[HamzaYusuf]

Whenever an asset is revalued we debit NCA in SoFP and credit revaluation reserve in SOFP but you said that we record the revaluation reserve in both SOFP and OCI as unrealized profit but how it is possible that one credit entry is record in two different statements such as SOFP and OCI?

Kindly explain?

[HamzaYusuf]

Thanks. I appreciate your help.

You didn’t answer my question (7). Let me ask you again. Is it necessary to record the revaluation profit in OCI or it is something not necessary because the journal entry is used in both SOFP and OCI when we credit revaluation reserve?

For example if an asset currently worth $100,000 and increase by $20000 then we debit cost $20,000 and credit revaluation reserve $20,000. Now the revaluation reserve will be recorded in SOFP as part of equity item or recorded in OCI as part of Unrealized profit?

[HamzaYusuf]

2. Like what other reserves?

3. The reason a company chooses to stock split so that they can reduce the high market price of their shares because they would end up with more number of shares?

4. For example if an asset (machine) worth of $30,000 is revalued to $50,000 then the difference of $20,000 is the revaluation surplus. We will post the journal entry by debiting Machine ($20,000) and crediting Revaluation reserve account ($20,000)?

5. The revaluation entry will be recorded as follows:
Debit Machine $20,000
Credit Revaluation reserve and OCI $20,000

6. We will record the revaluation profit of $20,000 in revaluation reserve and as well in the Other comprehensive income as unrealized profit on revaluation?

7. Is it necessary to record the revaluation profit in OCI or it is something not necessary because the journal entry is used in both SOFP and OCI when we credit revaluation reserve?

[HamzaYusuf]

1. Is it true that Tax account accounts for both the purchase tax in the debit-side and sales tax in the credit-side.

2. For example (lets take the lecture eg) the Tax account shows the debit side has a balance of $75600 which means it is a purchase tax that we paid on goods bought and therefore it is recoverable from the STATE?

3. Furthermore, the balance shown on the credit-side has a balance of $109200 which means it is a sales tax that we received from goods sold and therefore it is payable to the STATE?

4. Is it correct that the Tax accounts basically accounts for both the sales tax and purchase tax, is that correct?

5. Could you please explain that isn’t it true that sales tax and purchase tax are actually part of tax expenses shown in SOPL before getting net profit figures?

6. Is it also true that we show the NET balances of sales and purchases in our Financial statements after deducting the taxes are the amounts?

7. And where in the financial statements do we exactly show the purchase tax and sales tax that we charged or suffered?

Truly Thankful to YOU ? ? ?

[HamzaYusuf]

But why would the company choose to revise its budget in the first place and introduce a new budget system?

Is it true that there might be some arithmetical errors or previous errors carried forward in the current budget?

What are the other reasons to revise the budget that you can tell ??

[HamzaYusuf]

If we are told to evaluate the performance of the company. DO we have to calculate GOALS and MEASURES from the given information about the company or we will be told about the goals and measures of the company in the given question?

Secondly, we need to evaluate non-financial indicators of the balanced scorecard and comment on whether the company has achieved its goal or not?

Since I don’t find many questions on this topic in my examkit (maybe two at least) but they didn’t really answer the question that I asked you above. Are we frequently tested on balance scorecard and building block model from section C long questions nowadays?

[HamzaYusuf]

If a product is made by worked of several machines (one after the another) then the production will be restricted by the slowest of the machines because it is taking longer and that slowest machine is actually the bottleneck resource.

In example 3 we have labour hour available at 225,000 and each product per metres in hours is given in the table so we need to calculate the production capacity of each product and decide which machine is taking longer and we can see that by looking at their production capacity whichever product is making fewer units will be therefore taking longer time and it is bottleneck resource?

Is that correct?

[HamzaYusuf]

Sir, I am not referring to the flexed budget where we compare actual activity with the flexed activity but rather I am referring to the variance where sometimes we compare budgeted activity with the actual activity, and sometimes we compare budgeted activity with the standard activity in variances.

In what variances do we compare budgeted with actual; and the rest we compare budgeted with the standard.

[HamzaYusuf]

Can you please help me with the Rolling budget question Static Co (Dec 2016)

First, we must calculate the growth rate of everything so that we can easily adjust the growth for the coming period by calculating the actual activity and multiplying it with the growth rate?

Revenue = 13694 / 13425 = 2% growth every quarter
Do I have to calculate every quarter growth or do we just have to calculate the first quarter growth because it is possible that the growth rate increases in any quarter?

Cost of Sales = 8216 / 8055 = 2%

Distribution cost = 685 / 671 = 2%
Is it true that Distribution cost would remain fixed % of revenue in the question therefore we have to calculate like this by taking distribution cost divided by revenue each year otherwise it would have been calculated just like the growth (685 / 671) = 2%

Administration cost = 2000 fixed every quarter

Since the actual results for the first quarter (Q1) is already given in the question so we start calculating Q2 actual result with the growth rate and multiply it with Q1 actual results?

Are these all correct?

[HamzaYusuf]

Thanks for your reply it was a great help.

To see if the working capital is HIGHER or LOWER we have to look at the factors mentioned below such as:

1) If the company is having higher Working Capital: This can be identified by increase in the level of receivables, inventories and decrease in payables as compared to another company in the same sector.

[This shows that our company has adopted Conservative Investment Policy (i.e. Overcapitalization in Working Capital) and the company is more inclined towards Liquidity objective]

2) If the company is having lower Working Capital: This can be identified by decrease in the level of receivables, inventories and increase in payables as compared to another company in the same sector.

[This shows that our company has adopted Aggressive Investment Policy (i.e. Overtrading in Working Capital) and the company is more inclined towards Profitability objective]

Please correct me on these two problems of mine. I would be grateful to you 🙂

[HamzaYusuf]

Thanks for your reply it was a great help.

Sir can you please say to see if the company is having higher or lower working capital we can identify this by looking at these levels:

1) Higher Working Capital which means increase in the level of receivables, inventories and decrease in payables as compared to another company in the same sector

This shows that the company has adopted Conservative Investment Policy and has inclined towards Liquidity therefore it is an overcapitalization into the Working Capital

2) Lower Working Capital which means decrease in the level of receivables, inventories and increase in payables as compared to another company in the same sector

This shows that our company has adopted Aggressive Investment Policy (i.e. Overtrading in Working Capital) and the company is more inclined towards Profitability objective

[HamzaYusuf]

I know what is Compound Interest (thanks to your lecture :)) but this is what I get from your answer (please correct me if I am wrong!)

1) If the annual interest rate is 12% then it is called effective interest rate because it is based on annual rate not monthly or quarterly. BUT why it is referred to as a nominal interest rate?

However, if we break down the annual rate on monthly basis then we have to divide it by 12 such as 12%/12 = 1% every month is charged by the bank

2) Is it true that it is the bank that offered bank loans to companies based on simple interest or compound interest. It is the bank that dictates these terms to companies who are willing to take up the loans they have to comply with the terms of the bank. correct?

3) Please correct the formula that I asked you previously is correct or not because I thought that both of the formulas are the same but given in different ways! Please tell me this.

I have watched the lecture on simple & compound interest. Thank you for that…

[HamzaYusuf]

I’ve watched your lecture completely!

From your second line, I guess that you’re trying to say that there is a difference between opportunity cost & lost contribution (I thought they were both the same thing!)

If it is true then I understood opportunity cost as you stated that it is a lost income but what is a lost contribution then! and how would I identify it in the exam question?

Could you please also state an example where the relevant cost is higher of either scrap value & alternative use? I don’t understand the alternative use part and how would we be able to identify it?

Thanks in advance 🙂

[HamzaYusuf]

Yes, you are correct that the company expects to receive €1,500,000 in six months’ time. 🙂

Can you please explain what you meant by “individual one-off receipts”?

And the rest of the methods for hedging are short-term such as Forward Contracts, Money Market hedge, Futures, Options?

Thanks for your reply 🙂

[HamzaYusuf]

Please Ignore the last question which I asked. Please help me understand these few problems.

1) If we are considering buying a business for (lets say) $100m based on its Equity value, do we inherit the ASSETS and DEBTS of this company too?

2) If the Dividend Growth Model shows a Market Share Price of $4 and there are 10m shares issued with a nominal value of $1. The Market Value of the Company using DGM will be (10m x $4) = $40m.

While SOFP shows total Equity of $30m consists of $10m in Share Capital and $20m in Reserves.

Is it true that since the Market Value of the Company is $30m in total and anybody consider buying or taking over the Company has to pay $30m BUT Dividend Growth Model is showing Market Value of Company of $40m.

Then, anybody considering buying the Company has to pay $30m or $40m? Is it possible that the Company Shareholders can ask even higher price than $40m for the Company?

3) Net Asset Method is simply calculated as Total Assets – Total Liabilities which is actually Equity of the company where we can calculate the company worth by simply looking at company SOFP BUT if we are considering buying a company having equity worth of $100m (lets say) where Retained Earnings consist of $15m; If we bought the company do we have to pay total $100m or $85m (less Retained Earnings because company can pay all its RE to its shareholders in the last year of company before ceasing to exist?)

Thank you for your time!

[HamzaYusuf]

Sir can you please explain how do you come to USE 7.53% but not 7.43% which is on the (3 v 7) interest rate given as (7.53% – 7.43%)

Is it correct that the higher interest rate of 7.53% is applied on the BORROWING
And lower interest rate of 7.43% is applied on the DEPOSITING

As u said in your lecture please correct me if I get it right that FRA is where we locked the interest rate but the actual interest rate fluctuates from day-to-day which means that we have to pay interest on borrowing upon actual interest rate BUT the bank will return the overpaid interest payment or they can ask for in case of unpaid interest payment since we have Locked-in the FRA rate. [correct?]

Last of all, I have seen few FRA questions overall & mostly of them are Borrowing cases not Depositing cases. Can you please tell me any question where I can see the Depositing case? I have an examkit but they don’t have that in there!

[HamzaYusuf]

Sir can you please explain me this question how to answer this one!

Lagrag Co is a heavily indebted company which is keen to protect the interest payments on
$10 million of borrowings which will be required in 3 months for a period of 4 months. The
company has discovered that the following forward rate agreements are currently available
to it:

(3 v 4) 7.45 – 7.34
(3 v 7) 7.53 – 7.43
(4 v 7) 7.58 – 7.45

Required:
(a) Identify the appropriate forward rate agreement and show what the cash flows
arising will be if the interest rate payable by Lagrag Co in 3 months is:

(i) 7.76%
(ii) 7.42%

[HamzaYusuf]

Sir, I am sorry but I couldn’t understand why the bond is calculated on nominal value in the examiner’s answer like this: Nominal value of bonds redeemed = 90m x (100/112·50) = $80 million

I know that company here is trying to raise enough cash like $90m to buy back the bond where bondholders have agreed that they will allow Bar Co to buy back the bonds at market value.

I have quite understood the calculation of EPS & PE calculation as you’ve mentioned in your last response BUT before EPS I have not understood any calculation & the reason behind doing those calculations like redeeming the bond & it is saving interest cost by that or EPS will be affected by the redemption of the bonds etc!

Please tell me what does mean by redemption of bond? And if we redeem bond then how does it save us any interest cost?

Could u plz explain me the calculation before EPS? Thank u

[HamzaYusuf]

Can you please explain the Binding & Persuasive Precedent & whether it is binding on lower courts or higher courts?

Sir Vijay plz explain this to me!!

[HamzaYusuf]

In the specimen, there is a question

[Question] Gurdip plots the historic movements of share prices and uses this analysis to make her investment decisions.

[Solution] states that since “Gurdip is basing her decision on technical analysis which means that she believes that stock market is not efficient at all.” I am not able to understand the logic here!!!

Can you please explain fundamental analysis & technical analysis and why they are linked to market efficiency?

[HamzaYusuf]

Thanks, SIR 🙂 YOU explained it well

[HamzaYusuf]

I am sorry but the line may be from June 2016 examiner report 🙂

[HamzaYusuf]

Secured creditors are secured by the assets but what are the fixed & floating charge holders ?

Can you also state the hierarchy for the creditors when the company is liquidated?

[Author]

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