P7 – Financial Accounting and Tax Principles

Financial Management Pillar

Managerial Level Paper

P7 – Financial Accounting and Tax
Principles
24 May 2007 – Thursday Afternoon Session
Instructions to candidates

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 sub-
questions). The requirements for the questions in Sections B and C are
highlighted in a dotted box.

ALL answers must be written in the answer book. Answers or notes written
on the question paper will not be submitted for marking.

Answer the ONE compulsory question in Section A. This has 15 sub-

questions on pages 2 to 7.

Answer the SIX compulsory sub-questions in Section B on pages 8 to 11.

Answer the ONE compulsory question in Section C on pages 12 to 13.

Maths Tables and Formulae are provided on pages 15 to 17. These pages
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.

TURN OVER

 The Chartered Institute of Management Accountants 2007

SECTION A – 40 MARKS
[the indicative time for answering this Section is 72 minutes]
ANSWER ALL FIFTEEN SUB-QUESTIONS

Instructions for answering Section A:

The answers to the fifteen sub-questions in Section A must ALL be written in your
answer book.

Your answers should be clearly numbered with the sub-question number and then
ruled off, so that the markers know which sub-question you are answering. For
multiple choice questions, you need only write the sub-question number and
the letter of the answer option you have chosen. You do not need to start a new
page for each sub-question.

For sub-questions 1.3, 1.7, 1.13 and 1.15 you should show your workings as marks
are available for the method you use to answer these sub-questions.

Question One

1.1 DH has the following two legal claims outstanding:

• A legal action against DH claiming compensation of $700,000, filed in February

2007. DH has been advised that it is probable that the liability will materialise.

• A legal action taken by DH against another entity, claiming damages of $300,000,

started in March 2004. DH has been advised that it is probable that it will win the
case.

How should DH report these legal actions in its financial statements for the year ended
30 April 2007?

Legal action against DH Legal action taken by DH

A Disclose by a note to the accounts No disclosure

B Make a provision No disclosure

C Make a provision Disclose as a note

D Make a provision Accrue the income

(2 marks)

1.2 Country X uses a Pay-As-You-Earn (PAYE) system for collecting taxes from employees.
Each employer is provided with information about each employee’s tax position and
tables showing the amount of tax to deduct each period. EmpIoyers are required to
deduct tax from employees and pay it to the revenue authorities on a monthly basis.

From the perspective of the government, list THREE advantages of the PAYE system.
(3 marks)

P7 2 May 2007
1.3 DS uses the Economic Order Quantity (EOQ) model. Demand for DS’s product is 95,000
units per annum. Demand is evenly distributed throughout the year. The cost of placing
an order is $15 and the cost of holding a unit of inventory for a year is $3.

How many orders should DS make in a year?

(3 marks)

1.4 According to the International Accounting Standards Board’s Framework for the
Preparation and Presentation of Financial Statements, what is the objective of financial
statements?

Write your answer in no more than 35 words.

(2 marks)

1.5 The International Standard on Auditing 701 Modifications to the Independent Auditor’s
Report, classifies modified audit reports into “matters that do not affect the auditor’s
opinion” and “matters that do affect the auditor’s opinion”. This latter category is further
sub-divided into three categories.

List these THREE categories.

(3 marks)

1.6 DY’s trade receivables balance at 1 April 2006 was $22,000. DY’s income statement
showed revenue from credit sales of $290,510 during the year ended 31 March 2007.
DY’s trade receivables at 31 March 2007 were 49 days.
Assume DY’s sales occur evenly throughout the year and that all balances outstanding at
1 April 2006 have been received.

Also, it should be assumed all sales are on credit, there were no bad debts and no trade
discount was given.

How much cash did DY receive from its customers during the year to 31 March 2007?

A $268,510

B $273,510

C $312,510

D $351,510
(2 marks)

Section A continues on the next page

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May 2007 3 P7
1.7 DD purchased an item of plant and machinery costing $500,000 on 1 April 2004, which
qualified for 50% capital allowances in the first year, and 20% each year thereafter, on the
reducing balance basis.

DD’s policy in respect of plant and machinery is to charge depreciation on a straight line
basis over five years, with no residual value. On 1 April 2006, DD decides to revalue the
item of plant and machinery upwards, from its net book value, by $120,000.

Assuming there are no other capital transactions in the three year period and a tax rate of 30%
throughout, calculate the amount of deferred tax to be shown in DD’s income statement for the
year ended 31 March 2007, and the deferred tax provision to be included in its balance sheet at
31 March 2007.
(4 marks)

1.8 On 31 March 2007, DT received an order from a new customer, XX, for products with a
sales value of $900,000. XX enclosed a deposit with the order of $90,000.

On 31 March 2007, DT had not completed credit referencing of XX and had not
despatched any goods. DT is considering the following possible entries for this
transaction in its financial statements for the year ended 31 March 2007:

(i) include $900,000 in income statement revenue for the year;

(ii) include $90,000 in income statement revenue for the year;

(iii) do not include anything in income statement revenue for the year;

(iv) create a trade receivable for $810,000;

(v) create a trade payable for $90,000.

According to IAS 18 Revenue Recognition, how should DT record this transaction in its financial
statements for the year ended 31 March 2007?

A (i) and (iv)

B (ii) and (v)

C (iii) and (iv)

D (iii) and (v)

(2 marks)

1.9 Excise duties are deemed to be most suitable for commodities that have certain specific
characteristics.

List THREE characteristics of a commodity that, from a revenue authority’s point of view, would
make that commodity suitable for an excise duty to be imposed.
(3 marks)

P7 4 May 2007
1.10 During its 2006 accounting year, DL made the following changes.

Which ONE of these changes would be classified as “a change in accounting policy” as

determined by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?

A Increased the bad debt provision for 2006 from 5% to 10% of outstanding debts.

B Changed the treatment of borrowing costs from capitalising borrowing costs incurred on
capital projects to treating all borrowing costs as an expense in the year incurred.

C Changed the depreciation of plant and equipment from straight line depreciation to
reducing balance depreciation.

D Changed the useful economic life of its motor vehicles from six years to four years.

(2 marks)

1.11 DR has the following balances under current assets and current liabilities:

Current assets $
Inventory 50,000
Trade receivables 70,000
Bank 10,000

Current liabilities $
Trade payables 88,000
Interest payable 7,000

DR’s quick ratio is

A 0⋅80 : 1

B 0⋅84 : 1

C 0⋅91 : 1

D 1⋅37 : 1
(2 marks)

1.12 Which ONE of the following is most likely to increase an entity’s working capital?

A Delaying payment to trade payables.

B Reducing the credit period given to customers.

C Purchasing inventory on credit.

D Paying a supplier and taking an early settlement discount.

(2 marks)

Section A continues on the next page

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May 2007 5 P7
1.13 Details from DV’s long-term contract, which commenced on 1 May 2006, at 30 April 2007
were:

$000
Invoiced to client for work done 2,000
Costs incurred to date:
Attributable to work completed 1,500
Inventory purchased, but not yet used 250
Progress payment received from client 900
Expected further costs to complete project 400
Total contract value 3,000

DV uses the percentage of costs incurred to total costs to calculate attributable profit.

Calculate the amount that DV should recognise in its income statement for the year ended
30 April 2007 for revenue, cost of sales and attributable profits on this contract according to
IAS 11 Construction Contracts.
(4 marks)

1.14 Country Y has a VAT system which allows entities to reclaim input tax paid.

In Country Y the VAT rates are:

Zero rated 0%
Standard rated 15%

DE runs a small retail store. DE’s sales include items that are zero rated, standard rated
and exempt.

DE’s electronic cash register provides an analysis of sales. The figures for the three
months to 30 April 2007 were:
Sales value, excluding VAT
$
Zero rated 11,000
Standard rated 15,000
Exempt 13,000
Total 39,000

DE’s analysis of expenditure for the same period provided the following:

Expenditure, excluding VAT

$
Zero rated purchases 5,000
Standard rated purchases relating to standard rate outputs 9,000
Standard rated purchases relating to exempt outputs 7,000
Standard rated purchases relating to zero rated outputs 3,000
24,000

Calculate the VAT due to/from DE for the three months ended 30 April 2007.
(2 marks)

P7 6 May 2007
1.15 A bond has a current market price of $83. It will repay its face value of $100 in seven
years’ time and has a coupon rate of 4%.

If the bond is purchased at $83 and held, what is its yield to maturity?
(4 marks)

(Total for Question One = 40 marks)

Reminder

All answers to Section A must be written in your answer book.

Answers to Section A written on the question paper will not be

submitted for marking.

End of Section A

Section B starts on page 8

TURN OVER

May 2007 7 P7
SECTION B – 30 MARKS
[the indicative time for this Section is 54 minutes]
ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5
MARKS.

Question Two

(a)
Country Z has the following tax regulations in force for the years 2005 and 2006 (each year
January to December):

• Corporate income is taxed at the following rates:

o $1 to $10,000 at 0%;
o $10,001 to $25,000 at 15%;
o $25,001 and over at 25%.
• When calculating corporate income tax, Country Z does not allow the following
types of expenses to be charged against taxable income:
o Entertaining expenses;
o Taxes paid to other public bodies;
o Accounting depreciation of non-current assets.
• Tax relief on capital expenditure is available at the following rates:
o Buildings at 4% per annum on straight line basis;
o All other non-current tangible assets are allowed tax depreciation at 27% per
annum on reducing balance basis.

DB commenced business on 1 January 2005 when all assets were purchased. No first year
allowances were available for 2005.

Non-current assets cost at 1 January 2005

$
Land 27,000
Buildings 70,000
Plant and equipment 80,000

On 1 January 2006, DB purchased another machine for $20,000. This machine qualified for a
first year tax allowance of 50%.

DB’s Income statement for the year to 31 December 2006

$
Gross profit 160,000
Administrative expenses 81,000
Entertaining 600
Tax paid to local government 950
Depreciation on buildings 1,600
Depreciation on plant and equipment 20,000
Distribution costs 20,000
35,850
Finance cost 1,900
Profit before tax 33,950

The question requirement is on the opposite page

P7 8 May 2007
 Required for (a):
Calculate DB’s corporate income tax due for the year 2006.

(Total for sub-question (a) = 5 marks)

(b) On 1 April 2005, DX acquired plant and machinery with a fair value of $900,000 on a
finance lease. The lease is for five years with the annual lease payments of $228,000
being paid in advance on 1 April each year. The interest rate implicit in the lease is
13⋅44%. The first payment was made on 1 April 2005.

Required:
(i) Calculate the finance charge in respect of the lease that will be shown in DX’s
income statement for the year ended 31 March 2007.

(ii) Calculate the amount to be shown as a current liability and a non-current liability
in DX’s balance sheet at 31 March 2007.

(All workings should be to the nearest $000.)

(Total for sub-question (b) = 5 marks)

(c) The Framework for the Preparation and Presentation of Financial Statements
(Framework) was first published in 1989 and was adopted by The International
Accounting Standards Board (IASB).

Required:
Explain the purposes of the Framework.
(Total for sub-question (c) = 5 marks)

Section B continues on the next page

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May 2007 9 P7
(d) On 1 June 2006, the directors of DP commissioned a report to determine possible actions
they could take to reduce DP’s losses. The report, which was presented to the directors
on 1 December 2006, proposed that DP cease all of its manufacturing activities and
concentrate on its retail activities.

The directors formally approved the plan to close DP’s factory. The factory was gradually
shut down, commencing on 5 December 2006, with production finally ceasing on
15 March 2007. All employees had ceased working, or had been transferred to other
facilities in the company, by 29 March 2007. The plant and equipment was removed and
sold for $25,000 (net book value $95,000) on 30 March 2007.

The factory land and building was being advertised for sale, but had not been sold by
31 March 2007. The net book value of the land and building at 31 March 2007, based on
original cost, was $750,000. The estimated net realisable value of the land and building
at 31 March 2007 was $1,125,000.

Closure costs incurred (and paid) up to 31 March 2007 were $620,000.

The cash flows, revenues and expenses relating to the factory were clearly
distinguishable from DP’s other operations. The output from the factory was sold directly
to third parties and to DP’s retail outlets. The manufacturing facility was shown as a
separate segment in DP’s segmental information.

Required:
With reference to relevant International Accounting Standards, explain how DP
should treat the factory closure in its financial statements for the year ended
31 March 2007.
(Total for sub-question (d) = 5 marks)

(e) DN currently has an overdraft on which it pays interest at 10% per year. DN has been
offered credit terms from one of its suppliers, whereby it can either claim a cash discount
of 2% if payment is made within 10 days of the date of the invoice or pay on normal credit
terms, within 40 days of the date of the invoice.

Assume a 365 day year and an invoice value of $100.

Required:
Explain to DN, with reasons and supporting calculations, whether it should pay the
supplier early and take advantage of the discount offered.

(Total for sub-question (e) = 5 marks)

P7 10 May 2007
(f) DF, a sports and fitness training equipment wholesaler has prepared its forecast cash
flow for the next six months and has calculated that it will need $2 million additional short-
term finance in three months’ time.

DF has an annual gross revenue of $240 million and achieves a gross margin of 50%. It
currently has the following outstanding working capital balances:

• $16 million trade payables;

• $20 million trade receivables;
• $5 million bank overdraft.

DF forecasts that it will be able to repay half the $2 million within three months and the
balance within a further three months.

Required:
Advise DF of possible sources of funding available to it.

(Total for sub-question (f) = 5 marks)

(Total for Section B = 30 marks)

End of Section B

Section C starts on page 12

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May 2007 11 P7
SECTION C – 30 MARKS
[the indicative time for this Section is 54 minutes]
ANSWER THIS QUESTION

Question Three

DZ is a manufacturing entity and produces one group of products, known as product Y.

DZ’s trial balance at 31 March 2007 is shown below:

$000 $000
8% loan 2020 (see note (xiv)) 2,000
Administration expenses 891
Bank and cash 103
Cash received on disposal of land 1,500
Cash received on disposal of plant 5
Cost of raw materials purchased in year 2,020
Direct production labour costs 912
Distribution costs 462
Equity shares $1 each, fully paid 1,000
Income tax (see note (xi)) 25
Inventory of finished goods at 31 March 2006 240
Inventory of raw materials at 31 March 2006 132
Land at valuation at 31 March 2006 1,250
Loan interest paid – half year 80
Plant and equipment at cost at 31 March 2006 4,180
Production overheads (excluding depreciation) 633
Property at cost at 31 March 2006 11,200
Provision for deferred tax at 31 March 2006 (see note (xii)) 773
Provision for depreciation at 31 March 2006: (see notes (iv) and (v))
Property 1,900
Plant and equipment 2,840
Research and development (see note (vi)) 500
Retained earnings at 31 March 2006 2,024
Revaluation reserve at 31 March 2006 2,100
Revenue 8,772
Trade payables 773
Trade receivables 1,059
23,687 23,687

Further information:
(i) The property cost of $11,200,000 consisted of land $3,500,000 and buildings $7,700,000.

(ii) During the year, DZ disposed of non-current assets as follows:

• A piece of surplus land was sold on 1 March 2007 for $1,500,000;
• Obsolete plant was sold for $5,000 scrap value on the same date;
• All the cash received is included in the trial balance;
Details of the assets sold were:

Asset type Cost Revalued amount Accumulated depreciation

Land $500,000 $1,250,000 $0
Plant and equipment $620,000 $600,000

(iii) On 31 March 2007, DZ revalued its properties to $9,800,000 (land $4,100,000 and buildings
$5,700,000).

(iv) Buildings are depreciated at 5% per annum on the straight line basis. Buildings depreciation is
treated as 80% production overhead and 20% administration.

P7 12 May 2007
(v) Plant and equipment is depreciated at 25% per annum using the reducing balance method, the
depreciation being treated as a production overhead.

(vi) Product Y was developed in-house. Research and development is carried out on a continuous
basis to ensure that the product range continues to meet customer demands. The research and
development figure in the trial balance is made up as follows:
$000
Development costs capitalised in previous years 867
Less: Amortisation to 31 March 2006 534
333
Research costs incurred in the year to 31 March 2007 119
Development costs (all meet IAS 38 Intangible Assets criteria) incurred in the year to
31 March 2007 48
Total 500

(vii) Development costs are amortised on a straight line basis at 20% per annum.

(viii) Research and development costs are treated as cost of sales when charged to the income
statement.

(ix) DZ charges a full year’s amortisation and depreciation in the year of acquisition and none in the
year of disposal.

(x) Inventory of raw materials at 31 March 2007 was $165,000. Inventory of finished goods at
31 March 2007 was $270,000.

(xi) The directors estimate the income tax charge on the year’s profits at $811,000. The balance on the
income tax account represents the underprovision for the previous year’s tax charge.

(xii) The deferred tax provision is to be reduced to $665,000.

(xiii) No interim dividend was paid during the year.

(xiv) The 8% loan is a 20-year loan issued in 2000.

Required:
(a) Prepare DZ’s Property, Plant and Equipment note to the accounts for the year
ended 31 March 2007.
(6 marks)

(b) Prepare the income statement and a statement of changes in equity for the year
to 31 March 2007 and a balance sheet at that date, in a form suitable for
presentation to the shareholders and in accordance with the requirements of
International Financial Reporting Standards.

(All workings should be to the nearest $000).

(24 marks)

Notes to the financial statements are NOT required (except as specified in part (a) of
the question), but ALL workings must be clearly shown. Do NOT prepare a statement
of accounting policies.

(Total for Question Three = 30 marks)

(Total for Section C = 30 marks)

End of Question Paper. Maths Tables and Formulae are on pages 15-17
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May 2007 13 P7
 [this page is blank]

P7 14 May 2007
 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%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

May 2007 15 P7
Cumulative present value of $1 per annum

1− (1+ r ) − n
Receivable or Payable at the end of each year for n years r

Periods Interest rates (r)

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

P7 16 May 2007
 FORMULAE
Valuation models

n
(i) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r]
(ii) Present value of $1 payable or receivable in n years, discounted at r% per annum:
1
PV =
n
[1 + r ]

(iii) Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:
1 1 
PV = 
r 
1−
n 
[1 + r ] 
(iv) Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r%
per annum:
1
PV =
r

(v) 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:
1
PV =
r −g

Inventory management

(i) Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in Inventory for one year
D = annual demand

Cash management

(i) Optimal sale of securities, Baumol model:

2 x Annual cash disburseme nts x Cost per sale of securities

Optimal sale =
interest rate

(ii) Spread between upper and lower cash balance limits, Miller-Orr model:
1
3  3
x transactio n cost x variance of cash flows
4 
Spread = 3  
interest rate
 
 

May 2007 17 P7
 [this page is blank]

P7 18 May 2007
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. Apply To put to practical use
Calculate/compute To ascertain or reckon mathematically
Demonstrate To prove with certainty or to exhibit by
practical means
Prepare To make or get ready for use
Reconcile To make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table

4 ANALYSIS
How are you expected to analyse the detail of Analyse Examine in detail the structure of
what you have learned. Categorise Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct To build up or compile
Discuss To examine in detail by argument
Interpret To translate into intelligible or familiar terms
Produce To create or bring into existence

5 EVALUATION
How are you expected to use your learning to Advise To counsel, inform or notify
evaluate, make decisions or recommendations. Evaluate To appraise or assess the value of
Recommend To advise on a course of action

May 2007 19 P7
 Financial Management Pillar

Managerial Level

P7 – Financial Accounting
and Tax Principles

May 2007

Thursday Afternoon Session

P7 20 May 2007