The Chartered Institute of Taxation of Nigeria s1

THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA OCTOBER 2012: PROFESSIONAL EXAMINATION FOUNDATION:MANAGEMENT INFORMATION SYSTEM ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS. TIME: 3 HOURS

1. Project Management has been said to be the key to success of business management.

a. What do you understand by “Project Management”? (2 Marks)

b. What is project organization? (3 Marks)

c. Briefly describe one type of project organization. (5 Marks)

d. Outline five (5) contents of a formal project plan. (10 Marks)

(Total 20 Marks) SOULTION

1 (a) Project management refers to the administration of ongoing projects.

(b) Project organization refers to temporary task entity created within a parent organization to accomplish specific task. The understanding is that the entity will be dissolved upon completion of its objectives. It is usual for project organization to be multi – disciplinary in nature.

(c) There are two types of project organizations

i. Pure project – There is an organization structure with its various departments existing specifically for the project. The department may continue after the completion of the project, but if no further project is started, the department will be dissolved.

ii. Matrix – Involves people from various departments unlike pure project type. On completion of the project, the people are transferred back to their departments.

There will be two reporting lines. One line of reporting to their superior in their primary department and secondly to the project manager.

of 45 (d) The contents of formal project plan include

(i) A brief descriptive title

(ii) A concise description of project goals

(iii) Estimate of cost and benefit

(iv) Plan of work

(v) Time estimate

(vi) Designation of personnel

(vii) Procedures for conflict resolution

(viii) Provision for periodic reporting

(ix) Provision for periodic project review

(x) Brief reference to subsequent stages of the project

(xi) Provision for project determination and wind down.

2. Many businesses believe they practice a centralized data processing system.

a. What is a Centralized data processing system? (2 Marks)

b. Outline three (3) advantages and two (2) disadvantages of a centralised data processing system (10 Marks)

c. List four (4) devices of each of (i) soft wares, (ii) hard wares and(iii) telecommunication equipment that are installed to make centralized data processing work (8 Marks)

(Total 20 Marks) SOLUTION

2. (a) A centralized data processing system is a processing system where

one large central computer connects all the users in all the unit in an organization together. (2 Marks)

(b) i. 1. Economy of capital expenditure as one large computer is

of 45 purchased instead of several computers in different units.

2. Higher storage and processing capability

3. Centralization facilitates the standardization of

procedures.

4. Standardization of applications

5. Staff cost reduced by having a central pool of IT staff

ii. The disadvantages of a central system include

1. Specialized skills required for database maintenance

2. Special environment with adequate security, air-conditions to be provided

3. Risk of system down time to the entire organization.

4. Does not facilitate end use involvement.

(10 Marks) c. Various software, hardware and telecommunication equipment are installed to make centralize data processing possible and they include:

Hardware Telecommunication Software Equipment Desktop Modem Operating System e.g Linux, Android, Unix, Window Server Laptop Renter/ Switch Internet Database Server Local Area Network (LAN) - My SQL - Oracle Scanner Metro Area Network (MAN) Application Printer Wide Area Network (WAN) Financial- packages, Excel, Power point e.g Sage, Peachtree, MS office, UPS Mast Oracle, SAP, Widest Area Point (WAP) Flexcube, Finacle Telephone

(8 Marks)

of 45 3. The following terms are freely used in a computerized environment. Briefly describe each of them to the understanding of a new entrant.

a. Password (5 Marks)

b. RAM (5 Marks)

c. Virus (5 Marks)

d. Bug (5 Marks)

e. Kilobyte (5 Marks)

(Total 20 Marks) SOLUTION

3. a. Password – a password is a set of characters used to control access into a computer system and also applications. They can be used to determine what information is available to a user. b. RAM – Ram stands for Random Access Memory. Ram is the temporary storage area used by the computer to store items temporarily. It can also be said to be a temporary working storage. It is volatile and does not retain information.

c. Virus - A nuisance data can cause damage and corrupt files on the system. Examples include Melissa, Jamsalam virus.

d. A Bug is an error in a computer programme that will not allow a computer programme to run properly and accomplish the task at hand.

e. Kilobyte. This is the units of measuring computer storage. One byte is used to store one character. A thousand byte is referred to as a kilobyte or data.

of 45 4. A Revenue Authority has just computerised its tax records management system using data base. You are required to:

a. Define Data base and outline its features (6 Marks)

b. Define DBMS and state its advantages (10 Marks)

c. State two types of data base structure (4 Marks)

(Total 20 Marks)

SSOLUTION

4. a. (i) A data base is an organized collection of related data for

storage, access, retrieval and management.

(2 Marks)

(ii) Four features of data base:

i. ease of data input

ii. report generation

iii. index Information

iv. complex querying

v. perform global update

vi. incorporates graphics

vii. relate data to create information. (4 Marks)

b. DBMS – Database Management System is software that ensures the workings of a data base. (2Marks)

Four Advantages

(i) enables the design of the structure of data base

of 45 (ii) creates data entry forms so as to get information into the data base

(iii) validates data entry and check for inconsistencies

(iv) sorting and manipulation of data in the data base

(v) eliminates problems of data duplication and redundancy

(vi) enables data sharing between users

(vii) facilitates uniform development and maintenance of application program. (8 Marks)

c. Two types of Data base structure

i. Relational data base

ii. Network data base

iii. Hierarchical data base

iv. Object oriented data base (4 Marks)

5. a. Feasibility study is usually conducted when a new system is to be developed so as to ensure

optimal benefits.

What do you understand by the term “Feasibility Study”? Briefly itemize the content of a good feasibility study. (10 Marks)

b. As part of the IT Governance Structure, your organization has just proposed to set up an IT Steering Committee.

Outline five (5) functions of this steering committee (10 Marks)

(Total 20 Marks)

5. a. Feasibility study is conducted to justify the basis for developing a

of 45 new system. It answers the question of whether or not to adopt a new system in term of its costs and benefits. Data are collected and subjected to scientific analysis to guide in the choice of the system. The feasibility study is handling by a feasibility study team usually including system analysts. (2Marks) Contents of a feasibility study

i. Terms of reference

ii. Composition of members

iii. Outline of present system

iv. Outline of proposed system

v. Stages in carrying out the report

vi. Fact finding / Investigation

vii. Fact recording

viii. Analysis of facts using cost benefit approach

ix. Recommendation and conclusion (8 Marks) b. The functions of an IT steering committee include

i. Appointing members of the feasibility study group

ii. Ensure cost benefit analysis of IT projects

iii. Make recommendations to the management

iv. Monitor progress of IT projects

v. Approve commencement of IT projects

vi. Ranking project, in order of priority and assigning resources

vii. Take decision to defer projects

viii. Selecting system development staff. (10 Marks)

of 45 THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA OCTOBER 2012: PROFESSIONAL EXAMINATION FOUNDATION: ACCOUNTING ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS. TIME: 3 HOURS

1. a. Explain the term Accounting Concepts (5 Marks)

b. Briefly explain the following assumptions underlying the preparation of financial statements:

i. Going concern concept (3 Marks)

of 45 ii. Accrual concept (3 Marks)

iii. Consistency concept (3 Marks)

iv. Materiality concept (3 Marks)

v. Conservatism concept (3 Marks)

(Total 20 Marks)

SOLUTION

1 (a) ACCOUNTING CONCEPT

Accounting Concepts are broad basic assumptions underlying the preparation of periodic financial statements. They are not specifically stated because their acceptance and use are assumed. The disclosure of such concepts is necessary, only if they are not followed and the reasons for doing so must be stated.

(b) (i) GOING CONCERN CONCEPT

This concept is sometimes referred to as the “continuity of existence assumption”. In other words, in the absence of information to the contrary, it is assumed that the business has an indefinite life, that is, as continuing in operation for the foreseeable future.

The assumption is that the business unit will operate in perpetuity, which is the business is not expected to be liquidated or curtailed materially the scale of its operations in the foreseeable future.

A business is considered a going concern if it is capable of earning reasonable net income and there is no intention or threat from any source to curtail significantly its line of business in the foreseeable future.

(ii) ACCRUALS CONCEPT

Revenues and costs are accrued, that is recognized as they are earned or incurred (and not as money is received or paid), and recorded in the financial statements of the period to which they relate.

of 45 (iii) CONSISTENCY CONCEPT

Usually, there is more than one way in which an item may be treated in the accounts without violating accounting principles. For instance, a business may use the straight line method, the reducing balance or any other method in computing depreciation charges in its account.

The concept of consistency holds that when a company selects a method, it should continue to use that method in subsequent periods (unless conditions warrant a change) so that a comparison of accounting figures overtime is meaningful.

The concept ensures that the accounting treatment of like items is consistent from one period to another.

(iv) MATERIALITY CONCEPT

The principle holds that only items of material values are accorded their strict accounting treatment.

An item will be considered material if its omission or misstatement could distort the financial statement such that it influences the economic decisions of users taken on the basis of the financial statements.

However, the size of an organization may contribute or determine the materiality of some items. For instance cost of some items like calculators may be material to a sole trader whereas it will not to a big company like Mobil.

Clearly it would be absurd to capitalize the cost of a calculator by Mobil and begin to change depreciation on it every year. It would therefore not be inappropriate if the cost of the calculator because of its immateriality is expensed to profit and loss account in the year of its purchase.

of 45 (v) CONSERVATISM CONCEPT

It is also known as prudence concept and recognizes that uncertainty surrounds many transactions by exercising prudence i.e. caution in preparing financial statements.

To this end, revenue and profits are not anticipated, but are recognized by inclusion in the profit and has account only when realized in the form of cash or of other assets, the ultimate cash realization of which can be assessed with reasonable certainty.

Provision is also made for all known liabilities whether the amount of this is known with certainty or is just an estimate in the light of the information available.

2. BKL Logistics Limited’s bank Statement showed an overdraft figure of ₦235,600 as at 31 December, 2010. This did not agree with the cash book balance of ₦31,445. On investigation you discovered that: i. Bank charges of ₦665 shown on the bank statement have not been entered in the cash book

ii. A cheque drawn for ₦8,930 has been entered in error as a receipt

iii. A cheque of ₦3,420 has been returned by the bank marked “ refer to drawer” but it has not been written back in cash book

iv. A cheque with serial number 007 of December 15, 2010 issued to Mr. Ologbon for ₦25,060 and another cheque with serial number 010 of the same day issued to Mrs. Taylor for ₦15,600 have not been presented to the bank

v. The debit side of the cash book was under cast by ₦1,900

vi. A cheque with serial number 015 dated December 18, 2010 issued to Mr. Olumilua for ₦13,300 was yet to be presented as at December 31, 2010

vii. The bank has debited a cheque for ₦13,680 in error to the company’s account

viii. The last page of the paying-in book showed a deposit of ₦292,980 as at December 31, 2010 but yet to appear in the bank statement

of 45 ix. A cheque with serial number 021 dated December 21, 2010 issued for electricity bill in favour of PHCN for ₦5,700 was yet to be presented

You are required to: a. Prepare the adjusted cash book (8 Marks)

b. Prepare a bank reconciliation statement as at 31 December 2010 (12 Marks)

(Total20 Marks)

SOLUTION

2. BKL Logistics

ADJUSTED CASH BOOK

₦ ₦ Balance b/d Bank Charges 31445 665 Under cast error Cheque wrongly debited 1900 ( 8930 x 2) 17860 Returned Cheque 3420 Balance c/d 11400 33345 33345 Balance b/d 11400

WAZOBIA NIGERIA LTD

BANK RECONCILIATION STATEMENT AS AT 31 DEC. 2010

₦ Balance as per bank statement

of 45 (235600)

Add: Uncredited Cheque of 31/12/10 292980

57380 Less:Unpresented Cheques: 40660 + 13300 + 5700 (see note 1) 59660

2280 Add: Cheque wrongly debited to the account of Wazobia Nig. Ltd by bank 13680 Balance as per adjusted cash book 11400

Note 1: Unpresented Cheques.

Date Name Cheque Amount No 15/12/10 Mr. Ologbon 007 25,060 15/12/10 Mrs. Taylor 010 15,600 18/12/10 Olumilua 015 13,300 21/12/10 PHCN 021 5,700

3. The summarized balance sheet and operating results of ABC Limited for the two years ended 31st December, were shown as follows:

2010 2009 ₦ ’000 ₦ ’000 Fixed Asset (net) 811,100 347,050 Current Assets: 3,114,700 2,609,800 Stocks 2,742,950 2,502,600 Debtors 361,700 728,250 Bank 6,219,350 5,840,650 Less Current Liabilities: Creditors Taxation 2,352,750 2,144,250 Dividends 207, 700 160,950 125,000 112,500 2,685,450 2,417,700

of 45 Net Current Assets 3,533,900 3,422,950

Net Asset 4,345,000 3,770,000 Financed by:

Ordinary Shares of ₦1.00 625,000 625,000 each 1,793,700 1,489,350 Revenue reserves 676,300 405,650 Deferred taxation 1,250,000 1,250,000 10% debenture (2015) 4,345,000 3,770,000

Operating Result for the year ended 31st December

2010 2009 ₦ ’000 ₦ ’000 Sales 33,647,2 27,953,55 00 0 Profit before Interest & 1,170,60 1,044,100 Taxation 0 Interest payable on 10% 125,00 125,000 Debenture 0 Taxation 525,30 437,350 0 Dividends 187,500 175,000

Notes: The shares of the company were quoted at ₦1.20 at 31st December, 2008

You are required to calculate for the two years: a. Quick ratio (4 Marks)

b. Working Capital ratio (4 Marks)

c. Profit margin (4 Marks)

d. Return on Capital employed (4 Marks)

e. Earnings per share (4 Marks)

(Total 20 Marks)

3. SOLUTION

2008 2007

of 45 (a) Quick ratio = Current Assets – Stock 6,219,350 – 3,114,700 5,840,650 – Current Liabilities 2,685,450 2,609,800 2,417,700 1.16: 1 1.34: 1

(b) Working Capital Ratio = Current Assets 6,219,350 5,840,650 Current Liabilities 2,685,450 2,417,700

= 2.32 : 1 = 2.42: 1

(c)Profit Margin =Profit Before Interest & = 1,170,600 x 100 1,044,100 x 100 Tax x 100 33,647,200 27,953,550 1 Turnover 1 = 3.48% =3.74% (d) Return on Capital Employed ROCE = EBIT 1,170,600 x 100 1,044,100 x 100 x 100 3,095,000 + 1,250,000 2,520,000 + Capital Employed 1,250,000 1 1,170,600 x 100 4,345,000 1 1,044,100 x 100 3,770,000 1 = 26.95% = 27.70% (e) Earning Per PAT = 1,170,600 = 1,044,100 Share(EPS) Less: (125,000) (125,000) = PAT (525,000) (437,350) x 100 PAT = 520,600 481,750 NO of ordinary shares = 520,600 x 100 481,750 x 100 625,000 625,000 = 83 Kobo = 77 Kobo EPS =

4. The assets and liabilities of City club on the 1st of January, 2011 were:

₦ Furniture & Fittings 132,000

of 45 Games equipment 56,320 Tools and hobbies 36,520 equipment Subscription in arrears 2,640 Insurance prepaid 1,760 Subscription in advance 7,040

The Club Treasurer prepared the following summary of the receipts and payments for the year ended 31 December 2011

Receipts Payment ₦ ₦ Balance b/fwd 01/01/11 40,480 Electricity 23,760 Subscriptions 45,760 Expenses – Annual 27,280 dinner Donations 44,000 New Tools 7,920 Sales of Tickets-Annual 51,920 New games equipment 5,280 Dinner Sales of dance Ticket 58,960 Expenses – Dance 23,760 Cleaners’ wages 45,760 Printing & Stationery 4,400 Repairs 12,320 Insurance 10,560 Balance c/fwd 80,080 241,12 241,12 0 0 Balance b/fwd 80,080

The following additional information were further provided: i. Subscription received included the amount in arrears for the previous year; ₦1,760 was in arrears for the current year ii. Repairs outstanding amounted to ₦2,640 iii. Annual Insurance premium ₦10,560 to 31st March, 2012 iv. 10% depreciation is to be written off the balance as at 31st December, 2011 of Furniture and Fittings, Games Equipment, Tools and Hobbies equipment You are required to prepare: a. A Statement showing the Accumulated Fund as at 1st of January, 2011. (4 Marks)

of 45 b. The income and Expenditure Account for the year ended 31 st December, 2011. (12 Marks)

c. A Balance Sheet as at 31st December, 2011 (4 Marks)

(Total 20 Marks)

SOLUTION

4. CITY CLUB

Statement of Affairs as at 1st January, 2011

₦ ₦ Assets Furniture and fittings 132,00 Games Equipment 56,320 Tools and hobbies Equipment 36,520 Subscription in arrears 2,640 Insurance Prepaid 1,760 Cash 40,480 269,720 Less Liabilities Subscription in advance (7,040) (01/01/11) 262,680 Accumulated fund as at 01/01/11

CITY CLUB

INCOME & EXPENDITURE ACCOUNTS FOR THE YEAR ENDED 31/12/11

₦ ₦ INCOME Subscription 51,920 Donation 44,000 Annual Dinner 24,640 Dance 35,200 155,760 Expenditure

of 45 Insurance 9,680 Electricity 23,760 Cleaner’s wage 45,760 Printing & Stationery 4,400 Repairs 14,960 Depression – Furniture & Fitting 13,200 - Games Equipment 6,160 - Tools & Hobbies Equipment 4,444 (122 Surplus ,364) 33,396

CITY CLUB

Balance Sheet as at 31st December, 2008

₦ ₦ ₦ Fixed Assets Cost Acc Dep NBV Furniture & Fittings 132,000 (13,200) 118,800 Games Equipment 61,600 (6,160) 55,440 Tools & Hobbies Equipment 44,440 (4,444) 39,996 238,040 (23,804) 214,236 CURRENT ASSETS Subscription in Arrears 1,760 Prepaid Insurance 2,640 Cash at Bank 80,080 84,480 Current Liabilities Accrued expenses (2,640) Net Current Asset 81,840 Net Assests 296,076 Financed b4 Accumulated fund (01/01/08) 262,680 Surplus for the year 33,396 Accumulated fund (31/12/08 296,076

(1) Games Equipment A/C.

Bal b/fwd Bal c/d

of 45 56,320 61,600 Bank 5,280 61,600 61,600

(2) Tools & Hobbies Equipment A/C

Bal b/d Bal c/d 36,520 44,440 Bank 7,920 44,440 44,440

(3) Subscription Account

Bal b/d Bal b/d 2,640 7,040 I & E Accounts Cash Book 51,920 45,760 Bal c/d 1,760 54,560 54,560

(4) Insurance A/C

Bal b/d I & E 1,760 9,680 10,560 Bal c/d 2,640 12,320 12,320

5. Annual Dinner A/C

Bank Bank 27,280 51,920 I & E Accounts 24,640

of 45 51,920 51,920

6. Furniture & Fittings A/C

Bal b/d Bal c/d 132,000 132,000

7. Dance Account

Dance 58,960 23,760 I & E 35,200 58,960 58,960

8. Donation A/C

I & E Bank 44,000 44,000

9. Electricity A/C

Bank I & E 23,760 23,760

Repairs A/C

Bank 12,320 Bal c/d 2,640 14,960 14,960

11. Printing & Stationery A/C

of 45 Bank I & E 4,400 4,400

12. Cleaners wages

Bank I & E 45,760 45,760

13. Account Depreciation A/C – Furniture & Fittings

Bal c/d I & E 13,200 13,200

14. Account Depreciation A/C – Games Equipment

Bal c/d I & E 6,160 6,160

15. Accumulated Depreciation – Tools & Hobbies Equipment

Bal c/d I & E 4,444 4,444

16. Cash Book – (Bank Statement)

Bal b/d Electricity 40,480 23,760 Subscription Expenses – Annual Dinner 45,760 27,280 Donation New Tools 44,000 7,920 Sales Ticket – Annual Dinner New Games Equipment 51,920 5,280 Sales - Dance Ticket Expense – Dance 58,960 23,760 Cleaners wages 45,760 Printing & Stationery 4,400 Repairs 12,320 Insurance

of 45 10,560 Bal c/d 80,000 241,120 241,120

of 45 THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA

OCTOBER 2012: PROFESSIONAL EXAMINATION

FOUNDATION: BUSINESS LAW

ATTEMPT ALL QUESTIONS. TIME: 3 HOURS

1. a. State five fundamental elements of a valid simple contract (10 Marks)

b. There was an agreement between a father and his son to the effect that the father gives his son a Toyota Camry as gift if the son makes a first class degree in his final year examination. The son passed his examination with honours in the first class. The father has now refused to buy the car. Does the son has a right of action against the father? Would your answer be different if the agreement had been made under seal? (10 Marks)

(Total 20 Marks)

FOUNDATION – BUSINESS LAW- SOLUTION

1. a. The essential elements or ingredients that must be present to turn

simple agreement into a binding and enforceable contract are as follows:

i. Capacity

ii. Intention to create legal relation

iii. Offer and Acceptance

iv. Consideration

v. Lawful Object

vi. Formalities and

vii. Genuine consent. 2 marks each for any 5

(10 Marks)

b. Where a party neglects or refuses to honour a contractual

of 45 obligation, there is a breach of contract. A breach by one party causes a right of action to accrue to the other party. The usual remedy for breach of contract is damages. i.e. the award of a some money to put the aggrieved party in the position he would have enjoyed had the contract not been broken. The intention to create legal relations is an essential element in contract. Where no intention to be bound is attributed to the parties, there is no contract. The test of intention is objective. The court seeks to give effect to the intention of the parties whether expressed or presumed. In the case under consideration, father and son do not intend to enter into legal obligations, mutually communicated expressly or impliedly. This intention may be implied from the subject’s matter of the agreement, but it may also be expressed by the parties. In some family relations such an intention is readily implied, while in business matter the opposite result would ordinarily follow. The terms of some contract are embodied in a document which is then signed, sealed and delivered by the parties. A promise given under seal does not need to be supported by consideration; the father would have been liable under the agreement. (10 Marks) 20 Marks

QUESTION 2 a. What is a contract of sale of goods and how is it different from a hire purchase.? (10 Marks) b. Discuss the classification of the various types of goods recognized by Section 62 of the Sale of Goods Act, 1893. (10 Marks) (Total 20Marks) SOLUTION 2. a. A contract of the sales of good is a contract whereby the seller transfer

of 45 or agreed to transfer the property in the goods to the buyer for a money consideration called the price. Whereas a hire - purchase agreement under the hire – purchase Act 1965 (as amended) differs from the sales of goods. In hire- purchase contracts: a. The goods are initially bailed, not sold to the hirer. The hirer at that stage has only possession not title to the goods. The owner is therefore allowed in some circumstances to seize the goods from the hirer b. The hirer is not bound to buy the goods hired. He can return the goods to the owner at any time and discontinue Payment of installments. c. The (hire- purchase) agreement gives the hirer an option to purchase the goods (for a very nominal amount) after paying all the agreed installments. (10 Marks) b. Goods may be classified into specific goods, unascertained goods, existing goods and future goods. This classification is important especially in relation to the rules for determining when property in goods (and risk) is transferred from the seller to the buyer. i. Specific Goods: these are goods which are identified clearly and agreed upon at the time of the contract. ii. Unascertained Goods: these are goods which are not clearly identified in the contract. iii. Existing Goods: These are goods which the seller already possess or owns at the time of the contract. iv. Future Goods: these are goods which the seller is to manufacture, grow or acquire in future, after the contract is made. If the goods are in existence, but the seller will acquire it later on it will be classified as future goods. Future goods cannot be specific goods

of 45 since a seller cannot bind himself to sell. (10 Marks) QUESTION 3 3. a. Examine the importance of promoter in the formation of a limited liability company and the effect of Common Law and Statute on the pre-incorporation contract entered into by the promoters. (10 Marks) b. Peter, Smith and Jonathan were childhood friends and promoted a company Travellers Limited to engage in transportation business between Lagos and the Federal Capital Territory, Abuja. Before the company was incorporated, Peter employed James to carry out a construction work for the company for the sum of N80,000.00. After the incorporation, Smith sold to Travellers Limited. for N100,000.00, a plot of land at Maryland Estate in Lagos which he bought for himself previously for the sum of N60,000.00 without disclosing that the land belonged to him and the profit he made on the sale. The company later discovered the profit made by Smith and refused to pay him. Examine the legality of the two transactions and advise the company. (10 Marks) (Total 20 Marks) SOLUTION 3. a. A limited liability company like a human being does not drop from the sky. It is brought into legal existence through the activities and efforts of persons called promoters who take the various steps necessary for the establishment of the company. Those steps include acquisition of property, supply of goods and services, engagement of staff and negotiation for loans, all for the proposed company. That is to say in promoting a company, promoters must necessarily enter into contract with third parties and sometimes they purport to do so on behalf of the incorporated company. (5 Marks) The position at common law was that an unincorporated company has no capacity to contract or to acquire any rights or incur any obligations before the date of its incorporation. Thus the company when formed could not be

of 45 bound by any pre-incorporation contracts. It could neither ratify or adopt it in equity nor obtain any equitable relief or claim thereon. The rigid common law position has been taken care of by the statute to the effect that any contract or other transaction purporting to be entered into by the company prior to its incorporation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it has been in existence on the date of such contract or other transaction and had been a party thereto. Prior to ratification by the company, the person who purported to act in the name of or on behalf of the company shall in the absence of express agreement to the contrary be personally bound by the contract or other transaction and entitled to the benefit thereof. In effect the statute, the Companies and Allied matters Act 1990 has prevented a pre-incorporation contract from ever becoming a nullity. In other words, a pre- incorporation can under the Act, never become a nullity because where the company elects to ratify the contract, it takes over the burdens and benefits.

(5 Marks)

b. In view of the provision of the Act ratification is now possible unlike the common law position. But ratification is not an automatic neither is it compulsory. It is entirely at the discretion of the company. Upon ratification, however, the company becomes subject to the liabilities and entitled to the benefits of the contract. Peter employed James to do some construction work for the company. the company has the option to ratify the contract and take over the burden and benefits, if It is found to be at the advantage of the company and pay the N80,000.

of 45 After incorporation Smith sold to Travellers Limited, a plot of land for N100,000 which he previously bought for himself for N60,000. He did not disclose that he is the owner of the land and the ill-gotten gain of N40,000. The promoter has breach the fiduciary duties and the company may not ratify, the transaction (10 Marks) 20 Marks

4. a. Nigerian courts are structured into two broad categories, Superior Court of records are courts established by the constitution as Superior Courts. They are: i. Supreme Courts ii. Court of Appeal iii. Federal High Courts iv. State High Courts v. Customary Court of Appeal vi. Sharia Court of Appeal (6 Marks)

The inferior courts consist of minor courts like Magistrate Courts, District Court and Alkhali Courts. These are established by the State Government and vested with powers and jurisdiction inferior to the constitutionally mandated superior courts of judicature. (3 Marks) The Federal high Court exercises original jurisdiction in all criminal and civil matters touching on the revenue of the Federation. (1 Marks) Total 10 Marks

b. i. Battery. This is the direct and intentional application of either harmful or offensive physical force to the injured party.

(2 Marks)

of 45 ii. Assault. This is intentionally creating in another person a reasonable apprehension of imminent harmful and offensive contact. Apprehension and not contact is important and mere words may constitute assault. (2 Marks)

iii. False Imprisonment. This means unauthorized bodily restraint without lawful justification. It may be in a room, a vehicle or open space so long as the movement of the plaintiff is wrongly restrained. The person imprisoned need not know at the time. However if there is another way to move, there is no false imprisonment. (2 Marks)

iv. Conversion. This is intentional exercise of control over a chattel which so seriously interferes with the right of another person (the owner) to control it in such a way that the intermeddler may justifybly be asked to pay the full price for it. The plaintiff must either be in conversion or he must have the right of immediate possession. Ownership alone is not enough. (2 Marks)

v. Detinue. This is refusal to give up possession on demand having come into possession legally, for example, giving clothes to tailor or a dry cleaner for sowing and cleaning respectively. On payment of the agreed amount, failure to return the clothes on the agreed date is detinue and defendant may be ordered to pay damages and or to return the goods. 2 Marks each = (10 marks) Total 20 Marks

5. a. The bank, as the debtor, owes the following duties to his customers.

of 45 i. To honours the customers’ cheques ii. To pay cheques only on the customers authority or mandate iii. To keep the customers account secret. iv. To operate the account without negligence 2 Marks each Total 8 Marks

b. The most common grounds for dismissal of an employee are i. Disobedience ii. Incompetence iii. Commission Of Crime iv. Gross Misconduct v. Gross Insubordination vi. Gross immorality vii. Protracted illness leading to frustration of the contract. 1 Mark each = 7 Marks Total 15 Marks c. Cheques can be dishonoured on the following ground i. Insufficient of fund ii. Irregular Signature iii. Amount in words is different from amount in figures. iv. The Cheque is mutilated. v. If the cheque is stale. The bank that dishonoured cheques on the foregoing ground cannot be successfully sued. However where bank dishonoured a cheque on reasons outside the point mentioned is not justifiable, the bank can be sued. 1 mark for the points on dishonoured cheque 3 marks on reasons where bank can be sued successfully on dishourned cheque.

of 45 Total 100

THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA OCTOBER 2012: PROFESSIONAL EXAMINATION FOUNDATION: MANAGERIAL ECONOMICS

ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS. TIME: 3 HOURS

1. a. Monopolist demand and total cost functions are given as:

Q = 720 – 40P

TC = 12Q + 0.1Q2 respectively

Find how many (in units) he will produce and at what price (in thousands of Naira) (6 marks)

b. The following respective linear demand and cost functions belong to NNPC, a

monopolist petroleum corporation show that NNPC will produce half the output

(in barrels) under perfect competition.

Q = 150 – P

TC = 75 + 5Q (9 marks) c. State five similarities between Monopoly and Monopolistic competition (5 marks) (Total 20 marks)

SOLUTION

1. a. We need to first derive the Marginal Revenue ( MR) and Marginal Cost (MC) from the function given and to find the TR for profit maximizing. Solution:

Q = 720 – 40p 40p = 720 - Q

of 45 P = 18 -0.025Q (1 Mark)

.: TR = P X Q = (18 – 0.025Q) X Q = 18Q -0.025Q2

i.e TR = 18Q – 0.025Q2 (1 Mark)

Now MR = dTR/dQ = 18 – 0.05q (1 Mark)

Also MC = dTC /Dq = 12+ 0.2Q (1 Mark)

Monopolist profit will be maximised when MR = MC .: 18 – 0.05Q = 12 + 0.2Q 0.05Q – 0.2Q = 12 – 18 :. 0.25Q = 6 i.e Q = 24 In the demand function, p = 18 – 0.025Q substitute for Q .: P = 18 – 0.025 (24) = 18 – 0.6 = 17.4 .: Price = N17, 400 and Q = 24 Units (1 Mark) b. TC = 75 + 5Q = MC = dTC/dQ = 5 (1 Mark) Now from the linear demand function Q = 150 – p Q – 150 = -P i.e P = 150 – Q (1 Mark)

.: TR = P X Q = (150 – Q) X Q = 150Q – Q2 .: MR = dTR/dQ = 150 – 2Q (1 Mark)

Under perfect competition, price (P) = Marginal cost (MC) (1 Mark) .: 150 – Q = 5 -Q = 5 - 150 i.e Q = 150 – 5 = 145

Qpc = 145 barrels (1 Mark)

Also in equilibrium under monopoly MR = MC .: 150 – 2Q = 5 -2Q = 5 – 150 2Q = 150 – 5 = 145 i.e Qm = 145/2 72.5 (1 Mark) .: Qm = 72.5 barrels (1 Mark) Therefore output (production) under monopoly (Qm) is half of output (production) under perfect competition (Qpc) c. Monopoly and Monopolistic Competition (similarities)

I. There are many buyers in both markets

of 45 II. There is free exit of firms In both markets

III. In both markets MC =MR for profit maximization

IV. Transportation cost are incurred in both market

V. There is inadequate market information in both markets

VI. Preferential treatment exist in both markets

VII. There is lack of uniform prices in both markets

VIII. There is lack of uniform prices in both markets

(1 mark for each of 5 similarities) (5 Marks)

2. a. What is Merchant Bank? (2 marks)

b. State and briefly discuss four function of Merchant Bank (6 marks)

c. The Chartered Institute of Taxation of Nigeria bought stock worth N25million from the Stock Exchange Market which it deposited with a merchant bank. It has been argued that there is a reserve ratio of 12.5% and there is no cash drain in the banking system and no initial excess reserves.

Required: i. Define reserve ratio. (2 marks)

ii. What is the meaning of excess reserve? (2 marks)

iii. Calculate the total credit that the banking system can create if the cash ratio is increased to 15%. (3 marks)

of 45 d. State four of the assumptions that have to be in place before the creation of money. (5 marks)

(Total 20 marks)

SOLUTION

2. a. Merchant bank is a wholesale bank and it deals with bulk purchases/ transaction (2 Marks)

b. Functions of Merchant Banks I. Acting as issuing houses in the capital market II. Granting loans and advances III. Project Financing IV. Accepting Deposit

V. Providing advisory services

VI. Equipment leasing

VII. Providing foreign exchange services

VIII. Accepting Deposits

1 (1 /2 for 4 points) (6 Marks)

c. i. Reserved Ratio is the ratio at which bank can create credit. It is always stipulated or dictated by the CBN at any particular point in time. (2 Marks) ii. Excess reserve is the reserve obtained through the original reserve ratio and the new higher reserve ratio. (2 Marks) iii. Total credit =Deposits - Cash reserve

Thus Mdep = A/r, where Mdep = deposit

A = Initial or first deposit and r = cash reserve ratio

Where Mdep = N25m, r = 12.5%, r = 15%

.: 25 = Ai/0.125

i.e A1 = 3.125

of 45 .: Initial credit = 25 – 3.125 = N 21. 875 (1 Mark)

Also 25 = Af/0.15

i.e Af = 3.75

.:Final credit = 25 – 3.75 = N21.25 (1 Mark)

.: The total credit that will be created is N21. 25m

(1 Mark)

d. Assumption of credit creation.

I. That the banking system is comprised of many banks

II. That there is no cash leakage in the system

III. The statutory cash reserve ratio is 10% (or nay rate that is required at a particular point. That is, all banks are legally required to keep 10% of their total deposit liabilities in cash with CBN.

IV. All banks in the system are willing and able to make loan (credit) up to the limit set by cash reserve requirement.

V. A customer deposit (total reserve) in his current account with one of the banks.

1 (1 /4 for 4 point)

3. a. The Managing Director of your company is seeking your advice and experience about the economic, financial and social costs and benefits of the company. He, in addition, presented you with the following streams of costs and benefits for the

last five years.

Year 2006 2007 2008 2009 2010 N’ 000 N N N ‘000 N ‘000 ‘000 ‘000 Cost streams 2,500 5,000 3,000 6,000 7,500

of 45 Benefit streams 6,250 5,500 5,000 6,500 9,000

You are expected to:

i. Define Cost- Benefit Analysis (CBA) – (2½ marks)

ii. Calculate the Benefit/Cost ratio (5 marks)

iii. Calculate the Net Benefit/Cost ratio (5 marks)

b. State and briefly discuss any five factors affecting the volume of production in a free-market economy. (7½ marks)

(Total 20 marks)

SOLUTION

3 a. i. CBA is an appraisal technique in which public projects are assessed in terms of their expected and (discounted) costs and benefits which may arise from the implementation of such projects. The CBA is normally conducted to aid in decision making either to determine the economic viability of a project or to rank competing projects for implementation 1 (2 /2 Marks)

Year 2006 2007 2008 2009 2010 Benefit 6,250 5,500 5,000 6,500 9,000 streams (B) Cost 2,500 5,000 3,000 6,000 7,500 streams (C) Net Benefit 3,750 500 2,000 500 1,500 (B-C)

ii. Benefit/cost ratio (B/C)

Year 2006 2007 2008 2009 2010

of 45 B/C 2.5 1.1 1.67 1.08 1.2

iii. Net Benefit/Cost ratio

Year 2006 2007 2008 2009 2010 NBCR = (B-C)/C 1.5 0.1 0.67 0.08 0.2

b. Factors affecting volume of production in a free market economy.

I. Quality and quantity of available factors of production

II. Level of efficiency in the use of factors of production

III. Level of social economic and political stability in the economy

IV. Availability of economic infrastructure e.g transportation, electricity, banks etc.

V. Provision of social amenities (e.g recreational facilities) and type of working condition provided by employees

VI. Type of economic policies undertaken by the government with respect to the utilization of resources

VII. Weather and other natural phenomena

VIII. Level of technology in the country.

1 (1 /2 marks for each of 5 points) 1 (7 /2Marks)

4. a. Demand function for a commodity is given by Q = 500-P2 You are required to calculate the price elasticity of demand at i. P = N10 and

ii. P = N20 (Interprete your result) (3 marks)

b. The demand and supply functions for a product are given below: Qd = 497 – 2p Qs = P - 34

of 45 Where Qd = Quantity demanded Qs = Quantity Supplied P = Price of the product i. Determine the equilibrium price and quantity of the product. (4 marks) ii. If the government imposes a specific tax of N6 on the producer, determine the resulting equilibrium price and quantity. (4 marks) iii. What will be the market price and quantity traded on the market, if the producer received a subsidy of N3.00 per unit? (4 marks) iv. What is the price elasticity of supply at point (iii) above? (2 marks) (Total 20 marks) SOLUTION

4. a. i. The demand function is given as

Q = 500 – (10)2

Q = 500 – 100

= 400 (1 Mark) From differential calculus, differentiation of Q with respect to P i.e dQ/dP = -2p

: Ed = (dQ)/dP, P/Q

Since dQ/Dp = -2p, substitute for dq/dp, p and Q

Ed = dQ/dP, P/Q

Ed = -2p x 10/400

= - 2 (10) x 10/400

. : Ed = 0.5 (1 Mark)

The co-efficient of elasticity of demand is less than 1, hence demand is said to be in elastic. (1 Mark)

of 45 Expectation:

To test candidates understanding of elasticity of demand and its computation.

Ed = dq/dp x PQ

Q = 500 – (200)2

= 500 – 400 (1 Mark)

.: Ed = -2p x P/Q

= 40 X 20/100

Ed = 8 (1 Mark)

The co- efficient of elasticity of demand is greater than 1, hence demand is said to be elastic.

Comments:

To test candidates understanding of demand function, supply function and their elasticities. b. The demand and supply function is given as

Qd = 497 – 2p

Qs = p – 34

Equilibrium Qd = Qs

497 - 2p = p - 34

497 + 34 = p + 2p

531 = 3p

P = 531/3

i. N177 (equilibrium price) (2 Marks)

Hence equilibrium quantity

497 – 2 (177)

of 45 497 – 354

= 143 (equilibrium quantity) (2 Marks) ii. With a specific tax of N6 per unit on product, then supply function becomes:

Qs = p – 34 – 6

= p – 40

The resulting equilibrium price and equilibrium quantity is computed as:

Qd = Qs

497 - 2p = p – 40

497 + 40 = p + 2p

537 = 3p

P = N179 (equilibrium price) (2 Marks)

For equilibrium quantity

Qs = p -34 – 6

= p – 40

Qs = 179 - 40

Qs = 139 (equilibrium) iii. With a subsidy of N3 per unit on products, then supply function becomes

Qs = p – 34 + 3

Qs = p -31

Then resulting equilibrium price and equilibrium quantity is shown as

Qd = Qs

of 45 497 - 2p = p – 31

497 + 31 = p + 2p

.: P = 528 /3

P = N176 (equilibrium price) (2 Marks)

Equilibrium Qty

Qs = p -31

Qs = 176 – 31

Qs = 145 (equilibrium quantity) (2 Marks)

iv. The price elasticity of supply at point (iii) is shown as follows

Qs = p – 31

dQ/dp = 1

Es = dQ/dp x P/Q

= 1 x 176/145 = 1,2 (1 Mark)

Supply is price elastic (1 Mark)

5. a. The following data relate to a closed economy of a country where all production takes place in two firms.

Use the information in the table to answer the question.

Items Firm A Firm B N’ m N’ m Sales 200 400 Raw materials 100 60 Labour costs 80 160 Depreciation 16 40 Profit 4 140

of 45 i. Which of the items listed is an intermediate input? (1 mark)

ii. What happens to intermediate inputs in the computation of the national income? (2 marks)

iii. Calculate the Gross Domestic Product (GDP) of the country. (3 marks)

iv. Calculate the total amount of depreciation of the country (2 marks)

v. Compute the Net Domestic Product of the country (2 marks)

b. i. Explain the term Economic integration (2 marks) ii. List any four (4) ways that Nigeria will benefit from economic integration and highlight four problems of economic integration in Nigeria. (8 marks) (Total 20 marks)

SOLUTION

5. a. i. Raw materials

(1 Mark)

ii. The value of intermediate input is NOT added using the value added approach. However, if any other approach is used, the value of intermediate input is deducted. (2 Marks)

iii. GDP

= Total value of sales – value of intermediate inputs

(1 Mark)

= (200m + 400m) - (N100m + N60m)

of 45 = N600m – N 160m (1 Mark)

= N440m (1 Mark)

Using the value Added Approach

GDP = firm A`S total + firms B`s total

.: Firm A = N80m + N16m + N4m = N100m

: Firm B = N 160m + N40m +N140m = N340m

GDP = N100m + N 340m =N 440m

Iv. Total amount of depreciation

N16m + N40m = N56m (1 Mark)

v. Net Domestic product = GDP – Depreciation (1 Mark)

N440m - N56m = N384m (1 Mark)

b. a. Economic integration is a form of cooperation

among two or more nations to foster their economic interests. It may operate at various levels such as free trade area, customs` union, common market and economic union. (2 Marks)

b. i. Enlarged market: This will encourage large scale ii. Efficiency: There will be greater competition and as such there will be operational efficiency iii. Job opportunity: more jobs can be created in the process of economic integration iv. Resource Mobility: Resources such as labour and

of 45 capital can easily be mobilized from area of abundance to area of scarcity through economic integration. v. Improvement of welfare : A wide range of economic activities induced by economic integration is capable of ensuring improved quality of life. vi. Greater bargaining powers: Economic integration can lead to greater participation in the world market through collective bargaining. vii. Faster Economic Development: It brings about faster and sustainable economic growth and development in Nigeria. (any 4 points x 1mark) (4 Marks) Problems of Economic integration i. Ideological differences: This leads to sharp differences in opinion and delay in decision making. ii. Divided loyalty: Nigeria still hold her loyalty to her former colonial masters, thereby affecting her loyalty to the union. iii. Political instability: frequent change of government coupled with military rule has slowed down the process of integration. With the new political dispensation, the trend of military coup is fast fading away. iv. Inadequate capital: The dearth of capital to carry out or execute agreed projects has delayed the process of integration v. Inadequate Infrastructures: Shortages of

Infrastructural facilities such as good roads, electricity, etc hinders integration. (Any 4 points x 1 mark) (4 Marks)

of 45 Expectation:

To test candidates understanding of international economic organs especially economic integration