, March’21, April’21, Oct ’21,
Nov ’21, March ’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23,Sep ’23
,Oct ’23,March’24 & April ‘24
PYPs: May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec ’21, May’22, Nov ’22, May’23,
Nov’23
RTPs: May’19, Nov’19, May’20, Nov’20, May’21, Nov ’21, May ’22, Nov ’22,
May ’23, Nov ’23, May’24
 1.1

Chapter 1
Preliminary
Question 1
New Private Ltd. is a company registered under the Companies Act, 2013 with a paid -up share capital
of ` 70 lakh and turnover of ` 30 crores. Explain the meaning of the “Small Company” and examine the
following in accordance with the provisions of the Companies Act, 2013:
(i) Whether the New Private Ltd. can avail the status of small company?
(ii) What will be your answer if the turnover of the company is ` 15 crore and the capital is same as
` 70 lakh? (MTP 5 Marks Oct 21, MTP 6 Marks, Oct 20, PYP May ’18 6 Marks, Old & New SM)
(Same concept different figures MTP 6 Marks Apr’22)(PYP 5 Marks ,May ’23)
Answer 1
Small Company: According to Section 2(85) of the Companies Act, 2013, Small Company means a
company, other than a public company,—
(i) paid-up share capital of which does not exceed four crores rupees or such higher amount as may
be prescribed which shall not be more than ten crore rupees; and
(ii) turnover of which as per its last profit and loss account does not exceed forty crore rupees or such
higher amount as may be prescribed which shall not be more than one hundred crore rupees.
Nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.
(1) In the present case, New Private Ltd., a company registered under the Companies Act, 2013 with a
paid up share capital of ` 70 lakh and having turnover of ` 30 crore.
Since both the criteria of share capital not exceeding ` 4 crores and second criteria of turnover not
exceeding 40 crores is met it can avail the status of small company.
(2) If the turnover of the company is ` 15 crore, then both the criteria will be fulfilled and New Private
Ltd. can avail the status of small company.

Question 2
Kavya Ltd. has a paid up share-capital of Rs. 80 crores. Amjali Ltd. holds a total of Rs. 50 crores of
Kavya Ltd. Now, Kavya ltd. is making huge profits and wants to expand its business and is aiming at
investing in Amjali Ltd. Kavya Ltd. has approached you to analyse whether as per the provisions of the
th
Companies Act, 2013, they can hold 1/10 of the share capital of Amjali Ltd. (MTP 5 Marks ,March
21)
Answer 2
In terms of section 2 (87) of the Companies Act 2013 "subsidiary company" or "subsidiary", in relation
to any other company (that is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or together with
one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of
subsidiaries beyond such numbers as may be prescribed.
Since, Kavya Amjali ltd. is holding more than one half (50 crores out of 80 crores) of the total share capital
of Kavya Ltd., it (Amjali Ltd.) is holding of Kavya Ltd.
Further, as per the provisions of section 19 of the Companies Act, 2013, no company shall, either by
itself or through its nominees, hold any shares in its holding company and no holding company shall
allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares
of a company to its subsidiary company shall be void:
Provided that nothing in this sub-section shall apply to a case—
(a) where the subsidiary company holds such shares as the legal representative of a deceased member
of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) where the subsidiary company is a shareholder even before it became a subsidiary company of the
holding company
In the given question, Kavya ltd. cannot acquire the shares of Amjali Ltd. as the acquisition of shares does

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not fall within the ambit of any of the exceptions provided in section 19.

Question 3
The paid-up share capital of Altar Private Limited is ` 1 crore, consisting of 8 lacs Equity Shares of ` 10
each, fully paid-up and 2 lacs Cumulative Preference Shares of `10 each, fully paid-up. New Private
Limited and Ultra Private Limited are holding 3 lacs Equity Shares and 50,000 Equity Shares
respectively in Altar Private Limited. New Private Limited and Ultra Private Limited are the subsidiaries
of PQR Private Limited. With reference to the provisions of the Companies Act, 2013 examine whether
Altar Private Limited is a subsidiary of PQR Private Limited? Would your answer be different if PQR
Private Limited has 8 out of 9 Directors on the Board of Altar Private Limited?(RTP May’19 & May’18)
Answer 3
In terms of section 2 (87) of the Companies Act 2013 "subsidiary company" or "subsidiary", in relation to
any other company (that is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or together with
one or more of its subsidiary companies:
Explanation. —For the purposes of this clause,—
(a) a company shall be deemed to be a subsidiary company of the holding company even if the control
referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding
company;
(b) the composition of a company's Board of Directors shall be deemed to be controlled by another
company if that other company by exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors.
In the present case, New Pvt. Ltd. and Ultra Pvt. Ltd. together hold less than one half of the total share
capital i.e. less than one-half of total voting power. Hence, PQR Private Ltd. (holding of New Pvt. Ltd. and
Ultra Pvt. Ltd) will not be a holding company of Altar Pvt. Ltd. However, if PQR Pvt. Ltd. has 8 out of 9
Directors on the Board of Altar Pvt. Ltd. i.e. controls the composition of the Board of Directors; it (PQR
Pvt. Ltd.) will be treated as the holding company of Altar Pvt. Ltd.

Question 4
Following are some of the securities, issued by different companies related with each other, as follows:-
Company Securities Issued Remarks
Kleshrahit Ltd. Listed non-convertible redeemable Has the power to appoint 2/3rd
preference shares issued on private directors in Indriyadaman Ltd.
placement basis in terms of relevant
SEBI Regulations.
Indriyadaman Ltd. Listed non-convertible debt securities Holding 60% voting power in Sajagta
issued on private placement basis in (P) Ltd.
terms of relevant SEBI Regulations.
Sajagta (P) Ltd. Listed non-convertible debt securities The company holds 52% equity
issued on private placement basis in shares in Pratibodh Ltd. as an
terms of relevant SEBI Regulations. investment on behalf of another
company in a capacity of a trustee.
Equity shares issued by the Kleshrahit Ltd. and Indriyadaman Ltd. are not listed in any of the recognized
stock exchanges.
In the context of aforesaid facts, answer the following question(s):-
(a) Whether the aforesaid companies can be considered as listed company(ies)?
(b) Explain the relationship between the aforesaid companies? (RTP May ’22)
Answer 4
(a) According to section 2(52) of the Companies Act, 2013, listed company means a company which has
any of its securities listed on any recognized stock exchange; Provided that such class of companies,
which have listed or intend to list such class of securities, as may be prescribed in consultation with the
Securities and Exchange Board, shall not be considered as listed companies.
According to rule 2A of the Companies (Specification of definitions details) Rules, 2014, the following
classes of companies shall not be considered as listed companies, namely:-
(a) Public companies which have not listed their equity shares on a recognized stock exchange but have
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listed their –
(i) non-convertible debt securities issued on private placement basis in terms of SEBI (Issue and
Listing of Debt Securities) Regulations, 2008; or
(ii) non-convertible redeemable preference shares issued on private placement basis in terms of
SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013; or
(iii) both categories of (i) and (ii) above.
(b) Private companies which have listed their non-convertible debt securities on private placement basis
on a recognized stock exchange in terms of SEBI (Issue and Listing of Debt Securities) Regulations,
2008;
(c) Public companies which have not listed their equity shares on a recognized stock exchange but whose
equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of section
23 of the Act.
Company Name Analysis and Conclusion
Kleshrahit Ltd. Equity shares issued by the company are not listed. However, the company has
issued listed non- convertible redeemable preference shares issued on private
placement basis in terms of relevant SEBI Regulations which falls in the exceptions
to the listed company, given as per clause (a)(ii) to Rule 2A, as aforesaid, and
accordingly, Kleshrahit Ltd. shall not be considered as a listed company.
Indriyadaman Ltd. Equity shares issued by the company are not listed. However, the company has
issued listed non- convertible debt securities issued on private placement basis in
terms of relevant SEBI Regulations which falls in the exceptions to the listed
company, given as per clause (a)(i) to Rule 2A, as aforesaid, and accordingly,
Indriyadaman Ltd. shall not be considered as a listed company.
Sajagta (P) Ltd. The company has issued listed non-convertible debt securities issued on private
placement basis on a recognised Stock Exchange in terms of relevant SEBI
Regulations which falls in the exceptions to the listed company given as per clause
(b) to Rule 2A, as aforesaid, and accordingly, Sajagta (P) Ltd. shall not be
considered as a listed company.
(b) According to section 2(46) of the Companies Act, 2013, holding company in relation to one or more
other companies, means a company of which such companies are subsidiary companies.
According to section 2(87) of the Companies Act, 2013, subsidiary company or subsidiary, in relation to
any other company (that is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or together
with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of
subsidiaries beyond such numbers as may be prescribed.
Explanation—For the purposes of this clause,—
(a) a company shall be deemed to be a subsidiary company of the holding company even if the control
referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding
company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another
company if that other company by exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
(c) the expression “company” includes any body corporate;
(d) “layer” in relation to a holding company means its subsidiary or subsidiaries; As per the notification
dated 27th December 2013, Ministry clarified that the shares held by a company or power
exercisable by it in another company in a fiduciary capacity shall not be counted for the purpose of
determining the holding – subsidiary relationship in terms of the provision of section 2(87) of the
Companies Act, 2013.
(i) Relationship between Kleshrahit Ltd. & Indriyadaman Ltd.
It is given that Kleshrahit Ltd. has the power to appoint 2/3rd directors in Indriyadaman Ltd. i.e.
majority of the directors can be appointed by Kleshrahit Ltd.
Accordingly, as per sub-clause (i) to section 2(87) read with the Explanation given in point (b), it
can be understood that Indriyadaman Ltd. is the subsidiary company of Kleshrahit Ltd. while the

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latter is the holding company of Indriyadaman Ltd.

(ii) Relationship between Indriyadaman Ltd. & Sajagta (P) Ltd.
It is given that Indriyadaman Ltd. is holding 60% voting power in Sajagta (p) Ltd.
Accordingly, as per sub-clause (ii) to section 2(87), it can be understood that Sajagta (P) Ltd. is the
subsidiary company of Indriyadaman Ltd. while the latter is the holding company of Sajagta (P)
Ltd. as Indriyadaman Ltd. controls more than one-half of the total voting power of Sajagta (P) Ltd.
(iii) Relationship between Kleshrahit Ltd. & Sajagta (P) Ltd.
It is given that Indriyadaman Ltd. is holding 60% voting power in Sajagta (p) Ltd. and it has been
derived that Indriyadaman Ltd. is the subsidiary company of Kleshrahit Ltd. and Sajagta (P) Ltd. is
the subsidiary company of Indriyadaman Ltd., respectively.
Accordingly, as per sub-clause (ii) to section 2(87) read with the Explanation given in point (a), that
a company shall be deemed to be a subsidiary company of the holding company even if the control
is of another subsidiary company of the holding company i.e. subsidiary of subsidiary company
will be deemed to be a subsidiary of the holding company.
Hence, it can be understood that Sajagta (P) Ltd. is deemed to be subsidiary company of Kleshrahit
Ltd. while the latter would be considered as the holding company of Sajagta (P) Ltd.
(iv) Relationship between Sajagta (P) Ltd. & Pratibodh Ltd.
It is given that Sajagta (P) Ltd. holds 52% equity shares in Pratibodh Ltd. as an investment on behalf
of another company in a capacity of a trustee i.e. in a fiduciary capacity.
As per the notification dated 27th December 2013, Ministry (MCA) clarified that the shares held
by a company or power exercisable by it in another company in a fiduciary capacity shall not be
counted for the purpose of determining the holding–subsidiary relationship in terms of the
provision of section 2(87) of the Companies Act, 2013.
Accordingly, Sajagta (P) Ltd. & Pratibodh Ltd. do not share any holding– subsidiary relationship as
the former holds shares in latter just in a fiduciary capacity on behalf of another company.

Question 5
Geeta Private Limited is a start-up company. Mr. Prabodh has been appointed as Accounts Manager
of Geeta Private Limited. The Board meeting for approval of accounts is to be held on 01.08.2022 and
he has to prepare the financial statements for approval by the Board. Referring to section 2(40) of the
Companies Act, 2013, advise Mr. Prabodh about the statements that are required to be prepared.
(RTP Nov’22)
Answer 5
As per section 2(40) of the Companies Act, 2013, Financial Statement in relation to a company,
includes—
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income
and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub- clause (i) to
sub-clause (iv):
Exemption: As per the proviso to section 2(40), the financial statement, with respect to one person
company, small company, dormant company and private company (if such private company is a start-
up) may not include the cash flow statement.
In the instant case, Mr. Prabodh has to prepare the above financial statements except Cash Flow
Statement; since Geeta Private Limited is a start-up private company

Question 6
Hastprat Ltd. is an unlisted public company, having five directors in its board which includes two
independent directors.
Sankul (P) Ltd., is subsidiary company of Hastprat Ltd., actively carrying on its business, having paid
up capital of ` 1.5 crore with 40 members and turnover of ` 18 crore, respectively and the said company
is not a start-up company.
In the context of aforesaid case-scenario, please answer to the following question(s):-
Whether Sankul (P) Ltd. is mandatorily required to prepare cash flow statement for the financial year
as a part of its financial statements?
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Provide your answer by analysing Sankul (P) Ltd. into following category of companies:-
(i) One person company, (ii) Small company, (iii) Dormant company and (iv) Private company,
respectively. (RTP May ‘23)
Answer 6
According to section 2(10) of the Companies Act, 2013,
Financial statement in relation to a company, includes—
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an
income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub- clause (i)
to sub-clause (iv):
Provided that the financial statement, with respect to one person company, small company, dormant
company and private company (if such private company is a start-up) may not include the cash flow
statement.
For considering the applicability of preparation cash flow statement in case of Sankul (P) Ltd., it is
required first to be analyzed that Sankul (P) Ltd. does not fall in any of the categories of companies
mentioned under proviso to section 2(10) of the Companies Act, 2013:
(i) One person company – It is given that the company is having 40 members and also
its name does not contain the words ‘OPC’, so it is not a one person company.
(ii) Small company – A company which is a subsidiary company cannot be categorized as a small
company as per proviso to section 2(85) even though its paid up capital and turnover are within
the prescribed limits and accordingly, as Sankul (P) Ltd. is a subsidiary company of Hastprat Ltd.,
it cannot be considered as small company also.
(iii) Dormant company – It is given that the company is actively carrying on its business, so it cannot
be also categorized as a dormant company based upon the facts given.
(iv) Private company (which is a start-up) – It is given that Sankul (P) Ltd. is not a start- up company
and also, as per proviso to section 2(71) of the Act, a company which is a subsidiary of a company,
not being a private company, shall be deemed to be public company for the purposes of this Act
even where such subsidiary company continues to be a private company in its articles.
So, Sankul (P) Ltd. shall be deemed to be a public company as it is subsidiary of Hastprat Ltd., an unlisted
public company and so it will not fall into this category of exemption as well.
Thus, it can be concluded that Sankul (P) Ltd. is mandatorily required to prepare cash flow statement
for the financial year as a part of its financial statements as it does not fall in any of the categories of
companies mentioned under proviso to section 2(10) of the Companies Act, 2013.

Question 7
Teresa Ltd. is a company registered in New York (U.S.A.). The company has no place of business
established in India, but it is doing online business through data interchange in India. Explain with
reference to relevant provisions of the Companies Act, 2013 whether Teresa Ltd. will be treated as
Foreign Company. (PYP Nov’18,6 Marks) (Same concept different figures PYP Nov’19 2 Marks)
Answer 7
According to section 2(42) of the Companies Act, 2013, foreign company means any company or body
corporate incorporated outside India which,-
(a) has a place of business in India whether by itself or through an agent, physically or through electronic
mode; and
(b) conducts any business activity in India in any other manner.
As per the Rule given in the Companies (Specification of Definitions Details) Rules, 2014, the term
“electronic mode”, means carrying out electronically based, whether main server is installed in India or
not, including, but not limited to-
(i) Business to business and business to consumer transactions, data interchange and other digital
supply transactions;
(ii) Offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities,
in India or from citizens of India;
(iii) Financial settlements, web based marketing, advisory and transactional services, database services
and products, supply chain management;
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(iv) Online services such as telemarketing, telecommuting, telemedicine, education and information
research; and
(v) All related data communication services, whether conducted by e-mail, mobile devices, social
media, cloud computing, document management, voice or data transmission or otherwise;
In the given question, Teresa Ltd. will be treated as a foreign company within the meaning of section
2(42) of the Companies Act, 2013 since it is doing online business through data interchange in India even
though the company has no place of business established in India.

Question 8
The information extracted from the audited Financial Statement of Resolution Private Limited as on
31st March, 2023 is as below:
(1) Paid-up equity share capital ₹ 50,00,000 divided into 5,00,000 equity shares (carrying voting
rights) of ₹ 10 each. There is no change in the paid-up share capital thereafter.
(2) The turnover is ₹ 2,00,00,000.
It is further understood that Yellow Private Limited, which is a public limited company is holding
2,00,000 equity shares, fully paid-up, of Resolution Private Limited. Resolution Private Limited has filed
its Financial Statement for the said year with the Registrar of Companies (ROC) excluding the Cash Flow
Statement within the prescribed time line during the financial year 2023-24. The ROC has issued a notice
to Resolution Private Limited as it has failed to file the cash flow statement along with the Balance Sheet
and Profit and Loss Account. You are to advise on the following points explaining the provisions of the
Companies Act, 2013:
(i) Whether Resolution Private Limited shall be deemed to be a small company whose significant
equity shares are held by a public company?
(ii) Whether Resolution Private Limited has defaulted in filing its financial statement?
(MTP 5 Marks Mar’24) (PYP July ’21 , 6 Marks)(MTP 6 Marks Oct ’23)
Answer 8
(i) According to section 2(85) of the Companies Act, 2013, small company means a company, other than a
public company, having-
(A) paid-up share capital not exceeding four crore rupees; and
(B) turnover as per profit and loss account for the immediately preceding financial year not
exceeding forty crore rupees:
Provided that nothing in this clause shall apply to a holding company or a subsidiary company.
Also, according to section 2(87), subsidiary company, in relation to any other company (that is to say the
holding company), means a company in which the holding company exercises or controls more than one-
half of the total voting power either at its own or together with one or more of its subsidiary companies.
In the given question, Yellow Limited (a public company) holds 2,00,000 equity shares of Resolutions
Private Limited (having paid up share capital of 5,00,000 equity shares @ ₹ 10 each totaling ₹ 50 lakh).
Hence, Resolutions Private Limited is not a subsidiary of Yellow Limited and hence it is a private company
and not a deemed public company.
Further, the paid up share capital (₹ 50 lakh) and turnover (₹ 2 crore) is within the limit as prescribed under
section 2(85), hence, Resolution Private Limited can be categorised as a small company.
(ii) According to section 2 (40), Financial statement in relation to a company, includes—
(a) a balance sheet as at the end of the financial year;
(b) a profit and loss account, or in the case of a company carrying on any activity not for profit,
an income and expenditure account for the financial year;
(c) cash flow statement for the financial year;
(d) a statement of changes in equity, if applicable; and
(e) any explanatory note annexed to, or forming part of, any document referred to in points
(a) to (d):
Provided that the financial statement, with respect to One Person Company, small company and dormant
company, may not include the cash flow statement.
Resolution Private Limited being a small company is exempted from filing a cash flow statement as a part
of its financial statements. Thus, Resolution Private Limited has not defaulted in filing its financial
statements with ROC.

Chapter 1 Preliminary
 1.7

Question 9
Ram Pvt. Ltd. is the holding company of Laxman Pvt. Ltd. As per the last profit and loss account for the
year ending 31st March, 2023 of Laxman Pvt. Ltd., its turnover was ` 1.80 crore; and paid up share capital
was ` 80 lakh. The Board of Directors wants to avail the status of a small company. The Company
Secretary of the company advised the directors that the company cannot be categorized as a small
company. In the light of the above facts and in accordance with the provisions of the Companies Act,
2013, you are required to examine whether the contention of Company Secretary is correct, explaining
the relevant provisions of the Act. (RTP May ’24)
Or
Define “Small Company”. (PYP 2 Marks Dec ‘21)
Answer 9
As per section 2(85) of the Companies Act, 2013, small company means a company, other than a public
company:
(i) paid-up share capital of which does not exceed four crore rupees, and
(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not
exceed forty crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.
In the instant case, as per the last profit and loss account for the year ending 31st March, 2023 of Laxman
Pvt. Ltd., its turnover was to the extent of ` 1.80 crore, and paid-up share capital was ` 80 lakh. Though
Laxman Pvt. Ltd., as per the turnover and paid-up share capital norms, qualifies for the status of a ‘small
company’ but it cannot be categorized as a ‘small company’ because it is a subsidiary of another company
(Ram Pvt. Ltd). Hence, the contention of the company secretary is correct.

Question 10
ABC Private Ltd. has two wholly owned subsidiary companies, D Private Limited and E Private
Limited. Examine, whether, D Private Limited and E Private Limited will be treated as related party
as per the provisions of the Companies Act, 2013? (PYP 3 Marks , May ’22)
Answer 10
According to section 2(76)(viii) of the Companies Act, 2013, Related party, with reference to a
company, means any body corporate which is -
(A) a holding, subsidiary or an associate company of such company;
(B) a subsidiary of a holding company to which it is also a subsidiary; or
(C) an investing company or the venturer of the company;
In the given Question, D Private Limited and E Private Limited are wholly owned subsidiary companies
of ABC Private Ltd. According to stated clause (B), above, D Private Limited and E Private Limited are
related parties.
However, as per the Notification No. G.S.R. 464(E) dated 5th June, 2015, clause (viii) shall not apply
with respect to section 188 to a private company, though being a related parties.
Alternate Answer
According to section 2(76)(viii)(B) of the Companies Act, 2013, Related party, with reference to a
company, means any body corporate which is a subsidiary of a holding company to which it is also a
subsidiary.
However, Clause (viii) shall not apply with respect to section 188 (Related Party transactions) to a
private company vide Notification No. G.S.R. 464(E) dated 5th June, 2015.
In the given Question, D Private Limited and E Private Limited are wholly owned subsidiary companies
of ABC Private Ltd. According to stated clause (B), above, D Private Limited and E Private Limited are
related parties.
However, as per the mentioned Notification, clause (viii) shall not apply with respect to section 188 to
a private company. Therefore, D Private Limited and E Private Limited are not related parties for the
purpose of section 188.

Question 11
Referring the relevant provisions of the Companies Act, 2013, examine, whether following
companies will be considered as listed company or unlisted company:
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I. ABC Limited, a public company, has listed its non-convertible Debt securities issued on private
placement basis in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
II. CHG Limited, a public company, has listed its non-convertible redeemable preference shares
issued on private placement basis in terms of SEBI (Issue and Listing of Non-Convertible
Redeemable Preference Shares) Regulations, 2013.
III. PRS Limited, a public company, which has not listed its equity shares on a recognized stock
exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified
in sub-section (3) of section 23 of the Companies Act, 2013. (PYP 5 Marks , Nov ‘22)
Answer 11
According to Section 2(52) of the Companies Act, 2013, listed company means a company which has
any of its securities listed on any recognized stock exchange.
RULE 2A: According to Rule 2A of the Companies (Specification of definitions details) Rules, 2014, the
following classes of companies shall not be considered as listed companies, namely: -
(a) Public companies which have not listed their equity shares on a recognized stock exchange but
have listed their –
(i) non-convertible debt securities issued on private placement basis in terms of SEBI (Issue
and Listing of Debt Securities) Regulations, 2008; or
(ii) non-convertible redeemable preference shares issued on private placement basis in
terms of SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares)
Regulations, 2013; or
(iii) both categories of (i) and (ii) above.
(b) Public companies which have not listed their equity shares on a recognized stock exchange but
whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section
(3) of section 23 of the Act.
In view of the above provisions of the Act:
(i) ABC Limited is an unlisted company.
(ii) CHG Limited is an unlisted company.
(iii) PRS Limited is an unlisted company.

Question 12
Cross Limited is a company incorporated under the erstwhile the Companies Act, 1956 while XYZ
Private Limited is a company registered under the Companies Act, 2013. XYZ Private Limited has
issued ₹ 1,00,000 convertible preference shares (carrying right to vote) of ₹ 100 each and 10,00,000
equity shares of ₹ 10 each fully paid. Cross Limited is holding all the preference share and 1,00,000
equity shares of XYZ Private Limited. Examine whether:
(i) The provisions of the Companies Act, 2013 are applicable on Cross Limited?
(ii) XYZ Private Limited is a public company as per the Companies Act, 2013? (MTP 5 Marks Apr’24)
Answer 12
(i) Section 1 of the Companies Act, 2013, provides that the provisions of this Act shall apply to
companies incorporated under this Act or under any previous company law. Hence, the provisions
of the Companies Act, 2013 are also applicable on Cross Limited.
(ii) According to section 2(71) of the Companies Act, 2013, public company means a company which
is not a private company.
Provided that a company which is a subsidiary of a company, not being a private company, shall
be deemed to be public company for the purposes of this Act even where such subsidiary
company continues to be a private company in its articles.
According to section 2(87) of the Companies Act, 2013, "subsidiary company" or "subsidiary", in
relation to any other company (that is to say the holding company), means a company in which
the holding company:
(1) controls the composition of the Board of Directors; or
(2) exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies.
In the given question, total voting power in XYZ Private Limited is:
Particulars Amount in ₹
Convertible Preference Shares (carrying voting rights) 1,00,00,000
Equity Shares 1,00,00,000
Total Voting Power 2,00,00,000
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Cross Limited holds more than one- half of the total voting power
[(₹ 10,00,000 equity shares+ ₹ 1,00,00,000 preference shares)/ ₹ 2,00,00,000]. Therefore, XYZ
Private Limited is a subsidiary of Cross Limited.
Further, in terms of the provisions of section 2(71), XYZ Private Limited being subsidiary of Cross Limited
(a public company), shall also be deemed to be a public company.

Multiple Choice Questions (MCQ’s)

Question 1
A Ltd. is holding 61% shares in B Ltd. and B Ltd. holds 51% in C Ltd. State which is the correct statement
here:
(a) C Ltd. is the holding company to A Ltd.
(b) C Ltd. is the holding company to B Ltd.
(c) B Ltd. is the Subsidiary to C Ltd.
(d) Both B Ltd. and C Ltd. are subsidiary to A Ltd. (MTP 1 Mark , Sep’22)
Answer 1 (d)

Question 2
“Associate company”, in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company
having such influence and includes a joint venture company. Here, the words ‘significant influence’
means:
(a) Control of at least 10% of total voting power
(b) Control of at least 15% of total voting power
(c) Control of at least 20% of total voting power
(d) Control of at least 25% of total voting power (MTP 1 Mark March ‘23)
Answer 2 (c)

Question 3
Such shares which are issued by a company to its directors or employees at a discount or for a
consideration other than cash for working extraordinary hard and achieving desired output is
honoured with:
(a) Equity Shares
(b) Preference Shares
(c) Sweat Equity Shares
(d) Redeemable preference shares (RTP Nov 21)
Answer 3
The Answer is (c)

Question 4
Roma along with her six friends has got incorporated Roma Trading Ltd. in May 2019. She kept the
paid-up share capital at ` 30 lacs. Further, in April 2020, she noticed that in the last financial year, the
turnover of the company was well below ` 2 crores. Advise whether the company can be treated as a
‘small company’.
(a) Roma Trading Ltd. is definitely a ‘small company’ since its paid-up capital is much below ` 50 lacs
and also its turnover has not exceeded the threshold limit of ` 2 crores.
(b) The concept of ‘small company’ is applicable only in case of a private limited company/OPC and
therefore, despite meeting the criteria of ‘small company’ it being a public limited company cannot
enjoy benefits of ‘small company’.
(c) Unlike a private limited company/OPC which automatically becomes a ‘small company’ as soon as
it meets the criteria of ‘small company’, Roma Trading Ltd. being a public limited company has to
maintain the norms applicable to a ‘small company’ continuously for two years so that, thereafter,
it is treated as a ‘small company’.
(d) If all the shareholders of Roma Trading Ltd. give an undertaking to the ROC stating that they will
not let the paid share capital and also turnover exceed the limits applicable to a ‘small company’ in
the next two years, then it can be treated as a ‘small company’. (RTP Nov ’20)

Chapter 1 Preliminary
 1.10

Answer 4
The Answer is (b)

Question 5
A Ltd. is the holding company of B Ltd. Another company C Ltd. is the subsidiary company of B Ltd. Is
there any relationship between A Ltd. and C Ltd.(RTP May ’19)
(a) There is no relationship between A Ltd. and C Ltd.
(b) C Ltd. is deemed to be the subsidiary of A Ltd.
(c) A Ltd. shall be deemed to be the holding company of C Ltd. provided A Ltd. acquires at least 10%
stake in C Ltd.
(d) C Ltd. shall be deemed to be the subsidiary of A Ltd. if the latter company acquires minimum 10%
stake in the former company within six months after C Ltd. becomes subsidiary of B Ltd.
Answer 5
The Answer is (b)

Question 6
A Public company may be formed by:
(a) Only two persons
(b) Not more than three persons
(c) Not more than Seven Persons
(d) Seven or more Persons : (PYP Nov’22)
Answer 6 : (d)

Chapter 1 Preliminary
Paper 3

Taxation
Chapter-wise compilation
of RTPs, MTPs and PYPs

Modified as per Applicable for

new scheme Sept’24 & Jan’25

SAMPLE MATERIAL
Disclaimer:
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HOW TO GET THE BEST OUT OF OUR MATERIAL?
 Frequently Asked Questions
1. Why RTP’s, MTP’s and PYP’s?
RTP’s, MTP’s, and PYP’s are extremely important to ensure that you reproduce ICAI language.
These questions train you to understand what is important and what is expected of you.
At least 41% of questions* are asked from previous RTP’s, MTP’s and PYP’s.

2. What is included?
In this compiler, all questions from the last 3, 5 or 11 attempts depending on the one you have
selected will be available. There will be references to the marks and the attempt from which
they were asked. Identical or similar questions have been removed and references for both
attempts are mentioned.

3. What is the benefit of Chapter-wise?

We have categorized each and every question from all Old RTPs, MTP’s, and PYP’s into
chapters. This means that you don't have to wait until you've completed your entire syllabus
to tackle an RTP, MTP, or past paper. You can start solving these questions to check your
conceptual clarity right after finishing a particular chapter.

4. What does amended for the latest attempt mean?

When we reviewed all the questions from the past 11 attempts of RTP, MTP, and PYP’S, we
didn't just segregate them Chapterwise; we also updated them to reflect the latest provisions.
All the answers provided in the compilation are applicable for the May 2024 examination. So,
there's no need to stress about outdated or incorrect information.

5. How are Old RTP’s, MTP’s & PYP’s beneficial for me?
All old RTPs, MTPs, and PYPs have been organized according to the new syllabus issued by ICAI.
This means that if a specific chapter from the old scheme is not included in the new scheme,
it has been omitted. If a particular chapter in the new scheme is based on concepts from two
or more chapters in the old scheme, it has been adapted to align with how the chapter should
be in the new scheme. If a chapter is only partially included in the new scheme, the questions
related to those specific concepts are only included in the corresponding chapter of the new
scheme. A comprehensive reconciliation of the chapters between the new scheme and the old
scheme is provided on the following page.

6. What if a new attempt is added post my purchase?

If you have purchased materials for the May 2024 attempt, you will receive a file with the
questions segregated Chapterwise specifically for that attempt.

7. What does N/A mean?

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1. No questions from that chapter have been included in the selected attempts.
2. The chapter is newly introduced, and as a result, no questions have been previously asked
in RTP’s, MTP’s, or PYP’s.

*This is on an average based on the last 11 attempts

 Taxa on
Reconcilia on of chapters of the new scheme (May’24) with old course
New Chapter Name as per NEW Syllabus Comparison with
Chapter chapters of Old
No. Scheme
SECTION A: Income Tax Law
1 Basic Concepts Same
2 Residence and Scope of Total Income Same
3 Heads of Income
3.1 Salaries Same
3.2 Income from House Property Same
3.3 Profits and Gains of Business or Profession Same
3.4 Capital Gains Same
3.5 Income from Other Sources Same
4 Income of Other Persons included in Assesse’s Total Same
Income
5 Aggregation of Income, Set-Off and Carry Forward of Same
Losses
6 Deductions from Gross Total Income Same
7 Advance Tax, Tax Deduction at Source and Tax Collection Same
at Source
8 Provisions for filing Return of Income and Self- Same
Assessment
9 Income Tax Liability – Computation and Optimisation Same

SECTION B: Goods & Service Tax

1 GST in India – An Introduction Same
2 Supply under GST Same
3 Charge of GST Same
4 Place of Supply * Not a part of CA inter
syllabus in the old
scheme
5 Exemptions from GST Same
6 Time of Supply Same
7 Value of Supply Same
8 Input Tax Credit Same
9 Registration Same
10 Tax Invoice; Credit and Debit Notes Same
11 Accounts and Records** Not a part of CA inter
syllabus in the old
scheme
12 E-Way Bill ** Not a part of CA inter
syllabus in the old
scheme
13 Payment of Tax Same
14 Tax Deduction at Source and Collection of Tax at Source Not a part of CA inter
*** syllabus in the old
scheme
15 Returns Same

* This chapters were earlier a part of CA Final Paper 8: Indirect Tax in chapter 5
** These chapters were earlier a part of CA Final Paper 8: Indirect Tax in chapter 11
*** This chapters were earlier a part of CA Final Paper 8: Indirect Tax in chapter 12
(second part)
 Table of Contents
Sr. Particulars Page Number
No
Section A
1 Basic Concepts 1.1 – 1.12
2 Residence and Scope of Total Income 2.1 – 2.39
3.1 Salaries 3.1-1 – 3.1- 19
3.2 Income from House Property 3.2-1 – 3.2-16
3.3 Profits and Gains of Business or Profession 3.3-1 – 3.3-30
3.4 Capital Gains 3.4-1 – 3.4-34
3.5 Income from Other Sources 3.5-1 – 3.5-10
4 Income of Other Persons included in Assessee’s Total Income 4.1 - 4.17
5 Aggregation of Income, Set-Off and Carry Forward of Losses 5.1 – 5.41
6 Deductions from Gross Total Income 6.1 – 6.14
7 Advance Tax, Tax Deduction at Source and Tax Collection at 7.1 – 7.32
Source
8 Provisions for filing Return of Income and Self Assessment 8.1 – 8.17
9 Income Tax Liability – Computation and Optimization 9.1 – 9.79
10 Case Scenarios- Direct Tax Laws 10.1- 10.27
Section B
1 GST in India – An Introduction 1.1 – 1.2
2 Supply under GST 2.1 – 2.10
3 Charge of GST 3.1 – 3.15
4 Place of Supply 4.1 – 4.15
5 Exemptions from GST 5.1 – 5.19
6 Time of Supply 6.1 – 6.7
7 Value of Supply 7.1 – 7.30
8 Input Tax Credit 8.1 – 8.36
9 Registration 9.1 – 9.19
10 Tax Invoice; Credit and Debit Notes 10.1 – 10.11
11 Accounts and Records 11.1 – 11.2
12 E-Way Bill 12.1 – 12.8
13 Payment of Tax 13.1 – 13.8
14 Tax Deduction at Source and Collection of Tax at Source 14.1 – 14.8
15 Returns 15.1 – 15.9
16 Case Scenarios – Indirect Tax Laws 16.1 – 16.33

This includes:
MTPs: March’19, April’19, Oct’19, May’20, Oct’20, March’21, April’21, Oct ’21, Nov ’21,
March ’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23,Sep ’23 ,Oct ’23,March’24 &
April ‘24
PYPs: May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec ’21, May’22, Nov ’22, May’23, Nov’23
RTPs: May’19, Nov’19, May’20, Nov’20, May’21, Nov ’21, May ’22, Nov ’22, May ’23, Nov ’23,
May’24
 1.1

Chapter 1
Basic Concepts
Question 1
Compute the tax liability of Ms. Kajal for A.Y. 2024-25, a female resident aged 40 years, where her total
income is ₹2,00,50,000 comprising of business income. Ms. Kajal opts for the provisions of section 115BAC.
(MTP 3 Marks Apr’22)
Answer 1
Computation of tax liability of Ms. Kajal under section 115BAC for the A.Y.2024-25
₹ ₹
(A) Tax payable including surcharge on total income of
₹ 2,00,50,000
Up to ₹ 2,50,000 ₹ 3,00,000 Nil Nil
₹ ₹ 3,00,000 – ₹ 6,00,000 [₹ 3,00,000 @ 5%] 15,000 15,000
₹ 6,00,001 – ₹ 9,00,000 [₹ 3,00,000 @ 10%] 30,000 30,000
₹ 9,00,001 – ₹ 12,00,000 [₹3,00,000 @ 15%] 45,000 45,000
₹ 12,00,001 – ₹ 15,00,000 [₹3,00,000 @ 20%] 60,000 60,000
Above ₹ 15,00,000 @30% 55,65,000
Add: Surcharge @ 25% (since total income exceeds 57,15,000
₹ 2 crore but does not exceed ₹ 5 crore)
14,28,750 71,43,750
(B) Tax payable on total income of ₹ 2 crore [(₹ 15,000 plus
₹ 30,000 plus ₹ 45,000 plus ₹ 60,000 plus ₹ 62,500 plus 65,55,000
₹ 55,50,000) plus surcharge @15%]
(C) Excess tax payable (A)-(B) 5,88,750
(D) Marginal Relief (₹ 5,88,750 – ₹ 50,000, being the amount of 5,38,750
income in excess of ₹ 2,00,00,000)
(E) Tax payable before cess (A – D) 66,05,000
Add: Health and education cess @4% 2,64,200
Tax payable 68,69,200

Alternative Presentation
Computation of tax liability of Ms. Kajal for the A.Y.2024-25
₹ ₹
(A) Tax payable including surcharge on total income of
₹ 2,00,50,000
Upto ₹ 2,50,000 ₹ 3,00,000 Nil Nil
₹ ₹ 3,00,000 – ₹ 6,00,000 [₹ 3,00,000 @ 5%] 15,000 15,000
₹ 6,00,001 – ₹ 9,00,000 [₹ 3,00,000 @ 10%] 30,000 30,000
₹ 9,00,001 – ₹ 12,00,000 [₹3,00,000 @ 15%] 45,000 45,000
₹ 12,00,001 – ₹ 15,00,000 [₹3,00,000 @ 20%] 60,000 60,000
Above ₹ 15,00,000 @30% 55,65,000
Add: Surcharge @ 25% (since total income exceeds 57,15,000
₹ 2 crore but does not exceed ₹ 5 crore)
14,28,750 71,43,750

Chapter 1 Basic Concepts

 1.2

(B) Tax payable on total income of ₹ 2 crore [(₹ 15,000 plus

₹ 30,000 plus ₹ 45,000 plus ₹ 60,000 plus ₹ 62,500 plus 65,55,000
₹ 55,50,000) plus surcharge @15%]
(C) Total income less ₹ 2 crore 50,000
(D) Tax payable on total income of ₹ 2 crore plus excess of total 66,05,000
income over ₹ 2 crore (B + C)
(E) Tax payable: Lower of A and D 66,05,000
Add: Health and education cess @4% 2,64,200
Tax payable 68,69,200
(F) Marginal Relief (A -D) 5,38,750

Question 2 (Includes concepts of Residence & Scope of Total Income)

Miss Deepika, a citizen of India, got married to Mr. John of Australia and left India for the first time on
20.8.2023. She has not visited India again during the P.Y. 2023-24. She has derived the following income for
the year ended 31-3-2024:
Particulars ₹
(i) Income from sale of centrifuged latex processed from rubber plants 1,50,000
grown in Kanyakumari.
(ii) Income from sale of coffee grown and cured in Kodagu, Karnataka 2,00,000
(iii) Income from sale of coffee grown, cured, roasted and grounded in 5,00,000
Colombo. Sale consideration was received in Chennai.
(iv) Income from sale of tea grown and manufactured in West Bengal. 12,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. Basic 2,00,000
operations were not carried out by her on land.
You are required to determine the residential status of Miss Deepika and compute the business income and
agricultural income of Miss. Deepika for the Assessment Year 2024-25. (MTP 7 Marks, Oct’20)
Answer 2
Miss Deepika is said to be resident if she satisfies any one of the following basic conditions:
(i) Has been in India during the previous year for a total period of 182 days or more
(or)
(ii) Has been in India during the 4 years immediately preceding the previous year for a total period of 365
days or more and has been in India for at least 60 days during the previous year.
Miss Deepak’s stay in India during the P.Y.2023-24 is 142 days [30+31+30+31+20] which is less than
182 days. However, her stay in India during the P.Y.2023-24 exceeds 60 days. Since, she+ left India
for the first time, her stay in India during the four previous years prior to P.Y.2023-24 would be more
than 365 days. Hence, she is a resident for P.Y.2023-24.
Further, Miss Deepika would be “Resident and ordinarily resident” in India in during the previous year
2023-24, since her stay in India in the last seven previous years prior to P.Y.2023-24 is more than 730
days and she must be resident in the preceding ten years.
Computation of business income and agricultural income of Miss Deepika for A.Y. 2024-25
Particulars Income Business Agricultural
Income Income
₹ ₹
(I) Income from sale of centrifuged latex processed
from rubber plants grown in Kanyakumari
(Apportioned between business and agricultural 1,50,000 52,500 97,500
income in the ratio of 35:65 as per Rule 7A of
Income-tax Rules, 1962)

Chapter 1 Basic Concepts

 1.3

(ii) Income from sale of coffee grown and cured in

Kodagu, Karnataka
(Apportioned between business and agricultural 2,00,000 50,000 1,50,000
income in the ratio of 25:75, as per Rule 7B (1) of
the Income-tax Rules, 1962)
(iii) Income from sale of coffee grown, cured, roasted
and grounded in Colombo and received in Chennai 5,00,000 5,00,000
[See Note 1 below] -
(iv) Income from sale of tea grown and manufactured
in West Bengal (Apportioned between business 12,00,000 4,80,000 7,20,000
and agricultural income in the ratio of 40:60 as per
Rule 8 of the Income-tax Rules, 1962)
(v) Income from sapling and seedling grown in a
nursery at Cochin. Basic operations were not 2,00,000 - 2,00,000
carried out on land [See Note 2 below]
22,50,000 10,82,500 11,67,500
Notes:
(1) Since MS Deepika is resident and ordinarily resident in India for A.Y. 2024-25, her global income is taxable
in India. Entire income from sale of coffee grown, cured, roasted and grounded in Colombo is taxable as
business income since such income is earned from sale of coffee grown, cured, roasted and grounded
outside India i.e., in Colombo.
(2) As per Explanation 3 to section 2(1A), income derived from sapling or seedlings grown in a nursery would
be deemed to be agricultural income, whether or not the basic operations were carried out on land.
Hence, income of Rs.2,00,000 from sapling and seedling grown in a nursery at Cochin is agricultural
income.

Question 3
Mr. Rana, a resident and ordinarily resident aged 42 years, manufactures rubber from the latex processed
from rubber plants grown in Kerala. Thereafter, he sold the rubber for ₹ 47 lakhs. The cost of growing rubber
plants was ₹ 25 lakhs and the cost of manufacturing rubber was ₹ 7 lakhs. He has no other income during
the previous year 2023-24. Compute his tax liability for the Assessment Year 2024-25. (RTP May’19)
Answer 3
In cases where the assesses himself grows rubber plants and manufactures rubber processed from latex
obtained from rubber plants in India, then, as per Rule 7A, 35% of profit on sale of rubber is taxable as
business income under the head “Profits and gains from business or profession”, and the balance 65% is
agricultural income, which is exempt from tax.
Profits from manufacture and sale of rubber processed from latex = ₹ 47 lakhs – ₹ 25 lakhs – ₹ 7 lakhs = ₹ 15
lakhs
Agricultural Income = 65% of ₹ 15 lakhs = ₹ 9.75 lakhs
Business Income = 35% of ₹ 15 lakhs = ₹ 5.25 lakhs.
The tax liability of Mr. Rana has to be computed applying the concept of partial integration, since his total
income comprises of both agricultural income and non- agricultural income and his agricultural income
exceeds ₹ 5,000 p.a and his non- agricultural income exceeds the basic exemption limit i.e., ₹ 2,50,000
(applicable, in his case). Accordingly, his tax liability would be computed in the following manner:
Computation of tax liability of Mr. Rana for the A.Y. 2024-25
Particulars ₹
Tax on total income of ₹ 15,00,000, being agricultural income and non-agricultural income 2,62,500
Less: Tax on agricultural income and basic exemption limit i.e., ₹ 12,25,000 [₹ 9,75,000 1,80,000
plus ₹ 2,50,000]
82,500
Add: Health and Education cess@4% 3,300
Total Tax liability 85,800
Chapter 1 Basic Concepts
 1.4

Question 4
Explain with brief reasons, whether the following income can be regarded as agricultural income, as per the
provisions of the Income-tax Act, 1961:
(i) Rent received for letting out agricultural land for a movie shooting.
(ii) Income from sale of seedlings in a nursery adjacent to the agricultural lands owned by an assesses.
(RTP Nov ’20)
Answer 4
i) Rent received for letting out agricultural land for a movie shooting:
As per section 2(1A), “agricultural income” means, inter alia,
• any rent or revenue derived from land
• which is situated in India and is used for agricultural purposes.
In the present case, rent is being derived from letting out of agricultural land for a movie shoot, which
is not an agricultural purpose and hence, it does not constitute agricultural income.
ii) Income from sale of seedlings in a nursery:
As per Explanation 3 to section 2(1A), income derived from saplings or seedlings grown in a nursery is
deemed to be agricultural income, whether or not the basic operations were carried out on land.
Therefore, the amount received from sale of seedlings in a nursery adjacent to the agricultural lands
owned by the assesses constitutes agricultural income.

Question 5
Mr. Rajat Saini, aged 32 years, furnishes the following details of his total income for the A.Y. 2024-25:
Income from Salaries 27,88,000
Income from House Property (Computed) 15,80,000
Interest Income from FDR's 7,22,000
He has not claimed any deduction under Chapter VI-A. You are required to compute tax liability of Mr. Rajat
Saini as per the provisions of Income-tax Act, 1961. Assume that he has not opted for 115BAC. (PYP 5 Marks,
Nov’18, PYP May ’20)
Answer 5
Computation of tax liability of Mr. Rajat Saini for the A.Y. 2024-25
Particulars ₹ ₹
Income from Salaries 27,88,000
Income from house property (computed) 15,80,000
Interest income from FDR’s 7,22,000
Total Income 50,90,000
Tax Liability
(A) Tax payable including surcharge on total income of ₹ 50,90,000
Upton ₹ 2,50,000 Nil
₹ 2,50,001 – ₹ 5,00,000 @ 5% 12,500
₹ 5,00,001 – ₹ 10,00,000 @ 20% 1,00,000
₹ 10,00,001 – ₹ 50,90,000 @30% 12,27,000
13,39,500
Add: Surcharge @ 10%, since total income exceeds ₹ 50 lakhs but does 1,33,950 14,73,450
not exceed ₹ 1 crore.
(B) Tax Payable on total income of ₹ 50 lakhs (₹ 12,500 plus 13,12,500
₹ 1,00,000 plus ₹ 12,00,000, being 30% of ₹ 40,00,000)
Chapter 1 Basic Concepts
 1.5

(C) Excess tax payable (A)-(B) 1,60,950

(D) Marginal Relief (₹ 1,60,950 – ₹ 90,000, being the amount of 70,950
income in excess of ₹ 50,00,000)
Tax payable (A)-(D) [ ₹ 14,73,450 – ₹ 70,950] 14,02,500
Add: Education cess@1% and SHEC@2% 42,075
Add: EC & SHEC @ 4% 56,100
Tax Liability 14,58,600
Tax Liability (Rounded off) 14,58,600

Question 6
Mr. X a resident, aged 56 years, till recently was a successful businessman filing his return of incomes
regularly and promptly ever since he obtained PAN card. During the COVID- Pandemic period his business
suffered severely and he incurred huge losses. He was not able to continue his business and finally on 1st
January, 2024 he decided to wind-up his business which he also promptly intimated to the jurisdictional
Assessing Officer about the closure of his business.
The Assessing Officer sent him a notice to tax income of A.Y. 2024-25 during the A.Y. 2023-24 itself. Does
the Assessing Officer have the power to do so? Are there any exceptions to the general rule “Income of the
previous year is assessed in the assessment year following the previous year”? (PYP 4 Marks Nov‘22)
Answer 6
Yes, he has the power to do so.
Since the business of Mr. X is discontinued on 1st January, 2024, the income of the period from 1.4.2023 to
1.1.2024 may, at the discretion of the Assessing Officer, be charged to tax in A.Y.2024-25 itself.
Following are the other exceptions to the general rule “Income of the previous year is assessed in the
assessment year following the previous year” i.e., the income of the previous year is assessed in the
previous year itself.
(i) Shipping business of non-resident
(ii) Persons leaving India with no present intention of returning
(iii) AOP/BOI/Artificial Juridical Person formed for a particular event or purpose and likely to be
dissolved
(iv) Persons likely to transfer property to avoid tax.

Question 7
The assesses is found to be the owner of the gold (market value of which is ₹ 50,00,000) during the financial
year ending 31-03-2024 but he recorded to have spent ₹ 10,00,000 in acquiring the same. Explain how the
Assessing Officer will deal with the issue. (PYP 2 Marks May’22)
Answer 7
As per section 69B, if the assesses is found to be the owner of gold (market value of which is ₹ 50 lakhs)
during the financial year ending 31.3.2024 but he has recorded to have spent only ₹ 10 lakhs in acquiring it,
the Assessing Officer can add the difference of the market value of such gold and ₹ 10 lakhs i.e., ₹ 40 lakhs
as the income of the assesses for A.Y.2024-25, if the assesses offers no satisfactory explanation thereof.
Such income would be chargeable to tax@78% (@60% plus surcharge @25% and cess @4%).

Question 8
Examine with reasons whether the following statements are correct/incorrect with regard to the provisions
of Income-tax Act, 1961: Cash credit of ₹ 1,50,000 were traced in the books of accounts of Mr. Yogesh for
which no explanation about its source was provided. Such income is taxable @30% under section 115BB in
the hands of Yogesh. (RTP Nov‘23)
Answer 8
The statement is incorrect.
Unexplained cash credit is taxable @ 60% plus surcharge @25% plus cess @4% under section 115BBE.

Chapter 1 Basic Concepts

 1.6

Question 9
Discuss the taxability of the following transactions giving reasons, in the light of relevant provisions, for
your conclusion. Attempt any two out of the following three parts:
(i) Mr. Rajpal took a land on rent from Ms. Shilpa on monthly rent of ₹ 10,000. He sub- lets the land to Mr.
Manish for a monthly rent of ₹ 11,500. Manish uses the land for grazing of cattle required for agricultural
activities. Mr. Rajpal wants to claim deduction of ₹ 10,000 (being rent paid by him to Ms. Shilpa) from
the rental income received by it from Mr. Manish.
(ii) Mr. Netram grows paddy on land. He then employs mechanical operations on grain to make it fit for
sale in the market, like removing hay and chaff from the grain, filtering the grain and finally packing the
rice in gunny bags. He claims that entire income earned by him from sale of rice is agricultural income
not liable to income- tax since paddy as grown on land is not fit for sale in its original form.
(PYP 4 Marks, Jan’21)
Answer 9
(i) The rent or revenue derived from land situated in India and used for agricultural purposes would be
agricultural income under section 2(1A) (a). Therefore, rent received from sub-letting of the land used for
grazing of cattle required for agriculture activities is agricultural income. The rent can either be received
by the owner of the land or by the original tenant from the sub-tenant.
Accordingly, rent received by Mr. Rajpal from Mr. Manish for using land for grazing of cattle required for
agricultural activities is agricultural income exempt u/s 10(1). As per section 14A, no deduction is allowable
in respect of exempt income.
(ii) The income from the process ordinarily employed to render the produce fit to be taken to the market
would be agricultural income under section 2(1A) (b)(ii). The process of making the rice ready from paddy
for the market may involve manual l operations or mechanical operations, both of which constitute
processes ordinarily employed to make the product fit for the market.
Accordingly, the entire income earned by Mr. Netram from sale of rice is agricultural income.

Question 10
Mr. Avani, a resident aged 25 years, manufactures tea leaves from the Tea plants grown by him in India.
These are then sold in the India market for ₹ 40 lakhs. The cost of growing tea plants was ₹ 15 lakhs and the
cost of manufacturing tea leaves was ₹ 10 lakhs.
Compute her tax liability for the Assessment Year 2024-25. (PYP 7 Marks, May’18)
Answer 10
Computation of tax liability of Ms. Avani for the A.Y. 2024-25
In cases where the assesse himself grows tea leaves and manufactures tea in India, then, as per Rule 8 of
40% of profit on sale of tea is taxable as business income under the head “Profits and gains from business
or profession”, and the balance 60% is agricultural income, which is exempt from tax.
Profits from manufacture and sale of tea = ₹ 40 lakhs – ₹ 15 lakhs – ₹ 10 lakhs = ₹ 15 lakhs
Agricultural Income = 60% of ₹ 15 lakhs = ₹ 9 lakhs
Business Income = 40% of ₹ 15 lakhs = ₹ 6 lakhs.
The tax liability of Ms. Avani has to be computed applying the concept of partial integration, since her total
income comprises of both agricultural income and non-agricultural income and her agricultural income
exceeds ₹ 5,000 p.an and her non-agricultural income exceeds the basic exemption limit i.e., ₹ 2,50,000
(applicable, in her case).
Accordingly, her tax liability would be computed in the following manner:
Particulars ₹
Tax on total income of ₹ 15,00,000, being agricultural income and non-agricultural income 2,62,500
Less: Tax on agricultural income and basic exemption limit i.e.,
₹11,50,000 [₹ 9,00,000 plus ₹ 2,50,000] 1,57,500
1,05,000
Chapter 1 Basic Concepts
 1.7

Add: Education cess@2% 2,100

Secondary & higher education cess@1% 1,050
Add: EC & SHEC @ 4% (as per amendment) 4,200
Total Tax liability 1,09,200

Question 11
Mr. Kabra is engaged in the business of growing and curing (further processing) coffee in the state of
Karnataka. The whole of coffee grown in his plantation is cured. Relevant information pertaining to the year
ended 31-03-2024 are given hereunder:
PARTICULARS AMOUNT ₹
Opening balance of the car as on 01-04-2023 3,00,000
Opening balance of machinery as on 01-04-2023 15,00,000
Expenses incurred in growing coffee 3,10,000
Expenses of curing coffee 3,00,000
Sale value of cured coffee 22,00,000
The car is used for the agricultural operations and the machine was used for coffee curing business
operations. Compute the income arising from the above activities for the assessment year 2024-25 and the
written down value as on 01-04-2024 (WDV as on 31-03-2024 less depreciation for the P.Y. 2023-24).
(PYP 4 Marks, May’22)
Answer 11
Computation of Income from growing and curing coffee of Mr. Kabra for A.Y. 2024-25
Particulars Amount Amount
(₹) (₹)
Income from growing and curing coffee
Sale value of cured coffee 22,00,000
Less: Expenses incurred in growing coffee 3,10,000
Depreciation on Car (15% of ₹ 3,00,000) 45,000
3,55,000
Less: Expenses of curing coffee 3,00,000 18,45,000
Depreciation on machinery (15% of ₹ 15,00,000) 2,25,000 5,25,000
13,20,000
Business Income [25% of ₹ 13,20,000] 3,30,000
Agricultural Income [75% of ₹ 13,20,000] 9,90,000
Computation of Written Down Value as on 1.4.2024
Opening balance of Car as on 1.4.2023 3,00,000
Less: Depreciation@15% on ₹ 3 lakh 45,000
WDV of car as on 1.4.2024 2,55,000
Opening balance of machinery as on 1.4.2023 15,00,000
Less: Depreciation @15% on ₹ 15 lakh 2,25,000
WDV of machinery as on 1.4.2024 12,75,000

Question 12
Mr. Jay is having total income of ₹ 6,90,000 during the P.Y. 2023-24 consisting of Income from business of
₹ 40,000, lottery winnings (gross) ₹ 5,60,000, income by way of salary (computed) ₹ 1,20,000 and loss from
house property ₹ 30,000. Compute his tax liability and advance tax obligations for A.Y. 2024-25.
(MTP 4 Marks, Oct’21)

Chapter 1 Basic Concepts

 1.8

Answer 12
Computation of tax liability and advance tax obligations of Mr. Jay for A.Y. 2024-25
Particulars ₹ ₹
Income from salary (computed) 1,20,000
Less: Set-off loss from house property (30,000) 90,000
Loss from house property 30,000
Less: Set-off against salary income (30,000) -
Income from business 40,000
Lottery winning 5,60,000
Total Income 6,90,000
Tax liability
Tax @30% on lottery income 1,68,000
Tax on other income of ₹ 1,30,000 (Nil, since it does not -
exceed the basic exemption limit of ₹ 2,50,000)
1,68,000
Add: Health and education cess@4% 6,720
Total tax liability 1,74,720
Less: TDS on lottery income under section 194B 1,68,000
Net tax payable 6,720
Since tax payable for the P.Y. 2023-24 is less than ₹ 10,000, Mr. Jay is not
liable to pay advance tax.

MULTIPLE CHOICE QUESTIONS (MCQS)

1. XYZ LLP falls under which category of person?

(a) Firm
(b) Company
(c) Association of persons
(d) Artificial judicial person (MTP 1 Mark, May’20)
Ans :(a)

2. Under the provisions of the Income-tax Act, 1961, the term “Person” would not include:
(a) A body corporate incorporated in a country outside India
(b) A Limited Liability Partnership (LLP)
(c) Indian branch of a foreign company
(d) A local authority (MTP 1 Mark, Apr’19)
Ans :(c)

3. (Also includes concepts of Income Which Do Not Form a Part of Total Income)
Mr. Devansh has agricultural income of Rs.2,30,000 and business income of Rs.2,45,000. Which of the
following statements are correct?
(a) Agricultural income has to be aggregated with business income for tax rate purposes.
(b) No aggregation is required since agricultural income is less than basic exemption limit.
(c) No aggregation is required since business income is less than basic exemption limit.
(d) Agricultural income is exempt under section 10(1) but the same has to be aggregated with
business income, since it exceeds Rs. 5,000. (MTP 1 Mark, Mar’19)
Ans: (c)

Chapter 1 Basic Concepts

 1.9

4. Miss Nisha (68 years) is a resident individual. For the Assessment Year 2024-25, she has following income:
Long-term capital gain on transfer of equity shares Rs.1,80,000
(Securities Transaction Tax has been paid on acquisition and transfer of the said shares)
Other income Rs.2,75,000.
Calculate the tax liability of Miss Nish for Assessment Year 2024-25. Assume that she has not opted for
115BAC.
(a) Nil
(b) Rs. 5670
(c) Rs. 5,720
(d) Rs. 8,320 (MTP 2 Marks, Nov’21)
Ans: (c)

5. Mr. Ashutosh, aged 65 years and a resident in India, has a total income of ₹ 3,20,00,000, comprising long
term capital gain taxable under section 112 of ₹ 57,00,000, long term capital gains taxable under section
112A of ₹ 65,00,000 and other income of ₹ 1,98,00,000. What would be his tax liability for A.Y. 2024-25.
Assume that Mr. Ashutosh has not opted for the provisions of section 115BAC.
(a) ₹ 90,05,880
(b) ₹ 97,25,690
(c) ₹ 97,34,400
(d) ₹ 97,22,440 (MTP 2 Marks, Oct’21)
Ans: (d) Answer is amended to (a)

6. During the P.Y.2023-24, Mr. Rohan has ₹ 80 lakhs of short-term capital gains taxable u/s 111A, ₹ 70 lakhs
of long-term capital gains taxable u/s 112A and business income of ₹ 2.90 crores. Which of the following
statements is correct?
(a) Surcharge@25% is leviable on income-tax computed on total income of ₹ 4.40 crores
(b) Surcharge@15% is leviable on income-tax computed on total income of ₹ 4.40 crore
(c) Surcharge@15% is leviable in respect of income-tax computed on capital gains of ₹ 1.50 crore; in
respect of business income of ₹ 2.90 crores, surcharge is leviable@25% on income-tax
(d) Surcharge@15% is leviable in respect of income-tax computed on capital gains of ₹ 1.50 crore; in
respect of business income of ₹ 2.90 crores, surcharge is leviable@37% on income-tax
(MTP 2 Marks, Sep’22)
Ans: (c)

7. Mr. Ashish’s total income comprises of long-term capital gains on sale of land ₹ 5 lakhs; short-term capital
gains on sale of STT paid listed equity shares ₹ 2 lakhs; income from lottery ₹ 1 lakh and savings bank
interest ₹ 30,000. He invests ₹ 1.50 lakhs in PPF. His tax liability for A.Y.2024-25, assuming that he is a
resident Indian of the age of 40 years and does not opt for the provisions of section 115BAC, is –
(a) ₹ 1,64,800
(b) ₹ 1,66,400
(c) ₹ 1,14,400
(d) ₹ 1,13,300 (MTP 2 Marks, Oct’22)
Ans: (c)

8. The Gupta HUF in Maharashtra comprises of Mr. Harsh Gupta, his wife Mrs. Nidhi Gupta, his son Mr.
Deepak Gupta, his daughter-in-law Mrs. Deepti Gupta, his daughter Miss Preeti Gupta. Which of the
members of the HUF are eligible for coparcenary rights?
(a) Only Mr. Harsh Gupta and Mr. Deepak Gupta
(b) Only Mr. Harsh Gupta, Mr. Deepak Gupta and Miss Preeti Gupta
(c) Only Mr. Harsh Gupta, Mr. Deepak Gupta, Mrs. Nidhi Gupta and Mrs. Deepti Gupta
(d) All the members are co-parceners (MTP 1 Mark, Mar‘23)
Ans: (b)

Chapter 1 Basic Concepts

 1.10

9. Sham Singh spends ₹ 1,00,000 on cultivation and harvesting of his agricultural produce. 50% of the
production is sold for ₹1,10,000 and rest is stored for self-consumption. What is the amount of the
agricultural income?
(a) Rs. 60,000
(b) Rs. 1,10,000
(c) Rs.1,20,000
(d) Rs. 1,00,000 (MTP 2 Marks, Oct’20)
Ans: (a)

10. Which of the following incomes are exempt incomes as per the provisions of Income-tax Act, 1961?
(i) Allowance paid by Government to a citizen of India for rendering services outside India
(ii) Death-cum-retirement gratuity received by a government employee
(iii) Any sum received under a life insurance policy taken on 01.05.2023, if the premium payable
for any of the years exceeds 10% of the actual capital sum assured.
(iv) Any payment from National Pension System Trust to an employee on account of closure of
his NPS account.
(a) (I), (ii), (iii), (iv)
(b) (I) & (ii)
(c) (I), (ii) & (iv)
(d) (ii) & (iv) (MTP 1 Mark, Oct’19)
Ans: (b)

11. Which of the following statements is/are true in respect of taxability of agricultural income under the
Income-tax Act, 1961?
(i) Any income derived from saplings or seedlings grown in a nursery is agricultural income exempt
from tax u/s 10(1).
(ii) 60% of dividend received from shares held in a tea company is agricultural income exempt from
tax u/s 10(1).
(iii) While computing income tax liability of an Assesses aged 50 years, agricultural income is required
to be added to total income only if net agricultural income for the P.Y. exceeds Rs. 5,000 and the
total income (including net agricultural income) exceeds Rs.2,50,000.
(iv) While computing income tax liability of an Assesses aged 50 years, agricultural income is required
to be added to total income only if net agricultural income for the P.Y. exceeds Rs. 5,000 and the
total income (excluding net agricultural income) exceeds Rs.2,50,000.
Choose from the following options:
(a) (I) and (iii)
(b) (ii) and (iii)
(c) (I) and (iv)
(d) (I), (ii) and (iv) (MTP 2 Marks, Oct’19)
Ans: (c)

12. Income derived from farm building situated in the immediate vicinity of an agricultural land (not assessed
to land revenue) would be treated as agricultural income if such land is situated in –
(a) an area at a distance of 3 kms from the local limits of a municipality and has a population of 80,000 as
per last census
(b) an area within 1.5 kms from the local limits of a municipality and has a population of 12,000 as per
last census
(c) an area within 2 kms from the local limits of a municipality and has a population of 11,00,000 as per
last census
(d) an area within 8 kms from the local limits of a municipality and has a population of 10,50,000 as per
last census (MTP 1 Mark Mar‘23)
Ans: (a)
Chapter 1 Basic Concepts
 1.11

13. Mr. Ajay is a recently qualified doctor. He joined a reputed hospital in Delhi on 01.01.2024. He earned
total income of ₹ 3,40,000 till 31.03.2024. His employer advised him to claim rebate u/s 87A while filing
return of income for A.Y. 2024-25. Assume that he does not opt for 115BAC. He approached his father to
enquire regarding what is rebate u/s 87A of the Act. His father told him:
(i) An individual who is resident in India and whose total income does not exceed ₹ 3,50,000 is entitled to
claim rebate under section 87A.
(ii) An individual who is resident in India and whose total income does not exceed ₹ 5,00,000 is entitled to
claim rebate under section 87A.
(iii) Maximum rebate allowable under section 87A is ₹ 5,000.
(iv) Rebate under section 87A is available in the form of exemption from total income.
(v) Maximum rebate allowable under section 87A is ₹ 2,500.
(vi) Rebate under section 87A is available in the form of deduction from tax liability.
As a tax expert, do you agree with the explanation given by Mr. Ajay’s father? Choose the correct option
from the following:
(a) (ii), (iii), (vi)
(b) (i), (v), (vi)
(c) (ii), (iii), (iv)
(d) (i), (iv), (v)
(e) (ii) (v)(vi) (RTP May’19)

Ans: (As per amendment the answer is (e) as the Rebate is now available an individual who is resident in India and
whose total income does not exceed ₹ 5,00,000 and Maximum rebate allowable under section 87A is ₹ 12,500)

14. During the P.Y.2023-24, Mr. Ranjit has short-term capital gains of ₹ 95 lakhs taxable under section 111A,
long-term capital gains of ₹ 110 lakhs taxable under section 112A and business income of ₹ 90 lakhs.
Which of the following statements is correct?
(a) Surcharge@25% is leviable on income-tax computed on total income of ₹ 2.95 crore, since total income
exceeds ₹ 2 crore.
(b) Surcharge@15% is leviable on income-tax computed on total income of ₹ 2.95 crore.
(c) Surcharge@15% is leviable in respect of income-tax computed on capital gains of ₹ 2.05 crore; in respect
of business income, surcharge is leviable@25% on income- tax, since total income exceeds ₹ 2 crore.
(d) Sucharge@15% is leviable in respect of income-tax computed on capital gains of ₹ 2.05 crore;
surcharge@10% is leviable on income-tax computed on business income, since the same exceeds ₹ 50
lakhs but is less than ₹ 1 crore. (RTP Nov’19)
Ans: (b)

15. Mr. Ajay is found to be the owner of two gold chains of 50 gms each (market value of which is ₹ 1,45,000
each) during the financial year ending 31.3.2024 but he could offer satisfactory explanation for ₹ 50,000
spent on acquiring these gold chains. As per section 115BBE, Mr. Ajay would be liable to pay tax of –
(a) ₹ 1,87,200
(b) ₹ 2,26,200
(c) ₹ 1,49,760
(d) ₹ 1,80,960 (RTP May’20)
Ans: (a)

16. Mr. Rishabh, aged 65 years and a resident in India, has a total income of ₹4,50,00,000, comprising long
term capital gain taxable under section 112 of ₹ 85,00,000, long term capital gain taxable under section
112A of ₹ 75,00,000 and other income of ₹ 2,90,00,000. What would be his tax liability for A.Y. 2024-25.
Assume that Mr. Rishabh has opted for the provisions of section 115BAC.
(RTP May ’23, MTP 2 Marks Sep ’23)
(a) ₹ 1,41,40,750
(b) ₹ 1,38,86,990
Chapter 1 Basic Concepts
 1.12

(c) ₹ 1,38,84,390
(d) ₹ 1,39,81,240
Ans: (b) (As per amendment in the tax structure as per 115BAC the answer will be none of them it is Rs 1,38,50,200)

17. Mr. Anay (aged 25) has an agricultural income of ₹ 2,10,000 and business income of ₹ 2,35,000. Which of
the following statement is correct?
(a) Agricultural income always has to be aggregated with business income for rate purposes
(b) No aggregation is required since business income which constitutes his total income, is less than basic
exemption limit
(c) No aggregation is required since agricultural income is less than basic exemption limit
(d) Agricultural income is exempt under section 10(1) but the same has to be aggregated with business
income, since it exceeds ₹ 5,000. (RTP May’19)
Ans: (b)

18. Mr. A has taken two ULIPs. ULIP “X” is issued on 1.1.2023 and ULIP “Y” on 1.5.2023. The sum assured of
ULIP “X” and ULIP “Y” is ₹ 30 lakhs and ₹ 40 lakhs, respectively. The annual premium paid by Mr. A during
the P.Y. 2023-24 is ₹ 3 lakhs and ₹ 4 lakhs, respectively. What would be the taxability of the consideration
received by Mr. A on maturity of both the ULIPs?
(a) Consideration received on the maturity of ULIP “X” would be exempt u/s 10(10D) while the profits
and gains from receipt of consideration on the maturity of ULIP “Y” would be taxable.
(b) Consideration received on the maturity of ULIP “Y” would be exempt u/s 10(10D) while the profits
and gains from receipt of consideration on the maturity of ULIP “X” would be taxable.
(c) Consideration received on the maturity of both ULIP “X” and ULIP “Y” would be exempt u/s 10(10D)
(d) The profits and gains from receipt of consideration on the maturity of both ULIP “X” and ULIP “Y”
would be taxable. (RTP May ’22)
Ans: (a)

19. Mr. Garg, aged 45 years and a resident in India, is having a total income of ₹ 5,70,000 comprising of long
term capital gains taxable under section 112 of ₹ 70,000, long term capital gains taxable under section 112A
of ₹ 1,50,000, short term capital gains taxable under section 111A of ₹ 1,00,000 and other income of ₹
2,50,000. Compute his tax liability for A.Y. 2024-25 under the default tax regime under section 115BAC.
a) Nil
b) ₹ 5,200
c) ₹ 9,360
d) ₹ 19,760 (RTP May ‘24)
Ans : (b)

20. Mr. X, a resident 47 years, has salary income (computed) of ₹ 7,25,000 and agricultural income of ₹
1,00,000 for the P.Y. 2023-24. Compute his tax liability for A.Y. 2024-25 if he is paying tax under default
tax regime under section 115BAC.
(a) ₹ 26,000
(b) ₹ 33,800
(c) Nil
(d) ₹ 30,160 (MTP 1 Mark April ‘24)
Ans 20 : (a)

Chapter 1 Basic Concepts

Paper 4
Cost &
Management
Accounting
Chapter-wise compilation
of RTP, MTP and PYP

Modified as per Applicable for

new scheme Sept’24 & Jan’25

SAMPLE MATERIAL
Disclaimer:
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HOW TO GET THE BEST OUT OF OUR MATERIAL?
 Frequently Asked Questions
1. Why RTP’s, MTP’s and PYP’s?
RTP’s, MTP’s, and PYP’s are extremely important to ensure that you reproduce ICAI language.
These questions train you to understand what is important and what is expected of you.
At least 41% of questions* are asked from previous RTP’s, MTP’s and PYP’s.

2. What is included?
In this compiler, all questions from the last 3, 5 or 11 attempts depending on the one you have
selected will be available. There will be references to the marks and the attempt from which
they were asked. Identical or similar questions have been removed and references for both
attempts are mentioned.

3. What is the benefit of Chapter-wise?

We have categorized each and every question from all Old RTPs, MTP’s, and PYP’s into
chapters. This means that you don't have to wait until you've completed your entire syllabus
to tackle an RTP, MTP, or past paper. You can start solving these questions to check your
conceptual clarity right after finishing a particular chapter.

4. What does amended for the latest attempt mean?

When we reviewed all the questions from the past 11 attempts of RTP, MTP, and PYP’S, we
didn't just segregate them Chapterwise; we also updated them to reflect the latest provisions.
All the answers provided in the compilation are applicable for the May 2024 examination. So,
there's no need to stress about outdated or incorrect information.

5. How are Old RTP’s, MTP’s & PYP’s beneficial for me?
All old RTPs, MTPs, and PYPs have been organized according to the new syllabus issued by ICAI.
This means that if a specific chapter from the old scheme is not included in the new scheme,
it has been omitted. If a particular chapter in the new scheme is based on concepts from two
or more chapters in the old scheme, it has been adapted to align with how the chapter should
be in the new scheme. If a chapter is only partially included in the new scheme, the questions
related to those specific concepts are only included in the corresponding chapter of the new
scheme. A comprehensive reconciliation of the chapters between the new scheme and the old
scheme is provided on the following page.

6. What if a new attempt is added post my purchase?

If you have purchased materials for the May 2024 attempt, you will receive a file with the
questions segregated Chapterwise specifically for that attempt.

7. What does N/A mean?

It could mean any of the following:
1. No questions from that chapter have been included in the selected attempts.
2. The chapter is newly introduced, and as a result, no questions have been previously asked
in RTP’s, MTP’s, or PYP’s.

*This is on an average based on the last 11 attempts

 Cost and Management Accoun ng
Reconcilia on of chapters of the new scheme (May’24) with old course
New Chapter Name as per NEW Syllabus Paper No. as per
Chapter Old Course
No.
1 Introduction to Cost and Management Accounting Same
2 Material Cost Same
3 Employee Cost and Direct Expenses Same
4 Overheads – Absorption Costing Method Same
5 Activity Based Costing Same
6 Cost Sheet Same
7 Cost Accounting Systems Same
8 Unit & Batch Costing Same
9 Job Costing Same
10 Process & Operation Costing Same
11 Joint Products and By Products Same
12 Service Costing Same
13 Standard Costing Same
14 Marginal Costing Same
15 Budgets and Budgetary Control Same

Note:
Contract Cos&ng as per the Old Syllabus has been removed in the New Syllabus.
 Table of Contents
Sr. Particulars Page
No Number
1 Introduction to Cost and Management Accounting 1.1 – 1.11
2 Material Cost 2.1 – 2.31
3 Employee Cost and Direct Expenses 3.1 – 3.28
4 Overheads – Absorption Costing Method 4.1 – 4.38
5 Activity Based Costing 5.1 – 5.47
6 Cost Sheet 6.1 – 6.36
7 Cost Accounting Systems 7.1 -7.25
8 Unit & Batch Costing 8.1 – 8.12
9 Job Costing 9.1 – 9.11
10 Process & Operation Costing 10.1 – 10.35
11 Joint Products and By Products 11.1 – 11.21
12 Service Costing 12.1 – 12.42
13 Standard Costing 13.1 – 13.32
14 Marginal Costing 14.1 – 14.41
15 Budgets and Budgetary Control 15.1 – 15.33
16 Case Scenarios 16.1 – 16.11

MTPs: March’19, April’19, Oct’19, May’20, Oct’20, March’21, April’21, Oct ’21,
Nov ’21, March ’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23, Sep ’23
Oct ’23, March’24 & April ‘24
PYPs: May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec ’21, May’22, Nov ’22, May’23,
Nov’23
RTPs: May’19, Nov’19, May’20, Nov’20, May’21, Nov ’21, May ’22, Nov ’22,
May ’23, Nov ’23, May’24
 1.1

Chapter 1
Introduction to Cost and Management Accounting
Question 1
“Technology has played a significant role in cost accounting enabling business to automate their
process.”
EXPLAIN the impact of Information Technology in Cost Accounting in the light of above statement.
(MTP 5 Marks Mar’24)
Or
Discuss the impact of Information Technology in Cost Accounting.
(RTP May ’24, May’22 & May ’20,MTP 5 Marks March ’19 & April ’23 & Sep ‘23, PYP 5 Marks Jan ’21)
Answer 1
The impact of IT in cost accounting may include the followings:
(i) After the introduction of ERPs, different functional activities get integrated and as a consequence
a single entry into the accounting system provides custom made reports for every purpose and
saves an organisation from preparing different sets of documents. Reconciliation process of results
of both cost and financial accounting systems become simpler and less sophisticated.
(ii) A move towards paperless environment can be seen where documents like Bill of Material, Material
Requisition Note, Goods Received Note, labour utilisation report etc. are no longer required to be
prepared in multiple copies, the related department can get e-copy from the system.
(iii) Information Technology with the help of internet (including intranet and extranet) helps in resource
procurement and mobilisation. For example, production department can get materials from the
stores without issuing material requisition note physically. Similarly, purchase orders can be
initiated to the suppliers with the help of extranet. This enables an entity to shift towards Just-in-
Time (JIT) approach of inventory management and production.
(iv) Cost information for a cost centre or cost object is ascertained with accuracy in timely manner. Each
cost centre and cost object is codified and all related costs are assigned to the cost object or cost
centre. This process automates the cost accumulation and ascertainment process. The cost
information can be customised as per the requirement. For example, when an entity manufactures
or provide services, it can know information job-wise, batch-wise, process-wise, cost centre wise
etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with the help of IT. ERP
software plays an important role in bringing uniformity irrespective of location, currency, language
and regulations.
(vi) Cost and revenue variance reports are generated in real time basis which enables the management
to take control measures immediately.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or service activity closely
to eliminate non-value- added activities.
The above are examples of few areas where Cost Accounting is done with the help of IT.

Question 2
State the limitations of cost and management accounting. (MTP Oct ’18 5 Marks, RTP Nov’21)
Answer 2
Like other branches of accounting, cost and management accounting is also having certain limitations.
The limitations of cost and management accounting are as follows:
1. Expensive: It is expensive because analysis, allocation and absorption of overheads require
considerable amount of additional work, and hence additional money.
2. Requirement of Reconciliation: The results shown by cost accounts differ from those shown by
financial accounts. Thus Preparation of reconciliation statements is necessary to verify their accuracy.
3. Duplication of Work: It involves duplication of work as organization has to maintain two sets of
accounts i.e. Financial Account and Cost Account.
4. Inefficiency: Costing system itself does not control costs but its usage does.

Question 3
DISCUSS the steps to be followed to exercise control over cost. (MTP 5 Marks Oct’20)

Chapter 1 Introduction to Cost and Management Accounting

 1.2

Answer 3
To exercise control over cost, following steps are followed:
(i) Determination of pre-determined standard or results: Standard cost or performance targets for a
cost object or a cost centre is set before initiation of production or service activity. These are desired
cost or result that need to be achieved.
(ii) Measurement of actual performance: Actual cost or result of the cost object or cost centre is
measured. Performance should be measured in the same manner in which the targets are set i.e. if
the targets are set up operation-wise, and then the actual costs should also be collected and measured
operation-wise to have a common basis for comparison.
(iii) Comparison of actual performance with set standard or target: The actual performance so measured
is compared against the set standard and desired target. Any deviation (variance) between the two is
noted and reported to the appropriate person or authority.
(iv) Analysis of variance and action: The variance in results so noted are further analysed to know the
reasons for variance and appropriate action is taken to ensure compliance in future. If necessary, the
standards are further amended to take developments into account.

Question 4
DISCUSS the Standard and Discretionary Cost Centres (MTP 5 Marks March’21 & Oct ‘23, Old & New SM)
Answer 4
(i) Standards Cost Centre: Cost Centre where output is measurable and input required for the output can
be specified. Based on a well-established study, an estimate of standard units of input to produce a unit
of output is set. The actual cost for inputs is compared with the standard cost. Any deviation (variance)
in cost is measured and analysed into controllable and uncontrollable cost. The manager of the cost
centre is supposed to comply with the standard and held responsible for adverse cost variances. The
input-output ratio for a standard cost centre is clearly identifiable.
(ii) Discretionary Cost Centre: The cost center whose output cannot be measured in financial terms,
thus input-output ratio cannot be defined. The cost of input is compared with allocated budget for
the activity. Example of discretionary cost centers are Research & Development department,
Advertisement department where output of these department cannot be measured with certainty
and co-related with cost incurred on inputs.

Question 5
DISTINGUISH between cost control and cost reduction (MTP 5 Marks, Apr’21, Apr 19, Aug 18 & Oct ‘23)
(RTP Nov ’21, May 19, Nov ’18 & Nov ’22 & May ‘23) (PYP May ‘19 5 Marks, PYP 5 Marks Dec ’21)
Answer 5
Difference between Cost Control and Cost Reduction
Cost Control Cost Reduction
1. Cost control aims at maintaining the costs in 1. Cost reduction is concerned with reducing
accordance with the established standards. costs. It challenges all standards and
endeavours to improvise them continuously
2. Cost control seeks to attain lowest possible cost 2. Cost reduction recognises no condition as
under existing conditions. permanent, since a change will result in
lower cost.
3. In case of cost control, emphasis is on past and 3. In case of cost reduction, it is on present and
present future.
4. Cost control is a preventive function 4. Cost reduction is a corrective function. It
operates even when an efficient cost control
system exists.
5. Cost control ends when targets are achieved. 5. Cost reduction has no visible end and is a
continuous process.

Chapter 1 Introduction to Cost and Management Accounting

 1.3

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

The theory question required knowledge of the concepts of two terms Cost Control and
Cost Reduction to identify differences between them. Most of the examinees answered
partly correct. Performance of the examinees was below average.
In this theoretical question on ‘Cost control and Cost reduction’, below average
performance of the examinees was observed.

Question 6
EXPLAIN the difference between Cost Accounting and Management Accounting
(MTP 5 Marks, Oct ’21 & March ‘23) (RTP Nov’19, May ’20 & Nov ‘22) (PYP 5 Marks Nov 20)
Answer 6
Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting
(i) Nature It records the quantitative It records both qualitative and
aspect only. quantitative aspect.
(ii) Objective It records the cost of It Provides information to
producing a product and management for planning and
providing a service. co-ordination.
(iii) Area It only deals with cost It is wider in scope as it includes
Ascertainment. financial accounting, budgeting,
taxation, planning etc.
(iv) Recording of data It uses both past and present It is focused with the projection of
figures. figures for future.
(v) Development Its development is related to It develops in accordance to the
industrial revolution. need of modern business world.
(vi) Rules and It follows certain principles It does not follow any specific rules
Regulation and procedures for recording and regulations.
costs of different products.

Question 7
How do you deal with the following in cost accounts?
(i) Fringe benefits
(ii) Bad debts. (MTP 5 Marks, Oct’21)
Answer 7
(i) Fringe benefits: These are the additional payments or facilities provided to the workers apart from their
salary and direct cost-allowances like house rent, dearness and city compensatory allowances. These
benefits are given in the form of overtime, extra shift duty allowance, holiday pay, pension facilities etc.
These indirect benefits stand to improve the morale, loyalty and stability of employees towards the
organization. If the amount of fringe benefit is considerably large, it may be recovered as direct charge by
means of a supplementary wage or labour rate; otherwise, these may be collected as part of production
overheads.
(ii) Bad debts: There is no unanimity among different authors of Cost Accounting about the treatment of bad
debts. One view is that ‘bad debts’ should be excluded from cost. According to this view bad debts are financial
losses and therefore, they should not be included in the cost of a particular job or product. According
to another view it should form part of selling and distribution overheads, especially when they arise in
the normal course of trading. Therefore, bad debts should be treated in cost accounting in the same
way as any other selling and distribution cost. However extra ordinarily large bad debts should not be
included in cost accounts.

Question 8
DISCUSS cost classification based on variability and controllability. (MTP 5 Marks Nov ’21 & March ‘18)
(RTP May ’21 & May ’19, Old & New SM)
Answer 8
Cost classification based on variability

Chapter 1 Introduction to Cost and Management Accounting

 1.4

(i) Fixed Costs – These are the costs which are incurred for a period, and which, within certain output and
turnover limits, tend to be unaffected by fluctuations in the levels of activity (output or turnover). They
do not tend to increase or decrease with the changes in output. For example, rent, insurance of factory
building etc., remain the same for different levels of production.
(ii) Variable Costs – These costs tend to vary with the volume of activity. Any increase in the activity results
in an increase in the variable cost and vice-versa. For example, cost of direct labour, etc.
(iii) Semi-variable Costs – These costs contain both fixed and variable components and are thus partly
affected by fluctuations in the level of activity. Examples of semi variable costs are telephone bills, gas
and electricity etc.
Cost classification based on controllability
(i) Controllable Costs - Cost that can be controlled, typically by a cost, profit or investment centre manager
is called controllable cost. Controllable costs incurred in a particular responsibility centre can be
influenced by the action of the executive heading that responsibility centre. For example, direct costs
comprising direct labour, direct material, direct expenses and some of the overheads are generally
controllable by the shop level management.
(ii) Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member of an
undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the tool
room is controllable by the foreman in-charge of that section but the share of the tool-room expenditure
which is apportioned to a machine shop is not to be controlled by the machine shop foreman.

Question 9
STATE Direct Expenses with examples. (MTP 5 Marks April ’19)
Answer 9
Expenses other than direct material cost and direct employee cost, which are incurred to
manufacture a product or for provision of service and can be directly traced in an economically
feasible manner to a cost object. The following costs are examples for direct expenses:
(a) Royalty paid/ payable for production or provision of service;
(b) Hire charges paid for hiring specific equipment;
(c) Cost for product/ service specific design or drawing;
(d) Cost of product/ service specific software;
(e) Other expenses which are directly related with the production of goods or provision of service.

Question 10
EXPLAIN the difference between product cost and period cost. (5 Marks April ’19, Oct’22)
Answer 10
Product costs are those costs that are identified with the goods purchased or produced for resale. In
a manufacturing organisation they are attached to the product and that are included in the inventory
valuation for finished goods, or for incomplete goods. Product cost is also known as inventoriable
cost. Under absorption costing method it includes direct material, direct labour, direct expenses,
directly attributable costs (variable and non-variable) and other production (manufacturing)
overheads. Under marginal costing method Product Costs includes all variable production costs and
the all fixed costs are deducted from the contribution.
Periods costs are the costs, which are not assigned to the products but are charged as expense
against revenue of the period in which they are incurred. General Administration, marketing, sales
and distributor overheads are recognized as period costs.

Question 11
Some of the items of PR Company, a manufacturer of corporate office furniture, are provided below. As
the company is in the process of developing a formal cost accounting system, you are required to
CLASSIFY the items into three categories namely: (i) Cost tracing (ii) Cost allocation (iii) Non-
manufacturing item. Carpenter wages, Depreciation - office building, Glue for assembly, Lathe
department supervisor, Metal brackets for drawers, Factory washroom supplies, Lumber, Samples for
trade shows, Lathe depreciation, Lathe operator wages. (MTP 4 Marks March ’22)
Answer 11
Item Cost Tracing Cost Allocation Non-manufacturing
Carpenter wages √
Depreciation - office building √
Chapter 1 Introduction to Cost and Management Accounting
 1.5

Glue for assembly √

Lathe department supervisor √
Metal brackets for drawers √
Factory washroom supplies √
Lumber √
Samples for trade shows √
Lathe depreciation √
Lathe operator wages √

Question 12
STATE the method of costing for the following industries:
(i) Sugar manufacturing
(ii) Bridge Construction
(iii) Advertising
(iv) Car Assembly (MTP 4 Marks April ’22)
Answer 12
S. No. Industry Method of costing
(i) Sugar manufacturing Process costing
(ii) Bridge Construction Contract Costing
(iii) Advertising Job costing

Question 13
DEFINE cost units? WRITE the cost unit basis against each of the following Industry/Product-
Automobile, Steel, Cement, Chemicals, Power and Transport. (5 Marks March ’23)(RTP Nov ’22)
Answer 13
Cost units are usually the units of physical measurement like number, weight, area, volume, length, time
and value.
Industry or Product Cost Unit Basis
Automobile Number
Steel Ton
Cement Ton/ per bag etc.
Chemicals Litre, gallon, kilogram, ton etc.
Power Kilo-watt hour (kWh)
Transport Passenger- kilometer

Question 14
DISCUSS short notes on (i) Discretionary Cost Centre and (ii) Investment Centre (RTP Nov 20 & May ‘18)
Answer 14
(i) Discretionary Cost Centre: The cost centre whose output cannot be measured in financial terms, thus
input-output ratio cannot be defined. The cost of input is compared with allocated budget for the
activity. Example of discretionary cost centres are Research & Development department, Advertisement
department where output of these department cannot be measured with certainty and co-related with
cost incurred on inputs.
(ii) Investment Centres: These are the responsibility centres which are not only responsible for profitability
but also has the authority to make capital investment decisions. The performance of these responsibility
centres are measured on the basis of Return on Investment (ROI) besides profit. Examples of investment
centres are Maharatna, Navratna and Miniratna companies of Public Sector Undertakings of Central
Government.

Question 15
DESCRIBE Operation costing with two examples of industries where operation costing is applied.
(RTP Nov ’20)

Chapter 1 Introduction to Cost and Management Accounting

 1.6

Answer 15
This product costing system is used when an entity produces more than one variant of final product
using different materials but with similar conversion activities. This means conversion activity is similar
for all the product variants but materials differ significantly. Operation Costing method is also known as
Hybrid product costing system as materials costs are accumulated by job order or batch wise but
conversion costs i.e. labour and overheads costs are accumulated by department, and process costing
methods are used to assign these costs to products. Moreover, under operation costing, conversion
costs are applied to products using a predetermined application rate. This predetermined rate is based
on budgeted conversion costs. The two examples of industries are Ready made garments and Jeweler
making.

Question 16
As per the controllability, cost can be classified as controllable & uncontrollable costs. How will you
DIFFERENTIATE them? (MTP 4 Marks Mar’24)
EXPLAIN the difference between controllable & uncontrollable costs? (RTP May ’24 & May’22)
Or
DEFINE Controllable Cost and Uncontrollable Cost. (RTP Nov ’18) (MTP 5 Marks March ’19, April ’23 &
Sep ‘23)
Answer 16
Controllable costs and Uncontrollable costs: Cost that can be controlled, typically by a cost, profit or
investment center manager is called controllable cost. Controllable costs incurred in a particular
responsibility center can be influenced by the action ofthe executive heading that responsibility centre.
Costs which cannot be influenced by the action of a specified member of an undertaking are known as
uncontrollable costs.
Or
(i) Controllable Costs: - Cost that can be controlled, typically by a cost, profit or investment centre manager
is called controllable cost. Controllable costs incurred in a particular responsibility centre can be influenced
by the action of the executive heading that responsibility centre. For example, direct costs comprising
direct labour, direct material, direct expenses and some of the overheads are generally controllable by the
shop level management.
(ii) Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member of an
undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the tool room is
controllable by the foreman in-charge of that section but the share of the tool-room expenditure which is
apportioned to a machine shop is not to be controlled by the machine shop foreman.

Question 17
SUGGEST the unit of cost for following industries: (RTP May 23)
(a) Transport
(b) Power
(c) Hotel
(d) Hospital
(e) Steel
(f) Coal mining
(g) Professional Services
(h) Gas
(i) Engineering
(j) Oil
Answer 17
Cost units are as follows:
Industry or Product Cost Unit Basis
Transport Passenger- kilometer
Power Kilo-watt hour (kWh)
Hotel Room
Hospitals Patient day
Steel Ton
Coal mining Tonne/ton
Professional services Chargeable hour, job, contract
Chapter 1 Introduction to Cost and Management Accounting
 1.7

Gas Cubic feet

Engineering Contract, job
Oil Barrel, tonne, litre

Question 18
Narrate the objectives of cost accounting. (RTP Nov ’23)
Answer 18
The main objectives of introduction of a Cost Accounting System in a manufacturing organization are as
follows:
(i) Ascertainment of cost: The main objective of a Cost Accounting system is to ascertain cost for
cost objects. Costing may be post completion or continuous but the aim is to arrive at a complete
and accurate cost figure to assist the users to compare, control and make various decisions.
(ii) Determination of selling price: Cost Accounting System in a manufacturing organisation enables
to determine desired selling price after adding expected profit margin with the cost of the goods
manufactured.
(iii) Cost control and Cost reduction: Cost Accounting System equips the cost controller to adhere and
control the cost estimate or cost budget and assist them to identify the areas of cost reduction.
(iv) Ascertainment of profit of each activity: Cost Accounting System helps to classify cost on the basis
of activity to ascertain activity wise profitability.
(v) Assisting in managerial decision making: Cost Accounting System provides relevant cost
information and assists managers to make various decisions.

Question 19
Mention the Cost Unit of the following Industries:
(i) Electricity
(ii) Automobile
(iii) Cement
(iv) Steel
(v) Gas
(vi) Brick Making
(vii) Coal Mining
(viii) Engineering
(ix) Professional Services (PYP Nov’19,5 Marks)
Answer 19
Cost Unit of Industries:
S. No. Industry Cost Unit Basis
(i) Electricity Kilowatt-hour (kWh)
(ii) Automobile Number
(iii) Cement Ton/ per bag etc.
(iv) Steel Ton
(v) Gas Cubic feet
(vi) Brick-making 1,000 bricks
(vii) Coal mining Tonne/ton
(viii) Engineering Contract, job
(ix) Professional services Chargeable hour, job, contract
(x) Hospitals Patient day

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

This was a theoretical question based on cost unit in industries. Performance of the
examinees was Average.

Chapter 1 Introduction to Cost and Management Accounting

 1.8

Question 20
State the Method of Costing to be used in the following industries: ". (PYP 5 Marks Nov ‘20)
(i) Real Estate
(ii) Motor repairing workshop
(iii) Chemical Industry
(iv) Transport service
(v) Assembly of bicycles
(vi) Biscuits manufacturing Industry
(vii) Power supply Companies
(viii) Car manufacturing Industry
(ix) Cement Industry
(x) Printing Press
Answer 20
Method of costing used in different industries:
S. No. Industries Method of Costing
(i) Real Estate Contract Costing
(ii) Motor Repairing Workshop Job Costing
(iii) Chemical Industry Process Costing
(iv) Transport Service Service/Operating Costing
(v) Assembly of Bicycles Unit/ Single/Output/Multiple Costing
(vi) Biscuits Manufacturing Industry Batch Costing
(vii) Power Supply Companies Service/Operating Costing
(viii) Car Manufacturing Industry Multiple Costing
(ix) Cement Industry Unit/Single/Output Costing
(x) Printing Press Job Costing

Question 21
State the method of costing that would be most suitable for:
(i) Oil Refinery
(ii) Interior Decoration
(iii) Airlines Company
(iv) Advertising
(v) Car Assembly. (PYP 5 Marks Jan ‘21)
Answer 21
Method of Costing
S.No. Industry Method of Costing
(i) Oil Refinery Process Costing
(ii) Interior Decoration Job Costing
(iii) Airlines Company Operation/ Service Costing
(iv) Advertising Job Costing
(v) Car Assembly Multiple Costing

Question 22
Specify the types of Responsibility centres under the following situations:
(i) Purchase of bonds, stocks, or real estate property.
(ii) Ticket counter in a Railway station.
(iii) Decentralized branches of an organization.
(iv) Maharana, Navratna and Miniratna public sector undertaking (PSU) of Central Government.
(v) Sales Department of an organization. (PYP 5 Marks July 21)
Answer 22
Particulars Types of Responsibility
Centre
(i) Purchase of bonds, stocks, or real estate property. Investment Centre
(ii) Ticket counter in a Railway station. Revenue Centre
(iii) Decentralized branches of an organization. Profit Centre
Chapter 1 Introduction to Cost and Management Accounting
 1.9

(iv) Maharatna, Navratna and Miniratna public sector Investment Centre

undertaking (PSU) of Central Government.
(v) Sales Department of an organization. Revenue Centre

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

It was a theoretical question requiring examinees to specify the type of responsibility

centre for the given five statements. Majority of the examinees failed to give clear
responses to the statements. Performance of the examinees was below average.

Question 23
Explain Direct Expenses and how these are measured and their treatment in cost accounting.
(PYP May ’19 5 Marks)
Answer 23
Direct Expense: Expenses other than direct material cost and direct employee cost, which are incurred to
manufacture a product or for provision of service and can be directly traced in an economically feasible
manner to a cost object. The following costs are examples for direct expenses:
(i) Royalty paid/ payable for production or provision of service;
(ii) Hire charges paid for hiring specific equipment;
(iii) Cost for product/ service specific design or drawing;
(iv) Cost of product/ service specific software;
(v) Other expenses which are directly related with the production of goods or provision of service. The above
list of expenses is not exhaustive; any other expenses which are directly attributable to the production or
service are also included as direct expenses.
Measurement of Direct Expenses
The direct expenses are measured at invoice or agreed price net of rebate or discount but includes duties
and taxes (for which input credit not available), commission and other directly attributable costs. In case
of sub-contracting, where goods are get manufactured by job workers independent of the principal entity,
are measured at agreed price. Where the principal supplies some materials to the job workers, the value
of such materials and other incidental expenses are added with the job charges paid to the job workers.
Treatment of Direct Expenses
Direct Expenses forms part the prime cost for the product or service to which it can be directly traceable
and attributable. In case of lump-sum payment or one-time payment, the cost is amortized over the
estimated production volume or benefit derived. If the expenses incurred are of insignificant amount. i.e.
not material, it can be treated as part of overheads.

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

This theoretical question was related to ‘Direct Expenses’. Poor performance of the
examinees was observed.

Question 24
Briefly explain the ‘techniques of costing’. (PYP 5 Marks Dec ‘21)
Answer 24
Techniques Description
Uniform When a number of firms in an industry agree among themselves to follow the same
Costing system of costing in detail, adopting common terminology for various items and
processes they are said to follow a system of uniform costing.
Advantages of such a system are:
i. A comparison of the performance of each of the firms can be made with that of
another, or with the average performance in the industry.
ii. Under such a system, it is also possible to determine the cost of production of
goods which is true for the industry as a whole. It is found useful when tax-
relief or protection is sought from the Government.

Chapter 1 Introduction to Cost and Management Accounting

 1.10

Marginal It is defined as the ascertainment of marginal cost by differentiating between fixed

Costing and variable costs. It is used to ascertain effect of changes in volume or type of
output on profit.
Standard It is the name given to the technique whereby standard costs are pre-determined
Costing and and subsequently compared with the recorded actual costs. It is thus a technique of
Variance cost ascertainment and cost control. This technique may be used in conjunction
Analysis with any method of costing. However, it is especially suitable where the
manufacturing method involves production of standardized goods of repetitive
nature.
Historical It is the ascertainment of costs after they have been incurred. This type of costing
Costing has limited utility.
• Post Costing: It means ascertainment of cost after production is completed.
• Continuous costing: Cost is ascertained as soon as the job is completed or
even when the job is in progress.
Absorption It is the practice of charging all costs, both variable and fixed to operations, processes
Costing or products. This differs from marginal costing where fixed costs are excluded.
Direct costing Direct costing is a specialized form of cost analysis that only uses variable costs to
make decisions. It does not consider fixed costs, which are assumed to be
associated with the time periods in which they are incurred.

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

This theory question on technique of costing was not answered well. Examinees answered
different methods of costing instead of techniques. Performance of the examinees was
poor.

Question 25
Identify the methods of costing from the following statements:
(i) Costs are directly charged to a group of products.
(ii) Nature of the product is complex and method cannot be ascertained.
(iii) Costs ascertained for a single product.
(iv) All costs are directly charged to a specific job.
(v) Costs are charged to operations and averaged over units produced. (PYP 5 Marks May’22)
Answer 25
Method of costing followed:
Situation Method of costing
(i) Costs are directly charged to a group of products. Batch costing
(ii) Nature of the product is complex and method cannot be Multiple costing
ascertained.
(iii) Cost is ascertained for a single product. Unit/ Single/Output costing
(iv) All costs are directly charged to a specific job. Job costing
(v) Costs are charged to operations and averaged over units Process costing
produced.

Question 26
Mention the cost units (physical measurements) for the following Industry/product:
(i) Automobile
(ii) Gas
(iii) Brick works
(iv) Power
(v) Steel
(vi) Transport (by road)
(vii) Chemical
(viii) Oil
(ix) Brewing
(x) Cement (PYP 5 Marks Nov 22)
Chapter 1 Introduction to Cost and Management Accounting
 1.11

Answer 26
Industry or Product Cost Units
Automobile Number
Gas Cubic feet
Brick works 1,000 bricks
Power Kilo-watt hour (kWh)
Steel Tonne
Transport (by road) Passenger- kilometer or Tonne-kilometer
Chemical Litre, gallon, kilogram, tonne etc.
Oil Barrel, tonne, litre
Brewing Barrel
Cement Ton/ per bag etc.

Question 27
Define cost objects and give examples of any four cost objects. (PYP 5 Marks, May ‘23)
Answer 27
Definition of cost objects
Cost object is anything for which a separate measurement of cost is required. Cost object may be a
product, a service, a project, a customer, a brand category, an activity, a department or a programme
etc.
Examples of cost objects
Product Smart phone, Tablet computer, SUV Car, Book etc.
Service An airline flight from Delhi to Mumbai, Concurrent audit assignment, Utility bill
payment facility etc.
Project Metro Rail project, Road projects etc.
Activity Quality inspection of materials, Placing of orders etc.
Process Refinement of crudes in oil refineries, melting of billets or ingots in rolling mills etc.
Department Production department, Finance & Accounts, Safety etc.

Question 28
Answer any four of the following:
Explain very briefly the following terms used in Cost and Management Accounting:
(i) Pre-determined Cost
(ii) Estimated Cost
(iii) Imputed Cost
(iv) Discretionary Cost (PYP 5 Marks Nov’23)
Answer 28
(i) Pre- Determined Cost
A cost which is computed in advance before production or operations start, on the basis of
specification of all the factors affecting cost, is known as a pre-determined cost.
(ii) Estimated Cost
Estimated cost is “the expected cost of manufacture, or acquisition, often in terms of a unit of
product computed on the basis of information available in advance of actual production or
purchase”. Estimated costs are prospective costs since they refer to prediction of costs.
(iii) Imputed Cost
Imputed costs do not involve any immediate cash payment. Implicit costs are not recorded in the
books of account but yet, they are important for certain types of managerial decisions such as
equipment replacement and relative profitability of two alternative courses of action. They are also
known as economic costs. These costs are similar to opportunity cost.
(iv) Discretionary Cost
Discretionary costs are not tied to a clear cause and effect relationship between inputs and outputs.
They arise from periodic decisions regarding the maximum outlay to be incurred. Examples are -
advertising, public relations, training etc.

Chapter 1 Introduction to Cost and Management Accounting

Paper 5

Auditing
& Ethics
Chapter-wise compilation
of RTPs, MTPs and PYPs

Modified as per Applicable for

new scheme Sept’24 & Jan’25

SAMPLE MATERIAL
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!ll the answers provided in the compilation are applicable for the May 2024 examination/ So,
there's no need to stress about outdated or incorrect information/

5. How are Old RTP’s, MTP’s & PYP’s beneficial for me?
!ll old RTPs, MTPs, and PYPs have been organized according to the new syllabus issued by IC!I/
This means that if a specific chapter from the old scheme is not included in the new scheme,
it has been omitted/ If a particular chapter in the new scheme is based on concepts from two
or more chapters in the old scheme, it has been adapted to align with how the chapter should
be in the new scheme/ If a chapter is only partially included in the new scheme, the questions
related to those specific concepts are only included in the corresponding chapter of the new
scheme/ ! comprehensive reconciliation of the chapters between the new scheme and the old
scheme is provided on the following page/

6. What if a new attempt is added post my purchase?

If you have purchased materials for the May 2024 attempt, you will receive a file with the
questions segregated Chapterwise specifically for that attempt/

7. What does N/! mean?

It could mean any of the following.
1/ No questions from that chapter have been included in the selected attempts/
2/ The chapter is newly introduced, and as a result, no questions have been previously asked
in RTP’s, MTP’s, or PYP’s/

*This is on an average based on the last 11 attempts

 Audi ng and Ethics
Reconcilia on of chapters of the new scheme (May’24) with old course
Sr No Chapter Name as per New Syllabus Old Old Chapter Name
Chapter
No.
1 Chapter 1: Nature, Objective and Scope of 1.1, 1.3 &
Audit 1.4
1.1 Auditing Concepts 1.1 Auditing Concepts
1.2 Engagement Standards 1.3 Engagement
Standards
1.3 SA 200-Overall Objectives of the Independent 1.4 SA 200
Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing

2 Chapter 2: Audit Strategy, Audit Planning and 2.1 SA 300

Audit Programme

3 Chapter 3: Risk Assessment and Internal 4.1,4.3,2.2, SA 315, SA 320, Key

Control 4.2 & 6 concepts

4 Chapter 4: Audit Evidence 3.2, 3.3,

3.4, 3.5,
3.6,
7,8,14.4
4.1 SA 500- Audit Evidence 3.2 SA 500
4.2 SA 610- Using the Work of Internal Auditors 14.4 SA 610
4.3 Audit Sampling 7 Audit Sampling
4.4 SA 501- Audit Evidence-Specific Considerations 3.3 SA 501
for Selected Items
4.5 SA 505- External Confirmations 3.4 SA 505
4.6 SA 510- Initial Audit Engagements – Opening 3.5 SA 510
Balances
4.7 SA 550- Related Parties 3.6 SA 550
4.8 Analytical Procedures 8 Analytical Procedures

5 Chapter 5: Audit of Items of Financial 9 Chapter 5: Audit of

Statements Items of Financial
Statements

6 Chapter 6: Audit Documentation 3.1 SA 230

 7 Chapter 7: Completion and Review 3.7,
3.8,3.9,
3.10, 14.2
7.1 SA 560- Subsequent Events 3.7 SA 560
7.2 SA 570- Going Concern 3.8 SA 570
7.3 SA 450- Evaluation of Misstatements Identified New
during Audit
7.4 SA 580- Written Representations 3.9 SA 580
7.5 SA 260- Communication with Those Charged 3,10 SA 260
with Governance
7.6 SA 265- Communicating Deficiencies in Internal 14.2 SA 265
Control to Those Charged with Governance
and Management

8 Chapter 8: Audit Report 11.1, 11.2,

11.3, 11.4,
11.5, 10,
5, 14.5,
14.3
8.1 SA 700- Forming an Opinion and Reporting on 11.1 SA 700
Financial Statements
8.2 SA 705- Modifications to the Opinion in the 11.3 SA 705
Independent Auditor’s Report
8.3 SA 706- Emphasis of Matter Paragraphs and 11.4 SA 706
Other Matter Paragraphs in the Independent
Auditor’s Report
8.4 SA 701- Communicating Key Audit Matters in 11.2 SA 701
the Independent Auditor’s Report
8.5 SA 710- Comparative Information— 11.5 SA 710
Corresponding Figures and Comparative
Financial Statements
8.6 Audit of Branch Office Accounts 128(1) 14.5 SA 600
8.7 Joint Audit 14.3 SA 299
8.8 Reporting Requirements under Companies Act 10 Company Audit
8.9 CARO 10 Company Audit

9 Chapter 9: Special Features of Audit of 13 Chapter 9: Special

Different Type of Entities Features of Audit of
Different Type of
Entities

10 Chapter 10: Audit of Banks 12 Chapter 10: Audit of

Banks
 11 Chapter 11: Ethics and Terms of Audit 1.5, 1.2,
Engagements 1.6, 1.1,
1.4
11.1 Ethics 1.1 & 1.4 Auditing Concepts &
SA 200
11.2 SA 210- Agreeing the Terms of Audit 1.5 SA 210
Engagements
11.3 SQC 1- Quality Control for Firms which Perform 1.2 SQC 1
Audits and Reviews of Historical Financial
Information and Other Assurance and Related
Service Engagements
11.4 SA 220- Quality Control for an Audit of 1.6 SA 220
Financial Statements
Table of Contents
Sr. Particulars Page Number
No
1 Nature, Objective and Scope of Audit 1.1-1.12
2 Audit Strategy, Audit Planning and Audit Programme 2.1 – 2.18
3 Risk Assessment and Internal Control 3.1- 3.49
4.1 SA 500- Audit Evidence 4.1-1-4.1-15
4.2 SA 610- Using the Work of Internal Auditors 4.2-1-4.2-2
4.3 Audit Sampling 4.3-1-4.3-14
4.4 SA 501- Audit Evidence-Specific Considerations for 4.4-1 - 4.4-5
Selected Items
4.5 SA 505- External Confirmations 4.5-1-4.5-3
4.6 SA 510- Initial Audit Engagements – Opening Balances 4.6-1 – 4.6-2
4.7 SA 550- Related Parties 4.7-1 - 4.7-2
4.8 Analytical Procedures 4.8-1 – 4.8-14
5 Audit of Items of Financial Statements 5.1 – 5.39
6 Audit Documentation 6.1- 6.11
7.1 SA 560- Subsequent Events 7.1-1-7.1-4
7.2 SA 570- Going Concern 7.2-1-7.2-6
7.3 SA 450- Evaluation of Misstatements Identified during 7.3-1
Audit
7.4 SA 580- Written Representations 7.4-1-7.4-4
7.5 SA 260- Communication with Those Charged with *N/A
Governance
7.6 SA 265- Communicating Deficiencies in Internal Control to 7.6-1
Those Charged with Governance and Management
8.1 SA 700- Forming an Opinion and Reporting on Financial 8.1-1-8.1-11
Statements
8.2 SA 705- Modifications to the Opinion in the Independent 8.2-1-8.2-5
Auditor’s Report
8.3 SA 706- Emphasis of Matter Paragraphs and Other Matter 8.3-1-8.3-5
Paragraphs in the Independent Auditor’s Report
8.4 SA 701- Communicating Key Audit Matters in the 8.4-1-8.4-2
Independent Auditor’s Report
8.5 SA 710- Comparative Information—Corresponding Figures 8.5-1-8.5-2
and Comparative Financial Statements
8.6 Audit of Branch Office Accounts 128(1) 8.6-1-8.6-2
8.7 Joint Audit 8.7-1-8.7-3
8.8 Reporting Requirements under Companies Act 8.8-1-8.8-9
8.9 CARO 8.9-1-8.9-10
9 Special Features of Audit of Different Type of Entities 9.1- 9.35
10 Audit of Banks 10.1-10.21
11.1 Ethics 11.1-1-11.1-8
11.2 SA 210- Agreeing the Terms of Audit Engagements 11.2-1-11.2-5
11.3 SQC 1- Quality Control for Firms which Perform Audits and 11.3-1-11.3-6
Reviews of Historical Financial Information and Other
Assurance and Related Service Engagements
11.4 SA 220- Quality Control for an Audit of Financial 11.4-1-11.4-2
Statements
12 Case Scenarios 12.1 – 12.77

MTPs: March’19, April’19, Oct’19, May’20, Oct’20, March’21, April’21, Oct ’21,
Nov ’21, March ’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23,Sep ’23
,Oct ’23,March’24 & April ‘24
PYPs: May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec ’21, May’22, Nov ’22, May’23,
Nov’23
RTPs: May’19, Nov’19, May’20, Nov’20, May’21, Nov ’21, May ’22, Nov ’22,
May ’23, Nov ’23, May’24
 1.1

Chapter 1
Nature, Objective and Scope of Audit
Question 1
In case of certain subject matters, limitations on the auditor’s ability to detect material misstatements
are particularly significant. Explain such assertions or subject matters. (Old SM, RTP Nov’23)
Answer 1
In the case of certain subject matters, limitations on the auditor’s ability to detect material
misstatements are particularly significant. Such assertions or subject matters include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to continue as a going concern.

Question 2
“An audit is independent examination of financial information of any entity, whether profit oriented or
not, and irrespective of its size or legal form, when such an examination is conducted with a view to
expressing an opinion thereon.”
Explain stating clearly how the person conducting this task should take care to ensure that financial
statements would not mislead anybody. (MTP 4 Marks Oct’19)
The person conducting audit should take care to ensure that financial statements would not mislead
anybody. Explain stating clearly the meaning of Auditing. (RTP May ’20)
Answer 2
“An audit is independent examination of financial information of any entity, whether profit oriented
or not, and irrespective of its size or legal form, when such an examination is conducted with a view
to expressing an opinion thereon.”
Analysis of the Definition
1. Audit is Independent examination of Financial information.
2. of any entity – that entity may be profit oriented or not and irrespective of its size or legal form. For
example – Profit oriented – Audit of Listed company engaged in business. On the other hand, Audit
of NGO – not profit oriented.
3. The objective of the audit is to express an opinion on the financial statements.
The person conducting this task should take care to ensure that financial statements would not
mislead anybody. This he can do honestly by satisfying himself that:
(i) the accounts have been drawn up with reference to entries in the books of account;
(ii) the entries in the books of account are adequately supported by sufficient and appropriate
evidence;
(iii) none of the entries in the books of account has been omitted in the process of compilation
and nothing which is not in the books of account has found place in the statements;
(iv) the information conveyed by the statements is clear and unambiguous;
(v) the financial statement amounts are properly classified, described and disclosed in conformity
with accounting standards; and the statement of accounts present a true and fair picture of the
operational results and of the assets and liabilities.

Question 3
The relationship between auditing and law is very close one. (MTP 4 Marks Oct 19, RTP Nov ’18)
Answer 3
The relationship between auditing and law: The relationship between auditing and law is very close
one. Auditing involves examination of various transactions from the view point of whether or not these
have been properly entered into. It necessitates that an auditor should have a good knowledge of business
laws affecting the entity. He should be familiar with the law of contracts, negotiable instruments, etc. The
knowledge of taxation laws is also inevitable as entity is required to prepare their financial statements
taking into account various provisions affected by various tax laws. In analysing the impact of various
transactions particularly from the accounting aspect, an auditor ought to have a good knowledge about
the direct as well as indirect tax laws.

Chapter 1 Nature, Objective and Scope of Audit

 1.2

Question 4
Examine with reasons (in short) whether the following statements are correct or incorrect: Mr. Z, a team
member of auditor of Grateful and Competent Limited was of the opinion that while conducting an audit
of a company no distinction is required to be made between revenue expenditure and capital
expenditure. (MTP 2 Marks Oct’20)
Answer 4
Incorrect: The opinion of Mr. Z is incorrect because one of the important aspects to be followed while
conducting audit of a company is that a distinction is required to be made properly between revenue
expenditure and capital expenditure.

Question 5
Examine with reasons (in short) whether the following statement is correct or incorrect: The preparation
of financial statements involves judgment by management. (MTP 2 Marks Nov ’21, Mar’22)
Answer 5
Correct: The preparation of financial statements involves judgment by management in applying the
requirements of the entity’s applicable financial reporting framework to the facts and circumstances of
the entity. In addition, many financial statement items involve subjective decisions or assessments or a
degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may be
made.

Question 6
Examine with reasons (in short) whether the following statements are correct or incorrect.
The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. (MTP 2 Marks March ’23, New SM)
Answer 6
Correct: As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the purpose of an audit is to enhance the degree of confidence
of intended users in the financial statements. This is achieved by the expression of an opinion by the
auditor on whether the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework.

Question 7
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had
succinctly summed up the overall view of what an auditor should be as regards the personal qualities.
He said, “an auditor must be honest that is, he must not certify what he does not believe to be true and
must take reasonable care and skill before he believes that what he certifies is true” Explain stating
clearly the qualities of an auditor. (MTP 4 Marks March ’21, RTP May’19)
OR
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had
succinctly summed up the overall view of what an auditor should be as regards the personal qualities.
Explain stating the qualities an auditor should possess. (MTP 4 Marks Oct ‘21)
Answer 7
It is not enough to realise what an auditor should be. He is concerned with the reporting on financial
matters of business and other institutions. Financial matters inherently are to be set with the problems
of human fallibility; errors and frauds are frequent. The qualities required, according to Dicksee, are
tact, caution, firmness, good temper, integrity, discretion, industry, judgement, patience, clear
headedness and reliability. In short, all those personal qualities that go to make a good businessman
contribute to the making of a good auditor. In addition, he must have the shine of culture for attaining
a great height. He must have the highest degree of integrity backed by adequate independence. In fact,
Code of ethics mentions integrity, objectivity and independence as one of the fundamental principles
of professional ethics.
He must have a thorough knowledge of the general principles of law which govern matters with which
he is likely to be in intimate contact. The Companies Act need special mention but mercantile law,
specially the law relating to contracts, is no less important. Needless to say, where undertakings are
governed by a special statute, its knowledge will be imperative; in addition, a sound knowledge of the
law and practice of taxation is unavoidable.
He must pursue an intensive programme of theoretical education in subjects like financial and
Chapter 1 Nature, Objective and Scope of Audit
 1.3

management accounting, general management, business and corporate laws, computers and
information systems, taxation, economics, etc. Both practical training and theoretical education are
equally necessary for the development of professional competence of an auditor for undertaking any
kind of audit assignment.
The auditor should be equipped not only with a sufficient knowledge of the way in which business
generally is conducted but also with an understanding of the special features peculiar to a particular
business whose accounts are under audit. The auditor, who holds a position of trust, must have the
basic human qualities apart from the technical requirement of professional training and education.
He is called upon constantly to critically review financial statements and it is obviously useless for him
to attempt that task unless his own knowledge is that of an expert. An exhaustive knowledge of
accounting in all its branches is the sine qua non of the practice of auditing. He must know thoroughly
all accounting principles and techniques.
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had
succinctly summed up the overall view of what an auditor should be as regards the personal qualities.
He said, “an auditor must be honest that is, he must not certify what he does not believe to be true and
must take reasonable care and skill before he believes that what he certifies is true”.

Question 8
The person conducting the audit should take care to ensure that financial statements would not mislead
anybody. Explain (MTP 4 Marks Oct ‘21)
Answer 8
The person conducting the audit should take care to ensure that financial statements would not mislead
anybody. This he can do honestly by satisfying himself that:
(i) the accounts have been drawn up with reference to entries in the books of account;
(ii) the entries in the books of account are adequately supported by sufficient and appropriate
evidence;
(iii) none of the entries in the books of account has been omitted in the process of compilation and
nothing which is not in the books of account has found place in the statements;
(iv) the information conveyed by the statements is clear and unambiguous;
(v) the financial statement amounts are properly classified, described and disclosed in conformity
with accounting standards; and
(vi) the statement of accounts present a true and fair picture of the operational results and of the
assets and liabilities.

Question 9
The auditor has to form an opinion on the financial statements within a reasonable period of time and
at a reasonable cost. Explain the above statement with reference to "Timeliness of Financial Reporting
and the Balance between Benefit and Cost". (MTP 4 Marks April 22, RTP-May’18)
Answer 9
Timeliness of Financial Reporting and the Balance between Benefit and Cost: The matter of difficulty,
time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which
there is no alternative or to be satisfied with audit evidence that is less than persuasive. Appropriate
planning assists in making sufficient time and resources available for the conduct of the audit.
Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time,
and there is a balance to be struck between the reliability of information and its cost. There is an
expectation by users of financial statements that the auditor will form an opi nion on the financial
statements within a reasonable period of time and at a reasonable cost, recognizing that it is
impracticable to address all information that may exist or to pursue every matter exhaustively on the
assumption that information is in error or fraudulent until proved otherwise.

Question 10
Examine with reasons (in short) whether the following statement is correct or incorrect : The objective
of audit is to obtain absolute assurance about whether the financial statements as a whole are free from
material misstatement. (MTP 2 Marks April 19, RTP May’23, RTP May’18)
OR
The auditor is expected to and can reduce audit risk to zero (MTP 2 Marks May 20, MTP 2 Marks Oct’21)

Chapter 1 Nature, Objective and Scope of Audit

 1.4

Answer 10
Incorrect: The objective of audit is to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement. In auditing, reasonable assurance can be
given which is high level assurance but not absolute assurance. The auditor is not expected to, and
cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial
statements are free from material misstatement due to fraud or error. This is because there are
inherent limitations of an audit.

Question 11
Examine with reasons (in short) whether the following statements are correct or incorrect
The Auditor is expected to reduce audit risk to zero and can therefore obtain absolute assurance that
the financial statements are free from material misstatement due to fraud or error.
(MTP 2 Marks Oct’22, MTP 2 Marks Oct’21, PYP 2 Marks Jan 21)
Answer 11
Incorrect: As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, The auditor is not expected to, and cannot, reduce audit risk to
zero and cannot therefore obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error. This is because there are inherent limitations of an audit.

Question 12
Examine with reasons (in short) whether the following statements are correct or incorrect: There are
inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws
conclusions and bases the auditor's opinion being conclusive rather than persuasive.
(MTP 2 Marks April ‘21)
Answer 12
Incorrect: As per SA 200, the auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from material misstatement
due to fraud or error. This is because there are inherent limitations of an audit, which result in most of
the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being
persuasive rather than conclusive.

Question 13
Discuss the following:
CA Jatin is the auditor of JP Ltd. The auditor expressed his opinion on the financial statements without
ascertaining as to whether the financial statements as a whole were free from material misstatements.
Explain w.r.t SA 200. (MTP 3 Marks April ‘23)
OR
Mr. Z, auditor of the Company, Different and Capable Limited for the financial year 2022-23, explained
to audit team members about the objectives of the Independent Auditor in accordance with the
relevant Standard on Auditing. Explain those objectives. (RTP Nov ’23) (PYP 3 Marks May ’22)
Answer 13
Overall Objectives of the Independent Auditor: As per SA-200 “Overall Objectives of the Independent
Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, in conducting an audit
of financial statements, the overall objectives of the auditor are:
(i) To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework; and
(ii) To report on the financial statements, and communicate as required by the SAs, in accordance with
the auditor’s findings.
In the given case of JP Ltd, CA Jatin expressed his opinion on the financial statements of JP Ltd without
obtaining reasonable assurance about whether the financial statements as a whole are free from
material misstatement or not. Therefore, it can be concluded that CA Jatin did not comply with the
objective of audit as stated in SA 200.

Question 14
Both accounting and auditing are closely related with each other. Explain (RTP Nov’20)
Chapter 1 Nature, Objective and Scope of Audit
 1.5

Answer 14
Both accounting and auditing are closely related with each other as auditing reviews the financial
statements which are nothing but a result of the overall accounting process. It naturally calls on the part
of the auditor to have a thorough and sound knowledge of generally accepted principles of accounting
before he can review the financial statements. In fact, auditing as a discipline is also closely related with
various other disciplines as there is lot of linkages in the work which is done by an auditor in his day-to-
day activities. To begin with, it may be noted that the discipline of auditing itself is a logical construct
and everything done in auditing must be bound by the rules of logic. Ethical precepts are the basis on
which the foundation of the entire accounting profession rests. The knowledge of language is also
considered essential in the field of auditing as the auditor shall be required to communicate, both in
writing as well as orally, in day-to-day work.

Question 15
State with reason (in short) whether the following statements are true or false:
The preparation of financial statements does not involve judgment by management in applying the
requirements of the entity’s applicable financial reporting framework to the facts and circumstances of
the entity. (RTP May ‘19)
Answer 15
Incorrect: The preparation of financial statements involves judgment by management in applying the
requirements of the entity’s applicable financial reporting framework to the facts and circumstances of
the entity. In addition, many financial statement items involve subjective decisions or assessments or a
degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may
be made.

Question 16
State with reason (in short) whether the following statements are true or false: An audit is an official
investigation into alleged wrongdoing. (RTP May ’19, Nov’18)
Answer 16
Incorrect: An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is
not given specific legal powers, such as the power of search, which may be necessary for such an
investigation.

Question 17
State with reason (in short) whether the following statements are true or false:
There is no difference between “audit” and “review.” .(RTP Nov’22)
Answer 17
Incorrect: “Audit” and “Review” are two different terms. Audit is a reasonable assurance engagement,
and its objective is reduction in assurance engagement risk to an acceptably low level in the
circumstances of the engagement. However, “review” is a limited assurance engagement, and its
objective is a reduction in assurance engagement risk to a level that is acceptable in the circumstances
of the engagement

Question 18
The knowledge of human behavior is indeed very essential for an auditor so as to effectively discharge
his duties. Explain. (RTP Nov ’21)
Answer 18
The field of auditing as a discipline involves review of various assertions; both in financial as well as in
non-financial terms, with a view to prove the veracity of such assertions and expression of opinion by
auditor on the same. Thus, it is quite logical and natural that the function of audit can be performed if
and only if the person also possesses a good knowledge about the fields in respect of which he is
conducting such a review.
The discipline of behavioral science is closely linked with the subject of auditing. While it may be said
that an auditor, particularly the financial auditor, deals basically with the figures contained in the
financial statements but he shall be required to interact with a lot of people in the organization. As
against the financial Audi tor, the internal auditor or a management auditor is expected to deal with
human beings rather than financial figures. One of the basic elements in designing the internal control
system is personnel. Howsoever, if a sound internal control structure is designed, it cannot work until
Chapter 1 Nature, Objective and Scope of Audit
 1.6

and unless the people who are working in the organization are competent and honest. The knowledge
of human behavior is indeed very essential for an auditor so as to effectively discharge his duties.

Question 19
An audit is distinct from investigation. However, it is quite possible that sometimes investigation results
from the prima facie findings of the auditor. Discuss. (RTP May ’23, Old SM)
Answer 19
Audit is distinct from investigation. Investigation is a critical examination of the accounts with a special
purpose. For example, if fraud is suspected and it is specifically called upon to check the accounts
whether fraud really exists, it takes character of investigation.
The objective of audit, on the other hand as we have already discussed, is to obtain reasonable
assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling the auditor to express an opinion.
Therefore, audit is never started with a pre-conceived notion about state of affairs; about wrong-doing;
about some wrong having been committed. The auditor seeks to report what he finds in normal course
of examination of accounts.
However, it is quite possible that sometimes investigation results from the prima facie findings of the
auditor. It may happen that auditor has given some findings of serious concern. Such findings may
prompt for calling an investigation.

Question 20
Explain the objectives of an Audit as per SA 200. (RTP May ’20, May’19)
Answer 20
As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an audit of financial
statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement; and
(b) To report on the financial statements, and communicate as required by the SAs, in accordance with
the auditor’s findings.

Question 21
In case of certain subject matters, limitations on the auditor’s ability to detect material misstatements
are particularly significant. Explain such assertions or subject matters.
(RTP May ’20, PYP 3 Marks July ’21)
Answer 21
Other Matters that Affect the Limitations of an Audit: In the case of certain subject matters, limitations
on the auditor’s ability to detect material misstatements are particularly significant. Such assertions or
subject matters include:
Fraud, particularly fraud involving senior management or collusion.
• The existence and completeness of related party relationships and transactions.
• The occurrence of non-compliance with laws and regulations.
• Future events or conditions that may cause an entity to cease to continue as a going concern.

Question 22
State with reason (in short) whether the following statements are true or false:
The auditor’s opinion helps determination of the true and correct view of the financial position and
operating results of an enterprise. (RTP May ’21)
Answer 22
Incorrect: The auditor’s opinion helps determination of the true and fair view of the financial position
and operating results of an enterprise.

Question 23
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain giving
examples. (RTP Nov ’21, May’20, Old SM)
Answer 23
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For example:
Chapter 1 Nature, Objective and Scope of Audit
 1.7

1. There is the possibility that management or others may not provide, intentionally or unintentionally,
the complete information that is relevant to the preparation and presentation of the financial
statements or that has been requested by the auditor.
2. Fraud may involve sophisticated and carefully organized schemes designed to conceal it. Therefore,
audit procedures used to gather audit evidence may be ineffective for detecting an intentional
misstatement that involves, for example, collusion to falsify documentation which may cause the
auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor
expected to be an expert in the authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given
specific legal powers, such as the power of search, which may be necessary for such an investigation.

Question 24
State with reason (in short) whether the following statements are true or false:
The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor to omit an audit
procedure for which there is no alternative. (RTP Nov ’18, RTP Nov’21)
Answer 24
Incorrect: The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to
omit an audit procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available for the conduct of the
audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over
time, and there is a balance to be struck between the reliability of information and its cost.

Question 25
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance that the financial statements are free from material misstatement due to fraud or
error. This is because there are inherent limitations of an audit. Explain. (RTP Nov ’18, New SM)
Answer 25
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance that the financial statements are free from material misstatement due to fraud or
error. This is because there are inherent limitations of an audit. The inherent limitations of an audit arise
from:
(i) The Nature of Financial Reporting: The preparation of financial statements involves judgment by
management in applying the requirements of the entity’s applicable financial reporting framework
to the facts and circumstances of the entity. In addition, many financial statement items involve
subjective decisions or assessments or a degree of uncertainty, and there may be a range of
acceptable interpretations or judgments that may be made.
(ii) The Nature of Audit Procedures: There are practical and legal limitations on the auditor’s ability
to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and presentation
of the financial statements or that has been requested by the auditor.
2. Fraud may involve sophisticated and carefully organized schemes designed to conceal it.
Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an
intentional misstatement that involves, for example, collusion to falsify documentation which
may cause the auditor to believe that audit evidence is valid when it is not. The auditor is
neither trained as nor expected to be an expert in the authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not
given specific legal powers, such as the power of search, which may be necessary for such an
investigation.
(iii) Timeliness of Financial Reporting and the Balance between Benefit and Cost: The matter of
difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit
procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available for the conduct of
the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to
diminish over time, and there is a balance to be struck between the reliability of information and
its cost.

Chapter 1 Nature, Objective and Scope of Audit

 1.8

(iv) Other Matters that Affect the Limitations of an Audit: In the case of certain subject matters,
limitations on the auditor’s ability to detect material misstatements are particularly significant.
Such assertions or subject matters include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to continue as a going concern.

Question 26
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain giving
examples. Also explain the difference between audit and investigation. (RTP Nov 22, Nov’23)
Answer 26
The Nature of Audit Procedures: There are practical and legal limitations on the auditor’s ability to
obtain audit evidence. For example:
1. There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and presentation of
the financial statements or that has been requested by the auditor.
2. Fraud may involve sophisticated and carefully organized schemes designed to conceal it. Therefore,
audit procedures used to gather audit evidence may be ineffective for detecting an intentional
misstatement that involves, for example, collusion to falsify documentation which may cause the
auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor
expected to be an expert in the authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not
given specific legal powers, such as the power of search, which may be necessary for such an
investigation.
We have to clearly understand that audit is distinct from investigation. Investigation is a critical
examination of the accounts with a special purpose. For example, if fraud is suspected and it is
specifically called upon to check the accounts whether fraud really exists, it takes character of
investigation.
The objective of audit, on the other hand as we have already discussed, is to obtain reasonable
assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling the auditor to express an opinion.
Therefore, audit is never started with a pre-conceived notion about state of affairs; about wrong-
doing; about some wrong having been committed. The auditor seeks to report what he finds in
normal course of examination of accounts. However, it is quite possible that sometimes
investigation results from the prima facie findings of the auditor. It may happen that auditor has
given some findings of serious concern. Such findings may prompt for calling an investigation.

Question 27
Standards on Auditing (SAs) apply in “audit of historical financial information” whereas Standards on
Review Engagements (SREs) apply in “review of historical financial information.” Explain in detail giving
examples. (RTP May ’22)
Answer 27
It is to be understood that Standards on Auditing (SAs) apply in “audit of historical financial information”
whereas Standards on Review Engagements (SREs) apply in “review of historical financial information”.
Remember that Standards on auditing apply in “audit” of historical financial information which is a
reasonable assurance engagement whereas Standards on Review Engagements apply in “review” of
historical financial information which is a limited assurance engagement only.
“Historical financial information means” information expressed in financial terms in relation to a
particular entity, derived primarily from that entity’s accounting system, about economic events
occurring in past time periods or about economic conditions or circumstances at points in time in the
past.
Here, we have to broadly understand that “audit” and “review” are two different terms. Audit is a
reasonable assurance engagement, and its objective is reduction in assurance engagement risk to an
acceptably low level in the circumstances of the engagement. However, “review” is a limited assurance
engagement, and its objective is a reduction in assurance engagement risk to a level that is acceptable
in the circumstances of the engagement,
Chapter 1 Nature, Objective and Scope of Audit
 1.9

Standards on Auditing have been issued on wide spectrum of issues in the field of auditing including
(but not limited to) overall objectives of independent auditor, audit documentation, planning an audit
of financial statements, identifying and assessing risk of material misstatement, audit evidence, audit
sampling, going concern and forming an opinion and reporting on financial statements.
Some examples of Standards on Auditing are:
(i) SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with Standards on Auditing
(ii) SA 230 Audit Documentation
(iii) SA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and its Environment
(iv) SA 500 Audit Evidence
(v) Revised SA 700 Forming an Opinion and Reporting on Financial Statements Examples of Standards
on Review engagements are
(i) SRE 2400 (Revised) Engagements to Review Historical Financial Statements
(ii) SRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the
Entity

Question 28
M Motors Ltd is a leading Indian automobile manufacturer with many offerings across commercial,
passenger and electric vehicles. The Company is pioneering India’s electric vehicle transition and
enjoys considerable advantage in one of the fastest growing automotivemarkets.
GR & Associates have been appointed as its statutory auditors for financial year 2022-23. J and K
are newly appointed audit assistants inthe firm and are part of engagement team constituted
for purpose ofaudit of M Motors Ltd. However, they are confused about what such an audit tends to
achieve. They perceive audit as a guarantee against possible errors or frauds in financial statements.
Do you agree with perception of both the assistants? In this context, outline objectives ofan
independent audit conducted in accordance with Standards on Auditing. (RTP May’24)
Answer 28
In conducting audit of financial statements, objectives of auditor in accordance with SA-200 “Overall
Objectives of the Independent auditor and the conduct of an audit in accordance with Standards on
Auditing” are: -
(a) To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express
an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditor’s findings.
An analysis of above brings out following points clearly: -
(1) The auditor’s objective is to obtain a reasonable assurance whether financial statements as a whole
are free from material misstatement whether due to fraud or error.
Reasonable assurance is to be distinguished from absolute assurance. Absolute assurance is a complete
assurance or a guarantee that financial statements are free from material misstatements. However,
reasonable assurance is not a complete guarantee. Although it is a high-level of assurance but it is
not complete assurance.
Audit of financial statements is carried out by the auditor with professional competence and skills in
accordance with Standards on Auditing. Audit procedures are applied in accordance with SAs, audit
evidence is obtained and evaluated. On the basis of that, conclusions are drawn and opinion is
formed. It leads to high levelof assurance which is called as reasonable assurance but it is not
absolute assurance.
(2) Misstatements in financial statements can occur due to fraud orerror or both. The auditor seeks
to obtain reasonable assurance whether financial statements as a whole are free from material
misstatements caused by fraud or error. He has to see effect of misstatements on financial
statements as a whole, in totality.
(3) Obtaining reasonable assurance that financial statements as a whole are free from material
misstatements enables the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial reporting framework.
(4) The opinion is reported and communicated in accordance with audit findings through a written
Chapter 1 Nature, Objective and Scope of Audit
 1.10

report as required by Standardson Auditing.

Therefore, perception of both assistants is not proper. Auditor of financial statements does not seek to
provide guarantee that financial statements are free from material misstatements causedby
frauds or errors. He obtains reasonable assurance.

Question 29
Standards on Auditing (SAs) apply in “audit of historical financialinformation” whereas Standards on
Review Engagements (SREs) apply in “review of historical financial information.” Explain in detail giving
examples. (RTP May’24)
Answer 29
Standards on Auditing (SAs) apply in “audit of historical financial information” whereas Standards on
Review Engagements (SREs) apply in “review of historical financial information”. Standards on auditing
applyin “audit” of historical financial information which is a reasonable assurance engagement whereas
Standards on Review Engagementsapply in “review” of historical financial information which is a limited
assurance engagement only.
“Historical financial information means” information expressed in financial terms in relation to a
particular entity, derived primarily fromthat entity’s accounting system, about economic events
occurring in past time periods or about economic conditions or circumstances at points in time in the
past.
“Audit” and “review” are two different terms. Audit is a reasonable assurance engagement, and its
objective is reduction in assurance engagement risk to an acceptably low level in the circumstances of the
engagement. However, “review” is a limited assurance engagement, and its objective is a reduction in
assurance engagement risk to a level thatis acceptable in the circumstances of the engagement.
Standards on Auditing have been issued on wide spectrum of issues in the field of auditing including
(but not limited to) overall objectives of independent auditor, audit documentation, planning an audit
of financial statements, identifying and assessing risk of material misstatement, audit evidence, audit
sampling, going concern and forming an opinion and reporting on financial statements.
Some examples of Standards on Auditing are:
(i) SA 200 Overall Objectives of the Independent Auditor and theConduct of an Audit in Accordance
with Standards on Auditing
(ii) SA 230 Audit Documentation
(iii) SA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and its Environment
(iv) SA 500 Audit Evidence
(v) Revised SA 700 Forming an Opinion and Reporting on Financial Statements
Examples of Standards on Review engagements are
(i) SRE 2400 (Revised) Engagements to Review Historical Financial Statements
(ii) SRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the
Entity

Question 30
(a) The auditor should decide whether relevant information is properly disclosed in the financial
statements. Explain with reference to scope of audit. (MTP 3 Marks Mar’24)(SM)
Answer 30
The auditor should decide whether relevant information is properly disclosed in the financial statements.
He should also keep in mind applicable statutory requirements in this regard.
It is done by ensuring that financial statements properly summarize transactions and events recorded
therein and by considering the judgments made by management in preparation of financial statements.
The management responsible for preparation and presentation of financial statements makes many
judgments in this process of preparing and presenting financial statements. For example, choosing of
appropriate accounting policies in relation to various accounting issues like choosing method of charging
depreciation on fixed assets or choosing appropriate method for valuation of inventories.
The auditor evaluates selection and consistent application of accounting policies by management;
whether such a selection is proper and whether chosen policy has been applied consistently on a period-
to-period basis.

Chapter 1 Nature, Objective and Scope of Audit

 1.11

Question 31
KST Limited is engaged in manufacturing business. It appoints CA T to provide it an assurance report
on its financial statements prepared on the basis of historical financial information. The characteristic
of such an engagement is that it involves gathering of sufficient appropriate evidence on basis of
which limited conclusions can be drawn up by practitioner. Identify type of engagement. Which are
two other features of such an engagement? (MTP 3 Marks Apr’24)
Answer 31
As given above, the engagement involves gathering of sufficient appropriate evidence on the basis of
which limited conclusion can be drawn up. It is a limited assurance engagement like review. Other two
features of such type of engagement are: -
(1) It provides lower level of assurance than reasonable assurance engagement.
(2) It performs fewer procedures than reasonable assurance engagement.

Question 32
Nature of financial reporting itself is one of causes of inherent limitations of audit of financial
statements. Explain. (MTP 3 Marks Apr’24)
Answer 32
Preparation of financial statements involves making many judgments by management. These
judgments may involve subjective decisions or a degree of uncertainty. Therefore, auditor may not be
able to obtain absolute assurance that financial statements are free from material misstatements due
to frauds or errors.
One of the premises for conducting an audit is that management acknowledges its responsibility of
preparation of financial statements in accordance with applicable financial reporting framework and
for devising suitable internal controls. However, such controls may not have operated to produce
reliable financial information due to their own limitations.
Therefore, nature of financial reporting itself is one of causes inherent limitations of audit.

MULTIPLE CHOICE QUESTIONS (MCQS)

1. The persons with responsibility for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity are :
(a) management
(b) Those charged with governance –
(c) audit committee
(d) board of directors (MTP 1 Marks March ’21, Oct’23, RTP May ’21, Nov’21, Nov’23)
Ans: (b)

2. The Auditor of a Sole Proprietor Concern is appointed by

(a) CAG
(b) Bank
(c) Sole Proprietor himself
(d) District Administration (MTP 1 Mark April 22)
Ans: (c)

3. Which of the following is Incorrect:

(a) An auditor conducting an audit in accordance with SAs is responsible for obtaining absolute
assurance that the financial statements taken as a whole are free from material misstatement,
whether caused by fraud or error.
(b) As described in SA 200, owing to the inherent limitations of an audit, there is an unavoidable
risk that some material misstatements of the financial statements will not be detected, even
though the audit is properly planned and performed in accordance with the SAs.
(c) The risk of not detecting a material misstatement resulting from fraud is higher than the risk of
not detecting one resulting from error.
(d) The risk of the auditor not detecting a material misstatement resulting from management fraud
is greater than for employee fraud. (MTP 1 Mark March ’23)
Ans: (a)

Chapter 1 Nature, Objective and Scope of Audit

 1.12

4. With respect to auditing, which of the following statement is correct:

(a) Audited financial statements are absolutely free from all material misstatement due to fraud
or error.
(b) An audit is an official investigation into alleged wrongdoing and auditor has specific legal
powers to conduct investigation
(c) The auditor can obtain only a reasonable assurance about whether the financial statement as
a whole are free from material misstatement and report on it.
(d) An auditor’s opinion is an assurance as the future viability of the enterprise or the efficiency or
effectiveness of the management. (MTP 1 Marks April ’23)
Ans: (c)

5. The matter of difficulty, time, or cost involved is :

(a) not in itself a valid basis for the auditor to omit an audit procedure for which there is no
alternative.
(b) in itself a valid basis for the auditor to omit an audit procedure for which there is no
alternative.
(c) not in itself a valid basis for the auditor to omit an audit procedure for which alternative exists.
(d) not in itself a valid basis for the auditor to omit an audit procedure. (MTP 1 Mark March ’19)
Ans: (a)

6. Determining a percentage to be applied to a chosen benchmark (in relation to materiality)

involves the exercise of
(a) Independence
(b) Professional Judgement
(c) Professional skepticism
(d) All of the above (MTP 1 Mark April’19)
Ans: (b)

7. Which of the following is the responsibility of the auditor:

(a) Preparation and presentation of the financial statements in accordance with applicable
financial reporting
(b) Design, implementation and maintenance of internal controls
(c) Express an opinion on the Financial Statements
(d) To obtain limited assurance. (MTP1 Mark April’ 22)
Ans: (c)

8. The persons with responsibility for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity are
(a) Management
(b) those charged with governance
(c) audit committee
(d) board of directors (RTP May ’21, Nov’21)
Ans: (b)

9. M/s KYC & Co. is a reputed Audit firm in Mumbai. They are appointed as Statutory Auditors of
Blessed Ltd. Which of the below is the responsibility of M/s KYC & Co.
(a) Preparation of financial statements
(b) Designing, implementation and maintenance of internal control system
(c) Reporting on true and fair view of financial statements
(d) Compliance with the applicable law and regulation. (RTP Nov’20)
Ans:(c)

Chapter 1 Nature, Objective and Scope of Audit

Paper 6
Financial Management
&
Strategic Management
Chapter-wise compilation
of RTPs, MTPs and PYPs

Modified as per Applicable for

new scheme Sept’24 & Jan’25

SAMPLE MATERIAL
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HOW TO GET THE BEST OUT OF OUR MATERIAL?
 Frequently Asked Ques琀椀ons
1. Why RTP’s, MTP’s and PYP’s?
RTP’s, MTP’s, and PYP’s are extremely important to ensure that you reproduce ICAI language.
These ques琀椀ons train you to understand what is important and what is expected of you.
At least 41% of ques琀椀ons* are asked from previous RTP’s, MTP’s and PYP’s.

2. What is included?
In this compiler, all ques琀椀ons from the last 3, 5 or 11 a琀琀empts depending on the one you have
selected will be available. There will be references to the marks and the a琀琀empt from which
they were asked. Iden琀椀cal or similar ques琀椀ons have been removed and references for both
a琀琀empts are men琀椀oned.

3. What is the bene昀椀t of Chapter-wise?

We have categorized each and every ques琀椀on from all Old RTPs, MTP’s, and PYP’s into
chapters. This means that you don't have to wait un琀椀l you've completed your en琀椀re syllabus
to tackle an RTP, MTP, or past paper. You can start solving these ques琀椀ons to check your
conceptual clarity right a昀琀er 昀椀nishing a par琀椀cular chapter.

4. What does amended for the latest a琀琀empt mean?

When we reviewed all the ques琀椀ons from the past 11 a琀琀empts of RTP, MTP, and PYP’S, we
didn't just segregate them Chapterwise; we also updated them to re昀氀ect the latest provisions.
All the answers provided in the compila琀椀on are applicable for the May 2024 examina琀椀on. So,
there's no need to stress about outdated or incorrect informa琀椀on.

5. How are Old RTP’s, MTP’s & PYP’s bene昀椀cial for me?
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or more chapters in the old scheme, it has been adapted to align with how the chapter should
be in the new scheme. If a chapter is only par琀椀ally included in the new scheme, the ques琀椀ons
related to those speci昀椀c concepts are only included in the corresponding chapter of the new
scheme. A comprehensive reconcilia琀椀on of the chapters between the new scheme and the old
scheme is provided on the following page.

6. What if a new a琀琀empt is added post my purchase?

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in RTP’s, MTP’s, or PYP’s.

*This is on an average based on the last 11 a琀琀empts

 Financial Management & Strategic Management
Reconciliation of chapters of the new scheme (May’24) with old course
New Chapter Name as per New Syllabus Old Old Chapter Name
Chapter Chapter
No. No.
Section A: Financial Management
1 Scope and Objectives of Financial 1 Scope and Objectives of Financial
Management Management
2 Types of Financing 2 Types of Financing
3 Financial Analysis and Planning – Ratio 3 Financial Analysis and Planning –
Analysis Ratio Analysis
4 Cost of Capital 4 Cost of Capital
5 Financing Decisions – Capital Structure 5 Financing Decisions – Capital
Structure
6 Financing Decisions – Leverages 6 Financing Decisions – Leverages
MODULE 2
7 Investment Decisions 7 Investment Decisions
8 Dividend Decision 9 Dividend Decision
9 Management of Working Capital
9.1 Introduction to Working Capital 10.1 Introduction to Working Capital
Management Management
9.2 Treasury and Cash Management 10.2 Treasury and Cash Management
9.3 Management of Inventory 10.3 Management of Inventory
9.4 Management of Receivables 10.4 Management of Receivables
9.5 Management of Payables (Creditors) 10.5 Management of Payables
(Creditors)
9.6 Financing of Working Capital 10.6 Financing of Working Capital

Section B: Strategic Management

1 Introduction to Strategic Management 6,8 Introduction to Strategic
Management & Strategic
Management Process
2 Strategic Analysis: External Environment 7,10 Dynamics of Competitive Strategy
& Business Level Strategies
3 Strategic Analysis: Internal Environment 7,10,11 Dynamics of Competitive Strategy,
Business & Functional Level
Strategies
4 Strategic Choices 9 Corporate Level Strategies
5 Strategy Implementation and Evaluation 8,12,13 Strategic Management Process,
Organisation & Strategic
Leadership and Strategy
Implementation & Control
Table of Contents
Sr. Particulars Page Number
No
Financial Management
1 Scope and Objectives of Financial Management 1.1 – 1.9
2 Types of Financing 2.1 – 2.14
3 Financial Analysis and Planning – Ratio Analysis 3.1 – 3.47
4 Cost of Capital 4.1 – 4.36
5 Financing Decisions – Capital Structure 5.1 – 5.34
6 Financing Decisions – Leverages 6.1 – 6.33
7 Investment Decisions 7.1 – 7.56
8 Dividend Decision 8.1 – 8.25
9.1 Introduction to Working Capital Management 9.1-1 – 9.1-32
9.2 Treasury and Cash Management 9.2-1 – 9.2-12
9.3 Management of Inventory 9.3-1
9.4 Management of Receivables 9.4-1 – 9.4-11
9.5 Management of Payables (Creditors) 9.5-1
9.6 Financing of Working Capital 9.6-1 – 9.6-3
10 Case Scenarios 10.1 – 10.6
Strategic Management
1 Introduction to Strategic Management 1.1 – 1.21
2 Strategic Analysis: External Environment 2.1 – 2.14
3 Strategic Analysis: Internal Environment 3.1 – 3.23
4 Strategic Choices 4.1 – 4.26
5 Strategy Implementation and Evaluation 5.1 – 5.35
6 Case Scenarios 6.1 – 6.33

MTPs: March’19, April’19, Oct’19, May’20, Oct’20, March’21, April’21, Oct ’21,
Nov ’21, March ’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23,Sep ’23
,Oct ’23,March’24 & April ‘24
PYPs: May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec ’21, May’22, Nov ’22, May’23,
Nov’23
RTPs: May’19, Nov’19, May’20, Nov’20, May’21, Nov ’21, May ’22, Nov ’22,
May ’23, Nov ’23, May’24
 1.1

Chapter 1
Scope & Objectives of Financial Management

Question 1
STATE Agency Cost. DISCUSS The Ways to Reduce the Effect of It. (MTP 4 Marks, Aug’18)
OR
DISCUSS Agency Problem and Agency Cost.
(MTP 4 Marks, Oct’20, MTP 4 Marks March ’23, MTP 4 Marks Apr’21, MTP 5 Marks April ’23, RTP Nov 20,
May’22 & Nov ‘23)
Answer 1
Agency Cost: In a sole proprietorship firm, partnership etc., owners participate in management but in
corporate, owners are not active in management so, there is a separation between owner/ shareholders and
managers. In theory managers should act in the best interest of shareholders however in reality, managers
may try to maximize their individual goal like salary, perks etc., so there is a principal-agent relationship
between managers and owners, which is known as Agency Problem. In a nutshell, Agency Problem is the
chances that managers may place personal goals ahead of the goal of owners. Agency Problem leads to Agency
Cost. Agency cost is the additional cost borne by the shareholders to monitor the manager and control their
behavior so as to maximize shareholder’s wealth. Generally, Agency Costs are of four types (I) monitoring (ii)
bonding (iii) opportunity (iv) structuring
Addressing the agency problem
The agency problem arises if manager’s interests are not aligned to the interests of the debt lender and
equity investors. The agency problem of debt lender would be addressed by imposing negative covenants
i.e. the managers cannot borrow beyond a point. This is one of the most important concepts of modern day
finance and the application of this would be applied in the Credit Risk Management of Bank, Fund Raising,
Valuing distressed companies.
Agency problem between the managers and shareholders can be addressed if the interests of the managers
are aligned to the interests of the share- holders. It is easier said than done.
However, following efforts have been made to address these issues:
(A) Managerial compensation is linked to profit of the company to some extent and also with the long
term objectives of the company.
(B) Employee is also designed to address the issue with the underlying assumption that maximisation of
the stock price is the objective of the investors.
(C) Effecting monitoring can be done.

Question 2
EXPLAIN as to how the wealth maximization objective is superior to the profit maximization objective What
is the cost of these sources? [MTP 4 Marks, Mar’19] (RTP May ’24)
Answer 2
A firm’s financial management may often have the following as their objectives:
(i) The maximization of firm’s profit.
(ii) The maximization of firm’s value / wealth.
The maximization of profit is often considered as an implied objective of a firm. To achieve the aforesaid
objective various type of financing decisions may be taken. Options resulting into maximization of profit may
be selected by the firm’s decision makers. They even sometime may adopt policies yielding exorbitant profits
in short run which may prove to be unhealthy for the growth, survival and overall interests of the firm. The
profit of the firm in this case is measured in terms of its total accounting profit available to its shareholders.
The value/wealth of a firm is defined as the market price of the firm’s stock. The market price of a firm’s stock
represents the focal judgment of all market participants as to what the value of the particular firm is. It takes
into account present and prospective future earnings per share, the timing and risk of these earnings, the
dividend policy of the firm and many other factors that bear upon the market price of the stock.
Chapter 1 Scope & Objectives of Financial Management
 1.2

The value maximization objective of a firm is superior to its profit maximization objective due to following
reasons.
1. The value maximization objective of a firm considers all future cash flows, dividends, earning per share,
risk of a decision etc. whereas profit maximization objective does not consider the effect of EPS, dividend
paid or any other returns to shareholders or the wealth of the shareholder.
2. A firm that wishes to maximize the shareholder’s wealth may pay regular dividends whereas a firm with
the objective of profit maximization may refrain from dividend payment to its shareholders.
3. Shareholders would prefer an increase in the firm’s wealth against its generation of increasing
flow of profits.
4. The market price of a share reflects the shareholders expected return, considering the long- term
prospects of the firm, reflects the differences in timings of the returns, considers risk and recognizes the
importance of distribution of returns.
The maximization of a firm’s value as reflected in the market price of a share is viewed as a proper goal of a
firm. The profit maximization can be considered as a part of the wealth maximization strategy.

Question 3
DISCUSS the Inter relationship between investment, financing and dividend decisions.
(MTP 4 Marks, Oct’19]
OR
DISCUSS the three major decisions taken by a finance manager to maximize the wealth of shareholders.
(MTP 4 Marks, Oct’18)
OR
BRIEFLY explain the three finance function decisions.
[MTP 4 Marks, Oct’21, RTP Nov ’19, RTP May’19, PYP 3 Marks Nov’19)
OR
What are the two main aspects of the Finance Function? (PYP 2 Marks, May ’18, Old & New SM)
Answer 3
Inter-relationship between Investment, Financing and Dividend Decisions: The finance functions are divided
into three major decisions, viz., investment, financing and dividend decisions. It is correct to say that these
decisions are inter-related because the underlying objective of these three decisions is the same, i.e.
maximization of shareholders’ wealth. Since investment, financing and dividend decisions are all interrelated,
one has to consider the joint impact of these decisions on the market price of the company’s shares and these
decisions should also be solved jointly. The decision to invest in a new project needs the finance for the
investment. The financing decision, in turn, is influenced by and influences dividend decision because retained
earnings used in internal financing deprive shareholders of their dividends. An efficient financial management
can ensure optimal joint decisions. This is possible by evaluating each decision in relation to its effect on the
shareholders’ wealth.
The above three decisions are briefly examined below in the light of their inter-relationship and to see how
they can help in maximizing the shareholders’ wealth i.e. market price of the company’s shares.
Investment decision: The investment of long term funds is made after a careful assessment of the various
projects through capital budgeting and uncertainty analysis. However, only that investment proposal is to be
accepted which is expected to yield at least so much return as is adequate to meet its cost of financing. This
have an influence on the profitability of the company and ultimately on its wealth.
Financing decision: Funds can be raised from various sources. Each source of funds involves different issues.
The finance manager has to maintain a proper balance between long-term and short-term funds. With the
total volume of long-term funds, he has to ensure a proper mix of loan funds and owner’s funds. The optimum
financing mix will increase return to equity shareholders and thus maximize their wealth.
Dividend decision: The finance manager is also concerned with the decision to pay or declare dividend. He
assists the top management in deciding as to what portion of the profit should be paid to the shareholders by
way of dividends and what portion should be retained in the business. An optimal dividend pay-out ratio
maximizes shareholders’ wealth.
Chapter 1 Scope & Objectives of Financial Management
 1.3

The above discussion makes it clear that investment, financing and dividend decisions are interrelated and are
to be taken jointly keeping in view their joint effect on the shareholders’ wealth.

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

This was a theoretical question based on explanation of three finance functions decision. Only
a handful number of examinees attempted the question, but performance observed was
above average.

Question 4
DISCUSS the advantages and disadvantages of Wealth maximization principle.
(MTP 4 Marks, Mar’21, PYP 2 Marks May’22)
Answer 4
Advantages and disadvantages of Wealth maximization principle.
Advantages:
(i) Emphasizes the long term gains
(ii) Recognizes risk or uncertainty
(iii) Recognizes the timing of returns
(iv) Considers shareholders’ return.
Disadvantages:
(i) Offers no clear relationship between financial decisions and share price.
(ii) Can lead to management anxiety and frustration.

Question 5
WRITE two main objectives of Financial Management. [MTP 2 Marks, Oct’21, PYP 2 Marks Nov ’18)
Answer 5
Two main objectives of Financial Management
Profit Maximization
It has traditionally been argued that the primary objective of a company is to earn profit; hence the objective
of financial management is also profit maximization. This implies that the finance manager has to make his
decisions in a manner so that the profits of the concern are maximized. Each alternative, therefore, is to be
seen as to whether or not it gives maximum profit.
Wealth / Value Maximization
We will first like to define what is Wealth / Value Maximization Model. Shareholders wealth are the result of
cost benefit analysis adjusted with their timing and risk i.e. time value of money.
So, Wealth = Present Value of benefits – Present Value of Costs
It is important that benefits measured by the finance manager are in terms of cash flow. Finance manager
should emphasis on Cash flow for investment or financing decisions not on Accounting profit. The shareholder
value maximization model holds that the primary goal of the firm is to maximize its market value and implies
that business decisions should seek to increase the net present value of the economic profits of the firm.

Question 6
A finance executive of an organisation plays an important role in the company’s goals, policies, and financial
success. WHAT his responsibilities include? (MTP 4 Marks, Sep’22)
Answer 6
A finance executive of an organisation plays an important role in the company’s goals,policies, and financial
success. His responsibilities include:
(i) Financial analysis and planning: Determining the proper amount of funds to employ in the firm, i.e. designating
the size of the firm and its rate of growth.
(ii) Investment decisions: The efficient allocation of funds to specific assets.
(iii) Financing and capital structure decisions: Raising funds on favourable terms as possible i.e. determining the
composition of liabilities.
Chapter 1 Scope & Objectives of Financial Management
 1.4

(iv) Management of financial resources (such as working capital).

(v) Risk management: Protecting assets.

Question 7
EXPLAIN Financial Distress and explain its relationship with Insolvency. (MTP 4 Marks, Mar’18)
OR
‘Financial distress is a position where Cash inflows of a firm are inadequate to meet all its current
obligations.’ Based on above mentioned context, EXPLAIN Financial Distress along with Insolvency.
[MTP 4 Marks March 22]
Answer 7
There are various factors like price of the product/ service, demand, price of inputs e.g. raw material, Labour
etc., which is to be managed by an organization on a continuous basis. Proportion of debt also needs to be
managed by an organization very delicately. Higher debt requires higher interest and if the cash inflow is not
sufficient then it will put lot of pressure to the organization. Both short term and long term creditors will put
stress to the firm. If all the above factors are not well managed by the firm, it can create situation known as
distress, so financial distress is a position where Cash inflows of a firm are inadequate to meet all its current
obligations.
Now if distress continues for a long period of time, firm may have to sell its asset, even many times at a lower
price. Further when revenue is inadequate to revive the situation, firm will not be able to meet its obligations
and become insolvent. So, insolvency basically means inability of a firm to repay various debts and is a result
of continuous financial distress.

Question 8
DISTINGUISH between Profit maximisation vis-a-vis wealth maximization. (MTP 5 Marks, Apr’23)
OR
‘Profit maximisation is not the sole objective of a company. It is at best a limited objective. If profit is given
undue importance, a number of problems can arise.’ DISCUSS four of such problems.
(RTP May 22, RTP May 21)
OR
EXPLAIN “Wealth maximisation” and “Profit maximisation” objectives of financial management (Old & New
SM)
Answer 8
It has traditionally been argued that the primary objective of a company is to earn profit; hence the
objective of financial management is also profit maximisation. This implies that the finance manager has to
make his decisions in a manner so that the profits of the concern are maximised. Each alternative,
therefore, is to be seen as to whether or not it gives maximum profit.
However, profit maximisation cannot be the sole objective of a company. It is at best a limited objective. If
profit is given undue importance, a number of problems can arise. Some of these have been discussed
below:
(i) The term profit is vague. It does not clarify what exactly it means. It conveys a different meaning to
different people. For example, profit may be in short term or long term period; it may be total profit
or rate of profit etc.
(ii) Profit maximisation has to be attempted with a realisation of risks involved. There is a direct
relationship between risk and profit. Many risky propositions yield high profit. Higher the risk, higher
is the possibility of profits. If profit maximisation is the only goal, then risk factor is altogether ignored.
This implies that finance manager will accept highly risky proposals also, if they give high profits. In
practice, however, risk is very important consideration and has to be balanced with the profit
objective.
(iii) Profit maximisation as an objective does not take into account the time pattern of returns. Proposal A
may give a higher amount of profits as compared to proposal B, yet if the returns of proposal A begin
to flow say 10 years later, proposal B may be preferred which may have lower overall profit but the
returns flow is more early and quick.
(iv) Profit maximisation as an objective is too narrow. It fails to take into account the social considerations
Chapter 1 Scope & Objectives of Financial Management
 4.1

Chapter 4
Cost of Capital
Question 1
PQR Ltd. has the following capital structure on October 31, 20X8:
Sources of capital (Rs.)
Equity Share Capital (2,00,000 Shares of Rs. 10 each) 20,00,000
Reserves & Surplus 20,00,000
12% Preference Shares 10,00,000
9% Debentures 30,00,000
80,00,000
The market price of equity share is Rs. 30. It is expected that the company will pay next year a dividend
of Rs. 3 per share, which will grow at 7% forever. Assume 40% income tax rate.
You are required to COMPUTE weighted average cost of capital using market value weights.
(MTP 5 Marks, Aug’18, MTP 5 Marks Oct’18, RTP Nov ’19)
Answer 1
Workings:
(i) Cost of Equity
D1 Rs.3
(k e ) = + g = Rs.30 + 0.07 = 0.1 + 0.07 = 0.17 = 17%
Po
(ii) Cost of Debentures (Kd) = I (1 - t) = 0.09 (1 - 0.4) = 0.054 or 5.4%

Computation of Weighted Average Cost of Capital (WACC using market value weights)
Source of capital Market Value of Weight Cost of capital (%) WACC (%)
capital (Rs.)
9% Debentures 30,00,000 0.30 5.40 1.62
12% Preference Shares 10,00,000 0.10 12.00 1.20
Equity Share Capital 60,00,000 0.60 17.00 10.20
(Rs.30 × 2,00,000 shares)
Total 1,00,00,000 1.00 13.02

Question 2
JKL Ltd. has the following book-value capital structure as on March 31, 20X8.
(Rs.)
Equity share capital (2,00,000 shares) 40,00,000
11.5% Preference shares 10,00,000
10% Debentures 30,00,000
80,00,000
The equity shares of the company are sold at Rs. 20. It is expected that the company will pay next year a
dividend of Rs. 2 per equity share, which is expected to grow by 5% p.a. forever. Assume a 35% corporate
tax rate.
Required:
(i) COMPUTE weighted average cost of capital (WACC) of the company based on the existing capital
structure.
(ii) COMPUTE the new WACC, if the company raises an additional Rs. 20 lakhs debt by issuing 12%
debentures. This would result in increasing the expected equity dividend to Rs. 2.40 and leave the
growth rate unchanged, but the price of equity share will fall to Rs.16 per share.
(MTP 10 Marks, Oct’18, Oct ’23, RTP May’20) (Same concept different figures MTP 10 Marks Oct’20)
Answer 2
(i) Computation of Weighted Average Cost of Capital based on existing capital structure
Source of Capital Existing Capital Weights After tax cost of WACC (%)
structure (Rs.) (a) capital (%) (a)×(b)
(b)

Chapter 4 Cost of Capital

 4.2

Equity share capital (W.N.1) 40,00,000 0.500 15.00 7.500

11.5% Preference share capital 10,00,000 0.125 11.50 1.437
(W.N.2)
10% Debentures (W.N.3) 30,00,000 0.375 6.50 2.438
80,00,000 1.000 11.375
Working Notes (W.N.)
1. Cost of equity capital:
𝐄𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐃𝐢𝐯𝐢𝐝𝐞𝐧𝐝 (𝐃𝟏)
𝐾𝑒 = + Growth (g)
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐌𝐚𝐫𝐤𝐞𝐭 𝐏𝐫𝐢𝐜𝐞 𝐩𝐞𝐫 𝐒𝐡𝐚𝐫𝐞 (𝐏𝟎)
Rs 2
= + 0.05 = 0.15 or 15%
Rs 20
2. Cost of preference share capital: =
𝐀𝐧𝐧𝐮𝐚𝐥 𝐩𝐫𝐞𝐟𝐞𝐫𝐞𝐧𝐜𝐞 𝐬𝐡𝐚𝐫𝐞 𝐝𝐢𝐯𝐢𝐝𝐞𝐧𝐝(𝐏𝐃)
=
𝐍𝐞𝐭 𝐩𝐫𝐨𝐜𝐞𝐞𝐝𝐬𝐢𝐧 𝐭𝐡𝐞 𝐢𝐬𝐬𝐮𝐞 𝐨𝐟 𝐩𝐫𝐞𝐟𝐞𝐫𝐞𝐧𝐜𝐞𝐬𝐡𝐚𝐫𝐞 (𝐍𝐏)
𝐑𝐬.𝟏,𝟏𝟓,𝟎𝟎𝟎
= 𝐑𝐬.𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎 = 0.115 or 11.5%
3. Cost of 10% Debentures:
𝐈(𝟏−𝐭) Rs.3,00,000 (1− 0.35)
= = = 0.065 or 6.5%
𝐍𝐏 𝐑𝐬.𝟑𝟎,𝟎𝟎,𝟎𝟎𝟎

(ii) Computation of Weighted Average Cost of Capital based on new capital structure
Source of Capital New Capital Weights After tax WACC (%)
structure (Rs.) (b) cost of (a) ×(b)
capital (%)
(a)
Equity share capital (W.N. 4) 40,00,000 0.40 20.00 8.00
Preference share (W.N. 2) 10,00,000 0.10 11.50 1.15
10% Debentures (W.N. 3) 30,00,000 0.30 6.50 1.95
12% Debentures (W.N.5) 20,00,000 0.20 7.80 1.56
1,00,00,000 1.00 12.66

Working Notes (W.N.):

4. Cost of equity capital:
ExpectedDividend(D1) 𝐑𝐬.𝟐.𝟒𝟎
Ke = + Growth(g) = + 𝟓% = 𝟐𝟎%
Current Market Pr iceper share(P0 ) 𝐑𝐬.𝟏𝟔

5. Cost of 12% Debentures

𝟐,𝟒𝟎,𝟎𝟎𝟎(𝟏− 𝟎.𝟑𝟓)
Kd = = 0.078 or 7.8%
₹𝟐𝟎,𝟎𝟎,𝟎𝟎𝟎

Question 3
DISCUSS the dividend-price approach to estimate cost of equity capital
(MTP 2 Marks, Mar’19 & Oct ’23 & Mar’24)
Answer 3
In dividend price approach, cost of equity capital is computed by dividing the expected dividend by market
price per share. This ratio expresses the cost of equity capital in relation to what yield the company should pay
to attract investors. It is computed as:
D
K e = P1
0

Where, 𝐊 𝒆 = Cost of equity

D1 = Expected dividend (also written as 𝐃𝟏 )
𝐏𝟎 = Market price of equity (ex- dividend)

Question 4
Annona Ltd is considering raising of funds of about Rs.250 lakhs by any of two alternative methods, viz.,

Chapter 4 Cost of Capital

 4.3

14% institutional term loan and 13% non-convertible debentures. The term loan option would attract no
major incidental cost and can be ignored. The debentures would have to be issued at a discount of 2.5% and
would involve cost of issue of 2% on face value.
ADVISE the company as to the better option based on the effective cost of capital in each case. Assume a
tax rate of 50%. (MTP 5 Marks, Apr’19)
Answer 4
Calculation of Effective Cost of Capital
Particulars Option 1 Option 2
14% institutional Term 13% Non-convertible
loan Debentures
(Rs. in Lakhs) (Rs. in lakhs)
(A) Effective capital to be raised Face value 250.00 250.00
Less: Discount Nil (6.25)
250.00 243.75
Less: Cost of issue Nil 5.00
Effective amount of capital 250.00 238.75
(B) Annual interest charges on face value of 35.0 32.50
Rs. 250 lakhs
Less: Tax benefit on interest @ 50% 17.5 16.25
17.5 16.25
(C) Effective cost of capital after tax 𝐵 16.25
× 100 × 100
𝐴 238.75
= 7.0% = 6.81% (approx.)
So, the better option is raising of funds of Rs.250 lakhs by issue of 13% Non-convertible Debenture

Question 5
Totto Ltd. has following capital structure as on 31st December 2023, which is considered to be optimum:
(₹)
12% Debenture 4,50,000
10% Preference share capital 1,50,000
Equity shares capital (2,00,000 shares) 24,00,000
The company’s share has a current market price of ₹ 30.25 per share. The expected dividend per share in
next year is 50 percent of the 2023 EPS. The EPS of last 10 years is as follows. The past trends are expected
to continue:
Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
EPS (₹) 1.180 1.311 1.456 1.616 1.794 1.99 2.209 2.452 2.723 3.023
The company can issue 14 percent new debenture and 12 percent new preference share. The company’s
debenture is currently selling at ₹ 99. The new preference issue can be sold at a net price of ₹ 9.90, paying
a dividend of ₹ 1.25 per share. The company’s marginal tax rate is 50%.
(i) CALCULATE the after-tax cost (a) of new debts and new preference share capital, (b) of ordinary equity,
assuming new equity comes from retained earnings.
(ii) CALCULATE the marginal cost of capital for the new funds raised.
(iii) How much can be spent for capital investment before new ordinary share must be sold? Marginal cost of
capital remains to be constant. (Assuming that retained earnings available for next year’s investment is 50%
of 2023 earnings.)
(iv) What will be marginal cost of capital (cost of fund raised in excess of the amount calculated in part (iii) if the
company can sell new ordinary shares of ₹ 22 per share? Assuming both the cost of debt and of preference
share capital to be constant. (RTP May ’24) (MTP 10 Marks, Oct’19, Old & New SM, RTP May ’21)
Answer 5
(i) Calculation of after-tax cost of the followings:
𝐼(1−𝑡) ₹ 14(1−0.5)
(a) New 14% Debentures (Kd) = =
𝑁𝑃 ₹ 99
= 0.0707 or 7.07%

Chapter 4 Cost of Capital

 4.4
𝑃𝐷 ₹ 1.25
New 12% Preference Shares (Kp) = 𝑁𝑃 = ₹ 9.90

= 0.1263 or 12.63%
Where,
I = Interest
t = Tax rate
PD = Preference dividend
NP = Net proceeds

(b) Equity Shares (Retained Earnings) (Ke)

Expected dividend(D1)
= + Growth rate (G)
Current market price (p0)

50% of ₹ 3.023
= + 0.11* = 0.16 or 16%
₹ 3.025
* Growth rate (on the basis of EPS) is calculated as below:

EPSincurrent year−EPSinprevious year ₹ 3.023− ₹ 2.723

= = 0.11
EPSinprevious year ₹ 2.723
(Students may verify the growth trend by applying the aboveformula to last three or four years.
Growth Rate is rounded off)
(ii) Calculation of marginal cost of capital (on the basis of existing capital structure):
Source of capital Weight After tax Costof WACC
(a) capital (%) (b) (%)
(a) × (b)
14% Debenture 0.15 7.07 1.0605
12% Preference shares 0.05 12.63 0.6315
Equity shares 0.80 16.00 12.800
Marginal cost of capital 14.492
(iii) The company can spend for capital investment before issuing new equity shares and without
increasing its marginal cost of capital:
Retained earnings can be available for capital investment
= 50% of 2023 EPS × equity shares outstanding
= 50% of ₹ 3.023 × 2,00,000 shares = ₹3,02,300
Since, marginal cost of capital is to be maintained at the current level i.e. 14.492%, the retained
earnings should be equal to 80% of total additional capital for investment.
₹3,02,300
Thus, investment before issuing equity ( × 100) = ₹ 3,77,875
80
The remaining capital of ₹ 75,575 i.e. ₹ 3,77,875– ₹ 3,02,300 shall be financed by issuing 14%
Debenture and 12% preference shares in the ratio of 3: 1 respectively.

(iv) If the company spends more than ₹ 3,77,875 as calculated in part (iii) above, it will have to issue
new shares at ₹ 22 per share.
The cost of new issue of equity shares will be:

Expected dividend (D1) 50% of ₹ 3.023

Ke = + Growth rate (g) + 0.11
Current market price (p0) = ₹ 22
= 0.1787 or 17.87%
Calculation of marginal cost of capital (assuming the existing capital structure will be maintained):
Source of capital Weight(a) Cost (%)(b) WACC (%)
(a) × (b)
14% Debenture 0.15 7.07 1.0605
12% Preference shares 0.05 12.63 0.6315

Chapter 4 Cost of Capital

 4.5

Equity shares 0.80 17.87 14.296

Marginal cost of capital 15.988

Question 6
ABC Limited has the following book value capital structure:
Equity Share Capital (1 crore shares @ Rs.10 each) Rs.1,000 lakh
Reserves and Surplus Rs.2,250 lakh
9% Preference Share Capital (5 lakh shares @ Rs.100 each) Rs.500 lakh
8.5% Debentures (1.5 lakh debentures @ Rs.1,000 each) Rs.1,500 lakh
12% Term Loans from Financial Institutions Rs.500 lakh
• The debentures of ABC Limited are redeemable at par after five years and are quoting at Rs.985 per
debenture.
• The current market price per equity share is Rs.60. The prevailing default-risk free interest rate on 10-
year GOI Treasury Bonds is 5.5%. The average market risk premium is 7%. The beta of the company is
1.85
• The preference shares of the company are redeemable at 10% premium after 5 years is currently
selling at Rs.102 per share.
• The applicable income tax rate for the company is 35%.
Required:
CALCULATE weighted average cost of capital of the company using market value weights.
(MTP 5 Marks, May’20)
Answer 6
Working Notes:
(1) Computation of cost of debentures (Kd):
(1,000−985)
Rs.85(1−0.35) + 55.25+3
5
ke = (1,000+985) = = 0.0586 or 5.86%
992.5
2

(2) Computation of cost of term loans (KT):

= r (1-t)
= 0.12 (1-0.35) = 0.078 or 7.8%

(3) Computation of cost of preference capital (Kp):

preferenc Divident + (RV − NP)/n
= Kp =
(RV + NP)/2
(110−102)
Rs.9 + 9 + 1.6
5
= (110−102) = = 0.1 or 10%
106
2
(4) Computation of cost of equity (Ke):
= Rf + ß (Rm – Rf)
Or, = Risk free rate + (Beta × Risk premium)
= 0.055 + (1.85 ×0.07) = 0.1845 or 18.45%

Calculation of Weighted Average cost of capital Using market value weights

Source of Capital Market value of Weights After tax cost WACC
capital structure of capital (%) (%)
(Rs. in lakh)
Equity share capital 6,000 0.71 18.45 13.09
(1 crore shares × Rs.60)
9% Preference
share capital 510 0.06 10.00 0.60
(5 lakh shares × Rs.102)

Chapter 4 Cost of Capital

 4.6

8.5 % Debentures 1,477.5 0.17 5.86 0.99

(1.5 lakh × Rs.985)
12% Term loans 500 0.06 7.80 0.47
8,487.50 1.000 15.15

Question 7
"Financing a business through borrowing is cheaper than using equity." Briefly EXPLAIN
(MTP 2 Marks, May’20 & Sep’23)
Answer 7
Financing a business through borrowing is cheaper than using equity”
(i) Debt capital is cheaper than equity capital from the point of its cost and interest being deductible for income
tax purpose, whereas no such deduction is allowed for dividends.
(ii) Issue of new equity dilutes existing control pattern while borrowing does not result in dilution of control.
(iii) In a period of rising prices, borrowing is advantageous. The fixed monetary outgo decreases in real terms as
the price level increases.

Question 8
CALCULATE the WACC by using Market value weights. The capital structure of the company is as under:
(Rs.)
Debentures (Rs.100 per debenture) 10,00,000
Preference shares (Rs.100 per share) 10,00,000
Equity shares (Rs.10 per share) 20,00,000
40,00,000
The market prices of these securities are:
Debentures Rs. 115 per debenture
Preference shares Rs. 120 per preference share
Equity shares Rs. 265 each.
Additional information:
(1) Rs.100 per debenture redeemable at par, 10% coupon rate, 2% floatation cost, 10-year maturity.
(2) Rs.100 per preference share redeemable at par, 5% coupon rate, 2% floatation cost and 10 - year
maturity.
(3) Equity shares have a floatation cost of Rs. 1 per share.
The next year expected dividend is Rs. 5 with an annual growth of 15%. The firm has the practice of
paying all earnings in the form of dividend.
Corporate tax rate is 30%. Use YTM method to calculate cost of debentures and preference shares.
(MTP 10 Marks, Mar’21, Old & New SM, RTP Nov ’20)
Answer 8
(i) Cost of equity (𝑲𝒆 )
D1 Rs.5
= +g= + 0.15 = 0.1689 or 16.89%
P0 −F Rs.265−Re.1
(ii) Cost of Debt (Kd)
Calculation of NPV at discount rate of 5% and 7%
Year Cash Discount Present Discount Present
flows factor @ 5% Value factor @ 7% Value (Rs.)
(Rs.)
0 112.7 1.000 (112.7) 1.000 (112.7)
1 to 10 7 7.722 54.05 7.024 49.17
10 100 0.614 61.40 0.508 50.80
NPV +2.75 -12.73
Calculation of IRR
𝟐.𝟕𝟓 𝟐.𝟕𝟓
IRR = 5% + 𝟐.𝟕𝟓−(−𝟏𝟐.𝟕𝟑) (7%-5%) = 5% + 𝟏𝟓.𝟒𝟖 (7%-5%) = 5.36%

Chapter 4 Cost of Capital

 4.7

Cost of Debt (Kd) = 5.36%

(iii) Cost of Preference shares (Kp)
Calculation of NPV at discount rate of 2% and 5%
Year Cash Discount Present Discount Present Value (Rs.)
flows (Rs.) factor @ 2% Value factor @ 5%
0 117.6 1.000 (117.6) 1.000 (117.6)
1 to 10 5 8.983 44.92 7.722 38.61
10 100 0.820 82.00 0.614 61.40
NPV +9.32 -17.59
Calculation of IRR
𝟗.𝟑𝟐 𝟗.𝟑𝟐
IRR = 2%+ 𝟗.𝟑𝟐−(−𝟏𝟕.𝟓𝟗) (5%-2%) = 2%+ 𝟐𝟔.𝟗𝟏 (𝟓% − 𝟐%) = 3.04%
Cost of Preference Shares (Kp) = 3.04%
Calculation of WACC using market value weights
Source of capital Market Value Weights After tax cost WACC (Koi)
of capital
(Rs.) (a) (b) (c) = (a)×(b)
10% Debentures (Rs.115× 10,000) 11,50,000 0.021 0.0536 0.00113
5% Preference shares 12,00,000 0.022 0.0304 0.00067
(Rs.120× 10,000)
Equity shares (Rs.265 × 2,00,000) 5,30,00,000 0.957 0.1689 0.16164
5,53,50,000 1.000 0.16344
WACC (Ko) = 0.16344 or 16.344%

Question 9
Development Finance Corporation issued zero interest deep discount bonds of face value of Rs. 1,50,000
each issued at Rs. 3,750 & repayable after 25 years. COMPUTE the cost of debt if there is no corporate tax.
(MTP 3 Marks Apr’21)
Answer 9
Here,
Redemption Value (RV)= Rs.1,50,000, Net Proceeds (NP) = Rs. 3,750, Interest = 0, Life of bond = 25 years
There is huge difference between RV and NP therefore in place of approximation method we should use trial
& error method.
FV = PV x (1 + r)n
1,50,000 = 3,750 x (1 + r)25
40 = (1 + r)25
Trial 1: r = 15%, (1.15)25 = 32.919
Trial 2: r = 16%, (1.16)25 = 40.874
Here:
L = 15%; H = 16%
𝑁𝑃𝑉𝐿 = 32.919 - 40 = - 7.081
𝑁𝑃𝑉𝐻 = 40.874 - 40 = + 0.874
NPVL
IRR = L + (H − L)
NPVL −NPVH

−7.081
=15% + × (16% − 15%) = 15.89%
−7.081−(0.874)

Question 10
The following is the capital structure of Shard Ltd. as on 31.12.2020:
(₹)
Equity shares: 2,00,000 shares (of Rs.100 each) 2,00,00,000
9% Preference Shares (of Rs.100 each) 60,00,000
Chapter 4 Cost of Capital
 4.8

8% Debentures 90,00,000
3,50,00,000
The market price of the company’s share is Rs.120 and it is expected that a dividend of Rs.12 per share
would be declared for the year 2021. The dividend growth rate is 5% and the company is in the 30%
tax bracket.
(i) CALCULATE the company’s weighted average cost of capital.
(ii) Further, in order to finance an expansion plan, the company intends to borrow a fund of ₹ 2 crores
bearing 12% rate of interest. In this situation, WHAT will be the company’s revised weighted average
cost of capital? This financing decision is expected to increase dividend from Rs.12 to Rs.14 per share.
However, the market price of equity share is expected to decline from Rs.120 to Rs.115 per share.
In case of both (I) and (ii) above, use market value weight while calculating weighted average cost of
capital. (MTP 5 Marks, Oct’21)
Answer 10
(i) Computation of the weighted average cost of capital
Source of finance Market Weight After tax WACC (%)
(a) Value of (b) Cost of (d) = (b) × (c)
capital (₹) capital (%)
(c)
Equity share (Working note 1) 2,40,00,000 0.6154 15 9.231
[₹120 × 2,00,000 shares]
9% Preference share 60,00,000 0.1538 9 1.3842
8% Debentures 90,00,000 0.2308 5.60 1.2925
3,90,00,000 1.0000 11.9077
(ii) Computation of Revised Weighted Average Cost of Capital
Source of finance Market Weight After tax WACC
(a) Value of (b) Cost of (%)
capital (₹) capital (d) = (b)
(%) (c) × (c)
Equity shares (Working note 2) 2,30,00,000 0.3966 17.17 6.8096
[₹115 × 2,00,000 shares]
9% Preference shares 60,00,000 0.1034 9.00 0.9306
8% Debentures 90,00,000 0.1552 5.60 0.8691
12% Loan 2,00,00,000 0.3448 8.40 2.8963
5,80,00,000 1.0000 11.5056
Working Notes:
(1) Cost of Equity Shares
Ke = {Dividend Per Share (D1)/Market Price Share (P0)} + Growth Rate
= 12/120 + 0.05
= 0.15 or 15%
(2) Revised cost of equity shares (Ke)
Revised Ke= 14/115 + 0.05
= 0.1717 or 17.17%

Question 11
XYZ Company’s equity share is quoted in the market at ₹ 25 per share currently. The company pays a
dividend of ₹ 5 per share and the investor’s market expects a growth rate of 5% per year.
You are required to:
(i) CALCULATE the company’s cost of equity capital.
(ii) If the company issues 12% debentures of face value of Rs.100 each and realizes Rs.95 per debenture
while the debentures are redeemable after 10 years at a premium of 12%, CALCULATE cost of debenture
using YTM?
Assume tax rate to be 30%. (MTP 5 Marks, Nov’21, Mar’22 & Sep ’23)
Answer 11
Chapter 4 Cost of Capital
 4.9

(i) Cost of Equity Capital (Ke)

Ke = Expecteddividendper share(D1)
Marketpriceper share(P0)
= Growth rate(g)

𝑅𝑠.5×1.05
= + 0.05 = 26%
𝑅𝑠.25

(ii) Cost of Debenture (Kd):

Using Present Value method (or YTM)
Identification of relevant cash flows
Year Cash flows
0 Current market price (P0) = Rs.95
1 to 10 Interest net of tax [I(1-t)] = 12% of Rs.100 (1 – 0.30) = Rs.8.40
10 Redemption value (RV) = Rs.100 (1.12) = Rs.112
Calculation of Net Present Values (NPV) at two discount rates
Year Cash Discount factor Present Discount factor Present
flows @ 9% (L) Value @ 10% (H) Value
0 (95) 1.0000 (95.00) 1.0000 (95.00)
1 to 10 8.40 6.4176 53.91 6.1445 51.61
10 112 0.4224 47.31 0.3855 43.18
NPV +6.22 -0.21
Calculation of IRR=
𝑁𝑃𝑉𝐿
IRR = L + 𝑁𝑃𝑉 𝑁𝑃𝑉 (H-L)
𝐿 𝐻

6.22 6.22
= 9% + (10%-9%) =9% + = 9.97%
6.22−(−0.21) 6.43

= Therefore, Kd = 9.97%

Question 12
The capital structure of RV Limited as on 31st March, 2022 as per its Balance Sheet is as follows:
Particulars ₹
Equity shares of ₹ 10 each 25,00,000
10% Preference shares of ₹ 100 each 5,00,000
Retained earnings 5,00,000
13% debentures of ₹ 100 each 20,00,000
The market price of equity shares is ₹ 50 per share. Expected dividend on equity shares is ₹ 3 per
share. The dividend per share is expected to grow at the rate of 8%.
Preference shares are redeemable after eight years and the current market price is ₹ 80 per share.
Debentures are redeemable after five years and are currently selling at ₹ 90 per debenture. The tax
rate applicable to the company is 35%. CALCULATE weighted average cost of capital using:
(i) Book value proportions
(ii) Market value proportions (MTP 10 Marks Apr’22)
Answer 12
Working Notes:
(i) Cost of Equity (Ke)
𝐷1 𝑅𝑠.3
𝑃
+ g = 𝑅𝑠.50 + 0.08 = 0.14 i.e. 14%

(ii) Cost of preference Shares (Kp)

𝑅𝑉−𝑁𝑃 100−80
𝐷+ 10+ 12.5
𝑛 8
𝑅𝑉+𝑁𝑃 = 100+80 = 90
= 0.1389 = 13.89%
2 2
Chapter 4 Cost of Capital
 4.10

(iii) 𝐶𝑜𝑠𝑡 of debenture (kd)

𝑅𝑉−𝑁𝑃 100−90
𝐼(1−𝑡)+ 13(1−0.35)+ 8.45+2
𝑛 5
𝑅𝑉+𝑁𝑃 = 100+90 = = 0.11 i.e.11%
95
2 2
𝑂𝑟,
𝑅𝑉−𝑁𝑃 100−90
𝐼+ 13+
𝑛 5
[ 𝑅𝑉+𝑁𝑃 ](1-t) = [ 100+90 ] (1-0.35) = 0.1026 i.e.10.26%
2 2

Weighted Average cost of capital (Book Value)

Amount (₹) Weight (W) Cost (K) WxK
Equity shares 25,00,000 0.4546 0.14 0.0636
Preference shares 5,00,000 0.0909 0.1389 0.0126
Retained Earnings 5,00,000 0.0909 0.14 0.0127
Debentures 20,00,000 0.3636 0.1026 0.0373
55,00,000 0.1262
Or (if Kd is 11%) the WACC = 0.1289
Thus, WACC (Book value based) = 12.62% or 12.89%
Weighted Average cost of capital (Market Value)
Amount (₹) Weight (W) Cost (K) WxK
Equity shares 1,25,00,000 0.85 0.14 0.119
Preference shares 4,00,000 0.028 0.1389 0.0039
Debentures 18,00,000 0.122 0.1026 0.0125
1,47,00,000 0.1354
Or (if Kd is 11%) the WACC = 0.1363
Thus, WACC (Market value based) = 13.54% or 13.63%

Question 13
Answer the following:
The capital structure of a Company is given below:
Source of capital Book Value (₹)
Equity shares @ ₹ 100 each 24,00,000
9% Cumulative preference shares @ ₹ 100 each 4,00,000
11% Debentures 12,00,000
40,00,000
The company had paid equity dividend @ 25% for the last year which is likely to grow @ 5% every year. The
current market price of the company’s equity share is ₹ 200.
Considering corporate tax @ 30%, you are required to CALCULATE:
(i) Cost of capital for each source of capital.
(ii) Weighted average cost of capital. (MTP 5 Marks Sep’22)
Answer 13
i. Calculation of Cost of Capital for each source of capital:
(a) Cost of Equity share capital:
𝐷0 (1+ g) 25% ×₹100(1+ 0.05)
𝐾𝑒 = +g= + 0.05
Market Pr iceper share(𝑝0 ) ₹𝟐𝟎𝟎
₹ 26.25
= ₹ 200 + 0.05 = 0.18125 or 18.125%
(b) Cost of Preference share capital (𝐾𝑝 ) = 9%
(c) Cost of Debentures ( 𝐾𝑑 ) = r (1 – t)
= 11% (1 – 0.3) = 7.7%
ii. Weighted Average Cost of Capital

Chapter 4 Cost of Capital

 4.11

Source Amount (₹) Weights After tax Cost of WACC (%)

(a) Capital (%) (b) (c) = (a) × (b)
Equity share 24,00,000 0.60 18.125 10.875
9% Preference share 4,00,000 0.10 9.000 0.900
11% Debentures 12,00,000 0.30 7.700 2.310
40,00,000 1.00 14.085
Question 14
The financial advisor of Sun Ltd is confronted with following two alternative financing plans for raising ₹ 10
lakhs that is needed for plant expansion and modernization
Alternative I: Issue 80% of funds with 14% Debenture [Face value (FV) ₹ 100] at par and redeem at a premium
𝟏
of 10% after 10 years and balance by issuing equity shares at 33 𝟑% premium.
Alternative II: Raise 10% of funds required by issuing 8% Irredeemable Debentures [Face value (FV) ₹ 100]
at par and the remaining by issuing equity shares at current market price of ₹125.
Currently, the firm has an Earnings per share (EPS) of ₹ 21 The modernization and expansion
programme is expected to increase the firm’s Earnings before Interest and Taxation (EBIT) by ₹ 200,000
annually.
The firm’s condensed Balance Sheet for the current year is given below:
Balance Sheet as on 31.3.2022
Liabilities Amount (₹) Assets Amount (₹)
Current Liabilities 5,00,000 Current Assets 16,00,000
10% Long Term Loan 15,00,000 Plant & Equipment (Net) 34,00,000
Reserves & Surplus 10,00,000
Equity Share Capital (FV: ₹ 100 each) 20,00,000
TOTAL 50,00,000 TOTAL 50,00,000
However, the finance advisor is concerned about the effect that issuing of debt might have on the firm. The
average debt ratio for firms in industry is 35%.He believes if this ratio is exceeded, the P/E ratio of the
company will be 7 because of the potentially greater risk.
If the firm increases its equity capital by more than 10 %, he expects the P/E ratio of the company will
increase to 8.5 irrespective of the debt ratio.
Assume Tax Rate of 25%. Assume target dividend pay-out under each alternative to be 60% for the next year
and growth rate to be 10% for the purpose of calculating Cost of Equity
SUGGEST with reason which alternative is better on the basis of each of the below given criteria:
I. Earnings per share (EPS) & Market Price per share (MPS)
II. Financial Leverage
III. Weighted Average Cost of Capital & Marginal Cost of Capital (using Book Value weights)
(MTP 10 Marks Oct’22)
Answer 14
Calculation of Equity Share capital and Reserves and surplus:
Alternative 1:
₹2,00,000×100
Equity Share capital = ₹20,00,000 + = ₹21,50,000
133.3333

₹2,00,000×33.3333
Reserves = ₹ 10,00,000 + = ₹10,50,000
133.3333

Alternative 2:
₹ 9,00,000×100
Equity Share capital = ₹20,00,000 + 125
= ₹27,20,000

₹9,00,000×25
Reserves = ₹ 10,00,000 + = ₹11,80,000
125

Capital Structure Plans

Chapter 4 Cost of Capital

 4.12

Amount in ₹
Capital Alternative 1 Alternative 2
Equity Share capital 21,50,000 27,20,000
Reserves and surplus 10,50,000 11,80,000
10% long term debt 15,00,000 15,00,000
14% Debentures 8,00,000 -
8% Irredeemable Debentures - 1,00,000
Total Capital Employed 55,00,000 55,00,000

Computation of Present Earnings before interest and tax (EBIT)

EPS (₹) 21
No. of equity shares 20,000
Earnings for equity shareholders (I x II) (₹) 4,20,000
Profit Before Tax (III/75%) (₹) 5,60,000
Interest on long term loan (1500000 x 10%) (₹) 1,50,000
EBIT (IV + V) (₹) 7,10,000
EBIT after expansion = ₹7,10,000 +₹ 2,00,000 = ₹9,10,000
Evaluation of Financial Plans on the basis of EPS, MPS and Financial Leverage
Amount in ₹
Particulars Alternative I Alternate II
EBIT 9,10,000 9,10,000
Less: Interest: 10% on long term loan (1,50,000) (1,50,000)
14% on Debentures (1,12,000) Nil
8% on Irredeemable Debentures Nil. (8000)
PBT 6,48,000 7,52,000
Less: Tax @25% (1,62,000) (1,88,000)
PAT 4,86,000 5,64,000
No. of equity shares 21,500 27,200
EPS 22.60 20.74
Applicable P/E ratio (Working Note 1) 7 8.5
MPS (EPS X P/E ratio) 158.2 176.29
Financial Leverage EBIT/PBT 1.40 1.21

Working Note 1
Alternative I Alternative II
Debt:
₹15,00,000 +₹8,00,000 23,00,000 -
₹15,00,000 +₹1,00,000 - 16,00,000
Total capital Employed (₹) 55,00,000 55,00,000
Debt Ratio (Debt/Capital employed) = 0.4182 = 0.2909
= 41.82% = 29.09%
Change in Equity: ₹21,50,000-₹20,00,000 1,50,000
₹27,20,000-₹20,00,000 7,20,000
Percentage change in equity 7.5% 36%
Applicable P/E ratio 7 8.5
Calculation of Cost of equity and various type of debt
Alternative I Alternative II
A) Cost of equity
EPS 22.60 20.74
DPS (EPS X 60%) 13.56 12.44
Growth (g) 10% 10%
Chapter 4 Cost of Capital
 4.13

Po (MPS) 158.2 176.29

𝑲𝒆 = Do (1 + g)/ Po 13.56(1.1) 12.44(1.1)
158.2 176.29
= 9.43% = 7.76%
B) Cost of Debt:
10% long term debt 10% + (1-0.25) 10% +(1-0.25)
= 7.5% = 7.5%
14% redeemable debentures 14(1 − 0.25) + (110 − 100/10) nil
110 + 100/2
= 10.5 + 1 / 10.5
= 10.95%
8% irredeemable debenture NA 8000(1-0.25)/1,00,00 = 6%
Calculation of Weighted Average cost of capital (WACC)
Alternative 1 Alternative 2
Cost WACC Weights Cost WACC
Capital Weights (%) (%)
Equity Share Capital 0.3909 9.43 3.69% 0.4945 7.76 3.84%
Reserves and Surplus 0.1909 9.43 1.80% 0.2145 7.76 1.66%
10% Long term Debt 0.2727 7.50 2.05% 0.2727 7.50 2.05%
14% Debenture 0.1455 10.95 1.59%
8% Irredeemable Debentures - 0.0182 6 0.11%
9.12% 7.66%

Calculation Marginal Cost of Capital (MACC)

Alternative 1 Alternative 2
Amount(weight) Cost MACC Amount (weight) Cost MACC
Capital (%) (%)
Equity Share Capital ₹ 1,50,000(0.15) 9.43 1.41% ₹7,20,000(0.72) 7.76 5.59%
Reserves and Surplus ₹ 50,000(0.05) 9.43 0.47% ₹1,80,000(0.18) 7.76 1.40%
14% Debenture ₹ 8,00,000(0.80) 10.95 8.76% - 0.00%
8% Irredeemable
Debentures - ₹1,00,000(0.10) 6 0.60%
Total Capital Employed ₹10,00,000 10.65% ₹10,00,000 7.58%

Summary of solution:
Alternate I Alternate II
Earnings per share (EPS) 22.60 20.74
Market price per share (MPS) 158.20 176.29
Financial leverage 1.4043 1.2101
Weighted Average cost of capital (WACC) 9.12% 7.66%
Marginal cost of capital (MACC) 10.65% 7.58%
Alternative 1 of financing will be preferred under the criteria of EPS, whereas Alternative II of financing will be
preferred under the criteria of MPS, Financial leverage, WACC and marginal cost of capital.

Question 15
The proportion and required return of debt and equity was recorded for a company with its increased
financial leverage as below. (MTP 5 Marks, Apr’19)
Debt Required return Equity Required Return (Key) Weighted Average Cost of
(%) (Kid) (%) (%) (%) Capital (WACC) (Ko) (%)
0 5 100 15 15

Chapter 4 Cost of Capital

 4.14

20 6 80 16 ?
40 7 60 18 ?
60 10 40 23 ?
80 15 20 35 ?
You are required to complete the table and IDENTIFY which capital structure is most beneficial for this
company. (Based on traditional theory, i.e., capital structure is relevant).

Answer 15
Computation of Weighted Average Cost of Capital (WACC) for each level of Debt-equity mix.
Debt (%) Required Equity (%) Required Kd× Proportion of debt + Weighted Average
return (Kd) return (Ke) Ke Proportion and equity Cost of Capital
(%) (%) (WACC)(Ko) (%)
0 5 100 15 0% (5%) +100% (15%) 15
20 6 80 16 20% (6%) +80% (16%) 14
40 7 60 18 40% (7%) +60% (18%) 13.6
60 10 40 23 60% (10%) +40% (23%) 15.2
80 15 20 35 80% (15%) +20% (35%) 19
The optimum mix is 40% debt and 60% equity, as this will lead to lowest WACC value i.e., 13.6%.

Question 17
As a financial analyst of a large electronics company, you are required to DETERMINE the weighted average
cost of capital of the company using (a) book value weights and (b) market value weights. The following
information is available for your perusal.
The Company’s present book value capital structure is:
(₹)
Debentures (₹100 per debenture) 8,00,000
Preference shares (₹100 per share) 2,00,000
Equity shares (₹10 per share) 10,00,000
20,00,000
All these securities are traded in the capital markets. Recent prices are:
Debentures, ₹110 per debenture, Preference shares, ₹120 per share, and Equity shares, ₹ 22 per share
Anticipated external financing opportunities are:
(i) ₹ 100 per debenture redeemable at par; 10-year maturity, 11 per cent coupon rate, 4 per cent flotation
costs, sale price, ₹ 100
(ii) ₹ 100 preference share redeemable at par; 10-year maturity, 12 per cent dividend rate, 5 per cent
flotation costs, sale price, ₹100.
(iii) Equity shares: ₹ 2 per share flotation costs, sale price = ₹ 22.
In addition, the dividend expected on the equity share at the end of the year is ₹ 2 per share, the
anticipated growth rate in dividends is 7 per cent and the firm has the practice of paying all its earnings in
the form of dividends. The corporate tax rate is 35 per cent. (RTP May’19)
Answer 17
Determination of specific costs:
(𝑅𝑉−𝑁𝑃) (𝑅𝑠.100−𝑅𝑠.96)
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡(1−𝑡) + 𝑅𝑠.11(1−0.35) +
𝑁 10 𝑌𝑒𝑎𝑟𝑠
(i) Cost Debt(𝐾𝑑 ) = (𝑅𝑉+𝑁𝑃) = (𝑅𝑠.100+𝑅𝑠.96)
2 2
𝑅𝑠.7.15+𝑅𝑠.0.4
= 𝑅𝑠.98
= 0.077 or 7.70%

(𝑅𝑉−𝑁𝑃) (𝑅𝑠.100 − 𝑅𝑠.95)

𝑃𝐷 + 𝑅𝑠.12 +
𝑁 10 𝑌𝑒𝑎𝑟𝑠
(ii) Cost of Preference Shares(𝐾𝑝 ) = (𝑅𝑉+𝑁𝑃) =
(𝑅𝑠.100+ 𝑅𝑠.95)
2 2
𝑅𝑠.12+𝑅𝑠.0.5
= 𝑅𝑠.97.5 = 0.1282 or 12.82%
Chapter 4 Cost of Capital
 4.15

𝐷 𝑅𝑠.2
(iii) Cost of Equity Shares (𝐾𝑒 ) = 𝑃1 + G = 𝑅𝑠.22−𝑅𝑠.2 +0.07 = 0.17 or 17%
0

I – Interest, t – Tax, RV- Redeemable value, NP- Net proceeds, N- No. of years, PD- Preference dividend,
D1- Expected Dividend, P0- Price of share (net)
Using these specific costs we can calculate WACC on the basis of book value and market value weights
as follows:
(a) Weighted Average Cost of Capital (K0) based on Book value weights
Source of capital Book value Weights Specific WACC (%)
(₹) cost (%)
Debentures 8,00,000 0.40 7.70 3.08
Preferences shares 2,00,000 0.10 12.82 1.28
Equity shares 10,00,000 0.50 17.00 8.50
20,00,000 1.00 12.86
(b) Weighted Average Cost of Capital (K0) based on market value weights:
Source of capital Market value (₹) Weights Specific cost (%) WACC (%)
Debentures 8,80,000 0.265 7.70 2.04
𝑹𝒔. 𝟖, 𝟎𝟎, 𝟎𝟎𝟎
( × 𝑹𝒔. 𝟏𝟏𝟎)
𝑹𝒔. 𝟏𝟎𝟎

Preferences shares 2,40,000 0.072 12.82 0.92

𝑹𝒔. 𝟐, 𝟎𝟎, 𝟎𝟎𝟎
( × 𝑹𝒔. 𝟏𝟐𝟎)
𝑹𝒔. 𝟏𝟎𝟎

Equity shares 22,00,000 0.663 17.00 11.27

𝑹𝒔. 𝟏𝟎, 𝟎𝟎, 𝟎𝟎𝟎
( × 𝑹𝒔. 𝟐𝟐)
𝑹𝒔. 𝟏𝟎

33,20,000 1.000 14.23

Question 18
Kalyanam Ltd. has an operating profit of ₹ 34,50,000 and has employed Debt which gives total Interest
Charge of ₹ 7,50,000. The firm has an existing Cost of Equity and Cost of Debt as 16% and 8%
respectively. The firm has a new proposal before it, which requires funds of ₹ 75 Lakhs and is expected
to bring an additional profit of ₹ 14,25,000. To finance the proposal, the firm is expecting to issue an
additional debt at 8% and will not be issuing any new equity shares in the market. Assume no tax
culture.
You are required to CALCULATE the Weighted Average Cost of Capital (WACC) of Kalyanam Ltd.:
(i) Before the new Proposal
(ii) After the new Proposal (RTP Nov’21, Old & New SM)
Answer 18
Workings:
Interest
(a) Value of Debt =
Cost of debt(Kd )

𝑅𝑠.7,50,000
= = Rs. 93,75,000
0.08
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡−𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
(b) Value of equity capital =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 (Ke )
𝑅𝑠.34,50,000−𝑅𝑠.7,50,000
= = Rs. 1,68,75,000
0.16
(c) New Cost of equity (𝐊 𝐞 ) after proposal
𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑑 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡−𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑑 𝑑𝑒𝑏𝑡
=
𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Chapter 4 Cost of Capital

 4.16

(𝑅𝑠.34,50,000+𝑅𝑠.14,25,000)−(𝑅𝑠.7,50,000+𝑅𝑠.6,00,000)
=
𝑅𝑠.1,68,75,000
𝑅𝑠.48,75,000−𝑅𝑠.13,50,000 𝑅𝑠.35,25,000
= = = 0.209 or 20.9%
𝑅𝑠.1,68,75,000 𝑅𝑠.1,68,75,000

(i) Calculation of Weighted Average Cost of Capital (WACC) before the new proposal
Sources Amount (₹) Weight Cost of WACC
Capital
Equity 1,68,75,000 0.6429 0.160 0.1029
Debt 93,75,000 0.3571 0.080 0.0286
Total 2,62,50,000 1 0.1315 or 13.15 %
(ii) Calculation of Weighted Average Cost of Capital (WACC) after the new proposal
Sources Amount (₹) Weight Cost of WACC
Capital
Equity 1,68,75,000 0.5000 0.209 0.1045
Debt 1,68,75,000 0.5000 0.080 0.0400
Total 3,37,50,000 1 0.1445 or 14.45 %

Question 19
The information relating to book value (BV) and market value (MV) weights of Ex Limited is given
below:
Sources Book Value (₹) Market Value (₹)
Equity shares 2,40,00,000 4,00,00,000
Retained earnings 60,00,000 -
Preference shares 72,00,000 67,50,000
Debentures 18,00,000 20,80,000
Additional information:
I. Equity shares are quoted at ₹ 130 per share and a new issue priced at ₹ 125 per share will be
fully subscribed; flotation costs will be ₹ 5 per share on face value.
II. During the previous 5 years, dividends have steadily increased from ₹ 10 to ₹ 16.105 per share.
Dividend at the end of the current year is expected to be ₹ 17.716 per share.
III. 15% Preference shares with face value of ₹ 100 would realise ₹ 105 per share.
IV. The company proposes to issue 11-year 15% debentures but the yield on debentures of similar
maturity and risk class is 16%; flotation cost is 2% on face value.
V. Corporate tax rate is 30%.
You are required to DETERMINE the weighted average cost of capital of Ex Limited using
both the weights. (RTP May’22) (Same concept different figures Old & New SM)
Answer 19
𝐷1 𝑅𝑠.17.716
(i) Cost of Equity (𝐾𝑒 ) = 𝑃 −𝐹 + g = 𝑅𝑠.125−𝑅𝑠.5 + 0.10*
0
𝐾𝑒 = 0.2476
∗ Calculation of g:
𝑅𝑠. 10 (1+g)5 = Rs. 16.105
16.105
𝑂𝑟, (1+g)5 = 10 = 1.6105

Table (FVIF) Suggests that Rs. 1 Compounds to Rs. 1.6105 in 5 years at the Compound rate of 10
percent. Therefore, g is 10 per cent.

𝐷 𝑅𝑠.17.716
(ii) Cost of Retained Earnings (𝐾𝑟 ) = 𝑃1 + g = 𝑅𝑠.130
+0.10 = 0.2363
0

𝑃𝐷 𝑅𝑠.15
(iii) Cost of Preference Shares (𝐾𝑝 ) = 𝑃0
= 𝑅𝑠.105 = 0.1429

Chapter 4 Cost of Capital

 4.17

𝑅𝑉−𝑁𝑃
𝐼(1−𝑡) + ( )
𝑛
(iv) Cost of Debentures (𝐾𝑑 ) = 𝑅𝑉+𝑁𝑃
2
𝑅𝑠.100−𝑅𝑠.91.75∗
𝑅𝑠.15(1−0.30) + ( )
11 𝑦𝑒𝑎𝑟𝑠
= 𝑅𝑠.100+𝑅𝑠.91.75∗
2
𝑅𝑠.15×0.70+𝑅𝑠.0.75 𝑅𝑠.11.25
= 𝑅𝑠.95.875
= 𝑅𝑠.95.875 = 0.1173

*Since yield on similar type of debentures is 16 per cent, the company would be required to offer
debentures at discount.
Market price of debentures (approximation method)
= ₹ 15 ÷ 0.16 = ₹ 93.75
Sale proceeds from debentures = ₹ 93.75 - ₹ 2 (i.e., floatation cost) = ₹ 91.75
Market value (P0) of debentures can also be found out using the present value method:
P0 = Annual Interest × PVIFA (16%, 11 years) + Redemption value × PVIF (16%, 11 years)
P0 = ₹ 15 × 5.0287 + ₹ 100 × 0.1954
P0 = ₹ 75.4305 + ₹ 19.54 = ₹ 94.9705
Net Proceeds = ₹ 94.9705 – 2% of ₹ 100 = ₹ 92.9705
Accordingly, the cost of debt can be calculated
Sale proceeds from debentures = ₹ 93.75 – ₹ 2 (i.e., floatation cost) = ₹91.75
Total Cost of capital [BV weights and MV weights]
(Amount in (₹) lakh)
Source of capital Weights Specific Total cost
BV MV Cost (K) (BV × K) (MV × K)
Equity Shares 240 320** 0.2476 59.4240 79.2320
Retained Earnings 60 80** 0.2363 14.1780 18.9040
Preference Shares 72 67.50 0.1429 10.2888 9.6458
Debentures 18 20.80 0.1173 2.1114 2.4398
Total 390 488.30 86.0022 110.2216
**Market Value of equity has been apportioned in the ratio of Book Value of equity and retained earnings
i.e., 240:60 or 4:1.
Weighted Average Cost of Capital (WACC):
𝐑𝐬.𝟖𝟔.𝟎𝟎𝟐𝟐
Using Book Value = 𝐑𝐬.𝟑𝟗𝟎 = 0.2205 or 22.05%
𝐑𝐬.𝟏𝟏𝟎.𝟐𝟐𝟏𝟔
Using Market Value = 𝐑𝐬.𝟒𝟖𝟖.𝟑𝟎
= 0.2257 or 22.57%

Question 20
Bounce Ltd. evaluates all its capital projects using discounting rate of 15%. Its capital structure consists of
equity share capital, retained earnings, bank term loan and debentures redeemable at par.
Rate of interest on bank term loan is 1.5 times that of debenture. Remaining tenure of debenture and bank
loan is 3 years and 5 years respectively. Book value of equity share capital, retained earnings and bank loan
is ₹ 10,00,000, ₹ 15,00,000 and ₹ 10,00,000 respectively. Debentures which are having book value of
₹ 15,00,000 are currently trading at ₹ 97 per debenture. The ongoing P/E multiple for the shares of the
company stands at 5. You are required to CALCULATE the rate of interest on bank loan and debentures if
tax rate applicable is 25%. (RTP Nov’22)
Answer 20
Let the rate of Interest on debenture be x
∴ Rate of Interest on loan = 1.5x
𝑅𝑉−𝑁𝑃
𝐼𝑛𝑡(1−𝑡)+ 𝑛
∴ 𝐾𝑑 on debentures = 𝑅𝑉+𝑁𝑃
2
100−97
100 × (1−0.25) + 75𝑥+1
3
= 100+97 =
98.5
2

Chapter 4 Cost of Capital

 4.18

∴ 𝑘𝑑 on bank loan = 1.5x (1 – 0.25) = 1.125x

𝐸𝑃𝑆 1 1 1
𝑘𝑒 = 𝑀𝑃𝑆 = 𝑀𝑃𝑆/𝐸𝑃𝑆 = 𝑃/𝐸 = 5 = 0.2 𝑘𝑦 = 𝑘𝑒 = 0.2
Computation of WACC
Capital Amount (₹) Weights Cost Product
Equity 10,00,000 0.2 0.2 0.04
Reserves 15,00,000 0.3 0.2 0.06
Debentures 15,00,000 0.3 (75x+1)/98.5 (22.5x + 0.3)/98.5
Bank Loan 10,00,000 0.2 1.125x 0.225x
50,00,000 1 0.1 + 0.225x +
22.5x + 0.3
98.5
WACC = 15%
22.5𝑥 0.3
∴ 0.1 + 0.225× 98.5 + 98.5= 0.15
∴ 9.85+22.1625x+22.5x+0.3 = (0.15) (98.5)
∴ 44.6625x = 14.775 – 9.85 – 0.3
∴ 44.6625x = 4.625
4.625
∴x=
44.6625
∴ x = 10.36 %.
∴ Rate of interest on debenture = x= 10.36%
Rate of interest on Bank loan = 1.5x = (1.5) (10.36%) = 15.54%.

Question 21
Amrit Corporation has the following book value capital structure:
Equity Capital (50 lakh shares of ₹ 10 each). ₹ 5,00,00000
15% Preference share (50,000 shares ₹ 100 each) ₹ 50,00,000
Retained earnings ₹ 4,00,00,000
Debentures 14% (2,50,000 debentures ₹ 100 each) ₹ 2,50,00,000
Term loan 13% ₹ 4,00,00,000
The companies last year earnings per share was ₹ 5, and it maintains a dividend pay-out ratio of 60% and
returns on equity is 10%. The market price per share is ₹ 20.8. Preference share redeemable after 10 years
is currently selling for ₹ 90 per share. Debentures redeemable after 6 years are currently selling for ₹ 75
per debenture. The income tax rate is 40%.
(a) CALCULATE the Weighted Average Cost of Capital (WACC) using market value proportions.
(b) DETERMINE the Marginal Cost of Capital (MACC) if it needs ₹ 5,00,00000 next year assuming the amount
will be raised by 60% equity, 20% debt and 20% retained earnings. Equity issues will fetch a net price of
₹ 14 and cost of debt will be 13% before tax up to ₹ 40,00,000 and beyond ₹ 40,00,000 it will be 15%
before tax. (RTP May’23)
Answer 21
(a) Calculation of Cost of Equity
(i) 𝐷0 = ₹ 5x 60%= ₹ 3
g=bxr
= (1-0.6) x 10% = 4%
𝐷1 = 𝐷0 x (1 + g)= 3 x (1 + 4%)= 3 x 1.04 = 3.12
𝐷 3.12
𝐾𝑒 = 𝑃1 + g = 20.8 + 0.04= 19%
0

(ii) Calculation of Cost of Preference Shares

N =10 years ,NP = ₹ 90 ,PD = ₹ 15, RV = ₹ 100
𝑃𝐷+(𝑅𝑉−𝑁𝑃 )/𝑁
𝐾𝑃 = (𝑅𝑉+𝑁𝑃)
X 100
15+(100−90 )/10
𝐾𝑃 = (100+90)/2
X 100

Chapter 4 Cost of Capital

 4.19

𝐾𝑃 = 16/95 x 100= 16.84%

(iii) Calculation of Cost of Debentures

N = 6 years, NP = ₹ 75, Interest = ₹ 14, RV =₹100, T = 40%
𝑖𝑛𝑡(1−𝑡)+(𝑅𝑉−𝑁𝑃 )/𝑁
𝐾𝑑 = (𝑅𝑉+𝑁𝑃)/2
X 100
14(1−0.4)+(100−75 )/6 8.4−4.17
𝐾𝑑 = (100+75)/2
X 100= 𝐾𝑑 = 87.5
X 100=14.37%

(iv) Cost of Term Loan

Kd = Interest rate (1-t)
Kd = 13% (1-40%) = 7.8%

Calculation of Weighted Average Cost of Capital (WACC) (using market weights)

Capital Cost of Market Value Market Product
Capital Value (Cost x
Weights weights)
Equity 19.00% 20.8 x 50,00,000 ₹10,40,00,000 0.6218 11.81%
Preference Shares 16.84% 90 x 50,000 ₹ 45,00,000 0.0269 0.45%
Debentures 14.37% 75 x 2,50,000 ₹ 1,87,50,000 0.1121 1.61%
Term Loan 7.80% ₹ 4,00,00,000 0.2392 1.87%
Total ₹16,72,50,000 1 15.74%
WACC= 15.74%

(b) Calculation of Marginal Cost of Capital (MACC)

The required capital of ₹ 50,000,000 will be raised as follows:
Equity = 60% of ₹ 50,000,000 = ₹ 3,00,00,000
Deby = 20% of ₹ 50,000,000 = ₹1,00,00,000
Retained Earnings= 20% of ₹ 50,000,000 = ₹ 1,00,00,000
3.12
Marginal Cost of Equity = + 0.04
1.4
= 26.28%
Marginal Cost of Debt
13 % 𝑜𝑓 𝑅𝑠.40,00,000+15 % 𝑜𝑓 𝑅𝑠.60,00,000
Cost of Debt (before tax) =
𝑅𝑠.1,00,00,000
𝑅𝑠.5,20,000 + 𝑅𝑠.9,00,000
= = 14.2%
𝑅𝑠.1,00,00,000

Cost of Debt (after tax). = 14.2% (1-t)

= 14.2% (1-0.4)
= 8.52%
Calculation of marginal cost of capital
Capital Cost of Capital Value Weights Product (Cost x weights)
Equity 26.28% ₹ 3,00,00,000 0.6 15.77%
Reserves 26.28% ₹ 1,00,00,000 0.2 5.26%
Debt 8.52% ₹ 1,00,00,000 0.2 1.70%
Total ₹ 5,00,00,000 1 22.73%
Marginal Cost of Capital (MACC) = 22.73%

Question 22
Jason Limited is planning to raise additional finance of ₹ 20 lakhs for meeting its new project plans. It
has ₹ 4,20,000 in the form of retained earnings available for investment purposes. Further details are as
following:
Debt / Equity Mix 30 / 70
Chapter 4 Cost of Capital
 4.20

Cost of Debt
Up-to ₹ 3,60,000 8 % (before tax)
Beyond ₹ 3,60,000 12 % (before tax)
Earnings per share ₹4
Dividend pay-out 50% of earnings
Current Market Price per share ₹ 44
Expected Growth rate in Dividend 10 %
Tax 40%
You are required:
(a) To determine the cost of retained earnings and cost of equity.
(b) To determine the post-tax average cost of additional debt.
(c) To determine the pattern for raising the additional finance, and
(d) Compute the overall weighted average after tax cost of additional finance. (RTP Nov’23)
Answer 22
(a) Cost of Equity / Retained Earnings (using dividend growth model)
𝐷
Ke = 𝑃1
0
where D1 = Do (1 + g) = 2 (1 + .10) = 2.2
2.2
Ke = 44 + 0.10 = 0.15 o r 15%

(b) Cost of Debt (Post Tax)

Kd = I (1-t)
Upto 3,60,000 Kd = .08 (1-0.4) = 0.048
Beyond 3,60,000 = .12 (1-0.4) = 0.072
Thus, post-tax cost of additional debt = 0.048 x 3,60,000 / 6,00,000 + 0.072 x 2,40,000/ 6,00,000 =
0.0288 + 0.0288 = 0.0576 or 5.76%

(c) Pattern for Raising Additional Finance

Debt = 20,00,000 x 30% = 6,00,000
Equity = 20,00,000 x 70 % = 14,00,000
Out of this total equity amount of ₹ 14,00,000 –
Equity Shares = 14,00,000 – 4,20,000
= 9,80,000
And Retained Earnings = 4,20,000

(d) Overall Weighted Average after tax cost of additional finance

WACC = Kd x Debt Mix + Ke x Equity Mix = 0.0576 x 30% + 0.15 x 70% = 0.01728 + 0.105 = 0.1223
or 12.23% (approx.)

Question 23
Following are the information of TT Ltd.:
Particulars
Earnings per share Rs.10
Dividend per share Rs.6
Expected growth rate in Dividend 6%
Current market price per share Rs.120
Tax Rate 30%
Requirement of Additional Finance Rs.30 lakhs
Debt Equity Ratio (For additional finance) 2:1
Cost of Debt
0-5,00,000 10%
5,00,001 - 10,00,000 9%
Above 10,00,000 8%
Chapter 4 Cost of Capital
 4.21

Assuming that there is no Reserve and Surplus available in TT Ltd. You are required to:
(a) Find the pattern of finance for additional requirement
(b) Calculate post tax average cost of additional debt
(c) Calculate cost of equity
(d) Calculate the overall weighted average after tax cost of additional finance. (PYP 10 Marks, Jul’21)
Answer 23
(a) Pattern of raising additional finance
Equity 1/3 of Rs.30,00,000 = Rs.10,00,000
Debt 2/3 of Rs.30,00,000 = Rs.20,00,000
The capital structure after raising additional finance:
Particulars (₹)
Shareholder’s Funds
Equity Capital 10,00,000
Debt (Interest at 10% p.a.) 5,00,000
(Interest at 9% p.a.) 5,00,000
(Interest at 8% p.a.) (20,00,000–10,00,000) 10,00,000
Total Funds 30,00,000
(b) Determination of post-tax average cost of additional debt
𝐾𝑒 = I (1 – t)
Where,
I = Interest Rate
t = Corporate tax-rate
On First ₹ 5,00,000 = 10% (1 – 0.3) = 7% or 0.07
On Next ₹ 5,00,000 = 9% (1 – 0.3) = 6.3% or 0.063
On Next Rs.10,00,000 = 8% (1 – 0.3) = 5.6% or 0.056
Average Cost of Debt
(₹ 5,00,000× 0.07)+ (₹ 5,00,000 ×0.063)+ (Rs.10,00,000 × 0.056)
= × 100 = 6.125%
20,00,000
(c) Determination of cost of equity applying Dividend growth model:
D1
𝐾𝑒 = +g
p0
Where,
𝐾𝑒 = Cost of equity
D1 = D0 (1+ g)
D0 = Dividend paid
g = Growth rate = 6%
P0 = Current market price per share = Rs.120
Rs.6(1+0.06) Rs.6.36
𝐾𝑒 = Rs.120 + 0.06 = Rs.120 + 0.06 = 0.113 or 11.3%
(d) Computation of overall weighted average after tax cost of additional finance
Particulars (Rs) eights Cost of funds Weighted Cost (%)
Equity 10,00,000 1/3 11.3% 3.767
Debt 20,00,000 2/3 6.125% 4.083
WACC 30,00,000 7.85
(Note: In the above solution different interest rate have been considered for different slab of Debt)

Alternative Solution
(a) Pattern of raising additional finance
Equity 1/3 of Rs.30,00,000 = Rs.10,00,000
Debt 2/3 of Rs.30,00,000 = Rs.20,00,000

The capital structure after raising additional finance:

Particulars (₹)

Chapter 4 Cost of Capital

 4.22

Shareholders’ Funds
Equity Capital 10,00,000
Debt (Interest at 8% p.a.) 20,00,000
Total Funds 30,00,000

(b) Determination of post-tax average cost of additional debt Kd = I (1 – t)

Where,
I = Interest Rate
t = Corporate tax-rate
𝐾𝑑 = 8% (1 – 0.3) = 5.6%
(c) Determination of cost of equity applying Dividend growth model:
D
Then, k e = p 1 +g
0
Where,
𝐾𝑒 = Cost of equity
𝐷1 = 𝐷0 (1+ g)
𝐷0 = Dividend paid
g = Growth rate =6%
𝑃0 = Current market price per share = Rs.120

Rs.6(1+0.06) Rs.6.36
𝐾𝑒 = + 0.06 = + 0.06 = 0.13 or 11.3%
Rs.120 Rs.120
(d) Computation of overall weighted average after tax cost of additional finance
Particulars (₹) Weights Cost of funds Weighted Cost (%)
Equity 10,00,000 1/3 11.3% 3.767
Debt 20,00,000 2/3 5.6% 3.733
WACC 30,00,000 7.50
(Note: In the above solution single interest rate have been considered for Debt)

Question 24
The Capital structure of PQR Ltd. is as follows:
₹
10% Debenture 3,00,000
12% Preference Shares 2,50,000
Equity Share (face value Rs.10 per share) 5,00,000
10,50,000
Additional Information:
(i) Rs.100 per debenture redeemable at par has 2% floatation cost & 10 years of maturity. The market price
per debenture is Rs.110.
(ii) Rs.100 per preference share redeemable at par has 3% floatation cost & 10 years of maturity. The market
price per preference share is Rs.108.
(iii) Equity share has Rs.4 floatation cost and market price per share of Rs.25. The next year expected dividend
is Rs.2 per share with annual growth of 5%. The firm has a practice of paying all earnings in the form of
dividends.
(iv) Corporate Income Tax rate is 30%. Required:
Calculate Weighted Average Cost of Capital (WACC) using market value weights. (PYP 10 Marks, Jan’21)
Answer 24
Workings:
D1 Rs.2
1. Cost of Equity (𝐾𝑒 ) = +g = + 0.050 = 0.145 (approx. )
p0−F Rs.25−Rs.4
(RV−NP)
I(1−t) +
n
2. Cost of Debt (𝐾𝑑 ) = (RV−NP)
2
Chapter 4 Cost of Capital
 4.23

(100−98)
10(1−0.03)+ 7+0.2
10
= (100+98) = 99 =0.073(approx.)
10
(RV−NP)
PD+
n
3. Cost of Preference Shares (𝐾𝑝 ) = (RV+NP)
2
(100−97)
12 + 12+0.3
10
= (100+97) = = 0.125(approx.)
98.5
2

Calculation of WACC using market value weights

Source of capital Market Weights After tax WACC (Ko)
Value cost of
capital
(₹) (a) (b) (c) = (a) × (b)
10% Debentures (Rs.110 × 3,000) 3,30,000 0.178 0.073 0.013
12% Preference shares 2,70,000 0.146 0.125 0.018
(Rs.108 × 2,500)
Equity shares (Rs.25 × 50,000) 12,50,000 0.676 0.145 0.098
18,50,000 1.00 0.129
WACC (𝐾𝑜 ) = 0.129 or 12.9% (approx.)

Question 25
TT Ltd. issued 20,000, 10% convertible debenture of Rs.100 each with a maturity period of 5 years. At
maturity the debenture holders will have the option to convert debentures into equity shares of the
company in ratio of 1:5 (5 shares for each debenture). The current market price of the equity share is
Rs.20 each and historically the growth rate of the share is 4% per annum. Assuming tax rate is 25%.
Compute the cost of 10% convertible debenture using Approximation Method and Internal Rate of Return
Method.
PV Factor are as under:
Year 1 2 3 4 5
PV Factor @ 10% 0.909 0.826 0.751 0.683 0.621
PV Factor @ 15% 0.870 0.756 0.658 0.572 0.497
(PYP 5 Marks, Nov’20)
Answer 25
Determination of Redemption value:
Higher of -
(i) The cash value of debentures = ₹100
(ii) Value of equity shares = 5 shares × Rs.20 (1+0.04)5
= 5 shares × Rs.24.333
= ₹121.665 rounded to ₹121.67
₹121.67 will be taken as redemption value as it is higher than the cash option and attractive to the
investors.
Calculation of Cost of 10% Convertible debenture
(i) Using Approximation Method:
(RV−NP) (121.67−100)
I(1−t)+ 10(1−0.25)+ 7.5+4.334
n 5
𝐾𝑑 = (RV+NP) = (121.67−100) =
110.835
2 2
= 10.676%
(ii) Using Internal Rate of Return Method
Year Cash flows Discount factor Present Discount factor Present Value
(₹) @ 10% Value @ 15% (₹)
0 100 1.000 (100.00) 1.000 (100.00)
1 to 5 7.5 3.790 28.425 3.353 25.148
5 121.67 0.621 75.557 0.497 60.470
Chapter 4 Cost of Capital
 4.24

NPV +3.982 -14.382

𝐍𝐏𝐕𝐥 𝟑.𝟗𝟖𝟐
IRR = L+ (𝐇 − 𝐋) = 𝟏𝟎% + (𝟏𝟓% − 𝟏𝟎%)
𝐍𝐏𝐕𝐥 −𝐍𝐏𝐕𝐡 𝟑.𝟗𝟖𝟐—(−𝟏𝟒.𝟑𝟖𝟐)
= 0.11084 or 11.084% (approx.)

Question 26
A Company wants to raise additional finance of ₹ 5 crore in the next year. The company expects to retain
Rs.1 crore earning next year. Further details are as follows:
(i) The amount will be raised by equity and debt in the ratio of 3: 1.
(ii) The additional issue of equity shares will result in price per share being fixed at Rs.25.
(iii) The debt capital raised by way of term loan will cost 10% for the first ₹ 75 lakh and 12% for the next
₹ 50 lakh.
(iv) The net expected dividend on equity shares is Rs.2.00 per share. The dividend is expected to grow at
the rate of 5%.
(v) Income tax rate is 25%.
You are required:
(a) To determine the amount of equity and debt for raising additional finance.
(b) To determine the post-tax average cost of additional debt.
(c) To determine the cost of retained earnings and cost of equity.
(d) To compute the overall weighted average cost of additional finance after tax. (PYP 10 Marks, Nov’19)
Answer 26
a. Determination of the amount of equity and debt for raising additional finance:
Pattern of raising additional finance
Equity 3/4 of ₹ 5 Crore = Rs.3.75 Crore
Debt 1/4 of ₹ 5 Crore = Rs.1.25 Crore
The capital structure after raising additional finance:
Particulars (₹ In crore)
Shareholders’ Funds
Equity Capital (3.75 – 1.00) 2.75
Retained earnings 1.00
Debt (Interest at 10% p.a.) 0.75
(Interest at 12% p.a.) (1.25-0.75) 0.50
Total Funds 5.00
b. Determination of post-tax average cost of additional debt
𝐾𝑑 = I (1 – t)
Where,
I = Interest Rate
t = Corporate tax-rate
On ₹ 75,00,000 = 10% (1 – 0.25) = 7.5% or 0.075
On ₹ 50,00,000 = 12% (1 – 0.25) = 9% or 0.09
Average Cost of Debt

(₹ 𝟕𝟓,𝟎𝟎,𝟎𝟎𝟎 ×𝟎.𝟎𝟕𝟓)+ (₹ 𝟓𝟎,𝟎𝟎,𝟎𝟎𝟎 ×𝟎.𝟎𝟗)

=
𝟏,𝟐𝟓,𝟎𝟎,𝟎𝟎𝟎
× 𝟏𝟎𝟎

₹ 𝟓,𝟔𝟐,𝟓𝟎𝟎 + ₹ 𝟒,𝟓𝟎,𝟎𝟎𝟎
= x 100 = 8.10%
𝟏,𝟐𝟓,𝟎𝟎,𝟎𝟎𝟎

c. Determination of cost of retained earnings and cost of equity (Applying Dividend growth model):

Chapter 4 Cost of Capital

 4.25

D
ke = p1 + g
0
Where,
k e = Cost of equity
D1 = D0 (1+ g)
D0 = Dividend paid (i.e = Rs.2)
g = Growth rate
p0 = Current market price per share
Rs.2(1.05) Rs.2.1
Then, k e = + 0.05 = + 0.05 = 0.084 + 0.05 = 0.134 = 13.4%
Rs.25 Rs.25
Cost of retained earnings equals to cost of Equity i.e. 13.4%
d. Computation of overall weighted average after tax cost of additional finance
Particular (₹) Weights Cost of Weighted Cost
funds (%)
Equity (including 3,75,00,000 3/4 13.4% 10.05
retained earnings)
Debt 1,25,00,000 1/4 8.1% 2.025
WACC 5,00,00,000 12.075

Question 27
Explain the significance of Cost of Capital. (PYP 4 Marks, Nov’19)
Answer 27
Significance of the Cost of Capital: The cost of capital is important to arrive at correct amount and helps the
management or an investor to take an appropriate decision. The correct cost of capital helps in the following
decision making:
(i) Evaluation of investment options: The estimated benefits (future cash flows) from available
investment opportunities (business or project) are converted into the present value of benefits by
discounting them with the relevant cost of capital. Here it is pertinent to mention that every investment
option may have different cost of capital hence it is very important to use the cost of capital which is
relevant to the options available. Here Internal Rate of Return (IRR) is treated as cost of capital for
evaluation of two options (projects).
(ii) Performance Appraisal: Cost of capital is used to appraise the performance of a particulars project
or business. The performance of a project or business in compared against the cost of capital which
is known here as cut-off rate or hurdle rate.
(iii) Designing of optimum credit policy: While appraising the credit period to be allowed to the
customers, the cost of allowing credit period is compared against the benefit/ profit earned by
providing credit to customer of segment of customers. Here cost of capital is used to arrive at the
present value of cost and benefits received.

Question 28
Alpha Ltd. has furnished the following information:
- Earning Per Share (EPS) Rs.4
- Dividend payout ratio 25%
- Market price per share ₹ 50
- Rate of tax 30%
- Growth rate of dividend 10%
The company wants to raise additional capital of Rs.10 lakhs including debt of Rs.4 lakhs. The cost of debt
(before tax) is 10% up to Rs.2 lakhs and 15% beyond that. Compute the after tax cost of equity and debt
and also weighted average cost of capital. (PYP 5 Marks, May’19)
Answer 28
i. Cost of Equity Share Capital (𝐤 𝐞 )
D0 (1+ g) 25% of Rs.4(1+0.10) Rs.1.10
ke = +g= + 0.10 = + 0.10 = 𝟎. 𝟏𝟐𝟐 𝐨𝐫 𝟏𝟐. 𝟐%
P0 Rs.50 Rs.50

Chapter 4 Cost of Capital

 1.1

Chapter 1
Introduction of Strategic Management
Question 1
Mr. Raj has been hired as a CEO by XYZ ltd a FMCG company that has diversified into affordable
cosmetics. The company intends to launch Feelgood brand of cosmetics. XYZ wishes to enrich the lives
of people with its products that are good for skin and are produced in ecologically beneficial manner
using herbal ingredients. Draft vision and mission statement that may be formulated by Raj.
( RTP Nov’20, Nov’19, New SM)
Answer 1
Feelgood brand of cosmetics may have following vision and mission:
Vision: Vision implies the blueprint of the company’s future position. It describes where the organisation
wants to land. Mr. Raj should aim to position “Feelgood cosmetics” as India’s beauty care company.
It may have vision to be India’ largest beauty care company that improves looks, give extraordinary
feeling and bring happiness to people.
Mission: Mission delineates the firm’s business, its goals and ways to reach the goals. It explains the
reason for the existence of the firm in the society. It is designed to help potential shareholders and
investors understand the purpose of the company:
Mr. Raj may identify mission in the following lines:
 To be in the business of cosmetics to enhance the lives of people, give them confidence to lead.
 To protect skin from harmful elements in environment and sun rays.
 To produce herbal cosmetics using natural ingredients.

Question 2
“Strategy is partly proactive and partly reactive.” Discuss.
(MTP Oct ‘19, Mar’21 5 Marks, PYP 5 Marks Nov ’18, RTP May 18 & Nov ’20, Old & New SM)
Answer 2
Strategy is partly proactive and partly reactive. In proactive strategy, organizations will analyze possible
environmental scenarios and create strategic framework after proper planning and set procedures and
work on these strategies in a predetermined manner. However, in reality no company can forecast both
internal and external environment exactly. Everything cannot be planned in advance. It is not possible
to anticipate moves of rival firms, consumer behaviour, evolving technologies and so on.
There can be significant deviations between what was visualized and what actually happens.
Strategies need to be attuned or modified in the light of possible environmental changes. There can be
significant or major strategic changes when the environment demands. Reactive strategy is triggered
by the changes in the environment and provides ways and means to cope with the negative factors ortake
advantage of emerging opportunities.

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

Candidates had sufficient knowledge of strategy as being partly proactive and partly reactive.
The overall performance was good.

Question 3
Briefly explain the importance of strategic management.
(MTP-March ‘18, Oct’18 5 Marks, RTP-Nov ’18 & Nov ’22, PYP 5 Marks Dec ‘21)
Answer 3
Importance of Strategic Management: Strategic Management is very important for the survival and
growth of business organizations in dynamic business environment. Other major benefits of strategic
management are as follows:
• It helps organizations to be more proactive rather than reactive in dealing with its future. It
facilitates the organisations to work within vagaries of environment and remains adaptable
with the turbulence or uncertain future. Therefore, they are able to control their own destiny in
a better way.
• It provides better guidance to entire organization on the crucial point – what it is trying to do. Also
provides framework for all major business decisions of an enterprise such a decision on businesses,

Chapter 1 Introduction of Strategic Management

 1.2

products, markets, organization structures, etc.

• It facilitates to prepare the organization to face the future and act as path finder to various
business opportunities. Organizations are able to identify the available opportunities and identify
ways and means as how to reach them.
• It serves as a corporate defense mechanism against mistakes and pitfalls. It helps organizations
to avoid costly mistakes in product market choices or investments.
• Over a period of time, strategic management helps organizations to evolve certain core
competencies and competitive advantages that assist in the fight for survival and growth.

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

Most of the examinees were explained well the benefits of strategic management. Hence, the
performance was above average.

Question 4
Kamal Sweets Corner, a very popular sweets shop in Ranchi, was facing tough competition from branded
stores of packaged sweets and imported goods. The owners realised that their business reduced by 50%
in the last six months, and this created a stressful business environment for them. To find a solution,
they consulted a business consultant to help them develop a strategy to fight competition and sustain
their century old family business. The business consultant advised them to innovate a new snack for the
public and market it as a traditional snack of the region. The owners liked the idea and developed a new
snack called Dahi Samosa, which very quickly became popular amongst the public and it helped regain
the lost business of Kamal Sweets Corner.
One of the very crucial importance of strategic management was used by the business consultant to help
the owners of Kamal Sweets Corner. Which one could it be? Also, was this strategy Reactive or Proactive?
According to you who are more beneficial in general parlance? (MTP 5 Marks April 21, Old SM)
Answer 4
The strategy used here was of developing a competitive advantage via product which helped Kamal
Sweets Corner regain their lost business. This is also one of the major importance cum advantage of
strategic management, that is helps to develop core competencies and competitive advantages to
overcome competition.
This strategy was a Reactive strategy. Wherein, the owners saw their business fall to 50% of revenue
and then seeking a strategic advisory. They did not plan proactively as to when the new shops were
already opening. They reacted only when the business started to lose up.
Generally, it is always beneficial to develop strategies proactively, so that the dip in businesses is
small and manageable, and even if they are huge, the management has ample time to fix it.

Question 5
Yummy Foods and Tasty Foods are successfully competing in the business of ready to eat snacks in Patna.
Yummy has been pioneer in introducing innovative products. These products will give them good sale.
However, Tasty Foods will introduce similar products in reaction to the products introduced by the
Yummy Foods taking away the advantage gained by the former
(MTP 5 Marks Oct 21 & April ’23, Old & New SM, RTP Nov ’18)
Answer 5
Yummy foods are proactive in its approach. On the other hand, Tasty Food is reactive. Proactive
strategy is planned strategy whereas reactive strategy is adaptive reaction to changing circumstances.
A company’s strategy is typically a blend of proactive actions on the part of managers to improve the
company’s market position and financial performance and reactions to unanticipated developments
and fresh market conditions.
If organisational resources permit, it is better to be proactive rather than reactive. Being proactive in
aspects such as introducing new products will give you advantage in the mind of customers.
At the same time, crafting a strategy involves stitching together a proactive/intended strategy and
then adapting first one piece and then another as circumstances surrounding the company’s situation
change or better options emerge-a reactive/adaptive strategy. This aspect can be accomplished by
Yummy Foods.

Chapter 1 Introduction of Strategic Management

 1.3

Question 6
What is strategic decision making? What tasks are performed by a strategic Manager?
(MTP- Oct ’19 & Sep ‘23, 5 Marks, RTP Nov’20, RTP Nov’23, Old SM)
Answer 6
Decision making is a managerial process of selecting the best course of action out of several alternative
courses for the purpose of accomplishment of the organizational goals. Decisions may be operational
i.e., which relate to general day-to-day operations. They may also be strategic in nature. According to
Jauch and Glueck “Strategic decisions encompass the definition of the business, products to be handled,
markets to be served, functions to be performed and major policies needed for the organisation to
execute these decisions to achieve the strategic objectives.”
The primary task of the strategic manager is conceptualizing, designing and executing company
strategies. For this purpose, his tasks include:
• Defining the mission and goals of the organization.
• Determining what businesses it should be in.
• Allocating resources among the different businesses.
• Formulating and implementing strategies that span individual businesses.
• Providing leadership for the organization

Question 7
"A business organization cannot always plan all their strategies in advance and often need to blend
planned strategies with reactive strategies." Do you agree with the statement? Give reasons.
(MTP 5 Marks April 22, RTP May 23)
Answer 7
Yes, a business organization cannot always plan all their strategies in advance and often need to blend
planned strategies with reactive strategies. In planned strategy, organisations will analyse possible
environmental scenarios and create strategic framework after proper planning and set procedures and
work on these strategies in a pre-determined manner. However, in reality no company can forecast both
internal and external environment exactly. Everything cannot be planned in advance. It is not possible to
anticipate moves of rival firms, consumer behaviour, evolving technologies and so on. There can be
significant deviations between what was visualised and what actually happens. There can be significant
or major strategic changes when the environment demands. Reactive strategy is triggered by the changes
in the environment and provides ways and means to cope with the negative factors or take advantage
of emerging opportunities.

Question 8
Define Strategic Management. Also discuss the limitations of Strategic Management.
(MTP 5 Marks Sep’22, March ‘19, May’20, Apr’21, Mar’22, Oct’22 & Oct ‘23 5 Marks, PYP May 18 & May
'19, RTP May’19, May’21, May ’18, Nov ’21, Nov’23 Old SM)(RTP May’24)
OR
The strategic management cannot counter all hindrances and always achieve success for an
organization." Do you agree with this statement? Give arguments in support of your answer.
(RTP Nov ’23) (PYP 5 Marks Nov 22)
Answer 8
The term ‘strategic management’ refers to the managerial process of developing a strategic vision,
setting objectives, crafting a strategy, implementing and evaluating the strategy, and initiating
corrective adjustments where deemed appropriate.
The presence of strategic management cannot counter all hindrances and always achieve success as
there are limitations attached to strategic management. These can be explained in the following lines:
 Environment is highly complex and turbulent. It is difficult to understand the complex environment
and exactly pinpoint how it will shape-up in future. The organisational estimate about its future shape
may awfully go wrong and jeopardise all strategic plans. The environment affects as the
organisationhas to deal with suppliers, customers, governments and other external factors.
 Strategic Management is a time-consuming process. Organisations spend a lot of time in preparing,
communicating the strategies that may impede daily operations and negatively impact the routine
business.
 Strategic Management is a costly process. Strategic management adds a lot of expenses to an

Chapter 1 Introduction of Strategic Management

 1.4

organization. Expert strategic planners need to be engaged, efforts are made for analysis of external
and internal environments devise strategies and properly implement. These can be really costly for
organisations with limited resources particularly when small and medium organisation create
strategies to compete.
 Competition is unpredictable. In a competitive scenario, where all organisations are trying to move
strategically, it is difficult to clearly estimate the competitive responses to the strategies.

Question 9
CDE Holdings operates in various sectors, including manufacturing fitness equipment, organic foods,
eco-friendly products and children's educational tools. The organization is currently in the process of
recruiting Chief Executive Officer. In this scenario imagine yourself as a HR consultant for CDE
Holdings. Identify the strategic level that encompasses this role within CDE Holdings. (1 Mark)

Provide an overview of the key duties and responsibilities falling under the Chief Executive Officer's
scope. (PYP 5 Marks Nov’23)
OR
ABC Limited is in a wide range of businesses which include apparels, lifestyle products, furniture, real
estate and electrical products. The company is looking to hire a suitable Chief Executive Officer. Consider
yourself as the HR consultant for ABC limited. You have been assigned the task to enlist the activities
involved with the role of the Chief Executive Officer. Name the strategic level that this role belongs to
and enlist the activities associated with it.
(MTP 5 Marks Oct’22 & Sep ‘23, PYP Jan ’21 5 Marks, Old & New SM)
Answer 9
The Chief Executive Officer (CEO) position within CDE Holdings operates at the Corporate Level. This
executive level is key in leading the overall direction, performance, and success of the entire organization.
The CEO assumes a central role in shaping the company's strategic vision, overseeing diverse business
sectors, and ensuring alignment with organizational goals.

Key Duties and Responsibilities of the CEO:

The CEO's role encompasses various strategic responsibilities at the Corporate Level, involving:
1. oversee the development of strategies for the whole organization;
2. defining the mission and goals of the organization;
3. determining what businesses, it should be in;
4. allocating resources among the different businesses;
5. formulating, and implementing strategies that span individual businesses;
6. providing leadership for the organization;
7. ensuring that the corporate and business level strategies which company pursues are consistent
with maximizing shareholders wealth; and
8. managing the divestment and acquisition process.
Given the diverse nature of CDE Holdings, spanning manufacturing, organic foods, eco- friendly products,
and children's educational tools, the CEO's responsibilities are tailored to navigate the unique challenges
and opportunities presented by each sector. In conclusion, the CEO at the Corporate Level plays a critical
role in guiding CDE Holdings strategically, ensuring cohesive leadership, and driving sustainable success
across its diverse business domains.

Question 10
Explain the difference between three levels of strategy formulation.
(MTP 5 Marks March ’23, MTP Aug’18 5 Marks, Old & New SM, RTP May’20)
Answer 10
A typical large organization is a multidivisional organisation that competes in several different
businesses. It has separate self-contained divisions to manage each of these. There are three levels of
strategy in management of business - corporate, business, and functional.
The corporate level of management consists of the chief executive officer and other top level

Chapter 1 Introduction of Strategic Management

 1.5

executives. These individuals occupy the apex of decision making within the organization. The role of
corporate-level managers is to oversee the development of strategies for the whole organization. This
role includes defining the mission and goals of the organization, determining what businesses it should
be in, allocating resources among the different businesses and so on rests at the Corporate Level.
The development of strategies for individual business areas is the responsibility of the general
managers in these different businesses or business level managers. A business unit is a self - contained
division with its own functions - for example, finance, production, and marketing. The strategic role of
business-level manager, head of the division, is to translate the general statements of direction and
intent that come from the corporate level into concrete strategies for individual businesses.
Functional-level managers are responsible for the specific business functions or operations such as
human resources, purchasing, product development, customer service, and so on. Thus, a functional
manager’s sphere of responsibility is generally confined to one organizational activity, whereas
general managers oversee the operation of a whole company or division.

Question 11
Distinguish between vision and mission statement.
(MTP-Aug. ‘18, April’22 5 Marks, RTP May’18, RTP May’19, Old SM)
Answer 11
A Mission statement tells you the fundamental purpose of the organization. It concentrates on the
present. It defines the customer and the critical processes. It informs you of the desired level of
performance. On the other hand, a vision statement outlines what the organization wants to be. It
concentrates on the future. It is a source of inspiration. It provides clear decision-making criteria.
A mission statement can resemble a vision statement in a few companies, but that can be a grave
mistake. It can confuse people. Following are the major differences between vision and mission:
1. The vision states the future direction while the mission states the ongoing activities of the
organisation.
2. The vision statement can galvanize the people to achieve defined objectives, even if they are stretch
objectives, provided the vision is specific, measurable, achievable, relevant and time bound. A
mission statement provides a path to realize the vision in line with its values. These statements
have a direct bearing on the bottom line and success of the organization.
3. A vision statement defines the purpose or broader goal for being in existence or in the business
and can remain the same for decades if crafted well while a mission statement is more specific in
terms of both the future state and the time frame. Mission describes what will be achieved if the
organization is successful.

Question 12
Enumerate the task to be performed as a strategic manager of a company.
(MTP-April ‘19, 5 Marks)
Answer 12
The primary tasks of the strategic manager is conceptualizing, designing and executing company
strategies.
For this purpose, his tasks will include:
• Defining the mission and goals of the organization.
• Determining what businesses it should be in.
• Allocating resources among the different businesses.
• Formulating strategies.
• Implementing strategies.
• Providing leadership for the organization.

Question 13
Mission statement of a company focuses on the question: ‘who we are’ and ‘what we do’. Explain briefly.
(MTP 5 Marks Oct 20, Apr’21, RTP May’23)

Answer 13
A company’s mission statement is typically focused on its present business scope — “who we are and
what we do”; mission statements broadly describe an organizations present capability, customer focus

Chapter 1 Introduction of Strategic Management

 1.6

activities and business makeup. An organisation’s mission states what customers it serves, what need
it satisfies, and what type of product it offers. It is an expression of the growth ambition of the
organisation. It helps organisation to set its own special identity, business emphasis and path for
development. Mission amplifies what brings the organization to this business or why it is there, what
existence it seeks and what purpose it seeks to achieve as a business organisation.
In other words, the mission serves as a justification for the firm's very presence and existence; it
legitimizes the firm's presence.

Question 14
Explain briefly the. key areas in which the strategic planner should concentrate his mind to achieve
desired results. (5 Marks March ’22) (RTP Nov ’22 & May ’21)
Answer 14
A strategic manager defines the strategic intent of the organisation and take it on the path of achieving
the organisational objectives. There can be a number of areas that a strategic manager should
concentrate on to achieve desired results. They commonly establish long-term objectives in seven
areas as follows.
• Profitability.
• Productivity.
• Competitive Position.
• Employee Development.
• Employee Relations.
• Technological Leadership.
• Public Responsibility.

Question 15
What are 'objectives'? What characteristics it must possess to be meaningful?
(MTP 5 Marks April ’23, RTP May’22, May’21, PYP 5 Marks May’19)
Answer 15
Objectives are organizations performance targets — the results and outcomes it wants to achieve.
They function as yardstick for tracking an organization’s performance and progress.
Objectives with strategic focus relate to outcomes that strengthen an organization’s overall business
position and competitive vitality. Objectives, to be meaningful to serve the intended role, must
possess the following characteristics:
• Objectives should define the organization’s relationship with its environment.
• Objectives should be facilitative towards achievement of mission and purpose.
• Objectives should provide the basis for strategic decision-making.
• Objectives should provide standards for performance appraisal.
• Objectives should be understandable.
• Objectives should be concrete and specific.
• Objectives should be related to a time frame.
• Objectives should be measurable and controllable.
• Objectives should be challenging.
• Different objectives should correlate with each other.
• Objectives should be set within constraints.

Question 16
Dharma Singh, the procurement department head of Cyclic, a mountain biking equipment company, was
recently promoted to look after sales department along with procurement department. His seniors at
the corporate level have always liked his way of leadership and are assures that he would ensure the
implementation of policies and strategies to the best of his capacity but have never involved him in
decision making for the company.
Do you think this is the right approach? Validate your answer with logical reasoning around management
levels and decision making. (RTP May’21, Old & New SM)
Answer 16
Functional managers provide most of the information that makes it possible for business and corporate
level managers to formulate realistic and attainable strategies.
Chapter 1 Introduction of Strategic Management
 1.7

This is so because functional managers like Dharma Singh are closer to the customer than the typical
general manager is. A functional manager may generate important ideas that subsequently may become
major strategies for the company. Thus, it is important for general managers to listen closely to the ideas
of their functional managers and invoice them in decision making.
An equally great responsibility for managers at the operational level is strategy implementation: the
execution of corporate and business level plans, and if they are involved in formulation, the clarity of
thoughts while implementation can benefit too.
Thus, the approach of Cylix Corporate management is not right. They should involve Dharma Singh, as
well as other functional managers too in strategic management.

Question 17
Ramesh Sharma has fifteen stores selling consumer durables in Delhi Region. Four of these stores were
opened in last three years. He believes in managing strategically and enjoyed significant sales of
refrigerator, televisions, washing machines, air conditioners and like till four years back. With shift to
the purchases to online stores, the sales of his stores came down to about seventy per cent in last four
years.
Analyze the position of Ramesh Sharma in light of limitations of strategic management.
(RTP Nov’19 & Nov ’20, Old & New SM)
Answer 17
Ramesh Sharma is facing declining sales on account of large scale shift of customers to online stores.
While he is using the tools of strategic management, they cannot counter all hindrances and always
achieve success. There are limitations attached to strategic management as follows:
 Environment under which strategies are made is highly complex and turbulent. Entry of online
stores, a new kind of competitor brought a different dimension to selling consumer durables. Online
stores with their size power could control the market and offer stiff competition to traditional stores.
 Another limitation of strategic management is that it is difficult to predict how things will shape-up
in future. Ramesh Sharma, although managing strategically failed to see how online stores will
impact the sales.
 Although, strategic management is a time-consuming process, he should continue to manage
strategically. The challenging times require more efforts on his part.
 Strategic management is costly. Ramesh Sharma may consider engaging experts to find out
preferences of the customers and attune his strategies to better serve them in a customized manner.
Such customized offerings may be difficult to match by the online stores.
 The stores owned by Ramesh Sharma are much smaller than online stores. It is very difficult for him
to visualize how online stores will be moving strategically.

Question 18
Strategic management helps an organization to work through changes in environment to gain
competitive advantage. In light of statement discuss its benefits. (RTP Nov’19)
Answer 18
Strategic management involves developing the company’s vision, environmental scanning, strategy
formulation, implementation, evaluation and control. It emphasizes the monitoring and evaluation of
external opportunities and threats in the light of a company’s strengths and weaknesses and designing
strategies for the survival and growth. It helps in creation of competitive advantage to outperform the
competitors and also guide the company successfully through all changes in the environment.
The major benefits of strategic management are:
(a) Strategic management gives a direction to the company to move ahead. It defines the goals and
mission.
(b) It helps organizations to be proactive instead of reactive in shaping its future.
(c) It provides framework for all major decisions of an enterprise such as decisions on businesses,
products, markets, manufacturing facilities, investments and organizational structure. It provides
better guidance to entire organization on the crucial point - what it is trying to do.
(d) It helps organizations to identify the available opportunities and identify ways and means to achieve
them.
(e) It serves as a corporate defense mechanism against mistakes and pitfalls.
(f) It helps to enhance the longevity of the business.

Chapter 1 Introduction of Strategic Management

 1.8

(g) It helps the organization to develop certain core competencies and competitive advantages that
would facilitate survival and growth.

Question 19
Mr. Mehta sharing with his friend in an informal discussion that he has to move very cautiously in his
organization as the decisions taken by him has organization wide impact and involves large
commitments of resources. He also said that his decisions decide the future of his organization. Where
will you place Mr. Mehta in the organizational hierarchy and explain his role in the organization.
(RTP Nov’21)
Answer 19
Mr. Mehta works in an organization at top level. He participates in strategic decision making within the
organization. The role of corporate-level managers is to oversee the development of strategies for the
whole organization. This role includes defining the mission and goals of the organization, determining
what businesses it should be in, allocating resources among the different businesses, formulating and
implementing strategies that span individual businesses, and providing leadership for the organization.

Question 20
Distinguish between the following: Corporate and business level. (RTP May 19)
Answer 20
A typical large organization is a multi-divisional organization that competes in several different
businesses. There are three main levels of management: corporate, business, and functional. Corporate
level occupies the highest level of strategic decision making and cover actions dealing with the objective
of the firm, acquisition and allocation of resources and coordination of strategies of various businesses
for optimal performance. The corporate level of management consists of the Chief Executive Officer
(CEO), other senior executives. The role of corporate level managers is to oversee the development of
strategies for the whole organization. This role includes defining the mission and goals of the
organization, determining what businesses it should be in, allocating resources and so on.
Business level comes below corporate level. Business level strategies are the courses of action adopted
by an organization for each of its businesses separately, to serve identified customer groups and provide
value to the customers by satisfaction of their needs.

Question 21
ABC Ltd. currently sells its product in two major markets – Europe and Asia. While it is a market leader
in Europe, ABC Ltd. has struggled to penetrate the more competitive Asian market. ABC Ltd. hired a
strategic consultant to analyze the situation and submit his report to them. After the report received
from the strategic consultant, it has therefore decided to pull out of Asia entirely and focus on its
European markets only. This decision relates to which level in ABC Ltd. and explain the role of managers
at this level in the organization. (RTP May ’22)
Answer 21
Corporate level strategy relates to the markets and industries that the organization chooses to operate
in, as well as other decisions that affect the organization as a whole. The role of corporate-level managers
is to oversee the development of strategies for the whole organization. This role includes defining the
mission and goals of the organization, determining what businesses it should be in, allocating resources
among the different businesses, formulating and implementing strategies that span individual
businesses, and providing leadership for the organization.

Question 22
Falguni, CFO of Warships Advertisement Agency, stated that strategic management helps the
organisation to develop certain core competencies and competitive advantages that facilitate
management in the turbulent environment. Do you agree, if yes, then what and how does it facilitate
in? (RTP Nov ’23)
Answer 22
Yes, strategic management plays a crucial role in an organization's survival and growth, particularly in a
turbulent environment. It provides the framework for developing and leveraging core competencies and
competitive advantages that enable the organization to not only withstand challenges but also seize
opportunities for expansion and success.

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• Survival: In a turbulent environment characterized by rapid changes, uncertainties, and challenges,

strategic management helps an organization adapt and respond effectively. By developing core
competencies and competitive advantages, an organization becomes better equipped to navigate
unexpected disruptions and stay relevant in the market.
• Growth: Strategic management goes beyond survival. It enables an organization to identify
opportunities, innovate, and create value for its customers. By leveraging core competencies and
competitive advantages, the organization can capture market share, expand its offerings, and
achieve sustained growth.

Question 23
Define strategic intent. Briefly explain the elements of strategic intent. (RTP May’18, May’19, May’20)
OR
"Strategic intent provides the framework within which the firm would adopt a predetermined direction
and would operate to achieve strategic objectives." In the light of this statement, discuss the elements
of strategic intent. (PYP 5 Marks Nov 22)
Answer 23
Strategic Management is defined as a dynamic process of formulation, implementation, evaluation, and
control of strategies to realize the organization’s strategic intent. Strategic intent refers to purposes for
what organization strives for. Top management must define “what they want to do” and “why they want
to do”. “Why they want to do” represents strategic intent of the firm. Clarity in strategic intent is
extremely important for the future success and growth of the enterprise, irrespective of its nature and
size.
Strategic intent can be understood as the philosophical base of strategic management. It implies the
purposes which an organization endeavors to achieve. It is a statement that provides a perspective of the
means, which will lead the organization, reach its vision in the long run. Strategic intent gives an idea of
what the organization desires to attain in future.
Strategic intent provides the framework within which the firm would adopt a predetermined direction
and would operate to achieve strategic objectives. Strategic intent could be in the form of vision and
mission statements for the organization at the corporate level. It could be expressed as the business
definition and business model at the business level of the organization.
Strategic intent is generally stated in broad terms but when stated in precise terms it is an expression of
aims to be achieved operationally i.e., goals and objectives.
Elements of Strategic Intent
(i) Vision: Vision implies the blueprint of the company’s future position. It describes where the organization
wants to land. It depicts the organization’s aspirations and provides a glimpse of what the organization
would like to become in future. Every sub system of the organization is required to follow its vision.
(ii) Mission: Mission delineates the firm’s business, its goals and ways to reach the goals. It explains the
reason for the existence of the firm in the society. It is designed to help potential shareholders and
investors understand the purpose of the company. A mission statement helps to identify, ‘what business
the company undertakes.’ It defines the present capabilities, activities, customer focus and business
makeup.
(iii) Business definition: It seeks to explain the business undertaken by the firm, with respect to the customer
needs, target markets, and alternative technologies. With the help of business definition, one can
ascertain the strategic business choices. Organizational restructuring also depends upon the business
definition.
(iv) Business model: Business model, as the name implies is a strategy for the effective operation of the
business, ascertaining sources of income, desired customer base, and financial details. Rival firms,
operating in the same industry rely on the different business model due to their strategic choice.
(v) Goals and objectives: These are the base of measurement. Goals are the end results, that the
organization attempts to achieve. On the other hand, objectives are time-based measurable targets,
which help in the accomplishment of goals. These are the end results which are to be attained with the
help of an overall plan, over the particular period. However, in practice no distinction is made between
goals and objectives and both terms are used interchangeably.
The vision, mission, business definition, and business model explain the philosophy of the organization
but the goals and objectives represent the results to be achieved in multiple areas of business.

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Question 24
What should be the major components of a good mission statement? (RTP Nov’22)
Answer 24
Mission statements broadly describe an organizations’ present capabilities, customer focus, activities,
and business makeup. Following points are useful while writing a good mission statement of a company:
• Good mission statement is highly personalized – unique to the organization for which it is developed.
• *Mission statement should emphasize on giving an organization its own special identity, business
emphasis and path for development.
• *Mission statement should clearly specify that, what needs it is trying to satisfy, customer groups it is
targeting, technologies and competencies it uses and the activities it performs.
• Technology, competencies and activities are important in defining a company’s business because they
indicate the boundaries on its operation.
• The mission should not be to make profit.

Question 25
ABC Pharmaceuticals, a leading pharmaceutical company, is in the process of formulating its strategic
intent. The top management of ABC Pharmaceuticals wants to define the company's future direction,
objectives, and goals. They aim is to create a vision that sets the organization apart and provides a
roadmap for future growth. ABC Pharmaceuticals aspires to enrich the lives of people by producing
high-quality pharmaceutical products at competitive prices and wants to become the world's leading
pharmaceutical company by 2030." Based on this context, draft a vision and mission statement that
could be formulated by the top management of ABC Pharmaceuticals. (RTP Nov ’23 & May ’24)
Answer 25
ABC Pharmaceuticals may have following vision and mission:
Vision: Vision implies the blueprint of the company’s future position. It describes where the organisation
wants to land. ABC Pharmaceuticals may have vision "To be the globally recognized leader in
pharmaceutical innovation and enriching the lives of people worldwide by providing high-quality,
affordable, and accessible pharmaceutical products."
Mission: Mission delineates the firm’s business, its goals and ways to reach the goals. It explains the
reason for the existence of the firm in the society. It is designed to help potential shareholders and
investors understand the purpose of the company.
ABC Pharmaceuticals may identify mission in the following lines:
• To improve the well-being of individuals and communities by relentlessly pursuing excellence in
pharmaceutical research, development, and manufacturing.
• Committed to producing safe, effective, and sustainable medicines that address unmet medical
needs and enhance the quality of life for patients.
• Through innovation, collaboration, and ethical practices, we aim to make a positive impact on global
healthcare and become the trusted partner of healthcare providers and patients alike.

Question 26
How strategic decisions differ in nature from other routine decisions taken in day-to-day working of an
organization? Explain. (RTP Nov’21)
Answer 26
Strategic decisions are different in nature than all other decisions which are taken at various levels of the
organization during day-to-day working of the organizations. The major dimensions of strategic decisions
are given below:
 Strategic issues require top management decisions.
 Strategic issues involve the allocation of large amounts of company resources.
 Strategic issues are likely to have a significant impact on the long term prosperity of the organization.
 Strategic issues are future oriented.
 Strategic issues usually have major multifunctional or multi-business consequences.
 Strategic issues necessitate consideration of factors in the organization’s external environment.

Chapter 1 Introduction of Strategic Management