CIMA Professional Gateway Assessment

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1 SPECIMEN Instructions to candidates CIMA Professional Gateway Assessment (CPGA) You are allowed three hours to answer this question paper. You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, highlight and/or make notes on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is all parts and/or subquestions). The question requirements for ALL questions are highlighted in a dotted box. ALL answers must be written in the answer book. Answers written on the question paper will not be submitted for marking. Answer ALL THREE questions in Section A on pages 2 to 8. On Question One, the requirement for this question is on page 5, which is detachable for ease of reference. Answer ALL TWELVE sub-questions, in three sub-sections, in Section B on pages 9 to 12. Maths Tables are provided on pages 13 to 15. These are detachable for ease of reference. The list of verbs as published in the syllabus is given for reference on the inside back cover of this question paper. Write your candidate number, the paper number and examination subject title in the spaces provided on the front of the answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close. Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered. CIMA Professional Gateway Assessment TURN OVER The Chartered Institute of Management Accountants 2009

2 SECTION A 75 MARKS ANSWER ALL THREE QUESTIONS From Paper P8 Financial Analysis Consolidated Accounting Statements Question One Extracts from the consolidated financial statements of the EAG Group for the year ended 30 April 2008 are as follows: EAG Group: Consolidated income statement for the year ended 30 April 2008 $ million Revenue 30,750 0 Cost of sales (26,447 5) Gross profit 4,302 5 Distribution costs (523 0) Administrative expenses (669 4) Finance cost (510 9) Share of profit of associate 1 6 Profit on disposal of associate 3 4 Profit before tax 2,604 2 Income tax (723 9) Profit for the period 1,880 3 Attributable to Equity holders of the parent 1,652 3 Minority interests ,880 3 Specimen Paper 2 CPGA

3 EAG Group: Balance sheet at 30 April $ million $ million $ million $ million ASSETS Non-current assets Property, plant and equipment 22, ,332 8 Goodwill 1, ,865 3 Intangible assets Investment in associate , ,584 3 Current assets Inventories 5, ,881 0 Trade receivables 4, ,670 0 Cash , , , , $ million $ million $ million $ million EQUITY AND LIABILITIES Equity Share capital 4, ,600 0 Retained earnings 14, , , ,591 4 Minority interest 2, ,870 5 Non-current liabilities Long-term borrowings 6, ,013 0 Current liabilities Trade payables 5, ,356 3 Short-term borrowings Income tax , , , ,223 6 Notes: 1. Depreciation of $2,024 7 million was charged in respect of property, plant and equipment in the year ended 30 April On 1 January 2008 EAG disposed of the investment in associate for $18 million. The share of profit in the income statement relates to the period from 1 May 2007 to 31 December A dividend was received from the associate on 1 June There were no other disposals, and no acquisitions, of investments in the accounting period. 3. Goodwill in one of the group s subsidiaries suffered an impairment during the year. The amount of the impairment was included in cost of sales. Question One and its requirement continue on page 5, which is detachable for ease of reference CPGA 3 Specimen Paper

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5 Question One (continued) 4. The long-term borrowings are measured at amortised cost. The borrowing was taken out on 1 May 2006, and proceeds of $6,000 million, less issue costs of $100,000, were received on that date. Interest of 5% of the principal is paid in arrears each year, and the borrowings will be redeemed on 30 April 2011 for $6 55 million. All interest obligations have been met on the due dates. The effective interest rate applicable to the borrowings is 7%. The finance cost in the income statement includes interest in respect of both the long-term and the short-term borrowing. Short-term borrowing comprises overdrafts repayable on demand. 5. Amortisation of 25% of the opening balance of intangibles was charged to cost of sales. A manufacturing patent was acquired for a cash payment on 30 April An issue of share capital at par was made for cash during the year. 7. Dividends were paid to minority interests during the year, but no dividend was paid to the equity holders of the parent entity. Required: Prepare the consolidated cash flow statement of the EAG Group for the financial year ended 30 April The cash flow statement should be presented in accordance with the requirements of IAS 7 Cash Flow Statements, and using the indirect method. Notes to the financial statement are NOT required, but full workings should be shown. (Total for Question One = 25 marks) CPGA 5 Specimen Paper

6 From Paper P2 Decision Management Cost and Planning Analysis Question Two An engineering company manufactures a number of products and components, using a team of highly skilled workers and a variety of different metals. The current supplier has announced that the amount of M1, one of the materials it currently supplies, will be limited to 1,000 square metres in total for the next three-month period because there will be insufficient M1 to satisfy demand. The only items manufactured using M1 and their production costs and selling prices (where applicable) are shown below: Product P4 $/unit Product P6 $/unit Product C3 $/unit Product C4 $/unit Selling price n/a n/a Direct materials: M1 * M Direct labour Variable overhead Fixed overhead ** Total cost: * Material M1 is expected to be limited in supply during the next three months. These costs are based on M1 continuing to be available at a price of $20 per square metre. ** Fixed overhead is absorbed on the basis of direct labour cost. Products P4 and P6 are sold externally. Components C3 and C5 are used in other products made by the company. These other products do not require any further amounts of material M1. The estimated total demand for these products and components during the next three months is as follows: P4 P6 C3 C5 2,000 units 1,500 units 500 units 1,000 units Components C3 and C5 are essential components. They would have to be bought in if they could not be made internally. They can be purchased from external suppliers for $75 and $95 per unit respectively. The bought in components are of the same quality as those manufactured by the company. The products they are used in have sufficient margins to remain financially worthwhile if C3 and C5 are bought in at these prices. Specimen Paper 6 CPGA

7 Required: (a) Prepare calculations to show the most profitable course of action for the company for the next three months, assuming that there are no other suppliers of material M1, and advise the company on THREE other factors that it should consider before making its decision. (14 marks) (b) Calculate the maximum prices that the company should pay to obtain further supplies of material M1 from an alternative supplier, and the quantities of material M1 to which each of these prices apply. (6 marks) The company has now become aware of a contract that it has already accepted, for the immediate delivery of 500 units of P4 at a selling price of $125 per unit. This contract has a financial penalty clause for non-delivery. This contract is in addition to the 2,000 units of estimated demand for P4 stated previously. Assume that there is no alternative supplier of material M1. (c) Calculate the minimum financial penalty that would change your recommendation. (5 marks) (Total for Question Two = 25 marks) Section A continues on the next page TURN OVER CPGA 7 Specimen Paper

8 From Paper P5 Integrated Management Project Management Question Three Currently, each department of S Company has its own IT support team but a decision has recently been taken to centralise IT support. The Head of IT has stated that the new IT centralised support centre will lead to an improvement in service. However, staff in the different departments are unconvinced of this; rather they see it as a cost cutting exercise and feel that the individual requirements for IT support will be compromised. A project has been set up and resourced by the Head of IT, who has appointed F as Project Manager. F s brief is to implement the new IT centralised support service. Her project team is made up of both IT staff and staff representatives from the departments which will use the IT centralised support service. A key part of the project is the development of a standardised set of working practices, but F is already facing resistance from members of the project team and from department heads. At a recent project meeting there was clearly tension and conflict between the IT staff from the different departments in agreeing new working practices. This appears to be due to the fact that currently each IT support team has its own way of doing things to meet the needs of different departments and each sees its approach as best practice. Departmental heads are also concerned that they have very different needs and through the standardisation process, these needs may not be met. In addition, there is hostility since the centralisation project will result in the IT staff having to take on different roles with different working practices, and some may lose their jobs. F is glad that she has recently been on a training course on managing conflict. She had not realised how soon she would need to make use of the skills she has learned. Required: (a) Explain why F, as Project Manager, needs to be aware of the interests of stakeholders. Your answer should make reference to the different stakeholder groups or the IT centralised support service project. (13 marks) (b) Advise F on the different strategies that can be used to handle conflict between the different stakeholders in the IT centralised support service project. (12 marks) (Total for Question Three = 25 marks) End of Section A Specimen Paper 8 CPGA

9 SECTION B 25 MARKS ANSWER ALL TWELVE SUB-QUESTIONS IN THE THREE SUB-SECTIONS Subsection from Paper P2 Decision Management Four Questions - 8 marks 4.1 A company has a real cost of capital of 6 00% per annum. Inflation is currently 4 00% per annum. The company s annual money cost of capital is closest to A 1 92% B 2 00% C 10 00% D 10 24% 4.2 Company Zed is considering a short-term pricing decision to utilise some spare capacity. The item to be manufactured and sold would use 15,000 kgs of the raw material X. Material X is regularly used by company Zed and it currently has 1,000 kgs in inventory. Company Zed purchased this 1,000 kgs last month at a cost of $4 per kilo. The current replacement cost of material X is $4 80 per kilo. The current inventory could be sold at $4 30 per kilo. Calculate the relevant cost of material X for the purposes of this decision. 4.3 A company is considering investing $100,000 in a new machine that will reduce its annual cash operating costs as follows: Year Operating cash costs saved Calculate the payback period to the nearest 0 1 years. Subsection from Paper P2 Decision Management continues on the next page TURN OVER CPGA 9 Specimen Paper

10 4.4 Company Dee has only $700,000 available for investment in the coming year. The following four investment opportunities have been identified. All four investment opportunities are divisible and all have the same life: Investment Capital required Net present value W 400, ,000 X 250, ,000 Y 300, ,000 Z 350, ,000 Calculate the correct rank order for these four investments (best first) Subsection from Paper P5 Integrated Management Four Questions 9 marks 4.5 Mintzberg s organisational configuration is made up of the strategic apex, operating core and which THREE other components? (3 marks) 4.6 In the hierarchy of objectives, what kind of objective is increase earnings per share? A B C D Operational Primary Secondary Tactical 4.7 Which ONE of the following perspectives of strategy is where an organisation takes small steps based on what has been done before and what has worked in the past, while avoiding radical strategies? A B C D Bounded rationality Ecological Logical incrementalism Positioning 4.8 Which ONE of the following leads to high buyer power? A B C D Economies of scale High capital requirements Limited substitute products Low switching costs Specimen Paper 10 CPGA

11 Subsection from Paper P8 Financial Analysis Four Questions - 8 marks 4.9 Company Kay buys goods from its 75% owned subsidiary OMI. OMI earns a mark-up of 25% on these transactions. At the group s year end, 30 June 2008, Company Kay had not yet taken delivery of goods, at a sales value of $100,000. These goods were dispatched by OMI on 29 June At what amount would the goods in transit appear in the consolidated balance sheet of Kay Group as at 30 June 2008? A $60,000 B $75,000 C $80,000 D $100, Which ONE of the following is a valid reason for excluding a subsidiary from consolidation under current International Financial Reporting Standards? A B C A formal documented decision has been made by the directors to wind down the activities of the subsidiary. The activities of the subsidiary are so dissimilar from those of the rest of the group that it would be misleading to include them in the consolidation. The subsidiary has been acquired exclusively with a view to its subsequent disposal. D The subsidiary operates in a hyper-inflationary environment AA owns 60% of the issued ordinary share capital of BB. BB owns 60% of the issued ordinary share capital of CC. What is the effective interest of AA in CC? A 20% B 24% C 36% D 60% Subsection from Paper P8 Financial Analysis continues on the next page TURN OVER CPGA 11 Specimen Paper

12 4.12 Which ONE of the following statements about derivative financial instruments is correct? A derivative financial instrument A B C D can be recognised only if it is highly effective. invariably forms part of a hedging relationship. requires little or no initial net investment. should be valued at cost. (Overall Total for Section B = 25 marks) End of Section B. End of Question Paper Maths Tables and Formulae are on pages Specimen Paper 12 CPGA

13 MATHS TABLES AND FORMULAE Present value table Present value of $1, that is (1 + r) -n where r = interest rate; n = number of periods until payment or receipt. Periods Interest rates (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Periods Interest rates (r) (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% CPGA 13 Specimen Paper

14 Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n years n 1 (1+ r ) r Periods Interest rates (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Periods Interest rates (r) (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% Specimen Paper 14 CPGA

15 FORMULAE Annuity Present value of an annuity of $1 per annum receivable or payable for n years, commencing in one year, discounted at r% per annum: PV = r [1 + r ] n Perpetuity Present value of $1 per annum receivable or payable in perpetuity, commencing in one year, discounted at r% per annum: PV = r 1 Growing Perpetuity Present value of $1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a constant rate of g% per annum, discounted at r% per annum: PV = 1 r g Time series Additive model: Series = Trend + Seasonal + Random Multiplicative model: Series = Trend * Seasonal * Random Regression analysis The linear regression equation of Y on X is given by: where: and or solve Exponential Geometric Y = a + bx or Y Y = b(x X ), Covariance ( XY ) b = = Variance ( X ) a = Y b X Y = na + b X XY = a X + b X 2 Y = ab x Y = ax b n XY ( X )( Y ) n X 2 ( X ) 2 Learning curve Y x = ax b where: Y x = the cumulative average time per unit to produce X units; a = the time required to produce the first unit of output; X = the cumulative number of units; b = the index of learning. The exponent b is defined as the log of the learning curve improvement rate divided by log 2. CPGA 15 Specimen Paper

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19 LIST OF VERBS USED IN THE QUESTION REQUIREMENTS A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for each question in this paper. It is important that you answer the question according to the definition of the verb. LEARNING OBJECTIVE VERBS USED DEFINITION 1 KNOWLEDGE What you are expected to know. List Make a list of State Express, fully or clearly, the details of/facts of Define Give the exact meaning of 2 COMPREHENSION What you are expected to understand. Describe Communicate the key features Distinguish Highlight the differences between Explain Make clear or intelligible/state the meaning of Identify Recognise, establish or select after consideration Illustrate Use an example to describe or explain something 3 APPLICATION How you are expected to apply your knowledge. 4 ANALYSIS How are you expected to analyse the detail of what you have learned. 5 EVALUATION How are you expected to use your learning to evaluate, make decisions or recommendations. Apply Calculate/compute Demonstrate Prepare Reconcile Solve Tabulate Analyse Categorise Compare and contrast Construct Discuss Interpret Produce Advise Evaluate Recommend To put to practical use To ascertain or reckon mathematically To prove with certainty or to exhibit by practical means To make or get ready for use To make or prove consistent/compatible Find an answer to Arrange in a table Examine in detail the structure of Place into a defined class or division Show the similarities and/or differences between To build up or compile To examine in detail by argument To translate into intelligible or familiar terms To create or bring into existence To counsel, inform or notify To appraise or assess the value of To advise on a course of action CPGA 19 Specimen Paper

20 CIMA Professional Gateway Assessment (CPGA) Specimen Paper Afternoon Session Specimen Paper 20 CPGA