CASE 1 : COMPASS COMPANY.

Q1.Whydidthecashbalancedecreasewhenthecompanymadeanetprofitfortheperiod? Answer: From the given case, it can be analysed that companys net cash flow from operations of Rs 72,000 is comparatively less than compared to that of the sum of depreciation and profit whichis1,41,000.Thisresultsinnonrealizationofprofitsincashbecauseofaccruals. Secondly, due to an increase in investors and debtors of Rs. 58,000 and 44,000 respectively strainedthecashgeneratedfromoperations. Moreover, the company drew on its cash and cash equivalents in order to pay off the capital expenditure. Q2.Howdidthecompanyfinancetheacquisitionofplantandmachinery? Answer:CompassCompanyhasfinancedtheacquisitionofplantandmachineryfromthecapital expenditureincurred.TheamountthatwasincurredwasRs.1,73,000. Theexpenditurehasbeenpartlyfinancedthroughthreesources: 1. InterestReceipts Rs7000 2. Proceedsfromsaleofoldplantandmachinery Rs22,000 3 Proceedsfromsaleofinvestmentsandnetofpurchase Rs16,000 ThebalanceamountofRs1,28,000wasfinancedthrough: 1. Netcashfromoperatingactivities Rs72,000 2. Netcashfromfinancingactivities Rs25,000 3 Drawingdownoncashandcash Rs31,000 Q3.Howdidthecompanyutilizetheproceedsoftheequityissue? Answer: Asmentioned in thecase, the net realization from long term sources was Rs 72,000 (Rs 1,00,000raisedfromissuanceofsharecapitalandrepaymentofloanofRs28,000) The company was left with net cash of Rs 25,000 from financing activities after paying off dividendsofRs25,000andinterestofRs22,000. Afterreferringthecashflowstatement,ithasbeennotedthatthecompanysubstitutedsecured borrowingscarryingalowerinterestratebycostlierunsecuredborrowings. Q4.Isthecapacityexpansionstrainingthecompanyscash? Answer: There was a major drain in cash during the period due to expansion in the manufacturingcapacity.
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 Secondly,netcashoutflowfrominvestingactivitiesofRs1,28,000wasmetfrom: Netcashfromoperatingactivities:Rs72,000 Netcashfromfinancingactivities:Rs25,000 Drawingdownoncashandcashequivalents:Rs31,000 Only one third of the companys financing needs for expansion was through share capital. This resulted in a considerable drop in companys cash balance and to add on to this, management madeconstantpaymentstocreditorswhichledtoafurtherstrainoncompanyscash. Q5.Doesthecompanyenjoyafairdegreeoffinancialflexibility? Answer: Yes. The Company certainly enjoys a fair and a high degree of financial flexibility. The mainreasonsforthisareasfollows: Company has a large net cash flow from operations, which reduces its vulnerability to adversechangesinoperatingconditions. Fromthesuppliers,thecompanycanavailcredits. Compasscantapabanklineofcreditorothersourcesgivenastrongfinancialposition. Thecompanycanraisecashbysellinginvestmentswithoutdisruptingoperations. Q6.Whatinferencescanwedrawfromthestatementaboutthecompanysabilitytogenerate futurecashflows,torepayitsborrowingsandtopaydividends? Answer:Thecompanyappearstobebalancingshareholdersneedfordividendwithitsneedfor cash to payfor expansion, likely bypaying a dividend of Rs 25,000 as compared to net cash flow fromoperationsofRs50,000afterdeductingtheintrestpaid. Duringtheyear2005,thecompanypaidadividendof12.5%onbeginningsharecapitalthatisRs 25,000/Rs2,00,000.ThecompanywillhavetopayRs48,750,incaseifitiseagertomaintainthe rateofdividendinfuture. Thecompanyisunlikelytomaintainthedividendlevelpaymentsoverthesharecapitalincreased infuturewithoutpressurisingitsliquidity. Q7.Overallconclusionaboutthecompanysliquiditymanagementabilities. Answers: The companys liquidity has been strained due to selling investments, raising additional share capitals and drawing on cash balance. The companys role in responding to the unexpected needs or opportunities is derived from two main sources that is the ability to issue debt or equity at short notice and sell its investments without any effect on the companys operations. The working capital management of the company is a matter of serious concern and should be immediatelybeaddressed.
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2. SOUTHERN PETROCHEMICAL INDUSTRIES CORPORATION LTD. Q1. Examine the companys accounting policy on capitalization of interest in light of the requirementofAS16andaccountingprinciples. Answer:TherequirementsofAS16BorrowingCostarebeingviolatedbyCompany'sAccounting Policy.Inthecasegiventhiswasnoticedbytheauditorsaswell. As according to AS16, in case of qualifying asset (an asset that necessarily takes a substantial period of time3 to get ready for its intended use or sale. For eg: Manufacturing plants, power generation facilities etc.), capitalization of interest is done. But in regards to the case, the investment is done in a subsidiary company which is not considered as a qualifying asset hence accordingtoAS16,thetreatmentgivenbythecompanyiswrong. Q2.Identifypossiblemanagerialmotivesforthecompanysaccountingpolicy. Answer: Investments are over stated in the books of accounts, as the interest amount is being capitalised. This is the reason due to which company's profits are deflated to that extent resultinginevasionoftax.AlsoAdvancesandReserveswouldbeinflatedtothatextent. Therefore, through the case it can be seen that an aggressive accounting treatment was being followedbythemanagement.

CASE 3 - BENGAL ALUMINIUM CASE

Q1.WhatwouldhavebeenBengalAluminumsprofitaftertaxfortheyearendedMarch31, 2008butforthechangeindepreciationmethod? Answer: When a company decides for a change in depreciation calculation method, there must beareasonablejustificationforthechangedone.Andthereisaneffectonretrospectivebasisif themanagementapprovesthechange. ThePATforyearendedMarch31st2008wouldbe DecreaseinDepreciationExpense: Profit AfterTax=2,570,000,000141,586,327

=2,428,413,673 EffectofDepreciationWrittenBack: ProfitAfterTax=2,428,413,673782,312,370 =1,646,101,303

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Q2.ComputetheRatioofprofitaftertaxtosalesforthetwocompaniesforeachyear? Answer:TheRatioofProfitaftertaxtosalesisasfollows: COMPANY Year 2005 2006 2007 2008 Q3.WhatcouldhavebeentheMotivesforBengalAluminiumsdepreciationpolicyswitch? Answer:ThemotivebehindswitchingthedepreciationpolicyisthedecreaseintheDepreciation expensei.e.Itshouldhavebeen923,898,697insteadof782,312,370. The second motive for switching is the increase in the Net Profit Value. PAT should have been 2,428,413,673insteadof2,570,000,000. Taking into consideration the Depreciation written back 782,312,370 must have been added totheprofitandlossaccount.Hence,theactualprofitsfor2008wouldbe1,646,101,303instead of2,428,413,673andthepercentageofNetProfitis7.9%. Q4.Doyouconsiderthecompanysdisclosureoftheaccountingchangeadequate? Answer: If the company can justify the reasons for the change in policy, the companys disclosure of theaccounting changeis adequate. However, the money credited to the profit and lossaccountshouldnotbeconsideredasinflowofcash.Itismerelyanaccountingchange. Q5.DraftashortparagraphontheaccountingchangewhichSharmashouldconsiderincluding inherreportonAluminiumsstock. Answer: Based on the ratio of PAT to sales , it is evident that Bengal Aluminum Company has beenfarbehindNationalAluminiumCompanyintermsofnetprofitmargin,thiswasespecially afterinstallingthenewsmelteronApril1,2005. Based on the estimation, the actual profit/sales percentage would be closer to 7.9 than the calculatedvalueof12.43%.Sinceithasbeenmentionedthattheotheraluminumfirmspractice similar accounting practices, one could assume that the figures for these other companies could alsojustbebloatedfigures Investing in this firm could be risky. Hence utmost caution has to be taken and a clearer understandingofthesecompaniesaccountbookswouldbemandatory.
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BENGALALUMINIUM Ratio 10.61% 10.42% 10.25% 12.43%

NATIONALALUMINIUM Ratio 09.19% 10.78% 13.40% 15.12%