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Accounting (University of Lagos)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS

OF NIGERIA

NOVEMBER 2014 FOUNDATION EXAMINATION

Question Papers

Suggested Solutions

Plus

Examiners’ Reports

FOUNDATION EXAMINATION – NOVEMBER 2014

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FOREWORD
This issue of the PATHFINDER is published principally, in response to a growing
demand for an aid to:

(i) Candidates preparing to write future examinations of the Institute of Chartered

Accountants of Nigeria (ICAN);

(ii) Unsuccessful candidates in the identification of those areas in which they lost
marks and need to improve their knowledge and presentation;

(iii) Lecturers and students interested in acquisition of knowledge in the relevant

subjects contained herein; and

(iv) The profession; in improving pre-examinations and screening processes, and

thus the professional performance of candidates.

The answers provided in this publication do not exhaust all possible alternative
approaches to solving these questions. Efforts had been made to use the methods,
which will save much of the scarce examination time. Also, in order to facilitate
teaching, questions may be edited so that some principles or their application may be
more clearly demonstrated.

It is hoped that the suggested answers will prove to be of tremendous assistance to

students and those who assist them in their preparations for the Institute’s
Examinations.

NOTES

Although these suggested solutions have been published

under the Institute’s name, they do not represent the views of
the Council of the Institute. The suggested solutions are
entirely the responsibility of their authors and the Institute
will not enter into any correspondence on them.

FOUNDATION EXAMINATION – NOVEMBER 2014

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TABLE OF CONTENTS

SUBJECT PAGES

FINANCIAL ACCOUNTING 1 – 27

MANAGEMENT INFORMATION 28 – 52

QUANTITATIVE TECHNIQUES IN BUSINESS 53 – 85

BUSINESS & FINANCE 86 – 105

BUSINESS LAW 106 - 129

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

FOUNDATION LEVEL EXAMINATION - NOVEMBER 2014

FINANCIAL ACCOUNTING

Time Allowed: 3 hours

SECTION A: MULTIPLE-CHOICE QUESTIONS (20 Marks)

ATTEMPT ALL QUESTIONS IN THIS SECTION

Write ONLY the alphabet (A, B, C, D or E) that corresponds to the correct option in each
of the following questions/statements:

1. Which of the following is NOT part of a complete set of financial statements

under International Financial Reporting Standard (IFRS)?

A. Statement of changes in equity

B. Statement of financial position
C. Statement of cash flows
D. Statement of corporate governance
E. Notes to the financial statements

2. The following are attributes of good accounting information EXCEPT

A. Reliability
B. Consistency
C. Stability
D. Verifiability
E. Faithful representation

3. Which of the following is NOT an external user of accounting information?

A. Customer
B. Manager
C. Competitor
D. Government
E. Supplier

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4. A company’s net profit for the year ended 30 June, 2014 was N6,500,000. It was
found that N1,800,000 paid for maintenance of motor vehicles had been debited
to motor vehicle account and depreciated at 25% on cost (full year charge) in line
with the company’s policy. What would be the net profit after adjusting for the
error?
A. N1,350,000
B. N4,700,000
C. N5,150,000
D. N7,800,000
E. N8,300,000

5. A present obligation of an entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying
economic benefits, is known as

A. An asset
B. A provision
C. A liability
D. A payable
E. A receivable

6. In preparing financial statements, the bad debts account is closed by a transfer

to

A. Statement of financial position

B. Provision for bad debt account
C. Statement of profit or loss
D. Trading account
E. Statement of cash flows

7. Which of the following would NOT be posted to the credit of payables control
account?
A. Total credit purchases
B. Transfer of credit balances from receivables’ ledger
C. Transfer of debit balances to receivables’ ledger
D. Set-off contra
E. Interest charged by suppliers

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8. An item of property, plant and equipment costing N600,000 was bought on 1

January, 2011. Depreciation was provided at 20% annually on straight-line basis
and computed up to the point of sale. It was sold on 30 June, 2014 for N157,500.
In the year of sale, profit is
A. Reduced by N22,500
B. Increased by N22,500
C. Reduced by N120,000
D. Increased by N157,500
E. Reduced by N157,500

9. The source of data for recording the Returns Inward Book of a business entity is

A. Credit note
B. Debit note
C. Invoice
D. Payment voucher
E. Receipt

10. A loose tools record in the books of MYE Enterprises revealed the following:
N
Revaluation 1 January, 2013 200,000

Revaluation 31 December, 2013 250,000

Depreciation 31 December,2013 100,000

What is the value of loose tools acquired during the year?

A. N50,000
B. N60,000
C. N100,000
D. N120,000
E. N150,000

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11. The three major activity groups in the preparation of statement of cash flows in
order of presentation are

A. Operating activities, Financing activities and Investing activities

B. Investing activities, Operating activities and Financing activities
C. Operating activities, Investing activities and Financing activities
D. Financing activities, Operating activities and Investing activities
E. Operating activities, Direct activities and Financing activities

12. The journal entries required to record depreciation charge for the year in the
financial records of an entity at the year-end are

A. Dr. Statement of Profit or Loss: Cr. Provision for Depreciation Account

B. Dr. Depreciation Account: Cr. Statement of Profit or Loss
C. Dr. Statement of Financial Position: Cr. Statement of Profit or Loss
D. Dr. Changes in Equity: Cr. Depreciation Account
E. Dr. Provision for depreciation account: Cr. Changes in equity

13. Given the following information:

N
Cost of property, plant and equipment 5,000,000
Administrative and general overhead 750,000
Installation cost of property plant & equipment 500,000
Cost of entertainment 150,000

What amount should be capitalised as cost of property, plant and equipment?

A. N5,500,000
B. N6.250,000
C. N6.400,000
D. N6.700,000
E. N6.900,000

14. Which of the following is ONE of the contents of memorandum of association of a

limited liability company?

A. The transfer and transmission of shares

B. The voting rights of members

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C. The borrowing powers of the company

D. The object clause of the company
E. The appointment and powers of Managing Director

15. The cash book shows an overdrawn bank balance of N65,000 at 30 September,
2014. It was subsequently discovered that a standing order of N12,500 has been
recorded twice and that a dishonoured cheque for N9,000 has been debited in
the cash book instead of being credited. What is the correct bank balance?

A. N66,700 O/D
B. N67,500 O/D
C. N70,500 O/D
D. N71,600 O/D
E. N72,500 O/D

16. Winning Nigeria Limited has compiled the following Information for the year
ended 31 December, 2013:
N
Opening inventory 700,000

Purchases 1,200,000

Closing inventory 400,000

The gross margin is 40%. Based on these figures, what is the sales revenue for
the year?

A. N1,500,000
B. N1,800,000
C. N2,000,000
D. N2.500,000
E. N2,700,000

17. The initial measurement of assets under IAS 16 (Property, Plant and Equipment)
is at

A. Net realisable value

B. Replacement cost

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C. Historical cost
D. Revaluation
E. Fair value

18. Accounting for the effects of transactions and other events and circumstances on
a reporting entity’s economic resources and claims in the period in which those
effects occur even if the resulting cash receipts and payments occur in a different
period is governed by which of the following accounting concepts.

A. Cash basis
B. Accrual
C. Matching
D. Consistency
E. Going concern

19. Which of the following accounting records is used to determine the arithmetical
accuracy of ledger posting?

A. Sales day book

B. Control accounts
C. Trial balance
D. Statement of Profit or Loss
E. Statement of Financial Position

20. The following information relates to a retail trading business for the year ended
31 December 2013:

N’000
Accounts payables at 1 January, 2013 15,000
Accounts payables at 31 December, 2013 14,000
Total payments during 2013 90,000

What is the amount of the entity’s credit purchases during the year 2013?

A. N105,000
B. N91,000
C. N89,000
D. N71,000
E. N69,000

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SECTION B: ATTEMPT ANY FOUR QUESTIONS (80 MARKS)

QUESTION 1

A reliable financial statement is the product of properly maintained financial records

and adequate use of necessary accounting concepts

a. Write short notes on the following accounting concepts:

i. Business entity (2 Marks)

ii. Going concern (2 Marks)
iii. Matching (2 Marks)
iv. Consistency (2 Marks)
v. Materiality and aggregation (2 Marks)
(Total 10 Marks)

b. In accordance with IFRS Conceptual Framework, the following items/elements of

financial statements have had their conceptual names changed:

i. Trading profit and loss account

ii. Stocks
iii. Balance sheet
iv. Trade debtors
v. Net book value
vi. Trade creditors
vii. Fixed assets
viii. Profit after tax
ix. Shareholders’ fund
x. Long-term liability

State the new conceptual names for each of the items/elements above. (10 Marks)
(Total 20 Marks)

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QUESTION 2

The Accounts Officer of Endwell & Co was unable to agree the trial balance. The
difference of N175,200 was placed on the debit side of a suspense account. After a
careful review of the accounting entries in Endwell & Co’s books, the following errors
were detected:

i. A sum of N120,000 representing credit sales to a customer was posted to the

credit of his account.
ii. A cheque of N30,000 paid into the bank was later dishonoured but the
customer’s account was debited with N3,000.
iii. The Purchase Day Book was overcast by N18,000.
iv. The debit side of a supplier’s account was overcast by N60,000.
v. The returns inwards of N9,000 was omitted in a customer’s account.
vi. Discount allowed was overcast by N4,800.
vii. A credit sale of two office machines of N24,000 each was entered into the sales
day book.
viii. The statement of profit or loss for the year-end disclosed a net profit of
N210,000.

Required:

a. Prepare journal entries with appropriate narrations to correct the errors.

(12 Marks)
b. Prepare the suspense account. (4 Marks)
c. Prepare a statement to adjust the net profit after the correction. (4 Marks)
(Total 20 Marks)

QUESTION 3

a. State FIVE differences between the Cash Book and the Petty Cash Book.
(5 Marks)

b. The following transactions were extracted from the books of Mercy Trading
Company at 31 January 2014. All payments were made by cheques and all
receipts were paid into the bank. The company maintains a float of
N21,000,000.

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N’000
Jan 2 Cash at Eagles Bank 20,000
Jan 2 Petty cash in hand 1,400
Jan 3 Cheque issued for petty cash 19,600
Jan 5 Received from Fidelis, cheque in settlement of his
account receivable of N32,600,000 less 10% discount
6 Jan Settled Tunde’s account payable of N25,900,000 less 10%
discount
7 Jan Sold for cash 20 recharge cards at N750 per card
8 Jan Transferred to current account from deposit account 70,000
10 Jan Paid Lawal 4,800
16 Jan Paid cheque for motor repairs 8,000
17 Jan Paid Emeka 3,800
24 Jan Paid Yaro 4,050
27 Jan Paid Mazu 4,200
29 Jan Payments from petty cash during the month were the following:
Stationery 8,000
Trade expenses 2,000
Sundry purchases 9,200

Required:

i. Prepare a two-column cash book (showing discounts and bank columns only) for
the month ended 31 January 2014. (7 Marks)

ii. Prepare petty cash book for the same period. (8 Marks)
(Total 20 Marks)

QUESTION 4

a. State which of the following items should be classified as capital expenditure

for the purpose of preparing Statement of Financial Position:

i. The purchase of leasehold premises

ii. The annual depreciation of leasehold premises
iii. Solicitor’s fees in connection with the purchase of leasehold premises
iv. The costs of adding extra-storage capacity to a mainframe computer used
by the business.

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v. Computer repairs and maintenance costs

vi. Profit on the sale of an office building
vii. Revenue from sales via credit cards
viii. The cost of new machinery procured
ix. Custom duty charged on machinery procured and imported into the
country
x. The carriage costs of transporting new machinery from the supplier’s
factory to the buyers premises
xi. The wages of the machine operators
xii. Cost of cleaning of the machine room
xiii. Cost of oil and other materials purchased for the repairs of machine
(6 Marks)

b. On 30 June 2014, MAXWELL’s cash book showed that he had an overdraft of

N300,000 on his current account at the bank. The bank statement as at the end
of June 2014 showed that Maxwell was in credit by N65,000.

On checking the cashbook with the bank statement, you find the following
discrepancies:

i. Cheque drawn amounting to N500,000, had been entered in the cash

book, but had not been presented.

ii. Cheque received amounting to N400,000, had been entered in the cash
book, but had not been credited by the bank.

iii. On instructions from Maxwell, the bank had transferred interest of

N60,000 from his savings account to his current account, recording the
transfer on 5 July 2014. This amount had however been posted into the
cash book as at 30 June 2014.

iv. Bank charges of N35,000, shown in the bank statement had not been
entered in the cash book.

v. The payment side of the cash book had been under-cast by N10,000.

vi. Dividend received amounting to N200,000 had been paid directly to the
bank and not entered in the cash book.

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vii. A withdrawal of N50,000 from the savings account had been shown in
the cash book as a drawing from current account.

viii. A cheque for N25,000 issued to Jones over six months ago had been stale
and was later replaced. It was entered again in the cash book and no
other entry being made. Both cheques were included in the total of
unpresented cheques shown above.

Required:

i. Indicate the appropriate adjustments in the cash book. (8 Marks)

ii. Prepare a statement reconciling the amended balance with that shown in
the bank statement. (6 Marks)
(Total 20 Marks)

QUESTION 5

Garuba and Ngozi have been together in partnership for several years in a newspaper
publishing business, sharing profits and losses in the ratio 3:2 after charging salaries
of N3,000,000 per annum for each partner.

On 1 September 2013, Bola was admitted into the partnership on the following terms:

i. That he pays N2,800,000 to the original partners.

ii. He would be entitled to salary of N2,700,000 per annum and a 20% share of
profits after charging all salaries.

Garuba and Ngozi are to continue their old profit sharing ratios and Bola’s 20% share
of profit is guaranteed at a minimum of N1,500,000 per annum.
On 31 December 2013, the following balances were extracted from the partnership
books of Garuba, Ngozi and Bola:

N’000 N’000
Capital accounts
- Garuba 28,000
- Ngozi 18,000
Current accounts
- Garuba 4,000
- Ngozi 2,800

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Amount paid in by Bola 2,800

Income 272,000
Purchases 190,000
Wages 20,000
Salaries 25,000
General expenses 10,000
Plant & machinery 25,000
Motor vehicles 15,000
Receivables 20,000
Telephone expenses 3,750
Payables 24,350
Inventory 1 Jan 2013 15,000
Provision for bad debts 1,500
Bank balance 17,100
Drawings:
- Garuba 6,600
- Ngozi 5,000
- Bola 1,000 ______
353,450 353,450
Additional information:

i. Provision for doubtful debts should be maintained at 5% of receivables.

ii. Inventory at 31 December 2013 was valued at N12,000,000.

iii. Depreciation on plant and machinery to be 20% per annum and on motor
vehicles 25% per annum.

You are required to prepare the following accounts:

a. Statement of Profit or Loss for the year ended 31 December 2013 accounting for
Bola on a pro rata time basis. (10 Marks)

b. Partners’ Current Accounts for the period. (10 Marks)

(Total 20 Marks)

QUESTION 6

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a. In relation to Statement of Cash Flows, define the following terms with two
examples in each case:

i. Operating Cash Flows

ii. Investing Cash Flows
iii. Financing Cash Flows (9 Marks)

b. The financial data extracted from the books of Solomon Enterprises Limited for
the year ended 31 December 2013 are as follows:

N’000
Sales 55,924
Cost of sales 41,028
Selling and distribution expenses 2,748
Administration expenses 2,404
Interest expenses 1,528
Tax paid 1,584
Increase in inventories 11,868
Decrease in receivables 1,416
Increase in payables 4,944

Additional information:

Included in administration expenses are:

i. Depreciation charges for the year N500,000

ii. Loss on disposal of assets N48,000

Required:

Prepare the Statement of Cash Flows showing cash flow generated from operating
activities using the indirect method.

Show all workings (11 Marks)

(Total 20 Marks)

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SECTION A

PART I - MULTIPLE-CHOICE SOLUTIONS

1. D
2. C
3. B
4. C
5. C
6. C
7. D
8. A
9. A
10. E
11. C
12. A
13. A
14. D
15. C
16. D
17. C
18. B
19. C
20. C

Workings
N‘000

Q4. Net profit per statement 6,500

Add: Depreciation 450
6,950

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Less: Maintenance (1,800)

Net profit 5,150

Q8. Accumulated Depreciation:

Year N‘000
1 120
2 120
3 120
4 60
420

Carrying amount = N600,000 - N420,000 = N180,000

Reduced by N22,500 i.e. N180,000 - N157,500

Q10. Loose Tools Accounts

N N
Balance b/d 200,000 Depreciation 100,000
Acquisition 150,000 Bal c/d 250,000
350,000 350,000

N
Q15. Balance b/d 65,000
Less: outstanding (12,500)
Add: dishonoured cheque 18,000
70,500
N
Q16. Opening inventory 700,000
Purchases 1,200,000
Closing inventory (400,000)
1,500,000
Q20. Calculation of credit purchase figure
N‘000
Closing balance 14,000
Amount paid to suppliers 90,000
Less opening balance 104,000
Credit purchase (15,000)
89,000

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EXAMINER’S REPORT

The questions test and cover all aspects of the syllabus. Candidates’ performance was
above average. Few candidates lacked proper understanding of some of the
questions. They are advised to prepare well for future examinations.

SECTION B

SOLUTION 1

a. (i) Entity concept

In accounting, every economic unit, regardless of its legal form of

existence, is treated as a separate entity from parties having proprietary
or economic interest in it. An entity can sue or be sued.

(ii) Going Concern Concept

The assumption is that the business unit will operate in perpetuity, that
is, the business is not expected to be liquidated in the foreseeable future.
A business is considered a going concern, if it is capable of earning a
reasonable net income and there is no intention or threat from any
source to curtail significantly its line of business in the foreseeable
future.

(iii) Matching/Accrual Concept

The concept holds that for any accounting period, the revenue earned
and all the costs incurred that generated that revenue must be matched
and reported for the period. If revenue is carried over from a prior period
or deferred to a future period, all elements of cost and expense relating
to that revenue are usually carried over or deferred as the case may be.

(iv) Consistency

Usually, there is more than one way in which an item may be treated in
the accounts, without violating accounting principles. The concept of
consistency holds that when a company selects a method, it should
continue (unless conditions warrant change) to use that method in
subsequent periods so that a comparison of accounting figures over time

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is meaningful. The concept ensures that the accounting treatment of like

items is consistent, comparing one accounting period with another.

(v) Materiality and Aggregation

Each material class of similar items must be presented separately in the

financial statements. Information is material, if its non-disclosure could
influence the economic decisions of users taken on the basis of the
financial statements.
(b)
S/No. Names Under GAAP Names under IFRS
i. Trading, profit and loss account Statement of profit or loss and
other comprehensive income
ii. Stocks Inventories
iii. Balance Sheet Statement of financial position
iv. Trade debtors Trade receivables
v. Net book value Carrying amount
vi. Trade creditors Trade payables
Vii Fixed assets Non-current assets
viii. Profit after tax Profit for the period
ix. Shareholders’ fund Equity
x. Long-term liability Non-current liability

EXAMINER’S REPORT

The question tests basic knowledge of accounting concepts and the conceptual terms
under IFRS.

About 85% of the candidates attempted the question and the performance was
average.

Candidates’ commonest pitfalls were poor understanding and definitions of basic

accounting concepts.

Candidates are advised to learn and understand the IFRS conceptual framework.

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SOLUTION 2

ENDWELL & CO.

JOURNAL ENTRIES

(a)
N N
Receivables account 240,000
Suspense account 240,000
Being correction of errors in the sales
credited to a customer’s account
Receivables account 27,000
Suspense account 27,000
Being correction of the error of debiting
a customer with N3,000 instead of
N30,000.

Suspense account 18,000

Purchases account 18,000
Being correction of error of overstating
the total of purchases day book.
Suspense account 60,000
Payables account 60,000
Being correction of error of overstating
a suppliers account

Suspense account 9,000

Receivables account 9,000
Being correction of omission from a
customer’s account
Suspense account 4,800
Discount allowed account 4,800
Being correction of error of overstating
the discount allowed.
Sales account 48,000
Office machine disposal account 48,000
Being correction of error of disposal of
machine erroneously credited to sales
account

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(b) Suspense Account

N N
Trial balance difference 175,200 Receivables 240,000
Purchases 18,000 Receivables 27,000
Payables 60,000
Receivables 9,000
Discount allowed 4,800
267,000 267,000

(c) Statement of Adjustment in net profit

N N
Net profit brought forward 210,000
Add:
Discount allowed 4,800
Purchases 18,000 22,800
232,800
Less: Sales 48,000
Adjusted profit 184,800

EXAMINER’S REPORT

The question tests candidates’ knowledge on correction of errors, preparation of

journals and use of suspense account.

About 90% of the candidates attempted the question and the performance was well
above average.

Candidates’ commonest pitfalls were their inability to state narrations correctly for the
journal entries and how to prepare a suspense account.

Candidates are advised to understand the application of the double entry principle.

SOLUTION 3

(a) The differences between cash book and the petty cash book are as follows:

i. Cash book is for main cash transactions while petty cash book is for small value
transactions.

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ii. Cash book records mainly transactions between the entity and the bank while
petty cash book records employees’ official transactions of small value.

iii. The cash book balance can either be debit or credit or nil balance while petty
cash book can only either be debit or nil balance.

iv. In an imprest system, the petty cash book is replenished from the main cash
book but not otherwise.

v. Maximum amount payable is usually set for a petty cash book while there is no
such limit for main cash book.

vi. The payment voucher, paying-in-slip, cheque stub and receipts are sources of
information for posting main cash book while petty cash vouchers with
supporting documents are the sources of information for posting petty cash
book.

vii. The cash book balance is verified through bank reconciliation while the total of
petty cash vouchers and cash in hand must be equal to authorised float at a
given time.

viii. The petty cash is usually maintained on an imprest system, which allows the
officer maintaining the petty cash book to be given a fixed amount of money
known as float, for the purpose of making payments for the minor office
expenses of the organisation with rules on re-imbursement, while there is no
such special rules in the maintenance of the cash book.

b(i)
MERCY TRADING COMPANY

TWO-COLUMN CASH BOOK

Date Particulars Discount Bank Date Particulars Discount Bank

Allowed Received
2013 N’000 N’000 2013 N’000 N’000
Jan 2 Balance b/d 20,000 Jan 3 Petty Cash 19,600
5 Fidelis 3,260 29,340 6 Tunde 2,590 23,310
7 Cash sales 15,000 10 Lawal 4,800
8 Deposit Account 70,000 16 Motor repairs 8,000
17 Emeka 3,800
24 Yaro 4,050

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27 Mazu 4,200
31 Bal c/d 66,550
3,260 134,340 2,590 134,340

Feb 1 Bal b/d 66,550

PETTY CASH BOOK

Receipts Fol Date Particulars Pv Total Stationeries Trade Sundry
No. Amount Expenses Purchases
N’000 2013 N’000 N’000 N’000 N’000
1,400 Jan 2Balance b/d
19,600 3Bank
29Stationeries 8,000 8,000
29Trade
expenses 2,000 2,000
29 Sundry
purchases 9,200 9,200
19,200 8,000 2,000 9,200
30 Bal c/d 1,800
21,000 21,000
1,800 Feb 1 Bal b/d
19,200 Feb 1 Bank - Re-bursement

EXAMINER’S REPORT

The question tests candidates’ ability to prepare and distinguish between cash book
and petty cash book.

About 75% of the candidates attempted the question and performance was above
average.

Candidates’ pitfalls were:

i. their inability to distinguish between the cash book and the petty cash, book,
poor presentation of answers and
ii. inappropriate approximations of solutions to the nearest N’000.

Candidates are advised to pay attention to these inadequacies in future examinations.

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SOLUTION 4

(a) Items to be classified as capital expenditure for the purpose of preparing

statement of financial position are as follows:

(i) The purchase of leasehold premises.

(ii) Solicitors’ fees in connection with the purchase of leasehold premises.
(iii) The costs of adding extra storage capacity to a mainframe computer used
by the business.
(iv) The cost of new machinery procured.
(v) Custom duty charged on the machinery imported into the country.
(vi) The carriage costs of transporting the new machinery from the supplier’s
factory to the premises of the business purchasing the machinery.

(b) MAXWELL
ADJUSTED CASH BOOK
N‘000 N‘000
Dividend-Direct lodgement 200 Balance b/d 300
Stale cheque 25 Bank charges 35
Withdrawal from saving account 50 Under cast 10
Balance c/d 70
345 345
Balance b/d 70

BANK RECONCILIATION AS AT 30 JUNE 2014

N‘000
Balance as per cash book (adjusted) (70)
Unpresented cheques (N500,000 – N25,000) 475
Uncredited cheques (400)
Interest transferred from savings account not yet credited
by the bank 60
Balance as per bank statement 65

EXAMINER’S REPORT

The question tests candidates’ ability to distinguish between capital and recurrent
expenditures, how to up-date cash book and prepare bank reconciliation statement.

About 90% of the candidates attempted the question and performance was average.

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Candidates’ commonest pitfalls were their inability to properly differentiate between

items for adjusted cash book and those for the bank reconciliation statement coupled
with poor understanding of the rule of double-entry.

Candidates should know that only items that have not passed through the cash book at
the bank reconciliation date and errors committed by the book keeper would affect the
cash book. They are advised to learn these basic principles for better performance in
future examinations.

SOLUTION 5

GARUBA, NGOZI AND BOLA

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2013

N’000 N’000
Revenue 272,000
Less: Cost of sales
Opening inventory 15,000
Purchases 190,000
205,000
Closing inventory (12,000)
193,000
Add: Wages 20,000
(213,000)
Gross Profit 59,000
Decrease in provision for bad debt 500
59,500

Less EXPENSES
Salaries 25,000
General Expenses 10,000
Telephone expenses 3,750
Depreciation - plant & machinery 2% x 25,000,000 5,000
- Motor vehicle 25% x 15,000,000 3,750 (47,500
NET PROFIT 12,000

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Statements of Distribution of profit

1/1-1/9/2013 1/9-31/12/2013
8 months 4 months
N’000 N’000
Net Profit 8,000 4,000
Partners’ Salaries
- Garuba 8/12 x 3,000 (2,000) 4
/12 x 3,000 (1,000)
- Ngozi 8/12 x 3,000 (2,000) 4
/12 x 3,000 (1,000)
4
- Bola /12 x 2,700 (900)
Divisibles profit 4,000 1,100
Profit shared
- Garuba 4,000 x 3/5 2,400 3
/5 x 600 360
2
- Ngozi 4,000 x 2/5 1,600 /5 x 600 240
- Bola See note 1 500
4,000 1,100

Note 1: Share of profit from 1 Sept - 31 Dec 2013

20% of N1,100,000 = N220,000 less than = N500,000 i.e. 4/12 x N1,500,000

Adjustable profit = N1,100,000
Thus, N500,000 guaranteed minimum is allocated to Bola and the remaining
N600,000 is shared between Garuba and Ngozi in profit sharing ratio as follows:
N’000
Divisible profit 1/9-31/12/2013 1,100
Share of profits
Garuba = 3/5 x 600 360
Ngozi = 2/5 x 600 240
Bola (Guaranteed) 500
1,100

PARTNERS’ CURRENT ACCOUNTS

Garuba Ngozi Bola Garuba Ngozi Bola

N’000 N’000 N’000 N’000 N’000 N’000
Drawings 6,600 5,000 1,000 Bal b/f 4,000 2,800 -
Amount paid in Amount paid in 2,800
by Bola 2,800 Partners’ salaries 2,000 2,000 -
Bal c/d 4,840 3,760 400 Partners’ salaries 1,000 1,000 900
Share of Profit 2,400 1,600 -
Share of Profit 360 240 500
Distribution of

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amount paid in
by Bola 1,680 1,120 -
11,440 8,760 4,200 11,440 8,760 4,200
Bal b/d 4,840 3,760 400

EXAMINER’S REPORT

The question tests candidates’ understanding of the preparation of partnership

Accounts when a new partner is admitted. The question, which requires candidates to
prepare statement of profit or loss, distribution of profits to partners and their current
accounts, was attempted by about 75% of the candidates and performance was
average.

Candidates’ commonest pitfalls were their inability to:

 demonstrate clear understanding of the profit or loss distribution on pro rata

basis,
 distinguish between items in partners’ currents and capital accounts and
 Adjust for changes in allowances for bad and doubtful debts.

Therefore, candidates are advised to devote quality time to basic accounting

principles, practice past examination papers and read examiners’ reports.

SOLUTION 6

i. Operating Cash Flows: These comprise receipts and payments relating to the
normal activities of the firm as well as those items which do not specifically
relate to the other activity groups such as investing and financing e.g.
Inflows: (a) Cash received from customers
(b) Dividend received where the reporting entity exercises significant
control of the investee’s company. Where this condition is not met,
the dividend is taken to investing activity.

Outflows: (a) Cash paid to suppliers and employees

(b) Taxes paid
(c) Cash paid for operating expenses

ii. Investing Cash Flows: These involve cash associated with investments and
realisation of investments made outside the business, e.g.

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Inflows: (a) Proceeds from sale of investments (stocks, bonds other than cash
Equivalent).
(b) Proceeds from sale of non-current assets and intangible assets
(c) Loan collected or received
(d) Interest received
(e) Dividend received from investments
Outflows: (a) Purchase of investments (excluding cash equivalents)
(b) Purchase of non-current assets
(c) Loan granted
iii. Financing Cash Flows: These comprise cash flows relating to issues and
redemptions of securities for financing the business together with any expenses
relating thereto, as well as any interest and dividends paid therein.
Inflows: (a) Issue of bonds
(b) Issue of ordinary shares
(c) Issue of Notes payable
(d) Issue of loan stock

Outflows(a) Repayment of bonds

(b) Redemption of shares
(c) Finance lease payment
(d) Repayment of notes payable
(e) Payment of dividends
(f) Payment of interest on debt capital

(b) Solomon Enterprises Ltd

Statement of Cash Flows for the year ended
31 December, 2013
N’000 N’000
Cash flow from operating activities:
8,216
Profit before taxation (wi)
Depreciation 500
Loss on disposal of assets 48
Interest expenses 1,528
Operating profit before working capital
changes 10,292
Working capital changes:
Increase in inventories (11,868)
Decrease in receivables 1,416
Increase in payables 4,944
(5,508)

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Tax paid (1,584)

Net cash flow generated from operating
activities 3,200

Workings
i.
N
Revenue 55,924
Cost of sales (41,028)
Gross Profit 14,869
Selling and Distribution Expenses (2,748)
Administration Expenses (2,404)
9,744
Interest Expenses (1,528)
Profit before taxation 8,216

EXAMINER’S REPORT

The question tests candidates’ knowledge on how to prepare Statement of Cash Flows.
About 75% of the candidates attempted the question and performance was poor.

Candidates’ pitfalls were their poor understanding of the topic.

Candidates are advised to acquire good understanding of the technicalities involved in

the preparation of statement of cash flows using both direct and indirect methods.

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

FOUNDATION LEVEL EXAMINATION - NOVEMBER 2014

MANAGEMENT INFORMATION

Time Allowed: 3 hours

SECTION A: MULTIPLE-CHOICE QUESTIONS (20 Marks)

ATTEMPT ALL QUESTIONS IN THIS SECTION

Write ONLY the alphabet (A, B, C, D or E) that corresponds to the correct option in each
of the following questions/statements.

1. Use the high-low method to calculate the fixed and variable elements of the
following costs:

Month Activity N

January 600 1,700

February 800 1,900

March 650 1,750

April 850 1,950

May 900 2,100

June 1,350 2,300

A. VC = N0.08/unit, FC = N1120
B. VC = N0.88/unit, FC = N1020
C. VC = N0.80/unit, FC = N1220
D. VC = N0.82/unit, FC = N1320
E. VC = N0.85/unit, FC = N1330

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2. The objectives of storing materials vary from one organisation to another. Which
of the following is NOT an advantage of a centralized storage?
A. Stock taking is facilitated
B. Lower stock on average
C. Lower risk of duplication
D. Level of paper work is reduced
E. Loss of local knowledge from the user

3. Where there is active involvement of all departmental managers in the budgeting

process, the budgeting approach is known as

A. Bottom-up budgeting approach

B. Continuous budgeting approach
C. Feedback budgeting approach
D. Top-down budgeting approach
F. Activity based budgeting approach

4. The following data were extracted from the records of ABZ Limited for the month
of July

Budgeted Labour hours 6,400

Actual Labour hours 6,240

Standard hours produced 6,480

Calculate the capacity ratio:

A. 103%
B. 102.56%
C. 98%
D. 97.5%
E. S 97%

5. The working capital cycle starts and ends with ONE of the following:

A. Cash and Payables

B. Inventory and Receivables
C. Work in Progress and Inventory

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D. Cash and Inventory

E. Cash and Receivables

6. PQR Limited has an average usage of 1,200 units of stamps, minimum usage of
800 units and maximum usage of 2,000 units per day. If the lead time is 10 - 15
days and the previously calculated Economic Order Quantity is 6,000 units,
calculate the Maximum Level.
A. 30,000 units
B. 28,000 units
C. 18,000 units
D. 15,000 units
E. 8,000 units

7. Which of the following is a characteristic of the Push Production System?

A. Elimination of non-value adding activities

B. Emphasis on perfect quality
C. Short set-ups
D. Production is in anticipation of customer order
E. Reduction of cost of carrying inventory

8. A company had opening inventory of 36,000 units of product Zee, production of

126,000 units and closing inventory of 31,500 units. Profit based on marginal
costing was N2,250,000 and on absorption costing was N1,548,000. What is the
fixed overhead absorption rate per unit?

A. N156.00
B. N150.00
C. N62.50
D. N49.14
E. N5.37

9. The features of an open system include the following EXCEPT

A. Attempt to monitor and anticipate environmental disturbances

B. Receive inputs from the environment
C. Pass outputs to its environment

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D. Limit exchanges with its boundary

E. They are not self-contained because they are influenced by external
environmental behaviour

10. Which of the understated reports is NOT the responsibility of a Management

Accountant?

A. Operating Statement
B. Cash flow Statement
C. Statement of Assets and Liabilities
D. Statement of Profitability Analysis
E. Statement of Costs and Variance Returns

11. Management Information System (MIS) is a tool in business organisation for

A. Senior Marketing Managers
B. Middle level Managers
C. Senior Sales Managers
D. Senior Managers
E. Senior Programming Managers

12. A processing technique that allows data to be accumulated before processing

commences is

A. Computer data processing

B. Multi-tasking
C. Data capturing
D. Batch processing
E. Multi-processing

13. What is the processing technique by which many processors are used to
accomplish data processing?

A. Multiple processing
B. Multi-processing
C. Multiple processors
D. Multi-programming
E. Multiple programming

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14. The exposure of a system to likely risks and threats is called

A. Virus attack
B. Worms attack
C. Vulnerability
D. Weakness
E. Data Didling

15. “Change is a constant, inevitable and beneficial element of a management

process”. Which ONE of the following is NOT true of a Change Management
Process?

A. Enforcement of Change Management can be effected by education

B. Change must be imposed on clients
C. Impact of change must be measured on schedule and budget
D. Change must be approved by authority
E. Change request must be documented

16. In Sales Order Transaction Processing, the following activities are correct EXCEPT:

A. Customers’ file scrutiny

B. Order placed file enquiry
C. Stock file examination
D. Payment analysis
E. Verification of receivable file

17. A method of product costing which aims to include, in the total cost of a product,
an appropriate share of the organisation’s total overhead is:
A. Marginal costing
B. Activity-based costing
C. Differential costing
D. Absorption costing
E. Product costing

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18. What is a cost driver?

A. An item of direct cost

B. A common cost which is shared over cost centres
C. An activity which generates costs
D. Any cost relating to transport activity
E. An item of production overhead

19. The cost behavioural pattern which shows element of fixed and variable
components is

A. Variable cost
B. Standard cost
C. Full cost
D. Semi-variable cost
E. Fixed cost

20. The output from the production process with little recoverable value is referred to
as:

A. Residue
B. Scrap
C. Waste
D. Good production
E. Left over

SECTION B: ATTEMPT ANY FOUR OUT OF SIX QUESTIONS (80 Marks)

QUESTION 1

a. Working capital is generally understood to mean the difference between current

assets and current liabilities. Explain the term working capital cycle.
(2 Marks)

b. List FIVE factors that determine the working capital requirements of a firm.
(5 Marks)

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c. GLORY Limited has provided you with the following data regarding next year’s
budget that has just been presented to the board by the financial controller of
the company:

Budgeted average
amount outstanding

N
Inventory: Raw materials 480,000
Work-in-Progress 360,000
Finished goods 244,800
Receivables 600,600
Payables (422,400)
Budgeted average working capital 1,263,000

N
The following are available daily averages:
Revenue 9,240
Cost of Sales 7,200
Purchases of raw materials 3,840

You are required to compute the working capital cycle based on the above figures
(13 Marks)
(Total 20 Marks)

QUESTION 2

LADUGBO Limited, a company which manufactures and sells a single product named
BETA, has the following data relating to year 2015.
N
Selling Price 45.00
Direct material cost 10.00
Direct wages cost 4.00
Variable overhead cost 2.50

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The following forecasts of sales and production are expected during the first six
months of year 2015.
January - March April – June
Sales (units) 60,000 90,000
Production (units) 70,000 100,000

Fixed production overhead costs are budgeted at N400,000 per annum. Normal
production level is to be 320,000 units per annum.

Variable selling and distribution cost is N1.50 per unit sold while fixed administration
cost is N240,000 per annum.

You are required to:

Prepare profit statement for each of the two quarters, in a columnar format using
absorption costing approach. (20 Marks)

QUESTION 3

A company which operates below break-even point year-after-year needs to be

restructured.

a. What is break-even point? (2 Marks)

b. Elebu Nig. Plc. manufactures four products at its GBOOPA Plant in Olorungbebe
Industrial Estate.

The company sold 450,000 units of its product at N60 per unit. Variable costs
are N45 per unit while the fixed cost incurred evenly throughout the year
amounted to N2,916,000 which comprises of manufacturing costs of N1,800,000
and selling costs of N1,116,000.

You are required to calculate:

a. The break-even point in units and in value (5 Marks)

b. The number of units that must be sold to earn an income of N225,000 before
income tax (3 Marks)

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c. The number of units that must be sold to generate after tax profit of N300,000 if
the income tax rate is 40% (5 Marks)

d. The number of units required to break-even if the fixed cost increases by 2.5%
and variable cost increases by 5% (5 Marks)
(Total 20 Marks)

QUESTION 4

The purpose of data processing is to make data presentable, meaningful and useful for
a particular purpose.

Required:

a. Name an example of an offline data processing technique and explain briefly FIVE
of its characteristics. (11 Marks)

b. i. Explain an online processing technique. (3 Marks)

ii. Identify TWO of such techniques and explain briefly TWO characteristics
of each. (6 Marks)
(Total 20 Marks)

QUESTION 5

Data is converted to binary digits and forwarded to the desired location for the
purpose of communication.

Required:

a. With the aid of diagrams, explain THREE data transmission modes. In each
case, give ONE relevant example. (9 Marks)

b. State ONE difference between Parallel Data Transmission and Serial Data
Transmission. (2 Marks)

c. In a tabular form, state TWO differences between Asynchronous Data

Transmission and Synchronous Data Transmission. (4 Marks)

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d. Enumerate FIVE attacks that could take place as a result of vulnerabilities of a

computer system. (5 Marks)
(Total 20 Marks)

QUESTION 6

The initial principle identified from analysing the world’s regulations is Technology
Strategy Orchestration. While most businesses around the world have established a
technical awareness and dependency on technology which is referred to as Directional
Alignment, others have not integrated the business functions to reflect this
relationship. The more organisations have visibility into how business processes rely
on technology and the subsequent dependent relationships, the more likely business
values will be identified and leveraged.

You are required to:

a. State and explain briefly THREE ways that technology may enhance businesses.
(6 Marks)

b. State FOUR features of Directional Alignment. (6 Marks)

c. State FIVE steps to be followed in the determination of the business values

provided by Technology Strategy. (8 Marks)
(Total 20 Marks)

MULTIPLE CHOICE SOLUTIONS

1. C

2. E

3. A

4. D

5. E

6. B

7. D

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8. A

9. D

10. C

11. B

12. D

13. B

14. C

15. B

16. D

17. D

18. C

19. D

20. B

Workings

1. Using the High-Low Method

High Low Diff

Activity 240,000 140,000 100,000

Cost N3,900,000 N3,160,000 N740,000

Variable Cost Per unit = N740,000 = N7.40

100,000

ActualLabo urHoursWorked
4. Capacity Ratio = x 100
BudgetedLa bourHours

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6240
= x 100 = 97.5%
6400

6. Maximum level = Reorder Level + EOQ – (Min. Usage x Mini Lead Time)
(2000 x 15) + 6000 – (800 x 10)
= 30,000 + 6,000 – 8,000
= 28,000 units

8. Difference in Stock
Opening Stock = 36,000 units
Closing Stock = 31,500 units
4,500 units
Difference in Profit
Marginal Costing = N2,250,000
Absorption Costing = N1,548,000
702,000
Fixed overhead absorption rate per unit

N702,000
4,000

= N156

EXAMINER’S REPORT

The questions cover a sizeable proportion of the syllabus and performance was good
as about half of the candidates scored 50% and above of the allocated marks.
Candidates are advised to use standard study materials which should include the ICAN
Study Packs, in their preparation.

SOLUTION 1

a. Working capital cycle is the total length of time between investing cash in
paying for raw materials at the start of the production process and its recovery
at the end with the collection of cash from receivable.

b. Determinants of working capital requirements:

i. Production cycle
ii. Nature of business

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iii. Technology and Manufacturing Policy

iv. Credit Policy
v. Size of the firm
vi. Credit granted by suppliers
vii. Business fluctuations
viii. Sales and demand conditions
ix. Operating efficiency
x. Price level changes

GLORY LIMITED
COMPUTATION OF WORKING CAPITAL CYCLE

DAYS
Raw Material = R/M Stocks = N480,000 = 125
Daily Purchases N3,840

Work-In-Progress = WIP = N360,000

Daily Cost of Sales = N7,200 = 50

Finished Goods = Finished Goods = N244,800 = 34

Daily Cost of Sales N7,200

Receivables = Receivables = N600,600 = 65

Daily Sales N9,240

274

Less Payables = Payables N422,400 = 110

Daily R/M Purchases = N3,840
164

The working capital cycle of Glory Limited is 164 days, indicating that it takes
about 5½ months between the time the company pays for its raw materials to
the time cash is received from receivables.

EXAMINER’S REPORT

This question tests candidates’ understanding of the terms ‘Working Capital’ and
‘Working Capital Cycle’.

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About 75% of the entire candidates attempted this question and performance was very
poor. About 20% of those who attempted this question scored 50% and above of the
marks.

Major shortcomings exhibited by candidates include:

i. Misplacement of working capital for working capital cycle and vice versa.
ii. The term ‘Working Capital Cycle’ seemed strange to majority of the candidates
who attempted the question.

To enhance performance in future, it is recommended that candidates should:

i. Improve on their preparation.

ii. Take time to understand the requirements of a question before attempting an
answer.
iii. Use standard study materials which should include the ICAN Study Packs.
iv. Utilise past question papers as part of the preparation for future examinations.

SOLUTION 2
LADUGBO LIMITED

PROFIT STATEMENT FOR THE QUARTER ENDED JUNE 2015 BASED ON

ABSORPTION COSTING APPROACH

JANUARY - MARCH APRIL - JUNE

N‘000 N‘000 N‘000 N‘000
Sales 2,700 4,050
Less: Production Costs:
Opening Inventory - 177.5
Direct Material 700 1,000.0
Direct Wages 280 400.0
Variable Overhead 175 250.0
Fixed Production O/H 87.5 125.0
1,242.5 1,952.5
Less: Closing Inventory 177.5 355.0

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1,065 1,597.5
1,635 2,452.5
(Under)/Over-Absorbed O/H (12.5) 25.0
1,622.5 2,477.5
Variable Selling Costs (90.0) (135)
Fixed Administration Cost (60.0) (60)
Profit 1,472.5 2,282.5

Working:

i. Valuation of Closing Inventory

N
Direct Material 10.00
Direct Wages 4.00
Variable O/H 2.5
Variable Production Cost 16.5
Fixed Production O/H 1.25
17.75 x 10,000 = 177,500

ii. Fixed Production Overhead per unit

= Budgeted Fixed Overhead
Normal Activity Level

= N400,000 = N1.25
320,000 units

iii. Over/under absorbed overhead

Budgeted Production per quarter

= 320,000 units = 80,000 units

4
N
January-March (70,000 - 80,000) x N1.25 = (12,500)
April - June (100,000 - 80,000) x N1.25 = 25,000

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EXAMINER’S REPORT

The question tests candidates’ ability to determine profit or loss using Absorption
Costing.

The topic was very popular among the candidates as about 90% of them attempted
this question.

Performance was average as about half of the candidates who attempted the question
scored 50% and above of the marks.

The common pitfalls of the candidates who performed below average include:

i. The question asked for a columnar presentation but most candidates presented
their solution in ‘T’ format.
ii. Cost of production was not properly broken down, as required, by most
candidates.
iii. Inability to compute over and under absorbed overhead.
iv. Wrong apportionment of fixed overhead.
v. The question asked for quarterly presentation whereas many candidates
answered the question using monthly format.
vi. Poor presentation.

To enhance performance in future, it is recommended that candidates should:

i. Improve on the quality of their preparation.

ii. Spend some time to appreciate the instruction before attempting a question.
iii. Attend good quality tuition houses.
iv. Use standard study materials which should include ICAN Study Packs.

SOLUTION 3

a. Break-Even Point (BEP): This is the point where the company does not make
any profit or loss. It is the point where contribution equals fixed cost, or where
total cost equals sales. Any sales below the break-even point will result in a
loss while sales above the break-even point will result in profit for the
organization.

bi. Break-even Point (Units) = Fixed Cost

Contribution/Unit

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= N2,916,000
N15
= 194,400 Units
Break-even Point (Naira) = Fixed Cost
Contribution Margin Ratio
= N2,916,000 x N60
N15

= N11,664,000

ii. Units required to earn N225,000 profit

= Fixed Cost + Target Profit

Contribution/Unit

= N2,916,000 + N225,000 = 209,400 Units

N15
iii. Units required to earn N300,000 profit after tax

= Fixed Cost + (Target Profit/1 – tax rate)

Contribution/Unit

= N2,916,000 + (300,000/1-0.4)
N15

= 2,916,000 + 500,000 = 227,733 Units

N15

iv. Units required to breakdown (Revised)

= Fixed Cost (Revised)

Contribution/Unit (Revised)

= N2,916,000 x 1.025 = N2,988,900

N60 – (45 x 1.05) N12.75

= N234,424 Units

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Workings:

Contribution/Unit = Selling price – variable cost

N
= Selling Price 60
Variable cost 45
Contribution/Unit 15

EXAMINER’S REPORT

The question tests candidates’ understanding of the concept of Break Even Point in
units and value. The implication of taxation on Break Even Point was also required.

The question is popular with the candidates as 95% of the candidates attempted it.
Performance was good with about 60% of the candidates who attempted the question
scored 50% and above of the marks allocated.

The commonest pitfalls observed among these candidates who performed below
average include:

i. Inability to compute Break Even Point together with tax implications thereon.

ii. Inability to differentiate between Break Even Points in value and in units.

To enhance performance in future, it is recommended that candidates should:

i. Understand the intricacies involved in the computation of Break Even Point

with consideration for taxation implications.

ii. Improve on the level and quality of their preparation for future examinations.

iii. Use standard study materials which should include ICAN Study Packs.

SOLUTION 4

(a) An example of offline data processing technique is Batch Processing Technique.

Characteristics of Batch Processing:

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i. The technique is system oriented since a user need not attend to the processing
immediately.

ii. The technique is used to process activities that do not occur continuously e.g.
payroll, since salaries are paid once or twice a month.

iii. The technique allows for delay in data processing, since data is grouped before
processing will commence.

iv. The technique can be used to process large volume of data, since a batch can
contain a very large amount of data.
v. The technique uses queueing model to process data since data is processed on
First-In-First-Out basis.

vi. The turn-around time is high since the time between submission of a job and
receiving output/result is high.

vii. The controls are based on batch concepts e.g. batch totals, hash total, batch
quantity or values.

viii. Processing time is pre-determined e.g. 1 week, 1 month e.t.c.

ix. All or most of the transactions or records are required to be processed together
i.e. in batches.

x. In Batch processing technique, transactions are accumulated into groups of

suitable sizes before being processed at a pre-determined time. This means
that transactions are not processed as they occur.

b.(i) Online processing is a process in which transactions are entered directly into
the computer system and processed immediately i.e. as data enters into the
system, processing follows.

Examples of online processing techniques include the following:

Real-Time Processing
Time-Sharing Processing

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Characteristic of Real-Time Processing Techniques:

i. The technique is user oriented since users are attended to real time.

ii. The technique eliminates delay in data processing i.e. turn-around time is very
short.

iii. It is used for critical activities e.g. airline reservation, international hotels
reservation, and bank processes such as in Automated Teller Machines/Services.

iv. Varied Traffic Pattern i.e. varied volume, varied transaction types, irregular
timing of input and non-standard location of input.

v. Direct input and direct access storage media are used.

Characteristic of Time-Sharing Processing Technique:

i. The technique is user oriented based on time allocated to individual users.

ii. The technique allows for computer resources to be shared by individual users
on rotational basis. i.e. it discourages monopoly of resources because at the end
of the time slot, the computer resource is allocated to another user on the
system.

iii. Time sharing allows several users to remotely use the system concurrently.

iv. Users must have unique security codes e.g. ID number, password. etc.

v. Storage devices are direct access.

EXAMINER’S REPORT

The question tests candidates’ understanding of the techniques used in Data

Processing with respect to offline and online techniques. It demands for the
definitions and characteristics of both techniques.

About 50% of the candidates attempted this question. Performance was average with
about 60% of the candidates who attempted the question scoring over 50% of the
allocated marks.

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The major shortcoming displayed by many candidates was that they juxtaposed the
offline method with that of online method.

In order to improve on performance in future examinations, it is recommended that:

i. Candidates need to study more on how to answer examination questions.

ii. They should acquaint themselves with recommended texts on the syllabus.
iii. They should use standard study materials which should include ICAN Study
Packs.

SOLUTION 5

a. Three Data Transmission modes are:

i. Simplex
ii. Half duplex
iii. Duplex

Simplex

It is a data transmission mode that is uni-directional.

An example of such transmission mode is commercial broadcast - Radio or

transmission television.

Half Duplex

It is a data transmission mode that is bi-directional, but at different times.

An example is walkie-talkie telephoning.

Duplex

It is a data transmission mode that is bi-directional and concurrent. That is,

transmission in both directions take place at the same time.

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Examples are computer communication, mobile phone, etc.

b. Differences between Parallel transmission and Serial transmission.

All bits in a data are transmitted together in a Parallel data transmission, but
one bit of data is transmitted at a time in serial data transmission. That is,
transmission is in a sequence.

c. Differences between Asynchronous Transmission and Synchronous Data

Transmission include:

Asynchronous Transmission Synchronous Transmission

 Transmission not regular  Transmission is regular i.e.
consists of a stream of bits
transmitted in a single
channel
 One character is transmitted  Block of characters is
at a time transmitted at a time
 Each character is preceded  Information is synchronized
by a START signal and by the user of “clock”.
followed by A STOP signal

d. Attacks that could take place as a result of vulnerability of a computer

system include the following:

i. Virus and Worms

ii. Denial of Service
iii. Theft of data
iv. Unauthorised access
v. Hacking
vi. Hardware failure
vii. Software failure
viii. Alteration of data
ix. Masquerading
x. Personnel actions/errors
xi. Espionage

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EXAMINER’S REPORT

The question tests candidates’ understanding of the different techniques of Data

Transmission. It also demands for examples of attacks on computer systems.

About 50% of the candidates attempted the question. Performance was just average
with only 40% of the candidates who attempted the question scoring over 50% of the
allocated marks.

Major pitfalls exhibited by candidates include the following:

i. Poor understanding of the requirements of the question.

ii. Confusing Parallel Data Transmission Technique with Systems Changeover
Technique.
iii. Taking Data Transmission channels to mean Data Transmission Modes while
many other candidates expressed Data Transmission Modes as Input, Process
and Output

For future examinations, candidates are advised to:

i. Improve on their preparations

ii. Match preparation with the contents of the syllabus
iii. Use standard study materials which should include ICAN Study Packs.

SOLUTION 6

a. Technology may enhance businesses in the following ways:

i. Product/Process Design - Technology enables precise design of products,

services and processes with detailed analysis of features.
ii. Implementation/Production - Production process is better handled by
technology rather than numerous factory workers.
iii. Delivery - Products and services are quickly delivered to the end-users or
customers using technology.
iv. Marketing/Advertising - These become easier to achieve by reaching all
parts of the world with technology.
v. Quality Assurance - Technology ensures quality monitoring.

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vi. E-Commerce - Technology ensures that buying and selling are carried out
without physical markets.
vii. Globalisation – Technology allows businesses to link up with partners
anywhere in the world.

b. Features of Directional Alignment:

i. A shared understanding of how IT applications, technologies and services

will contribute to business objectives - today and in the future.
ii. A shared focus on where to expend scarce resources, time and money i.e.
the tradeoffs that the enterprise is prepared to make.
iii. A credible working relationship between the IT organisation and the rest
of the business evidenced by reliable daily operations, responsive
problem management and predictable innovative solution delivery.

c. Steps in Determining the Business Values provided by Technology Strategy

i. Determine the long-term business strategy of the organisation,

articulate and promote it.
ii. Identify business priorities by identifying customer preferences.
iii. Correlate the business values of the company within the systems IT
network.
iv. Determine the goodwill provided by business functions and then
attribute portions to the appropriate technology systems.
v. Establish a dynamic assignment of systems to business units, and
create a means for management review of performance and
controls.
vi. Centralise projects and technology efforts and communicate any
proposed or active projects to business owners who will be affected
or benefited.
vii. Conduct regular prioritisation efforts of systems, projects and
business functions based on actual business valuation.

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EXAMINER’S REPORT

This question is three-fold. It tests candidates’ understanding in the following areas:

a. The effect of technology on businesses.

b. How technology allows businesses to focus.
c. The procedure for evaluating the impact of technology on businesses.

About 85% of the candidates attempted this question. Performance was poor with
about 40% of those who attempted the question scoring over 50% of the allocated
marks.

Very common pitfalls include:

i. Answers provided by many candidates did not address the requirement of the
question.
ii. Performances in (b) and (c) were abnormally low.

There will be considerable improvement in future if candidates:

i. Note the contents of the syllabus.

ii. Show more interest in the use of Study Packs.
iii. Improve on examination techniques.
iv. Improve on communication skill.
v. Appreciate the requirements of a question which asks for ‘List’ and ‘Develop’.
vi. Use standard study materials which should include ICAN Study Packs.

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

FOUNDATION LEVEL - NOVEMBER 2014

QUANTITATIVE TECHNIQUES IN BUSINESS

Time Allowed: 3 hours

SECTION A: MULTIPLE-CHOICE QUESTIONS (20 Marks)

ATTEMPT ALL QUESTIONS IN THIS SECTION

Write ONLY the alphabet (A, B, C, D or E) that corresponds to the correct option in each
of the following questions/statements.

1. Two events are said to be mutually exclusive if

A. The occurrence (or non-occurrence) of one event does not affect the
occurrence (or non-occurrence) of the other event
B. Both events can occur simultaneously
C. The occurrence of one event precludes the occurrence of the other event
D. Both are impossible events
E. The occurrence of one event depends on the occurrence of the other event

2. The following tree diagram shows the scenario with two paying cashiers (C 1 and
C2) at a Microfinance Bank where M represents mutilated notes and N represents
new notes:
M
CI 0.11

0.58 0.89
N

0.42 M
C2 0.15

0.85

N
The probability that a customer of the bank does not receive a mutilated note is
A. 0.8832
B. 0.8732

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C. 0.8730
D. 0.3570
E. 0.1592

3. The daily sales figures of a supermarket follow a normal distribution with mean
of N60,000 and standard deviation of N14,000. Find the probability that the
sales figure of a certain day exceeds N46,000.

A. 0.1587
B. 0.1590
C. 0.8413
D. 0.8415
E. 0.8423

4. An Accountant, with a fast food restaurant located in a professional examination

centre, estimated that the regression equation relating to the total sales, y (in
thousands of naira) and the number of candidates, x, that enrolled for the
examination over 6 diets is given as y = 150 +5x.

The number of candidates that will enrol for a particular diet if its estimated total
sales is N950,000 is

A. 160
B. 360
C. 450
D. 620
E. 700

5. The measure of relationship that exists between two or more variables is known
as coefficient of

A. skewness
B. variation
C. kurtosis
D. determination
E. correlation

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6. The following are quantitative techniques of forecasting in business analysis

EXCEPT
A. Regression analysis
B. Delphi method
C. Moving average
D. Exponential smoothing
E. Time series analysis

7. The building blocks for a linear programming problem are

A. A linear objective function and equality of constraints
B. A linear objective function and inequality constraints
C. A linear objective function, structural linear inequality constraints and
non negativity constraints on the decision variables
D. A linear objective function, structural linear inequality constraints and
negativity constraints on the decision variables
E. A linear objective function and structural non-linear inequality
constraints.

8. The mean arrival rate (µ) in a bank is observed to be one customer in every 4
minutes and the mean service time (1/  ) is 2½ minutes per customer, the
average time of service in the bank is
A. 1.04 minutes
B. 1.67 minutes
C. 6.67 minutes
D. 6.76 minutes
E. 10.0 minutes

9. The table below shows the frequency distribution of marks obtained by 36

students in a class

Class Marks Frequencies

0 but less than 5 6

5 but less than 10 10

10 but less than 15 8

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15 but less than 20 12

The first quartile of the distribution is

A. 6.0
B. 6.2
C. 6.3
D. 6.4
E. 6.5

10. The following are the marks obtained by 10 students in a class mid-term
examination: 30%, 40%, 50%, 30%, 30%, 30%, 40%, 60%, 40% and 30%. The
cumulative frequency that corresponds to 50% is
A. 1
B. 5
C. 8
D. 9
E. 10

11. The following data are for the travelling time to and from work in hours per day
for a group of factory workers
No of hours No of workers

Under 1 20

1 up to 2 10

2 up to 3 5

3 up to 4 4

The variance of the data is

A. 1.00
B. 1.01
C. 1.02
D. 1.12
E. 1.22

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12. Given the frequency distribution of weights of babies at the post-natal ward of a
University Teaching Hospital as:
Weight (kg) Number of babies

2–3 32

4–5 17

6–7 11

Which of the following values represents the relative frequency of the class 4-5
kg weight of babies in the ward?

A. 0.17
B. 28%
C. 0.283
D. 17%
E. 0.17%

13. The mode in the set of data 2, 3, 5, 5, 5, 7, 7, 7 and 6 is described as

A. Unimodal
B. Bimodal
C. Modal average
D. Trimodal
E. Multimodal

14. The mean deviation of the values: 7, 8, 10, 14, 25, 30 is

A. 16.86
B. 14.89
C. 7.89
D. 6.89
E. 5.89

15. Assume that the standard selling price of a medium size detergent produced by
BICU Nigeria Limited is N250 per unit. If the total fixed cost is N85,000 and cost

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of producing each unit is N130. What is the smallest number of units which the
company should produce in order to break even?
A. 709
B. 708
C. 707
D. 706
E. 700

16. The number of units of goods produced when utilizing x units of labour and y
units of capital is
3 1
f(x,y) = 80 x 4 y 4

How many units of goods will be produced by using 81 units of labour and 256
units of capital?

A. 2,880
B. 2,908
C. 2,960
D. 5,360
E. 8,640

17. A retailer sells 2,000 cups of ice cream daily at Bolekaja bus stop for N250 per
cup. If the retailer’s commission on each cup is 27% of the selling price, the
estimated retailer’s daily cost will be:
A. N250,000
B. N285,000
C. N325,000
D. N350,000
E. N365,000

18. Annuity is defined as the

A. Specific amount of money saved at regular intervals meant to be used in
funding some future financial commitments
B. Lump sum investment designed to produce a sequence of equal regular
payments overtime
C. Specific amount of money received at intervals which is not necessarily
equal to fund some future financial commitments

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D. Lump sum investment designed to produce a sequence of unequal but

regular payments overtime
E. Repayment of interest-bearing debts through series of equal regular
payments until the debt is entirely paid off with the accrued interest

19. If the interest rate received on a sinking fund is ...................., the periodic cost for
sinking fund is lower than that for amortisation

A. Lower than that charged on the debt

B. Equal to that charged on the debt
C. Higher than that charged on the debt
D. Equal to zero
E. Equal to one

20. The sufficient and necessary conditions for a firm that wants to minimise its
operational costs f(x) are

A. f ' ( x )  0 and f '' ( x )  0

B. f ' ( x )  0 and f ' ( x)  0
C. f ' ( x )  0 and f '' ( x )  0
D. f ' ( x )  0 and f '' ( x )  0
E. f ' ( x )  0 and f '' ( x )  0

SECTION B: ATTEMPT ANY FOUR IN THIS SECTION (80 Marks)

QUESTION 1

a. The cost of purchasing 8 calculators and 10 books is 158 (thousands of naira).

At another instance, the cost of purchasing 15 calculators and 3 books is 123
(thousands of naira).

Required:

i. Use the information above to write down a system of linear equations to

describe the given cost scenario. (4 Marks)

ii. Solve the resulting system of equations. (4 Marks)

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iii. Find the cost of each calculator and each book. (2 Marks)

b. The Chief Accountant of Zeesco Plc. has a large sum of money which she plans
to donate to 4 not-for-profit organisations. She plans to give 1/3 of this amount
to organisation A. Out of the remaining amount, she plans to give 2/5 to
organisation B. Also, she intends to give ½ of the balance to organisation C and
the rest to organisation D. If she plans to give 11 million naira to organisation
D, how much does she plan to share among these organisations?
(10 Marks)
(Total 20 Marks)

QUESTION 2

In finance, the standard deviation is frequently used to measure the risk of an

investment.

An investor is considering two possible investments A and B. A sample of 10 rates of

return is recorded for each investment. These rates of return given as percentages are
as follows:

Investment A
4, 6, 6, 5, 4, 5, 8, 5, 5, 8

Investment B
0, -2, 6, 12, 9, 16, -4, 16, 25, 12

Required:

a. Calculate the mean rate of return for each of the two investments. (6 Marks)

b. Calculate the standard deviation of the rate of return for each of the
investments. (6 Marks)

c. Which of the TWO investments is riskier and why? (8 Marks)

(Total 20 Marks)

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QUESTION 3

a. Calculate the various control levels from the following data on a given inventory
item:
Normal usage 1,600 per day
Minimum usage 1,000 per day
Maximum usage 3,000 per day
Lead time 16 – 20 days
EOQ 40,000
(9 Marks)

b. If the optimistic, most likely and pessimistic times are given as 11 days, 15 days
and 18 days respectively, calculate the expected time of the project delivery.
(3 Marks)

c. The network for a small building project is shown below together with the time
in days required to complete each task.

f
7 3

7 2 4 6
a c d g end
3

7 b 5
3 e

Required:

i. List the possible paths together with their durations through the network.
(6 Marks)

ii. State the critical path and the project duration. (2 Marks)
(Total 20 Marks)

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QUESTION 4

The sales of PQR Nigeria Plc. in thousands of Naira are listed in the table below for
each quarter for years 2005 – 2008.

Sales of PQR in N’000s

Year Quarter 1 Quarter 2 Quarter 3 Quarter 4
2005 22 35 82 37
2006 24 46 81 44
2007 25 40 87 49
2008 29 42 100 55

Required:

a. Calculate the trend in the above data using the Least Squares Method.
(12 Marks)

b. Estimate the sales for each quarter using the trend line. (4 Marks)

c. Calculate the percentage variation for each quarter’s actual sales from the
estimate obtained in (b) above. (4 Marks)
(Total 20 Marks)

QUESTION 5

a. A business school preparing candidates for professional examinations

conducted a mock examination to ascertain the level of preparedness of its
candidates in two subjects: Quantitative Techniques in Business (QTB) and
Management Information (MI).

The table below gives the scores of twelve selected candidates.

Candidates 1 2 3 4 5 6 7 8 9 10 11 12
Score in QTB (x) 35 77 95 28 76 80 90 62 39 65 90 37
Score in MI (y) 50 82 89 58 65 61 84 59 48 53 80 52

Required:

i. Calculate the Spearman’s rank correlation coefficient between x and y.

(9 Marks)

ii. Comment on the result in (i) above. (1 Mark)

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b. In a particular organisation, an experiment which was conducted to determine

the gasoline mileage of a particular type of car yielded the following data:

Miles per gallon Per cent

10 and under 12 4
13 and under 15 8
16 and under 18 14
19 and under 21 26
22 and under 24 12
25 and under 27 11
28 and under 30 10
31 and under 33 7
34 and under 36 6
37 and under 39 2

You are required to draw:

i. Frequency polygon for gasoline mileage (5 Marks)

ii. The ogive for gasoline mileage. (5 Marks)

(Total 20 Marks)

QUESTION 6

a. If N250,000 is invested in an account that earns 4% per year compound interest,

what is the

i. value of the investment after 5 years? (3 Marks)

ii. total interest earned? (2 Marks)

b. When it was apparent that your parents could not afford to finance your
university education, you sought and obtained a 4-year loan of N250,000.00
from Education Bank Limited. The bank imposed a simple interest rate of 7½%.

i. How much do you need to pay-off the bank now (4 years after) that you
are through with your study? (7 Marks)

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ii. If you decide to be paying N25,000 every month from now and the bank
agreed to reduce the interest rate to 1% per month on the unpaid balance
at the beginning of the month, how much additional total interest will be
paid? (8 Marks)
(Total 20 Marks)

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SOLUTIONS

SECTION A: MULTIPLE CHOICE SOLUTIONS

1. C
2 B
3. C
4. A
5. E
6. B
7. C
8. C
9. E
10. D
11. C
12. C
13. B
14. C
15. A
16. E
17. E
18. C
19. B
20. E

EXAMINER’S REPORT

The questions fairly cover the syllabus.

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Candidates’ performance was just fair as about 40% of the candidates scored less than
8 out of the marks.

Candidates are advised to cover the syllabus fairly well in future examinations.

Workings

2. Using the tree diagram, the question is answered by branch C1N + C2N
i.e. 0.58 x 0.89 + 0.42 x 0.85
= 0.8732

3. Find the standard value of

X = 46,000
Z = 46,000 - 60,000 = -1
14,000

Required Region

-1
Required probability = 0.3413 + 0.5
= 0.8413

4. y = 150 + 5x

Y = 950,000 = 950
1,000

950 = 150 + 5x

5x = 800
x = 800 = 160
5
8. m = ¼ = 0.25
1
  2 / 5  0.4
1
2
2

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1 1 1
Ta =    6.67
  m 0.4  0.25 0.15
9.
Class f cf
0–5 6 6
5 – 10 10 16
10 – 15 8 24
15 - 20 12 36
36

N = 36 = 9
4 4
96 5
Q1  5   5  5  3    5  1.5
 10   10 
= 6.5

12. Total frequency = 32 + 17 +11 = 60

 Relative frequency of the class 4 – 5kg weight of babies in the ward
= 17 = 0.283 option E
60

14.
X f X- X IX - X
7 1 -8.67 8.67
8 1 -7.67 7.67
10 1 -5.67 5.67
14 1 -1.67 1.67
25 1 9.33 9.33
30 1 14.33 14.33
6 47.34

7  8  10  14  25  20 94
X = =  15.67
6 6
 Mean deviation = 47.34 = 7.89 Option C
6
15. Let x represent the units produced
 Revenue, R = N250x
Variable cost Cv = N130x
Total cost = N85,000 + 130x

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 To break even
R = Total cost
i.e. 130x + 85,000 = 250x
 120x =85,000
 x = 708.33
 The smallest number of units which the company should produce in order to break
even is 709 units Option A

16. If f (x, y) = 80x ¾ y ¼

Where x = 81, and y = 256
F (81, 256) = 80 (81)3/4 (256)1/4
= 80 (33) (4)
= 80 x 27 x 4
= 8640units Option E

17. 2000 cups at N250 each = N500,000

27% of N250 = N67.50
 2000 cups at N67.5 each = N135,000
 Retailer’s daily cost = N500,000 – N135,000
= N365,000 Option E

SOLUTION 1

(a) Let x represent the cost of one calculator and y the cost of one book.

(i) If 8 calculators and 10 books are purchased at a combined cost of

N158,000, the linear equation for this cost scenario is:

8x + 10y = 158,000 ........................ (1)

Also, if 15 calculators and 3 books are purchased at a combined cost of

N123,000, the linear equation of the cost scenario becomes
15x + 3y = 123,000 ....................... (2)

The system of linear equations that describe the given cost scenario is
8x + 10y = 158,000 ....................... (1’)
15x + 3y = 123,000 ....................... (2’)

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(ii) Multiplying equation (1’) by 3 and (2’) by 10 transforms the system of

linear equations into
24x + 30y = 474,000 ....................... (3)
150x + 30y = 1,230,000 ....................... (4)

Subtracting equation (3) from equation (4) gives:

126 x = 756,000
 x = 756,000 = N6,000 .............. (5)
126
Substituting (5) into equation (3) gives:

24(6000) + 30y = 474,000

Or 144,000 + 30y = 474,000
Or 30y = 474,000 – 144,000 = 330,000
 y = 330,000 = N11,000
30
 Cost of one calculator (x) = N6,000
Cost of one book (y) = N11,000

(b) Let x be the amount the Chief Accountant plans to share.

1
The share of organisation A = x
3
2
Remaining amount = x
3
2 2  4
The share of organisation B =  x = x
5  3  15
2 4 2
Remaining amount = x  x  x
3 15 5
12  1
The share of organisation C =  x   x
25  5

1
The share of organisation D = x
5
1
 x  N11,000,000
5
i.e. x = N55,000,000

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This implies that the Chief Accountant plans to share N55million among the
Four organisations.

EXAMINER’S REPORT

The question tests candidates’ ability to formulate and solve simultaneous equations
in business context. It also tests candidates’ ability in the use of fractional analysis in
decision-making process.

About 95% of the candidates attempted the question and performance was good.

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SOLUTION 2

A A A A  A  2
B BB B  B 2
A2 B2
4 -1.6 2.56 0 -9 81 16 0
6 0.4 0.16 -2 -11 121 36 4
6 0.4 0.16 6 -3 9 36 36
5 -0.6 0.36 12 3 9 25 144
4 -1.6 2.56 9 0 0 16 81
5 0.6 0.36 16 7 49 25 256
8 2.4 5.76 -4 -13 169 64 16
5 -0.6 0.36 16 7 49 25 256
5 -0.6 0.36 25 16 256 25 625
8 2.4 5.76 12 3 9 64 144
56 18.4 90 752 332 1562

(a) Mean of Investment A = 56 = 5.6= A

10
Mean of Investment B = 90 = 9 = B
10
 A  A 
2

(b) Standard deviation for A =

n 1
18.4
=
9

= 1.43

 B  B 
2

Standard deviation for B =

n 1

752
=
9

= 9.14

(c) Investment B with the larger standard deviation of 9.14 is riskier than
investment A with smaller standard deviation of 1.43.

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Investment B with a larger variance is more variable than investment A and

therefore B is more likely to be less predictable than A.

Coefficient of Variation (CV) is used to compare the variability of two different

sets of data as follows:

C.VA = Sd x 100 = 1.43 x 100 = 25.54%

x 5.6

C.VB = std dev x 100 = 9.14 x 100 = 101.56%

Mean 9

Investment B has a larger coefficient of variation than A, hence it is riskier.

EXAMINER’S REPORT

The question tests candidates’ understanding of and ability to compute the mean as a
measure of central tendency and standard deviation (variance) as a measure of
dispersion and their application in investment risk analysis.

About 50% of the candidates attempted the question and performance was fair.

The commonest pitfalls in the candidates’ answers were:

(i) inability to correctly compute the standard deviation of the rates of return
for the two investments A & B and
(ii) lack of understanding on how to use the calculated standard deviation
outcomes for the risk analysis between the two investments A and B.

Candidates are advised to deepen their knowledge and understanding of measures of

central tendencies and dispersion, their computations and simple applications.

SOLUTION 3

(a) i. There are three control levels to be calculated namely:

 Re-order level = Maximum usage x maximum lead time
= 3,000 x 20 = 60,000

 Minimum level = Re-order level – Average usage for average

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lead time
= 60,000 – (1,600 x 18)
= 60,000 – 28,800
= 31,200

 Maximum level = Re-order level + EOQ – Minimum

Anticipated usage in lead time = 60,000 + 40,000 – (1,000 x 16)
= 84,000

ii. Expected Time (ET) is calculated as = O + P + 4ML

6
where O = optimistic time = 11 days
P = Pessimistic time = 18 days
ML = Most likely time = 15 days

ET = 11 + 18 + 4 x (15) = 89
6 6
= 14.83days

(b) i. The possible paths Path lengths in days

A – F – G – END 16
A – C – D – G – END 19
A – B – D – G – END 20
A – B – E – G – END 21

ii. The critical path is the path with greatest length. That is
A–B–E–E–G
The project duration is 21days.

EXAMINER’S REPORT

The question tests candidates’ understanding of Inventory Control and Network

Analysis.

The question was not popular as about 30% of the candidates attempted it.

Those that attempted the question demonstrated adequate understanding of its

requirements and performance was quite good.

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SOLUTION 4

(a) Use the Least Squares Linear Regression Line y = a + bx to obtain the trend in
the given data as follows:

Year X (quarters) Y (Sales) XY X2

2005 1 22 22 1
2 35 70 4
3 82 246 9
4 37 148 16
2006 5 24 120 25
6 46 276 36
7 81 567 49
8 44 352 64
2007 9 25 225 81
10 40 400 100
11 87 957 121
12 49 588 144
2008 13 29 377 169
14 42 588 196
15 100 1500 225
16 55 880 256
 X  136 Y  798  XY  7316  x 2  1496
Using y = a + bx

where
n xy   X  Y   Y  b  X 
b= and a = y  bx =
n X 2   X   n 
2
n  

we get
167316  136798
b=
161496  136
2

= 8528
5440

= 1.568
and

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798  136 
a=  1.568 
16  16 
= 36.547

The trend line is y = 36.55 + 1.57X.

(b) The trend line is used to estimate the sales for each quarter as follows:

Quarter Sales (y) Trend Actual 100

x
(x) Trend 1
Yˆ  36.55  1.57 x
1 22 38.12 57.70
2 35 39.69 88.20
3 82 41.26 198.70
4 37 42.83 86.39
5 24 44.40 54.05
6 46 45.97 100.06
7 81 47.54 170.38
8 44 49.11 89.59
9 25 50.68 49.33
10 40 52.25 76.56
11 87 53.82 161.65
12 49 55.39 88.46
13 29 56.96 50.91
14 42 58.53 71.76
15 100 60.10 166.39
16 55 61.67 89.18

Column (3) in the above table gives the estimated sales value for each quarter
using the trend line.

(c) Column (4) of the table gives the calculated percentage variation for each
quarter’s actual sales in (a) to the estimates obtained in (b) above.

EXAMINER’S REPORT

The question tests candidates’ understanding of the use of Least Square Method in
trend analysis of time series data.

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About 30% of the candidates attempted the question and performance was average.

The commonest pitfalls in the candidates’ answers include the use of incorrect
formulae for the computations of the parameter/coefficient estimates in the formulated
linear regression model and their inability to sum up data correctly.

Candidates should understand the principle of the Least Squares Method and how it
can be used to obtain the trend in given data situations.

SOLUTION 5

(a)
X Y Rank of X Rank of Y D = Rx – Ry d2
Rx Ry
35 50 11 11 0 0
77 82 5 3 2 4
95 89 1 1 0 0
28 58 12 8 4 16
76 65 6 5 1 1
80 61 4 6 -2 4
90 84 2.5 2 0.5 0.25
62 59 8 7 1 1
39 48 9 12 -3 9
65 53 7 9 -2 4
90 80 2.5 4 -1.5 2.25
37 52 10 10 0 0
 d  41.5
2

(i) The Spearman’s rank correlation coefficient between X and Y is

6 d 2
1
R=

n n2 1  where n = 12

641.5
= 1
1212 2  1

249
= 1  0.855
1716

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 R = 0.855

(ii) The result in (i) shows that there is a strong positive correlation between the
scores of the candidates in QTB and MI subjects.

b. Data Collection

Miles per gallon F cf

9.5 – 12.5 4 4
12.5 – 15.5 8 4 + 8 = 12
15.5 – 18.5 14 12 + 14 = 26
18.5 – 21.5 26 26 + 26 = 52
21.5 – 24.5 12 52 + 12 = 64
24.5 – 27.5 11 64 + 11 = 75
27.5 – 30.5 10 75 + 10 = 85
30.5 – 33.5 7 85 + 7 = 92
33.5 – 36.5 6 92 + 6 = 98
36.5 – 39.5 2 98 + 2 = 100

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(i) Frequency polygon graph showing the gasoline mileage of a particular car in an
organisation.

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(ii) Cumulative Frequency Curve Ogive Curve/graph

EXAMINER’S REPORT

The question tests candidates’ knowledge of Rank Correlation and their ability to: (i)
compute Spearman’s rank correlation coefficient between two variables and
(ii) draw frequency polygon and ogive curves from given group of data.

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About 90% of the candidates attempted the question but performance was poor.

The major pitfalls in the candidates’ answer were their inability to use appropriate
class intervals for the given data and their failure to correctly construct the required
frequency polygon and ogive graphs.

Candidates are advised to study these concepts more critically and develop the
necessary skills needed for their graphical representation.

SOLUTION 6

a. (i) From the available information in the question, the relevant formula
for the computation of the value of the investment after 5 years (A) is:

A = P (1 + i)n
where P = N250,000
i = 4% or 0.04
n=5

 A = 250,000 (1 + 0.04)5
= 250,000 (1.04)5
= N304,163.23

(ii) The interest earned over the period is

N304,163.23 – N250,000 = N54,163.23

b. (i) The total amount (TA) to be paid back to the bank in order to liquidate
the loan 4 years after can be calculated using

TA = P (l + t r)
where
TA = Total amount due
P = N250,000 (original principal (the borrowed sum)
t = 4 (the time period)
r = 7.5% or 0.075 (simple interest rate)

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By substitution, we have

TA = 250,000 (1 + 0.075(4))
= 250,000 (1 + 0.30)
= 250,000 (1.30)
= N325,000

(ii)
(i) (ii) (iii) (iv) (iii) + (iv)
Loan Amount Paid Unpaid bal. Int. on unpaid New bal
Bal
325,000.00 - 32,500.00 3,250.00 328,250.00
328,250.00 25,000 303,250.00 3,032.50 306,282.50
306,282.50 25,000 281,282.50 2,812.83 284,095.33
284,095.33 25,000 259,095.33 2,590.95 261,686.28
261,686.28 25,000 236,686.28 2,366.86 239,053.14
239,053.14 25,000 214,053.14 2,140.53 216,193.67
21,619.67 25,000 191,193.67 1,911.94 193,105.61
193,105.61 25,000 168,105.61 1,681.06 169,786.67
169,786.67 25,000 144,786.67 1,447.87 146,234.54
146,234.54 25,000 121,234.54 1,212.35 122,446.89
122,446.89 25,000 97,446.89 974.47 98,421.36
98,421.36 25,000 73,421.36 734.21 74,155.57
74,155.57 25,000 49,155.57 491.56 49,647.13
49,647.13 25,000 2,464.13 246.47 24,893.60
24,893.60 Additional
total interest
N24,893.6

SOLUTION 6 Alternate solution

a.
(i)
n
 i 
A = P 1  
 100 
= 250,000 (1.04)5

= N304,163.23

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 The value of the investment after 5 years is N304,163.23.

(ii) The interest earned over the period is N(304,163.23 – 250,000)

= N54,163.23

ALITER TO 6a(i) & 6a(ii)

6a(i)
N
st
1 Year: I = 250,000 x 1 x 0.04 = 10,000.00

At the end of the 1st year: Amount = 250,000 + 10,000 = 260,000.00

2nd year: I = 260,000 x 1 x 0.04 = 10,400.00

At the end of 2nd year A = 260,000 + 10,400 = 270,400.00

3rd year: I = 270,400 x 1 x 0.04 = 10,816.00

At the end of 3rd year A = 270,400 + 10,816 = 281,216.00

4th year: I = 281,216 x 1 x 0.04 = 11,248.64

5th year: A = 281,216 + 11,248.64 = 292,464.64

5th year: I = 292,464.64 x 0.04 = 11,698.59

At the end of 5th year: A = 292,464.64 + 11,698.59 = 304,163.23

 Value of the investment after 5 years = N304,163.23

6a (ii)
Total interest earned = 10,000 + 10,400 + 10,816 + 11, 248.64 + 11,698.59
= N54,163.23

b (i) The total amount to be paid back to the bank in order to liquidate the loan for
years after denoted by TA can be calculated using

TA = P (1 + T r)

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Where

TA = Total amount due

P = Original principle (the borrowed sum)
T = The time period
r = Simple interest rate

NOTE:

TA = P (1 + T r)
P = N250,000
T = 4 years
r = 71/2% or 0.075
Thus,
TA = N250,000 1 + 4 (0.075)
= N250,000 (1 + 0.3)
= N250,000 (1.3)
= N325,000.00

6b
(i)

(C1) (C2) (C3) (C4) (C5)

Month Outstanding Amount Paid Unpaid bal. Int. on unpaid New bal
loan (N) Fix (N) (N) Bal (N) 1% of (N) (C3 + C4)
(C1 – C2) unpaid bal.
0 325,000.00 - 32,500.00 3,250.00 328,250.00
1 328,250.00 25,000 303,250.00 3,032.50 306,282.50
2 306,282.50 25,000 281,282.50 2,812.83 284,095.33
3 284,095.33 25,000 259,095.33 2,590.95 261,686.28
4 261,686.28 25,000 236,686.28 2,366.86 239,053.14
5 239,053.14 25,000 214,053.14 2,140.53 216,193.67
6 21,619.67 25,000 191,193.67 1,911.94 193,105.61
7 193,105.61 25,000 168,105.61 1,681.06 169,786.67
8 169,786.67 25,000 144,786.67 1,447.87 146,234.54
9 146,234.54 25,000 121,234.54 1,212.35 122,446.89
10 122,446.89 25,000 97,446.89 974.47 98,421.36
11 98,421.36 25,000 73,421.36 734.21 74,155.57
12 74,155.57 25,000 49,155.57 491.56 49,647.13

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13 49,647.13 25,000 2,464.13 246.47 24,893.60

14 24,893.60 Additional
total interest
N24,893.60

NOTE: How the entries in the above columns are calculated.

The balance at the beginning of the month from 6b(i) above is N325,000.00.

* See month 0 column C1 in the table

1% of the unpaid balance = 0.01 (N325,000) = 3250

* See month 0 column C4

 The new unpaid balance

= N325,000 + N3,250 = N328,250

* See month 0 column C5

Outstanding loan at the beginning of the next month

* See month 1 column C1

If the debtor pays N25,000, then his new unpaid balance will be N328,250 – N25,000
= N303,250

* See month 1 column C3

The interest on this new unpaid balance 0.01 (N303,250) = N3,032.5

* See month 1 column C4

The new balance = N303,250 + N,3032.5 = N306,282.5

(See month 1,column C5)

Note that after making the 14th payment of N25,000, the new unpaid balance is

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(N24,893.6 – N25,000) = - N106.4, which indicates that N24,893.6 must be his last
payment.

EXAMINER’S REPORT

The question tests candidates’ understanding of the concepts of simple interest and
compound interest and their applications in finance.

About 70% of the candidates attempted the question and performance was fair.

The commonest pitfalls of candidates in answering the question include the use of
wrong simple interest formulae, inadequate computation skills and misinterpretation
of the requirements of the b(ii) part of the question.

Candidates should develop their computational skills, improve their grasp of basic
formulae in mathematics, business and finance and spend adequate time in reading
and digesting questions before answering them.

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

FOUNDATION LEVEL EXAMINATION - NOVEMBER 2014

BUSINESS AND FINANCE

Time Allowed: 3 hours

SECTION A: MULTIPLE-CHOICE QUESTIONS (20 Marks)

ATTEMPT ALL QUESTIONS IN THIS SECTION

Write ONLY the alphabet (A, B, C, D or E) that corresponds to the correct option in each
of the following questions/statements.

1. The latin word “agenda” means

A. Matters arising
B. Notice
C. Correspondence
D. Report
E. Things to be done
2. Which of the following should NOT be the social objective of a business
organisation?

A. Pay tax as at when due

B. Obey laws enacted by the National Assembly
C. Keep clean environment
D. Encourage tax avoidance
E. Encourage tax evasion

3. Which of the following is NOT a factor to be considered when deciding the form
of a business enterprise?

A. The degree of personal liability

B. The willingness to share decision making powers and risks
C. The cost of establishing the business
D. The location of the business
E. The legal requirements concerning the provision of public information

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4. The following are the advantages of decentralisation EXCEPT that it:

A. Promotes development of general managers
B. Aids adaptation to fast-changing environment
C. Enhances a uniform policy
D. Relieves top management of some burden of decision making
E. Gives managers more freedom and independence in decision making

5. Which of the following defines the purpose of an organisation and gives the
direction in which it is heading?

A. Vision statement
B. Mission statement
C. Business objective
D. Strategic intent
E. Organisational goal

6. The management function that ensures that things are done in accordance with
established policies and practices is

A. Organising
B. Coordinating
C. Controlling
D. Planning
E. Motivating

7. The financial structure of a firm is made up of the following components EXCEPT

A. Ordinary shares
B. Preference shares
C. Debentures
D. Undistributed profits
E. Dividends

8. Political, Economic, Social and Technological (PEST) analysis is used to assess

A. Staff of the organisation

B. Business environment

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C. Board of Directors
D. Shareholders
E. Corporate Affairs Commission

9. Which of the following is NOT a discounted cash flow investment appraisal

technique?

A. Net present value

B. Internal rate of return
C. Profitability index
D. Discounted payback period
E. Payback period

10. Ethics is a science of

A. Religion
B. Philosophy
C. Psychology
D. Physiology
E. Morals

11. Leaders who possess special ability to bring about innovation in organisational
processes and development can be referred to as

A. Transactional leaders
B. Transformational leaders
C. Inventional leaders
D. Facilitative leaders
E. Strategic leaders

12. Organisational culture relates to all of the following EXCEPT

A. Norms
B. Belief
C. Values
D. Change
E. Tradition

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13. A work group which manages its own work practices and job allocation within
the group is known as

A. Team group
B. Operative work group
C. Autonomous work group
D. Cooperative work group
E. Joint work group

14. The “threat of entry” part of the Porter’s Five Forces Model is influenced by

A. Supplier competitiveness
B. Economies of scale
C. Inflation
D. Terrorism
E. Financial Reporting Council Regulation

15. The objective of a not-for-profit organisation should be the pursuit of

A. Cost effectiveness
B. Profit minimisation
C. Shareholders wealth maximisation
D. Value for money
E. Market position

16. Which of the following provides a good example of agency relationship in a

typical business organisation?

A. Employees and Employer

B. Employees and Creditors
C. Creditors and Shareholders
D. Creditors and Governments
E. Debtors and Creditors

17. The environment of a business operating outside its own country of incorporation
is called .......................... environment.

A. International

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B. Multilateral
C. Cultural
D. Multinational
E. National

18. Organisational design that is influenced and facilitated by the advent of the
internet and other communication technologies is known as ........................
organisation.

A. Network
B. Virtual
C. Horizontal
D. Matrix
E. Departmental

19. The plan that explains how the business is structured, what resources are
required and how these resources are employed to achieve business objectives is
............................. plan.

A. Operational
B. Strategic
C. Budget
D. Marketing
E. Tactical

20. Which of these management writers is regarded as the father of “Scientific

Management”?

A. Charles Babbage
B. Robert Katz
C. Henry Mintzberg
D. Frederick Taylor
E. Henri Fayol

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SECTION B: ATTEMPT ANY FOUR OUT OF SIX QUESTIONS (80 Marks)

QUESTION 1

The business environment comprises a diversity of business organisations ranging

from very simple enterprises to huge multinational corporations.

a. Identify FIVE features of a sole proprietorship. (10 Marks)

b. Identify FIVE characteristics of a Public Limited Liability Company.

(10 Marks)
(Total 20 Marks)
QUESTION 2

a. In today’s business environment, organisational structure is an important

element of business management because the way organisation is structured
will go a long way in determining the organisation’s efficiency and
effectiveness.

Explain briefly the following forms of organisational structure:

i. Centralisation
ii. Decentralisation
iii. Matrix
iv. Network organisation (Total 10 Marks)

b. Continuous pressure on modern business organisations has made many top

managers to concede more authority to middle level and lower level managers.
State FIVE advantages and FIVE disadvantages of decentralisation.
(10 Marks)
(Total 20 Marks)

QUESTION 3

The financial market is a mechanism by which surplus and deficit units of an economy
can be brought together to accelerate the growth and development of the economy.

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Required:

a. Explain the primary and secondary segments of the Nigerian financial market.
(4 Marks)

b. State and explain FOUR advantages that a company would derive from listing
on the stock exchange. (8 Marks)

c. List in a tabular form FOUR listing requirements each of the first-tier and
Alternative Securities Markets. (8 Marks)
(Total 20 Marks)

QUESTION 4

Management decisions regarding acquisition of non-current assets and other long-

term investments involve huge capital outlay and they are critical to future
profitability and success of the company.
Gboza Limited proposed to buy a plant costing N2,000,000 which is expected to
generate annual net cash flow of N600,000 for six years at a cost of capital of 10%.

Required:

a. Appraise the project using the internal rate of return. (13 Marks)

b. Should the plant be purchased? (2 Marks)

c. State TWO advantages and THREE disadvantages of accounting rate of return as

an investment appraisal technique. (5 Marks)
(Total 20 Marks)

QUESTION 5

Leadership power promotes vision, creativity and change in the organisation.

Identifying the sources of a leader’s power is important in understanding leadership.

Required:

a. Explain the concept of power. (5 Marks)

b. State and explain FIVE sources of power. (15 Marks)

(Total 20 Marks)

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QUESTION 6

Communication permeates every managerial function in work organisations.

Communication can only be said to be effective if the message is interpreted in its
intended form.

Required:

a. Identify FIVE factors that can constitute barriers to effective communication.

(10 Marks)
b. State FIVE methods that can be used to improve communication effectiveness.
(10 Marks)
(Total 20 Marks)
SECTION A: MULTIPLE-CHOICE SOLUTIONS

1. E
2. E
3. D
4. C
5. B
6. C
7. E
8. B
9. E
10. E
11. B
12. D
13. C
14. B
15. D
16. A
17. A

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18. B
19. B
20. D

EXAMINER’S REPORT

The multiple-choice questions (MCQs) test candidates’ general knowledge of the basic
elements and principles of business and finance as outlined in the ICAN syllabus.

Candidates performed well as 75% of them scored 50% and above of the allocated
marks.

SECTION B:

SOLUTION 1

a. The features of sole proprietorship are:

i. It is owned by an individual
ii. It is relatively small in size
iii. It is not a legal entity because the owner cannot be separated from the
business. It can neither sue nor be sued.
iv. The owner has unlimited liability.
v. It requires little formalities in setting up
vi. The scope of operation is limited by the capabilities of the owner.
vii. The death of the owner may affect continuity.
viii. It is simple to operate
ix. Limited sources of funds
x. The owner enjoys all the profit and takes all the risk alone.

b. Characteristics of a public limited liability company

i. Minimum shareholders of 50 persons.

ii. No maximum number of shareholders required.
iii. Perpetual succession - The death of one member does not end the
business.
iv. Large capital requirement.
v. Shares are transferable.

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vi. Requirement to disclose financial information to the public.

vii. It is a legal entity. It can sue and can be sued.
viii. Separation of ownership from management.
ix. Liability of members is limited to the amount of unpaid capital.
x. Easy access to raising of capital
xi. Government control and regulation
xii. Double taxation on the owners

EXAMINER’S REPORT

The question tests candidates’ knowledge of the types of business and Limited Liability
Company.

The question was well attempted and the performance was very good. About 90% of
the candidates attempted the question and they scored over 70% of the allocated
marks.

Candidates’ commonest pitfall was their inability to express themselves and interpret
the question correctly.

Candidates are advised to cover the syllabus so as to prepare very well.

SOLUTION 2

2(a)
i. Centralisation: is the process by which the activities of an organisation,
particularly those regarding planning and decision-making, become
concentrated within a particular location and/or group or keeping all of the
important decision-making power within head office or the centre of the
organisation. In centralised organisation, all decisions, even some of the most
basic, must be referred to top managers.

ii. Decentralisation: is the granting of decision-making authority by top

management to subordinates. Decentralisation increases as the degree,
importance, and range of lower level decision making increases and the
amount of checking up by top management decreases. In a decentralised
organisation, action can be taken more quickly to solve problems, more
people provide input into decisions, and employees are less likely to feel
alienated from those who make the decisions that affect their work lives.

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iii. Matrix Structures: Matrix structure is a type of organisational structure that

combines both the function and product forms of departmentalisation. In
matrix designs, managers play three major roles. First, there is the top leader
- the individual who has authority over both lines (the one based on function
and the one based on product or project). It is this individual’s task to
enhance co-ordination between functional and product managers and to
maintain an appropriate balance of power between them. Second, there are
the matrix bosses - people who head functional departments or specific
projects. Since neither functional managers nor project managers have
complete authority over subordinates, they must work together to assure that
their efforts align rather than conflict. In addition, they must agree on issues
such as promotions and compensation for specific people working under their
joint authority.

Finally, there are two-boss managers - people who must report to both
product and functional managers, and attempt to balance the demands of
each.

iv. Network Organisation: Network organsations get their name from the fact
that their only function is administrative oversight. They do not actually
produce what they sell. All production-related and marketing functions are
carried out by independent companies under contract to the network
organization.

b. Advantages of Decentralisation

i. Relieves top management of some burden of decision making.

ii. Encourages decision making and assumption of authority and responsibility.
iii. It speeds up operational decisions by enabling line units to take local actions
without reference back all the time.
iv. Aids in adaption to fast-changing environment.
v. Makes comparison of performance of different units of the organisation
possible.
vi. Gives managers more freedom and independence in decision making.
vii. It encourages initiative and motivation.
viii. Promotes the establishment and use of board controls that may. increase
motivation as training opportunities for subordinates.
ix. Facilitate diversification.
x. Quicken decision making.

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xi. It improves control and supervision.

xii. It promotes executive development.

Disadvantages of Decentralization

i. It makes it difficult to have a uniform policy.

ii. Increases complexity of coordination of decentralized organisations units.
iii. It may result in some loss of control by upper-level managers.
iv. It may be limited by inadequate control techniques.
v. It involves considerable expenses for training managers
vi. It can lead to inconsistency of treatment of customers, clients or the public,
especially in service industries.
vii. It could encourage dysfunctional organizational.

EXAMINER’S REPORT

The question tests candidates’ understanding of the various forms of organisational

structures.

Most candidates attempted the question and the average pass rate is 58%.

The commonest pitfall was candidates’ inadequate understanding of Matrix structure

and Network forms of organizational structure.

Candidates are advised to prepare well for future examinations.

SOLUTION 3

a. Primary Market: This is a market where securities are sold directly by the issuer
to raise funds for the first time. It can also be referred to as the new issue
market. Secondary market is the segment of the stock market in which stocks,
are traded after they have been issued by companies. It is the section of the
capital market where securities are bought and sold between investors (traded).
The existence of the secondary market encourages trading in the primary
market.

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b. i. Free advertisement and publicity:

Nearly every newspaper carries on a daily basis, the list of quoted
companies and their share prices.

ii. Enhanced prestige and reputation:

Quoted companies are more respected than the unquoted or private
companies.

iii. Easy valuation of the company:

Since the share price of a quoted company is easily available, it becomes
easy to value the quoted company.

iv. Ability to raise fund at a lower cost.

v. It helps enhance the possibility of using such shares for settlement of

mergers/acquisition consideration.

vi. Survival and continuity: For a quoted company with many shareholders,
it will be very difficult for the shareholder to allow the company to
collapse.

3. Listing requirements for the First tier and second tier market.

First Tier Market Alternative Securities Market

i. Company to be listed must be a The company must be a public
public limited company limited company registered
registered by the Corporate with the Corporate Affairs
Affairs Commission (CAC) Commission (CAC)
ii. The company must submit to the The company must submit to
exchange its financial the Stock Exchange its financial
statements and business records reports for the last three (3)
for the past five (5) years years.
iii. Evidence to indicate that its Evidence to show that its
shareholders are not less than current shareholders are not
three hundred (300). less than 100.
iv. It must submit to the Stock It must provide evidence that
Exchange an audited Financial the date of its latest audited
Statements that is not more than account is not more than nine

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nine months prior to its listing.months prior to the time of

filling its application.
v. Evidence of payment of tax (Tax Evidence of payment of tax for
Clearance Certificate) for the the period of its operation.
period of its operation.
vi. The application for listing must The company’s application for
be sponsored by one of the listing must be sponsored by
dealing members of the one of the dealing members of
exchange. the exchange.
vii. It must provide a guarantee that Evidence to indicate that not
at least 25% of the issued share less than 10% of its issued
would be made available to the capital will be taken up by the
public. public.

EXAMINER’S REPORT

The question tests candidates’ understanding of the operations of the financial market,
specifically the segments of the capital market.

The candidates displayed a poor understanding of the question.

The performance was not impressive as more than 70% of the candidates that
attempted this question scored less than 50% of the allocated marks.

Candidates are advised to familiarise themselves with every part of the syllabus.

SOLUTION 4

Appraisal of the project using Internal Rate of Return.

GBOZA LIMITED

Year Cashflow DF @ 10% PV DF @ 20% PV

N N N
0 (2,000,000) 1.000 (2,000,000) 1.000 (2,000,000)
1 600,000 0.909 545,400 0.833 499,800
2 600,000 0.826 495,600 0.694 416,400
3 600,000 0.751 450,600 0.579 347,400
4 600,000 0.683 409,800 0.482 289,200
5 600,000 0.621 372,600 0.402 241,200

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6 600,000 0.564 338,400 0.335 201,000

612,400 (5,000)
NPVp
Internal Rate of Return (IRR) = DFp+ x (20% - 10%)
NPvp  NPVw

612,400
=10% + x 10%
612,400  5,000

612,400
= 10% + x 10%
617,400

= 10% + 0.992 x 10%

= 10% + 9.92%

= 19.92%
Where

DFp = Discount factor yielding positive NPV

DFn = Discount factor yielding negative NPV
NPvp = Positive NPV
NPVn = Negative NPV

ALTERNATIVE SOLUTION

Year Cashflow DF@10% PV DF@20% PV

N N N
0 (2,000,000) 1.000 (2,000,000) 1.000 (2,000,000)
1-6 600,000 4.3553 2,613,180 3,3255 1,995,300
613,180 (4,700)
NPvp
Internal Rate of Return = DFp + + (DFn – DFp)
NPvp  NPvn
613,180
= 10% + x 10%
613,180  4,700

= 10% + 9.92%

= 19.92%

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b. The decision rule

Accept all projects whose IRR are greater than the company’s cost of capital (k).

i.e. Accept if IRR > K

Reject if IRR < K
May accept if IRR = K

If mutually exclusive projects are being considered the rule is to accept the
project that produces the highest IRR.

Following from solution 4(a) above.

Cost of capital K = 10%
IRR = 19.92%

Conclusion:

The project should be accepted because IRR = 19.92% is greater than the cost of
capital K = 10% i.e. IRR = 19.92% > K = 10%

c. The advantages of accounting rate of return are:

i. It is easy to calculate
ii. It is simple to understand and use
iii. Unlike the payback period, it considers the profit over the entire life of
the project.
iv. It uses readily available accounting data.
v. It presents the analysis in terms of a familiar percentage figure that can
be easily understood and interpreted by all the users of the data.
vi. It could be used to compare performance for many companies.

The disadvantages of accounting rate of return are:

i. It uses accounting profits in appraising the project.

ii. There are no rules for setting the minimum acceptable ARR by the
management.
iii. It ignores time value of money.
iv. It is an average concept and will hide the size and timing of individual
cash flows.
v. It does not recognise the risk associated with each project and attitude of
the management to risks.
vi. There is no unique definition of Accounting Rate of Return.
vii. It is a relative measure rather than an absolute measure.

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EXAMINER’S REPORT

The question tests candidates’ knowledge of investment appraisal techniques.

About 59% of the candidates who attempted the question scored 50% or more of the
allocated marks.

Most of the candidates did not have deep knowledge of basic investment appraisal
techniques.

Candidates are advised to study very well for the examination.

SOLUTION 5

a. The concept of power: This is the ability to influence others to get something
done by way of accomplishing tasks and objectives. It has the ability to control
others, to hire, to fire, to determine who uses what resources. It has the ability
to co-ordinate the human resources. It has to do with the ability to co-ordinate
the human and material resources of the organisation in order to attain set
goals.

b. Sources of Power
POSITION POWER:
- Legitimate power
- Reward Power
- Coercive Power
PERSONAL POWER:
- Expert Power
- Referent Power

POSITION POWER

i. Legitimate Power: This type of power generates from the formal authority
tied to a superior position in the organisation’s structure. For example, the
position of sales manager confers on him or her the power to elicit co-
operation from the field workers in meeting sales targets.

ii. Reward Power: It is the ability to bestow or grant rewards such as

promotion, pay rises and merit-pay to subordinates for excellent
performance.

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iii. Coercive Power: This kind of power has to do with authority to force
compliance from others through punishment. The punishment could be in
the form of delayed or denied promotion, demotion or outright
retrenchment.

PERSONAL POWER

i. Expert Power: This sort of power stems from a leader’s special knowledge or
skill to perform a specialised task. Leaders at supervisory levels are often
respected by both their superiors and subordinates because of the technical
skills they possess in their fields.

ii. Referent Power: Referent power relates to charismatic qualities of the

leader. A leader’s personality characteristics can elicit follower’s or
subordinates identification, respect and admiration. Because of these
personality traits, subordinates often regard their leaders as their mentors
and wish to emulate them.

EXAMINER’S REPORT

The question tests candidates’ knowledge of the concept of power and sources of
power in work organisations. The general performance was poor as about half of the
candidates scored below 50%.

The major pitfall noticed was that most of the candidates addressed the question from
the literal meaning/knowledge they had of sources of power. The candidates are
encouraged to acquire and study the recommended texts for the course.

SOLUTION 6

Factors that constitute barriers to effective communication.

i. Factors relating to the attributes of the sender (personality of the speaker)

 Conflicting or inconsistent signals

 Credibility
 Reluctance

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ii. Factors relating to the receiver:

 Poor listening habits

 Pre-dispositions
 Distractions

iii. Factors relating to both the sender and receiver:

 Semantic problems (misconstrued words or sentences)

 Status differences
 Power differences
 Different perceptions

iv. Environmental factors:

 Noise
 Information overload
 Information underload
 Inappropriate timing
 Inappropriate channel of communication

6(b) Methods of improving communication effectiveness

i. Method for the sender:

 Encourage two-way communication e.g. use of suggestion boxes
 Be aware of language and meaning, use simple expressions
 Maintain credibility
 Be sensitive to receiver’s perceptive and be open-minded
ii. Approaches for the receiver:

 Listen to the other group or persons intently, that is, be attentive

 Be sensitive to sender’s perspective.
 Get into the right mood and frame of mind.

iii. Methods for both the sender and receiver:

 Follow up and encourage feedback.

 Regulate information flow to avoid over-load or under-load of
information
 Select appropriate channel of communication

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 Respect each other’s opinion.

EXAMINER’S REPORT

This question tests candidates’ understanding of the factors that constitute barriers to
effective communication and strategies for eliminating them. Candidates performed
fairly well. More than half of the candidates who attempted the question scored above
50% of the allocated marks. The major pitfall was that candidates approached the
question using general knowledge of communication. Candidates are advised to pay
more attention to business communication.

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

FOUNDATION LEVEL EXAMINATION - NOVEMBER 2014

BUSINESS LAW

Time Allowed: 3 hours

SECTION A: MULTIPLE-CHOICE QUESTIONS (20 Marks)

ATTEMPT ALL QUESTIONS IN THIS SECTION

Write ONLY the alphabet (A, B, C, D or E) that corresponds to the correct option in each
of the following questions/statements:

1. Law contained in judgements of courts is

A. Case Law
B. Statute
C. Civil Law
D. Criminal Law
E. Company Law

2. The body that recommends persons for appointment as Judges of State High
Courts in Nigeria is
A. State Solicitor-General
B. State Advisory Judicial Committee
C. National Judicial Council
D. State Ministry of Justice
E. State Attorney-General

3. A company is regarded in law as

A. Corporate aggregate
B. Corporate personality
C. Corporate trustee
D. Corporate proprietorship
E. Corporate municipality

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4. The minimum number of persons that could form a Public Limited Liability
Company is
A. 28
B. 21
C. 14
D. 7
E. 2

5. The first meeting of a Public Limited Liability Company is called

A. Annual General Meeting

B. Shareholders’ meeting
C. Statutory Meeting
D. Extra-Ordinary General Meeting
E. Class Meeting

6. A company director who breaches his/her fiduciary duty to the company is liable
to being
A. Removed from office
B. Reported to the Economic & Financial Crimes Commission (EFCC)
C. Reported to the Independent Corrupt Practices Commission (ICPC)
D. Reported to the Police
E. Rusticated

7. A floating charge over a company’s properties will cover all of the following
EXCEPT
A. Cash
B. Stock-in-Trade
C. Plant and Machinery
D. Rent
E. Dividends

8. A company may be declared insolvent in any of the following situations EXCEPT if

it
A. Fails to file annual returns
B. Has been wound-up

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C. Is a judgment debtor
D. Is not a judgment creditor
E. Is incapable of meeting its financial obligations

9. The basic law relating to theft, fraud and deception in Nigeria is

A. International law
B. Labour law
C. Constitutional law
D. Criminal law
E. Law of contract

10. The crime of bribery involves all of the following EXCEPT the existence of
A. A giver and a receiver
B. The guilty mind of the giver and the act of giving
C. The guilty mind of the receiver and the act of receiving
D. The exchange of money or any other material
E. Refusal to issue receipt for the money involved

11. The basic law relating to bribery could be found in the

A. Criminal Code, Penal Code, Corrupt Practices and Other Related Offences Act
and EFCC Act
B. Criminal Code, Criminal Practices & Other Related Offences Act, CAMA, EFCC
Act
C. Penal Code, ICPC Act
D. Judicature Act, ICPC Act, EFCC Act and CAMA
E. Criminal Code, Penal Code, Judicature Act, EFCC Act

12. The basic law on money laundering in Nigeria is the

A. Money Laundering (Prohibition) Act 2011
B. Criminal Code
C. Penal Code
D. Companies and Allied Matters Act
E. Criminal Procedure Act

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13. Nigeria Deposit Insurance Corporation Act 2003 established the Nigeria Deposit
Insurance Corporation which is aimed at protecting
A. Insurance Industry in Nigeria
B. Life Insurance Industry in Nigeria
C. Depositors’ money in banks
D. Government bond
E. Commercial Banks’ deposit with the Central Bank of Nigeria

14. The essential elements of a contract include the following EXCEPT

A. Offer
B. Acceptance
C. Consideration
D. Intention to create legal relationship
E. Invitation to treat

15. An agent that represents a principal in the disposal of real property is called a/an
A. Broker Agent
B. Factor Agent
C. Auctioneer
D. Mercantile Agent
E. Del-credere Agent

16. In Sale of Goods Act, goods include the following EXCEPT

A. Ships
B. Aeroplanes
C. Tubers of yam
D. Chattels
E. Money

17. Generally, a Hire Purchase contract has the following characteristics EXCEPT
A. Bailee and Bailor
B. Written agreement
C. Deposit of a specified sum of money
D. Possession of goods by the hirer
E. The agreement that cannot be terminated

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18. The capital requirement for Re-insurance business is

A. N1 billion
B. N2 billion
C. N3 billion
D. N4 billion
E. N10 billion

19. ONE of the duties of a bank to its customers is the duty of/not

A. Employment
B. Pay on their behalf without mandate
C. To assist them
D. Secrecy
E. To give scholarship to their children

20. A Trust is managed by the

A. Beneficiaries
B. Trustee
C. Person that created it
D. Court
E. Bailiff

SECTION B: ATTEMPT ANY FOUR OUT OF SIX QUESTIONS (80 Marks)

QUESTION 1

a. The laws of Nigeria may be classified into civil law and criminal law.

You are required to explain any TWO distinctions between civil law and criminal
law. (5 Marks)

b. One of the conditions attached to loans obtained by a registered company is the

creation of a charge on the properties of the company.

You are required to explain briefly any TWO differences between fixed charge
and floating charge. (5 Marks)

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c. i. Vicarious liability is an aspect of the law of torts.

Explain vicarious liability briefly, and give TWO examples of a situation

in which it occurs. (4 Marks)

ii. ‘X’ employed ‘Y’ as a driver and asked ‘Y’ to take a parcel to X’s head
office. ‘Y’ decided to visit a friend who lives five kilometres away from
the route to X’s office. On his way, ‘Y’ knocked down ‘A’ and injured him.
‘A’ wants to sue ‘X’.

Required:

Can ‘A’ successfully sue ‘X’? State your reasons. (6 Marks)

(Total 20 Marks)
QUESTION 2

a. “The Memorandum and Articles of Association of a company are together the

Constitution of the company”.

You are required to list any FIVE contents of the Articles of Association.
(5 Marks)

b. Decisions at company meetings are taken by resolutions.

You are required to:

i. Explain briefly ONE type of such resolutions. (4 Marks)

ii. State the quorum at a company meeting and who may convene an Extra-
Ordinary General Meeting. (2 Marks)
iii. List THREE issues that are considered ordinary businesses at the Annual
General Meeting. (3 Marks)

c. A director that fails to observe fiduciary duties will be liable to sanctions.

You are required to list and explain briefly any THREE of such sanctions.
(6 Marks)
(Total 20 Marks)

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QUESTION 3

a. Limited liability companies and partnerships are different in formation and

characteristics.

Required:

i. State any FIVE distinctions between a limited liability company and a

partnership. (5 Marks)

ii. Explain briefly the duty that a director’s interest shall not conflict with
his duties to the company and its consequences. (4 Marks)

b. Persons proposing to form a company are required to present certain documents

to the Corporate Affairs Commission.

You are required to state any EIGHT of the documents to be presented to

Corporate Affairs Commission for the incorporation of a company. (8 Marks)

c. Meetings of incorporated companies are for diverse purposes.

State the THREE types of company meetings. (3 Marks)
(Total 20 Marks)

QUESTION 4

a. Suzee operates a current account with Life Bank Plc. On Monday, she was
informed that the credit balance on her account was N125,000. She anticipated
that on Tuesday, her mother would lodge cash of N65,000 into her account, but
the mother did not do so.

On Wednesday, she issued a cheque in favour of Timmy for the sum of

N140,000. On Friday, when Timmy presented the cheque, it was returned
unpaid because the credit balance on Suzee’s account still remained N125,000.
Timmy is aggrieved and alleges that an offence has been committed.

Required:

Explain the legal issues surrounding Suzee’s act of issuing that cheque.
(6 Marks)

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b. “Today, the ethical value of a lot of professionals is nothing to write home

about. They sometimes unlawfully convert their client’s money to personal use
without placing premium on the consequences of such a criminal action on
their part”.

Required:
i. Explain briefly one penalty that may be imposed by the court on a person
convicted of the offence of theft, fraud or deception. (2 Marks)

ii. State the TWO consequences of conviction for an offence. (2 Marks)

c. i. Upon incorporation, a company enjoys a corporate personality, separate

from its owners.
Required:

Explain any TWO conditions under which the veil of incorporation of a

company may be lifted. (5 Marks)

ii. Parties to a sale of goods transaction owe certain duties under the law.
Required:

Explain any TWO duties of a seller in a sale of goods contract. (5 Marks)

(Total 20 Marks)

QUESTION 5

a. “A Trust is an equitable obligation which imposes upon a person, called a

trustee, a duty of dealing with the property of a deceased person over which he
has control.”

You are required to explain any FOUR differences between a private trust and
public trust. (8 Marks)

b. Hire Purchase, in ordinary parlance, means an agreement entered into to hire

some goods and subsequently pay by instalments.

You are required to explain any THREE of the general obligations of the hirer at
Common Law. (6 Marks)

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c. The law of agency deals with rules that govern the relationship between
commercial agents, their principals and third parties.

You are required to explain briefly any THREE types of agents. (6 Marks)
(Total 20 Marks)

QUESTION 6

a. i. For a Trust to be validly created, “three certainties” are essential.

You are required to state and explain any TWO of the certainties.
(6 Marks)
ii. Generally, a trustee may be appointed to replace another trustee named
in the instrument setting up the Trust.

Required:

State any FOUR situations in which a trustee may be so appointed.

(4 Marks)
b. One of the innovations introduced into the hire purchase contract by the Hire
Purchase Act of 1965 is the preparation of a memorandum evidencing the
agreement.

Required:

State and explain any TWO information that a hire purchase memorandum must
contain. (5 Marks)

c. A contract of employment, like any other contract, must contain the necessary
ingredients to make the agreement enforceable.

Required:
State any TWO ways in which a contract of employment could be formed and any
THREE methods of bringing the contract to an end. (5 Marks)
(Total 20 Marks)

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MULTIPLE CHOICE SOLUTIONS

1. A
2. C
3. B
4. E
5. C
6. A
7. C.
8. A
9. D
10. E
11. A
12. A
13. C
14. E
15. C
16. E
17. E
18. E
19. D
20. B

EXAMINER’S REPORT

The questions fairly cover all topics in the syllabus.

Candidates’ performance was very good.

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SOLUTION 1

(a) The distinctions between civil law and criminal law are as follows:

(i) While civil law regulates the relationship between two or more persons,
criminal law deals with offences that are punishable by the State;

(ii) The parties in a civil case are referred to as the plaintiff/ claimant and
defendant while; the parties to a criminal case are the State or Police Vs
the accused.

(iii) The onus of proof in civil law is on the party that alleges, while the onus
of proof in criminal law is on the prosecution;

(iv) The standard of proof in a civil case is balance of probability or

preponderance of evidence while the standard of proof in criminal case is
proof beyond reasonable doubt; and

(v) Whereas civil law is to protect and enforce the rights of individuals who
may receive compensation for wrong done to them, criminal law is to
punish the wrongdoer.

(b) A charge on a company’s property is an interest created in favour of a creditor

(e.g. a debenture holder) to secure an outstanding debt of the company.

The differences between a fixed charge and floating charge are as follows:

i. A fixed charge is in the form of a legal mortgage over specified assets of

the company e.g. land, building or fixed plant, while floating charge is
not attached to any particular asset;

ii. The asset so charged in a fixed charge cannot be disposed without the
consent of the debenture holder, while for a floating charge the
company is free to dispose of any of the assets; and

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iii. For a floating charge, new assets acquired by the company are
available to the debenture holder when the charge crystallizes, while
for a fixed charge, only the existing assets are covered by the charge.

(c) (i) VICARIOUS LIABILITY

This is a situation where a person that has authority over another person
will be held liable for the action of the subordinate party that has
caused injury to a third party. The conditions under which the rule
would apply are:

 Where there is a relationship between the wrongdoer and the

person found liable, e.g master and servant.

 The wrong has been done in the course of employment and within
the scope of employment of the wrong doer.

(ii) In the problem question, there is a relationship of master and servant

between ‘X’ and ‘Y’.

 ‘Y’ committed the wrong for which “X” was being threatened with
liability five kilometers away from the head office where he was
supposed to go.

 ‘Y’ had the accident when he made a detour from his course of
duty.

 ‘Y’ therefore, was outside the course of his duty when he knocked
’A’ down. He was on a frolic of his own.

 That being so, ‘X’ cannot be vicariously liable to ‘A’, even though
there was a special relationship of master and servant between ‘X’
and ‘Y’.

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EXAMINER’S REPORT

The question tests candidates’ knowledge of civil law and criminal law, fixed and
floating charges, and vicarious liability principles. Over 80% of the candidates
attempted the question.

Candidates’ performance was good.

Pitfall: A few candidates confused floating charges and fixed charges with bank
charges.

Candidates are advised to study this topic more deeply.

SOLUTION 2

(a) The contents of Articles of Association include:

(i) The name of the company;

(ii) Restriction on transfer of shares, if any;
(iii) Classes of shares and how the shares can be transferred;
(iv) Names, addresses and description of shareholders;
(v) Forfeiture of shares;
(vi) Commission and brokerage on the issued shares;
(vii) Alteration of share capital; and
(viii) Company meetings.

(b) (i) There are two types of resolutions namely:

 Ordinary resolution
 Special resolution

Ordinary Resolution

Ordinary resolution is a resolution passed by a simple majority of the

votes of members present at a meeting and entitled to vote either in
person or by proxy.

Notice of the resolution will normally be given but the length of notice
depends on type of meeting at which the resolution is to be passed.

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Issues requiring ordinary resolution include ordinary businesses of the

Annual General Meeting, such as, election/removal of directors,
declaration of dividend, appointment of auditors and other matters such
as increase of capital.

Special Resolution:

A special resolution is a resolution passed by three-quarters or 75% of the

members entitled to vote personally or by proxy at a general meeting, of
which not less than 21 days notice has been given, specifying the
intention to pass the resolution as a special resolution.

A special resolution is required to make important decisions such as

alteration of the businesses of the company, change of name of the
company, alteration of the Memorandum/Articles, reduction of capital,
winding up, re-registration as public limited company.

2b (ii) The quorum for a company meeting shall, unless otherwise stated in the
articles, be 1/3 of members or 25 members (whichever is lesser).

(iii) Transactions that are considered as ordinary businesses at the Annual

General Meeting are:

 Declaration of dividend;
 Presentation of the financial statements;
 Election of directors in place of those retiring;
 Appointment and fixing of Auditors’ remuneration;
 Appointment of members of the Audit Committee; and
 Election of members of the Audit committee.

(c) A director that fails to observe fiduciary duties will be liable to the following
sanctions:

(i) Action in Negligence: If the breach is negligent in nature, the company

can bring an action in court in negligence against the director;

(ii) Legal Action for Breach of Duty: The company can bring an action in
court against the director for breach of duty;

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(iii) Legal Action for Breach of Contractual Obligation: Where the director is
an executive director, he will be liable for such breach as contained in his
letter of appointment.

(iv) Removal: A director can be removed by the members at the Annual

General Meeting for breach of fiduciary duties;

(v) Suspension: An errant director can be suspended by members at the

Annual General Meeting for breach of his fiduciary and official duties;
and

(vi) Recovery of Secret Profit Made by the Director: This means that if the
director uses any company information for his personal benefit, the
company can institute a legal action against the director to recover any
secret profit or benefit made by him.

EXAMINER’S REPORT

The question tests candidates’ understanding of the contents of the Articles of

Association of companies, company meetings and resolutions as well as directors’
fiduciary duties.

About 85% of the candidates attempted it. Candidates displayed mastery of the
question, and performance was excellent.

SOLUTION 3

(a)(i) A company is different from a partnership in several ways which include the
following:

 A company is formed by incorporation under the Companies and Allied

Matters Act while a partnership may be formed by mere agreement
which may be in writing or otherwise;

 Membership of a private company is fifty and limitless for public

companies, while the maximum number of partners in a partnership is
twenty, except for partnership of professionals in law, accounting and
the members in a cooperative society;

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 A company, once formed, becomes a juristic person that can sue and be
sued. A Partnership does not have a legal personality;

 The liability of shareholders in a company is limited to their shares, while

in partnership, the liability of partners is unlimited, except for limited
partners;

 A company has perpetual succession while in partnership, the death of a

member dissolves the partnership if the member is not a limited partner;

 Management of a company is by directors who may not be shareholders,

while management in partnership is by partners excluding limited
partners; and

 A company, being a creation of law, can only come to an end through

winding-up while a partnership can come to an end for various reasons
such as effluxion of time, death of partners, etc.

(ii) The principle is that the interest of a director must not conflict with his duties to
the company. (S.289 of CAMA).

A director shall not in the course of management of the affairs of the company
make secret profit. If he does, he must account to the company.
A director shall not take a bribe in cash or in kind to induce the company to
transact business with the person he took the bribe from. Furthermore, a
director is not entitled to benefit from the use of company information, property
or opportunity to derive secret self-benefit. The consequence of this is that,
where it is established that the director took a bribe, or abused his office for
self-benefit, he may be removed, or forced to resign from office as a director.

(b) The documents that are required for incorporation of a company are as follows:

(i) The Memorandum of Association;

(ii) The Article of Association;

(iii) The statement of the authorized share capital;

(iv) Statutory declaration of compliance sworn to by a legal practitioner;

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(v) Notice of the address of the registered office of the company;

(vi) Returns on allotment of share;

(vii) Particulars of directors together with their consent to save;

(viii) The particulars of the Secretary, if named in articles; and

(ix) Any other document which may be required by the Commission.

(c) Three types of company meetings are:

(i) Statutory meeting;

(ii) Annual General Meeting; and

(iii) Extra-ordinary General Meeting.

EXAMINER’S REPORT

The question tests candidates’ understanding of the distinction between Limited

Liability Companies and Partnerships, company incorporation documents, and types of
company meetings.

Over 85% of the candidates attempted it. Candidates understood the question in its
entirety, and performance was very good.

SOLUTION 4

(a) The legal issues surrounding Suzee’s act of issuing the cheque are as
follows:

(i) The issuance of a cheque on an account that does not have enough
credit balance to cover the value of the cheque is an offence;

(ii) A cheque that is returned unpaid by a bank due to insufficient funds

in the account is called a dud cheque;

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(iii) Issuance of a dud cheque is an offence under the Dishonoured

Cheques (Offence) Act, Laws of the Federation of Nigeria; and

(iv) The punishment for issuing a dud cheque is imprisonment under the
Dishonoured Cheques (Offences) Act, Laws of the Federation of
Nigeria.

In summary, the issuance of the cheque by Suzee on an account that does

not have sufficient funds is an offence that attracts a term of imprisonment.

(i) A person that has been convicted by the court for one or all of the
offences of theft, fraud or deception may be sentenced by the court as
a form of punishment to

 Term of imprisonment: The sentence of a term of imprisonment may

be with or without a hard labour, as determined by the court.

 Payment of fines: A person that has been ordered by a court to pay a

fine must pay the fine into the coffers of the government.

(ii) The consequences of being convicted of an offence include:

 The creation of a criminal record against the convict;
 Inability of the convict to contest for any public office;
 Inability of the convict to hold any political office; and
 Social stigmatization, which may lead to being shunned by some
members of the society.

4(c)(i) The veil of incorporation of a company may be lifted in any of the

following circumstances:

 Where membership of the company falls below the statutory

minimum of two members. In that case, the remaining member will
be held liable for the debts of the company;

 If, in the course of winding up, it appears that certain acts were done
or business had been carried out with intent to defraud the creditors
or for any other fraudulent purpose;

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 Where there is evidence that the company was used to evade

payment of tax, the tax authorities could seek recovery of the unpaid
tax from the members of the company;

 Where it becomes necessary to determine whether or not the company

complies with the laws of the country;

 To determine the nationality of the members where it is suspected

that the company is an enemy company; and

 Where those managing the company’s affairs fail to disclose to the

public that they are acting on behalf of the company.

(ii) The duties of a seller in a sale of goods contract include:

 The duty to ensure that the title he has in the goods is a good one
because the law is that a person cannot give what he does not have,
(nemo dat quod non habet);

 Duty to ensure that the goods are of merchantable quality, or that

they are not goods that are damaged or spoilt. They must be of good
quality in the market;

 Duty to deliver the goods to the buyer: This is an essential duty which
goes to the roots of the sale of goods contract. The seller must deliver
possession of the goods to the buyer. In the absence of delivery of the
goods by the seller the contract of sale is not complete; and

 Duty to ensure that the goods are fit for the purpose for which they
are meant: Once the seller is aware of the purpose that the buyer
requires the goods for, then, the seller must ensure that the goods
satisfy that purpose.

EXAMINER’S REPORT
The question tests candidates’ knowledge of the laws on dud cheques, fraud and
financial crimes, lifting the veil of incorporation, and sale of goods.

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Around 84% of the candidates displayed understanding of the topics, and performance
was very good.

SOLUTION 5

(a) Differences between Private Trust and Public Trust are as follows:

(i) A Public trust cannot fail for uncertainty of object, but a private trust may
fail for such uncertainty. Cypres doctrine applies to public trust when the
original objective of the trust becomes impossible to perform, and the court
is allowed to amend the original intention in order to prevent the trust from
failing. However, the doctrine is not applicable to private trust;

(ii) A private trust pays income tax to the government, whereas a public trust is
exempted from paying tax;

(iii) A public trust can last forever, whereas a private trust in most cases, has
limited life span because it is subject to the rule against perpetuity and trust
accumulation; and

(iv) A private trust is enforced by the beneficiaries while a public trust is

enforced and managed by the office of the Attorney-General or Public
Trustee.

(b) Some of the general obligations of the hirer at Common Law are:

(i) The duty to take delivery of the goods, which is the subject-matter of the
hire purchase transaction, from the owner;
(ii) The duty to take reasonable care of the goods to avoid loss or damage;
(iii) The obligation to pay the installment as and when due or as agreed with
the owner;
(iv) The duty to give back the goods to the owner upon expiration of the
period of the hire purchase if he is not interested in exercising his option
to purchase, or if he defaults in paying the installment due; and
(v) The duty to give the owner information about where the goods are kept
as and when so demanded by the owner.

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(c) The following are the types of agents in the law of agency:

 Special Agent: This is someone who has authority to do some particular

act on behalf of his principal, though not on a continuous basis, for
instance on a special order to purchase a house or a vehicle;

 General Agent: This is someone who has the power to act for his principal
in all matters involving business or trades for example, a solicitor or legal
practitioner;

 Factor Agent: This is an agent who sells or disposes of goods that are
entrusted to him. His activities are governed by the Factors Act of 1889;

 Broker Agent: This agent negotiates and makes contract for the use and
purchase of goods. However, unlike a factor agent, he is not left in
possession of the goods. Typical examples are Insurance brokers and
Stock brokers.

 Universal Agent: This is someone who represents various principles in

many aspects of trade. He is appointed by a deed under power of
Attorney and has wide powers;

 Mercantile Agent: He represents someone in commercial and certain

aspects of trade transactions. His duties are similar to those of the factor
agent;

 Auctioneer: He represents a principal in the disposal of real properties

and other assets. He is usually licensed to sell properties of mortgagors
who have defaulted and other assets declared for sale by government
and individuals. The auctioneer acts between the vendor and the
purchaser. He receives commission and invariably sells to highest
bidder;

 Estate Agent: This agent deals in the acquisition rent-lease and disposal
of landed properties. The agent receives commission on such transaction
from the property owner; and

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 Del credere Agent: This is a mercantile agent who, in consideration of

extra pay, called del credere commission, guarantees to his principal that
the third party with whom he enters into contract on behalf of the
principal shall duly pay the sum becoming due under the contract.

EXAMINER’S REPORT

The question tests candidates’ knowledge of types of Trusts, duties of the hirer and
types of agents.

Over 60% of the candidates attempted it. Performance was good overall, but below
average in Law of Trusts.

Major pitfall: Most of the candidates lacked adequate knowledge of the Law of Trusts.
Candidates should cover this topic for future examinations.

SOLUTION 6

6(a)(i) The three certainties for the creation of a valid trust are:
 Certainty of words: The words used in a trust must point unmistakably to
an intention to create a Trust. The words must be imperative and
unambiguous. They must not be precatory words;

 Certainty of subject-matter: This means that the property which is the

subject-matter of the Trust must be clearly described and sufficiently
identifiable; and

 Certainty of object: This means that there must be identifiable

beneficiaries, that is, the persons who are to benefit from the Trust.

(ii) A trustee may be appointed to replace one that

 Is dead;
 Is outside the country for over one year;
 Desires to be discharged;
 Refuses or is unfit to act;
 Is incapable of acting; or

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 Is a minor or infant.

6(b) The information that the hire purchase memorandum must contain are:

 A statement of the cash price: The memorandum must contain the cash
price of the goods and the currency denomination;

 A statement of the hire purchase price of the goods: Being a hire

purchase agreement, the price must be different from cash price The
hire purchase price is cash price plus interest;

 The statement of date when each installment is to be paid: The date of

the hire purchase installment payment is crucial to the agreement so as
to determine the number of installments and when the hirer can exercise
option to purchase;

 A statement of the deposit paid: This will enable the hirer to know the
outstanding balance of the purchase price. This balance is payable by
agreed installments;

 A statement of the true rate of interest: Without this information, the

hirer cannot determine the total cost of the goods under hire; and

 A list of the goods to which the agreement relates: This would enable
the parties to see at a glance the total number of goods the agreement
covers.

6(c)(i) A contract of employment may be formed in any of the following ways:

 Orally or by words of mouth;
 In writing;
 By conduct, or attitude of the parties; or
 Partly orally and partly in writing.

(ii) A contract of employment may be brought to an end by any of the following

means:

 Notice from either party;

 Termination of the employees’ appointment
 Effluxion of time of the contract of employment;

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 Dismissal of the employee;

 Frustration of the contract of employment;
 Death of any of the parties;
 Retirement of the employee;
 Resignation of the employee.

EXAMINER’S REPORT

The question tests candidates’ understanding of trusteeship, new innovations

introduced into hire purchase contracts, and contract of employment.

55% of the candidates attempted it, and their performance was good. Some candidates
displayed very shallow knowledge of trusteeship.

Candidates should get familiarised with the topic.

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