(ii) Determine whether your decision in (b)(i) would change if you were to use the Maximin and Minimaxregret decision criteria. Your answer should be supported by relevant workings. (6 marks)
(ii) Determine whether your decision in (b)(i) would change if you were to use the Maximin and Minimax
regret decision criteria. Your answer should be supported by relevant workings. (6 marks)
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(c) Discuss the ways in which budgets and the budgeting process can be used to motivate managers toendeavour to meet the objectives of the company. Your answer should refer to:(i) setting targets for financial performance;(ii) participation in the budget-setting process. (12 marks)
(d) Estimate by how much the bid might be increased without the shareholders of Paxis suffering a fall in their expected wealth, and discuss whether or not the directors of Paxis should proceed with the bid. (5 marks)
4 David Silvester is the founder and owner of a recently formed gift packaging company, Gift Designs Ltd. David hasspotted an opportunity for a new type of gift packaging. This uses a new process to make waterproof cardboard andthen shapes and cuts the card in such a way to produce a container or vase for holding cut flowers. The containerscan be stored flat and in bulk and then simply squeezed to create the flowerpot into which flowers and water are thenput. The potential market for the product is huge. In the UK hospitals alone there are 200,000 bunches of flowersbought each year for patients. David’s innovative product does away with the need for hospitals to provide and storeglass vases. The paper vases are simple, safe and hygienic. He has also identified two other potential markets; firstly,the market for fresh flowers supplied by florists and secondly, the corporate gift market where clients such as cardealers present a new owner with an expensive bunch of flowers when the customer takes delivery of a new car. Thevase can be printed using a customer’s design and logo and creates an opportunity for real differentiation and impactat sales conferences and other high profile PR events.David anticipates a rapid growth in Gift Designs as its products become known and appreciated. The key question ishow quickly the company should grow and the types of funding needed to support its growth and development. Theinitial financial demands of the business have been quite modest but David has estimated that the business needs￡500K to support its development over the next two years and is uncertain as to the types of funding best suited toa new business as it looks to grow rapidly. He understands that business risk and financial risk is not the same thingand is looking for advice on how he should organise the funding of the business. He is also aware of the need to avoidreliance on friends and family for funding and to broaden the financial support for the business. Clearly the fundingrequired would also be affected by the activities David decides to carry out himself and those activities better providedby external suppliers.Required:(a) Provide David with a short report on the key issues he should take into account when developing a strategyfor funding Gift Designs’ growth and development. (10 marks)
22 Which of the following statements about limited liability companies’ accounting is/are correct?1 A revaluation reserve arises when a non-current asset is sold at a profit.2 The authorised share capital of a company is the maximum nominal value of shares and loan notes the companymay issue.3 The notes to the financial statements must contain details of all adjusting events as defined in IAS10 Events afterthe balance sheet date.A All three statementsB 1 and 2 onlyC 2 and 3 onlyD None of the statements
1 The board of Worldwide Minerals (WM) was meeting for the last monthly meeting before the publication of the yearendresults. There were two points of discussion on the agenda. First was the discussion of the year-end results;second was the crucial latest minerals reserves report.WM is a large listed multinational company that deals with natural minerals that are extracted from the ground,processed and sold to a wide range of industrial and construction companies. In order to maintain a consistent supplyof minerals into its principal markets, an essential part of WM’s business strategy is the seeking out of new sourcesand the measurement of known reserves. Investment analysts have often pointed out that WM’s value rests principallyupon the accuracy of its reserve reports as these are the best indicators of future cash flows and earnings. In order tosupport this key part of its strategy, WM has a large and well-funded geological survey department which, accordingto the company website, contains ‘some of the world’s best geologists and minerals scientists’. In its investor relationsliterature, the company claims that:‘our experts search the earth for mineral reserves and once located, they are carefully measured so that the companycan always report on known reserves. This knowledge underpins market confidence and keeps our customerssupplied with the inventory they need. You can trust our reserve reports – our reputation depends on it!’At the board meeting, the head of the geological survey department, Ranjana Tyler, reported that there was a problemwith the latest report because one of the major reserve figures had recently been found to be wrong. The mineral inquestion, mallerite, was WM’s largest mineral in volume terms and Ranjana explained that the mallerite reserves ina deep mine in a certain part of the world had been significantly overestimated. She explained that, based on theinterim minerals report, the stock market analysts were expecting WM to announce known mallerite reserves of4·8 billion tonnes. The actual figure was closer to 2·4 billion tonnes. It was agreed that this difference was sufficientto affect WM’s market value, despite the otherwise good results for the past year. Vanda Monroe, the finance director,said that the share price reflects market confidence in future earnings. She said that an announcement of an incorrectestimation like that for mallerite would cause a reduction in share value. More importantly for WM itself, however, itcould undermine confidence in the geological survey department. All agreed that as this was strategically importantfor the company, it was a top priority to deal with this problem.Ranjana explained how the situation had arisen. The major mallerite mine was in a country new to WM’s operations.The WM engineer at the mine said it was difficult to deal with some local people because, according to the engineer,‘they didn’t like to give us bad news’. The engineer explained that when the mine was found to be smaller thanoriginally thought, he was not told until it was too late to reduce the price paid for the mine. This was embarrassingand it was agreed that it would affect market confidence in WM if it was made public.The board discussed the options open to it. The chairman, who was also a qualified accountant, was Tim Blake. Hebegan by expressing serious concern about the overestimation and then invited the board to express views freely. GaryHowells, the operations director, said that because disclosing the error to the market would be so damaging, it mightbe best to keep it a secret and hope that new reserves can be found in the near future that will make up for theshortfall. He said that it was unlikely that this concealment would be found out as shareholders trusted WM and theyhad many years of good investor relations to draw on. Vanda Monroe, the finance director, reminded the board thatthe company was bound to certain standards of truthfulness and transparency by its stock market listing. She pointedout that they were constrained by codes of governance and ethics by the stock market and that colleagues should beaware that WM would be in technical breach of these if the incorrect estimation was concealed from investors. Finally,Martin Chan, the human resources director, said that the error should be disclosed to the investors because he wouldnot want to be deceived if he were an outside investor in the company. He argued that whatever the governance codessaid and whatever the cost in terms of reputation and market value, WM should admit its error and cope withwhatever consequences arose. The WM board contains three non-executive directors and their views were alsoinvited.At the preliminary results presentation some time later, one analyst, Christina Gonzales, who had become aware ofthe mallerite problem, asked about internal audit and control systems, and whether they were adequate in such areserve-sensitive industry. WM’s chairman, Tim Blake, said that he intended to write a letter to all investors andanalysts in the light of the mallerite problem which he hoped would address some of the issues that Miss Gonzaleshad raised.Required:(a) Define ‘transparency’ and evaluate its importance as an underlying principle in corporate governance and inrelevant and reliable financial reporting. Your answer should refer to the case as appropriate. (10 marks)
(b) Explain how the use of SWOT analysis may be of assistance to the management of Diverse Holdings Plc.(3 marks)
(ii) The sales director has suggested to Damian, that to encourage the salesmen to accept the new arrangement,the company should increase the value of the accessories of their own choice that can be fitted to the lowemission cars.State, giving reasons, whether or not Damian should implement the sales director’s suggestion.(2 marks)
(b) Seymour offers health-related information services through a wholly-owned subsidiary, Aragon Co. Goodwill of$1·8 million recognised on the purchase of Aragon in October 2004 is not amortised but included at cost in theconsolidated balance sheet. At 30 September 2006 Seymour’s investment in Aragon is shown at cost,$4·5 million, in its separate financial statements.Aragon’s draft financial statements for the year ended 30 September 2006 show a loss before taxation of$0·6 million (2005 – $0·5 million loss) and total assets of $4·9 million (2005 – $5·7 million). The notes toAragon’s financial statements disclose that they have been prepared on a going concern basis that assumes thatSeymour will continue to provide financial support. (7 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Seymour Co for the year ended30 September 2006.NOTE: The mark allocation is shown against each of the three issues.
(b) Explain what effect the acquisition of Di Rollo Co will have on the planning of your audit of the consolidatedfinancial statements of Murray Co for the year ending 31 March 2008. (10 marks)