Chapter: One

Define organization.

Organization is a social arrangement for the controlled performance of collective goals which have a
boundary separating it from its environment.

What is stakeholder?

Literally a person or a group of persons who has stake in organization is called stakeholder. Here stake
means personal or financial interest.

Why do organizations exist?

Organization exist for the following reasons

1. To overcome the individual limitation

2. To enable people to specialize in what they do best
3. To save time
4. To achieve synergy i.e. combined output is greater than the sum of individual output.

List four ways in which organization may differ from each other?

1. Ownership i.e. private sector and public sector

2. Control
3. Legal status
4. Profit motive, i.e. Not for profit organization

Define Business? What are the business objectives?

Business:

Business is an organization that is oriented toward making profit to maximize the interest of owners and is
considered separate from the entity.

There are two types of business objectives

1. Primary objectives
2. Secondary objectives

Primary objective:

1. To maximize the profit at a acceptable level of risk

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 2. Profit satisficing: The level of profit and risk must be satisfactory. Management may choose simply
to achieve satisfactory profit for business.
3. Revenue maximization

Secondary objectives:

1. Product development
2. Market share
3. Employee
4. Technology
5. Social responsibility

What is not for profit organization? Give example.

The organization which runs to provide goods and service to its beneficiaries not to earn profit is called not
for profit organization. For example

1. ICAB
2. Charitable organization
3. Club
4. Association
5. Religious bodies etc.

What is constraint theory?

Simon said in some cases, decision is taken irrespective of profitability. For example, Profit is compromised
in case of relationship with the staff, protection of environment, customer satisfaction with quality goods and
service

Drucker suggested that eight business objectives are needed in key areas. What are the objectives?

The areas are as follows

 Profitability
 Productivity
 Social responsibility
 Innovation
 Market standing
 Physical and financial resource
 Manager performance and development
 Work performance and attitude

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What is mission?

Mission compasses purposes, strategies, policies, standard behavior and values set by the business.

What are the elements of Mission Statement?

1. Purposes
2. Strategies
3. Policies
4. Standard behavior
5. Values

What is goal? What are different types of goal?

Goal is the intention behind decision and action. Goal is a desired end result.

Two types of goal

Operational goal (objectives): it is quantitative such as to increase budget by 5% in next year

Non-operational goal (Aims): It is qualitative such as to seek truth for a university

What are the characteristics of operational goals?

The acronyms is SMART

1. S-specific
2. M-measureable
3. A-achievable
4. R-relevant
5. T-time bound

What are the purposes of setting operational objectives in business?

1. To implement the mission

2. To publicize the direction to the manager and staff
3. To appraise the validity of decision
4. To assess and control actual performance

Most organizations have established quantifiable operational goal (objectives). Give reason why
non operation goal (aims) might still be important?

Aims might be as helpful as quantified objectives. Customer satisfaction, retention of technological

leadership is hard to measure but is very important for success.

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Define the following terms.

o Economy: Economy is reduction or containment of cost

o Effectiveness: It is a measure of achievement
o Efficiency: It is being effective with minimum cost
o Critical Success Factor: Product features that are particularly valued by a group of customers are
critical success factor.
o Key performance indicator: once a business identified CSFs the thing it must be good at to
succeed it core competences. It must identify standard performance to be achieved to outperform
rival. The standards are sometimes called key performance indicator.

Define the concept of corporate responsibility.

1. The impact of operation on environment should not be adverse.

2. Fair treatment in case of employment such as minority group, gender discrimination
3. Charitable support to local community
4. Working condition should be healthy and safety
5. Product safety

What expectations would the local community have of a company operating a coal-fired
power station within two miles of a medium-sized town?

The local community might expect the following

1. The opportunity of employment

2. Electricity to the local areas
3. Safe operating practices
4. Waste treatment plant
5. Effort taken by the company to minimize the carbon dioxide

Is wealth maximization always the primary objectives?

Making as much profit as possible at an acceptable risk, wealth maximization, then, is assumed to be the
primary objectives of the business.

Simon said sometimes decision is taken irrespective of profitability. Profitability is compromised in case of
employee relationship, customer satisfaction with quality product and services etc.

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 Chapter: TWO

Organization:

Organization is a social arrangement for controlled performance of collective goals which have a boundary
separating it from its environment.

Why does the organization need for management?

1. To monitor the progress and result to ensure that the objectives are met
2. To monitor corporate values, ethics and principles
3. To look after the interest of owner and the stakeholder of the organization

What is management?

Management is getting things done by others- Stewart.

What is governance?

Governance is a system by which the organization is controlled and directed. Governance incorporates the
concept of ethics, risk management, protection of the interest of stakeholders and extending way beyond
concept the management.

Define the following

1. Power: Power is the ability to get things done.

2. Authority: It is the right to do something or requires someone else to do something
3. Responsibilities: It is obligation of what is done
4. Accountability: It is the liabilities of what is done.

What are different types of power?

1. Coercive power: The power based on the physical force

2. Reward Power: The power based on the access to and control over valued resources.
3. Legitimate Power: The power based on the position of the organization
4. Expert Power: The power based on the expert knowledge and expertise
5. Referent power (personal): The power based on the personality to attract, influence
6. Negative power: The power to disrupt operation such as industrial action, sabotage etc.

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What are the different types of manager?

1. Top level manager: Formulates the policies and strategies

2. Middle level manager: Convey the policies and strategies to the line managers
3. Line manager: Direct the functional manager to implement the policies and strategies
4. Functional manager: They implement the policies and strategies to achieve the objectives

What is human resource management?

Human resource management is the creation, development, maintenance of an effective workforce,

matching the requirements of the business and responding to the environment.

- Naylor
What are the approaches of HRM?

Hard approach: It emphasizes the resource element of HRM. Human resources are planned and
developed to meet the wider objectives of the organization as with other resources such as material and
money.

Soft approach: It emphasizes on the human element of HRM. It is concerned with the employee relation,
development of skill and the welfare of the staff.

Functions of Human resources management:

1. Personnel planning and development

2. Job designs
3. Recruitment and selection
4. Training and development
5. Performance appraisal
6. Remuneration
7. Disciplining employee
8. Promotion

What are the 4Cs of Human Resource management?

1. Commitment
2. Competence
3. Congruence
4. Cost effectiveness

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Hierarchy of need theory:

1. Self-actualization: It is concerned with how people think themselves. They consider whether their
lives are worthwhile and have meaning.
2. Esteem: People desire esteem and respect from others
3. Social: people want to be a group
4. Safety or security: Once the basic need is satisfied, people feel security. Safety means physical
safety, security from employment
5. Physiological need: People seek to satisfy their basic need such as fooding, clothing etc.

What are different types of managerial roles?

1. Informational roles: Checking data received and passing to other and acting as a spokesperson of
the team.
2. Interpersonal roles: Acting as a leader of the team and linking with the manager of other teams.
3. Decisional roles: It is the roles that managers actually do what we perceive as managing.
 Handle disturbance
 Allocative resource
 Negotiation etc.

What is model?

Models are used in management theory to represent complex reality. Model is the real world
representation.

How model helps-

1. It helps to explain the past

2. It helps to understand the present
3. To predict the future
4. More influence over future events

Describe the rational goal model of management.

Taylor analyzed a factory work and came to the conclusion that in order to reach maximum efficiency of
each worker, managers are needed to be in detailed control of every last part of the process. Taylor put
forward five principle of scientific management

 Determine the best way to do the work

 Select the best person to do the work
 Train the worker to follow the set procedures
 Give financial incentive to ensure the work is done in a prescribed way

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  Give all responsibility to plan the work to manager not worker

Describe internal process model of management.

It looks at how the organization is doing things; not at why.

 Rationality: Efficient means are used to meet objectives

 Hierarchical line of authority: defined authority
 Division of labor
 Centralization

Describe Organizational iceberg:

“What sinks ship isn’t always what the sailor can see; but what they cannot see”. Two aspects are
characterized

1. Formal aspects: It is overt and visible such as formal goal, technology, physical facilities of an
organization etc
2. Behavioral aspects: It is covert and not visible as Conflict, political behavior, attitudes, values
and personality of an organization.

Marketing Mix 4Ps Service Marketing mix 3Ps

Price People
Product Process
Place Physical evidence
Promotion

What are different types of culture? What is 4 C’s model of HRM?

Culture is the basic assumption, values, belief that designs a particular behavior of human.

Types of culture:

 Internal process culture

 Rational goal culture
 Open systems culture
 Human Relation culture

4 C’s Model of HRM:

o Commitment
o Congruence
o Competence

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 o Cost effectiveness

What is product? What are the elements of product?

Anything that can be offered to market for attention and acquisition and which can satisfy the demand of
the consumer is known as product.

Element of product:

 Basic product-Car
 Actual product-Focus Ford
 Augmented product

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 Organizational structure:

What is organizational structure?

Organizational structure is managing an organization by grouping its people into different departments,
allocation and coordination of authority, responsibility, and resources among the departments.

What for the organizational structure is intended?

1. To link the individual into a network of relationship.
2. To assign the work to be done to the suitable person.
3. To give authority and responsibility to accomplish the work.
4. To facilitate the coordination between activities and objectives.

What are the building blocks of organizational structure as per Mintzberg?

There are six building blocks
1. Ideology: The values and beliefs of the organization
2. Strategic apex: Determines the mission & vision of the company and formulates strategic plans
3. Middle line manager: Conveys the message of strategic apex and monitors the operating core
4. Operating core: Those who are engaged in production process
5. Techno-structure: It standardizes the work procedures
6. Support staff: Includes canteen, legal counsel, security staff etc.

What are the coordinating mechanisms of organizational structure?

1. Direct supervision: Order by a superior to the subordinates

2. Standardization of work: Standard work procedures
3. Standardization of skill: Requiring workers to have particulars skill and qualification
4. Standardization of output: Setting target to be achieved
5. Manual adjustment: Informal communication

What are the modern principles/ approaches to organizational structure?

Modern organizational structure is characterized by two factors

1. Multi-skilling: Personnel should be multi-skilled to perform variety of work as contrary to

specialization of labor.
2. Flexibility: Business should be flexible to the changing and competitive needs of the customers’
demand, technological change. Business process is re-engineered to flexible structure.

What are the classical principles of organizational structure as per Henry Fayol?
Henry Fayol suggests that all organization should follow 14 guiding principles based on the principle of
hierarchy in order to function effectively and efficiently.
The principles are as follows
1. Division of work
2. Scalar chain

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 3. Authority and Responsibility
4. Unity of command
5. Unity of direction
6. Initiative
7. Centralization
8. Subordination of individual interest
9. Discipline
10. Order
11. Stability of personnel
12. Equity
13. Remuneration
14. Esprit de corps: Harmony and teamwork are essential to promote discipline and contentment.

Taylor’s model, scientific management:

o Human is an rational economic animal
o People respond to individual not groups
o People can be treated in a standardized fashion like machine

How the organizational structure can be communicated?

Organizational structure can be communicated in three ways that are as follows
1. Organizational charts: Pictorial description of the structure
2. Organizational manual: Details about organizational different positions and standard working
principles.
3. Job description: Duties, authority and responsibility etc.

What is the hierarchy of needs as suggested by Abraham Maslow/content theory?

Abraham Maslow (Motivation and personality, 1954) suggested a hierarchy of needs to explain the
motivation of individual.

1. Self-actualization need: It is concerned what people think about themselves. They feel whether
their lives are worthwhile and have any meaning.
2. Esteem need: People desire to have respect and esteem from others.
3. Social need: People want to belong to a group
4. Safety: Once basic needs satisfied then he moves to safety. Safety means physical safety,
security of employment etc.
5. Physiological needs: Person seeks to satisfy basic needs such as foods, shelter and clothing

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Explain McGregor’s model; X theory & Y theory.

X Theory:

1. People dislike work and avoid it where possible

2. People lack ambition
3. People dislike responsibility
4. Coercion, control and punishment are needed

Y Theory:

1. People like work

2. People have ambition
3. People like responsibility
4. Self actualization is the best reward

Define motivation.

Motivation is the degree to which people want certain behavior and choose to engage in them.

Explain Herzberg’s contents theory; hygiene factors and motivating factors.

Herzberg contents theory deals with two factors

Hygiene factors:

Hygiene factors can prevent dissatisfaction but cannot lead to motivated workers. The factors are as
follows

1. Company policies and administration

2. Supervision
3. Salary
4. Relationship with the other staff
5. Working condition

Motivating factors:

It can ensure both positive satisfaction and motivation. The factors are as follows

1. A sense of achievement
2. A sense of advancement
3. A sense of recognition
4. Challenging works

What is group? What are the stages of group development?

A collection of people with the following

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 o A common sense of identity
o A common aim
Stages of group development:
o Forming: purpose is defined
o Storming: member competes for chosen roles
o Norming: Norms is established
o Performing: Group is capable of performing in full potentials

How many types of business structure?

Business structure can be categorized into five

1. Simple business structure (entrepreneurial structure)

2. Machine bureaucracy structure (functional or bureaucratic structure)
3. Divisionalized business structure
4. Ad hoc business structure/ Matrix structure

What are the features of entrepreneurial structure/simple structure?

Entrepreneurial structure is most appropriate when there is one product or a group of similar product.

Features of entrepreneurial structure:

- Entrepreneur has specialized knowledge of product/service.

- Entrepreneur has total control over running of business.
Advantages:

1. Quick decision can be made

2. Goal congruence
3. Flexibility to change

Disadvantages:

1. It cannot expand beyond certain size

2. Lack of career structure for level of employees

What are the features of functional (Bureaucratic) structure?

Features of functional (Bureaucratic) structure:

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 1. Jobs are grouped by common features i.e. production and ranked in hierarchy mangers, supervisor
and employees etc.
2. Clear line of reporting and authority exists
3. Formal procedures and paperwork characterize this type of structure
4. The vertical flow of authority can go up and down throughout the structure.

Matrix Structure:

o It is characterized by vertical and lateral lines of communication

o It may be temporary i.e. for on- off contract

When appropriate:

o Complex/hi-tech industry
o Educational institution where the lecturer report both to subject head and course head

What is span of control? What factors influence the span of control?

Span of control:

Span of control is the numbers of people reporting to one person.

Factors influencing the span of control:

 Manager’s capabilities: The physical and mental limitation of a single manager to control the
people working under him.
 The nature of the manager’s workload: The more the non-supervisory work the narrower the
span of control and greater the delegation of authority.
 Geographical dispersion: Dispersed team requires more effort to supervise
 Subordinates’ work: If all individual subordinates do similar task, wider span is required; if group,
narrower span is desirable

What is centralized organization? What are the factors affecting the amount of centralization in a
business?

It is one where the decision making authority is concentrated at organizational apex.

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Factors:

1. The more it is authoritative, the more it is centralized

2. The more it is participative, the more it is decentralized
3. Sizes of the organization: if the sizes increase so does the decentralization.
4. Diversification: More diversified more decentralized
5. Ability of the management: the more able, the more decentralization.
6. Geography: the more spread, the more decentralization

What is contingency theory of Management Accounting?

There is no universally agreed management accounting control systems. Everything depends on the
situation or contingent factors.

Define the following

Tall Business: One which, in relation to its size, has a large number of hierarchical levels in management
because there is narrower span of control.

Flat Business: One which, in relation to its size, has a smaller number of hierarchical levels in
management because there is wider span of control

In what circumstances can you see that the disadvantage of incorporation outweigh the advantage?
[Interactive question]

o Where the sole proprietor and some partners have historically been used to taking all the risk and
rewards of business
o When they cannot share the control with other
o When they don’t like publicity and administration
o When the expense of audit is disproportionate to the benefit gained by gained by the business.

Mechanistic and organic business structure:

Mechanistic:

o It is stable
o It is suitable for slow changing environment

Organic:

o It is flexible and adaptive

o It is suitable for fast changing environment.

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 Chapter: Four
Business Strategy
What is business strategy?
A business strategy is a course of action with a specification of resource to achieve some objectives-(CIMA
Terminology).

A business strategy is concerned with

1. Long term direction

2. The resources at its disposal
3. The environment in which it operates
4. The return it makes to its stakeholders

What is strategic management?

A strategic management is a process of making decision on the scope of business’ activities, long term
direction and the allocation of resource to achieve the objective.

What are the formal approaches of strategic planning? /What are the levels of strategic
management?

1. Strategic analysis
2. Strategic choice
3. Implementation of choice
4. Review and control

What are the emergent approaches of strategic planning?

1. Strategic analysis
2. Strategic choice and implementation
3. Review and control

This approach is flexible to changing environment. It continuously evolves over the changes. Here the
strategic choice and implementation go at the same time. If one project is failure, then alternative emerges.

What are the stages of strategic planning?

1. Strategic analysis
2. Strategic choice
3. Implementation of choice
4. Review and control

The strategic planning carried out depends on whether the business takes a positioning-based view or
resource-based view.

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  Positioning-based view: The forces in an industry, sectors and markets are the most important
factors.
 Resource-based view: The business’s strategic capabilities are the most important factors.

What are the levels of strategy?

1. Corporate level:
 Determines the corporate mission and vision and strategies
 Decision to expand, close down or enter into a new market
 Investment decision
2. Strategic business unit:
 It relates to how a particular market is approached for example djuice of Grameen phone
 Bridges between functional level and corporate level
3. Functional(operational):
 To carry out the main function like operation, production, distribution, human resource
management, marketing etc.

What are the benefits and drawbacks of strategic management and planning? MJ-12

Benefits:

1) Ensuring coherent response to market and environmental forces

2) Making the best use of scarce resources
3) Harmony of objectives between different SBUs
4) Specifying milestone for achievement of goal and monitoring progress by stage
5) Improving stakeholder’s perception of business

Drawbacks:

1) Expense in term of money and time particularly in small business

2) The danger of creating bureaucratic structure that slows down the process
3) The danger of straitjacket approach discouraging opportunism
4) Lack of goal congruence

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Analyzing general Environment:

PESTEL analysis:

1. Political factors like govt. stability, regulation, taxation

2. Economical factors inflation, recession, interest rate, globalization, productivity etc
3. Social factors culture, social mobility, social perception, education etc
4. Technological factors like R & D policy, innovation
5. Ecological factors like sustainability issues, pollution, green issues
6. Legal factors like legislation, environmental protection, consumer right protection.

What is competitive (task) environment?

Task environment relates to a factor of particular relevance to the business such as competitors, customers
and suppliers of resources.

Analyzing competitive (Task) Environment:

Porter five factors analysis:

a) Bargaining power of suppliers

b) Bargaining power of customers
c) The threat of new entrant
d) The threat of substitute product
e) The rivalry among existing firms

What is value chain?

The sequence of business activities by which value is added to the product and services is value chain.

Porter’s value chain model:

Two types of activities

Primary activities:

1. Inbound logistic
2. Operation
3. Outbound logistic
4. Marketing and sales
5. Service

Support activities:

1. Procurement

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 2. Technological development
3. Human resource management
4. Infrastructure facility

What is supply chain management?

Optimizing the activities of business working together to produce the product and service is called supply
chain management.

What are the stages in the life cycle of a product?

Introduction:

1. Product enters into the market

2. Unit cost is high because of low production
3. The product is loss maker

Growth:

1. Sales sharply increase

2. Unit cost falls down
3. Product starts making profit

Maturity:

1. It is the longest period of the life

2. The rate of sales slows down
3. Profit is good

Decline:

1. Sales sharply falls down

2. Profit also falls down
3. Severe competition

What is BCG Matrix?

Boston Consulting Group developed a matrix to assess the product in term of potential cash generation and
cash expenditure requirements.

Market Share
Growth
Market

High Low
High Star Question mark
Low Cash cow Dog

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What is SWOT analysis? What are the purposes of such analysis?

A critical assessment of the strength weakness, opportunity and threat in relation to the external and
internal factors affecting the entity are SWOT analysis.

Here strength and weakness is internal; opportunity and threat is external.

The purpose of SWOT analysis:

1. To assist in the preparation of long term plan

2. To assess the viability of business in a new industry
3. To exploit the opportunity in a new industry

Stakeholders mapping, power and interest:

Power is the means by which the stakeholder can influence the objectives.

Sources of power

Internal source External Source

Hierarchy Control over strategic resources
Reputation Involvement in implementation
Relative pay External links
Knowledge Legal rights

What is mission statement? What information a standard mission statement should include?

A formal document that states the basic functions of business in society in term of how it satisfies its
stakeholders is called mission statement.

World’s Local Bank-HSBC

Mission statement is where the organization is now and what it is doing.

There is no standard format of mission statement. In general a mission statement includes the following
information

1. The purpose of the business

2. The strategies of the business
3. Values and policies
4. Standard of behavior

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What is Gap analysis?

Gap analysis looks at the gap between what the organization would achieve if it continued on its existing
course measured in term of profit.

New strategy can close the gap so that business can achieve the objectives.

Explain porter’s generic competitive advantages.

Porter believes in three competitive advantages

Cost Leadership:

1. Producing at a lower cost

2. Achieving economics of scale
3. Using latest technology

Differentiation:

1. Build up brand image

2. Particulars and special product features

Focus or niche strategy:

1. Concentrate one or more particular segment with a single product and service

How to evaluate corporate strategy?

Jhonson and Scholes set three criteria for evaluating corporate strategy.

Suitability:

Is the strategy suitable for the business operation?

2. Does it exploit strength

3. Does it rectify weakness
4. Does it satisfy business objectives

Feasibility:

Can the strategy be implemented?

1. Is there enough money

2. Is there ability to deliver goods and service
3. Does we have access to technology

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Acceptability:

1. Financial consideration
2. Customers
3. Government
4. Public

What are the levels of plan?

 Strategic plan: it sets out the general direction that will be taken into consideration to
achieve corporate strategy.
 Business Plan: What market to serve? How to serve the market? What finance is required
for that?
 Operational plan: It specifies what is expected for each function and what actions are
required to meet the expectation

As an articled student in chartered accountancy profession make your SWOT analysis.

Internal
Strong determination
Strength Laborious
Sound educational background

Weakness Finance constraints

External
Threat of market being narrower
Threat Opportunity cost
Severe competition
Far reaching prospect
Opportunity Financial solvency
Global career

What is resource audit and position audit?

1. Resource audit: It considers how well or badly the resources of the company are utilized.
2. Position audit: It is a part of planning process that examines the current position of the entity.

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What is SWOT analysis? What aspects of business should be analyzed?

SWOT analysis:

It is a critical assessment of strength, weakness, threat and opportunity in relation to its external or internal
sources affecting the entity to achieve its objectives.

The following aspects of the business should be analyzed

1. The value chain

2. The supply chain
3. The resources and competencies using resource and position audit
4. Its product and market

Outline how a restaurant can add value?

o Introducing automated systems of production

o Introducing particular types of cuisine i.e. Japanese, Thai, Chinese, and Indian etc.
o Ensuring guaranteed quality of raw material
o Decorating sumptuously for customers who value for atmosphere

Publishing business after being qualified as chartered accountants [interactive question]

o Political factors: Regulation of tuition by ICAB

o Economical factors: Impact of interest rate
o Social Factors: Acceptance of study material and method
o Technological factors: How are we going to produce study material either electronically,
hardcopy or softcopy
o Ecological factors: We are providing our service in a green way
o Legal factors: The health, safety and employment issues

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 Chapter: 6

Introduction to Financial Information

Why do business and manager need financial information?

1. Planning:
a) How to implement necessary steps to achieve the objective
2. Controlling
a) To compare the actual result with the budgeted result
b) To determine the variance
c) To take corrective action
3. Recording transaction:
a) Recorded transaction may be produced as evidence
b) There may be legal necessity i.e. accounting and auditing purpose
4. Performance measurement
a) Comparison of actual result with the plan
5. Decision making
b) To make decision on the basis of information.

What are different types of information?

1. Planning information: It helps people in the planning process

2. Operational information: It helps to carry out day to day activities
3. Tactical information: It helps in short term issue and opportunity
4. Strategic information: It helps in long-term decision making

What are the qualities of good information?

The acronym is ACCURATE

Accurate:

 There should be no typographical errors

 The figure should be added up

Complete:

 Information should include everything that it should include

Cost-benefit:

 The benefit should outweigh than the cost incurred to achieve that benefit

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User-targeted:

 The information should be targeted to the users

Relevant:

 Information is relevant if it makes difference in decision making

Authoritative:

 The sources of information should be reliable

Timely:

 Information should be served when it is needed

Easy to use:

 Information should be presented clearly.

What are the sources of information?

There are two types of sources

Internal sources:

 The accounting records

 Human resource and payroll records
 Machine logs
 Staff
 Time sheet in service business

External sources:

 Internet
 Government
 Newspaper and magazines
 Advice or information bureau
 Research and development

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What criteria should information processing meet?

The acronym is CATIVA

a. Completeness: Everything that needs to be processed should be processed

b. Accuracy: Information should be processed accurately so that no error remains in processed
information
c. Timeliness: Processing should occur in line with the information needs
d. Inalterability: Once processed, no alteration is made
e. Verifiability: The sources of data should be verified
f. Assessability: The effectiveness of the processing should be open to scrutiny so that its quality can
be judged.

Define the following

 A systems
 A business systems
 Information systems
 Information technology

A. Systems: A set of interacting components that operate together to accomplish a purpose

B. A business systems: A collection of people, machines and methods organized to perform some
specific function
C. Information systems: All systems and procedure involved in collection, storage, production and
distribution of information
D. Information Technology: The equipment used to capture, store, retrieve and transmission of
information.

What is Transaction Processing Systems?

A system that performs records and processes routine transaction is called Transaction processing
Systems. It is designed only for routine transaction

What are the qualities of secured information systems?

The acronym is ACIANA

1. Availability of information
2. Confidentiality of information
3. Integrity of information
4. Authenticity of information
5. Non-repudiation of information

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 6. Authorization

What is Management Information System?

System that converts data from the internal sources into information in the form of summary report,
exception report is called management information systems. It helps the manager in effective and timely
decision making, directing and controlling the activities for which they are responsible.

What is Expert system? When the expert systems are most useful?

Expert systems allow user to benefit from expert knowledge and information. The systems consist of a data
base holding specialized data about what to do, how to interpret in a given circumstances.

It is most useful when

 The problem is well-defined

 The expert defines the rules that can solve the problem
 The problem cannot be solved by conventional transaction processing systems

What are the applications of expert systems?

1. Diagnostic systems
2. Surveillance
3. Project management
4. Forecasting
5. Legal and tax advice

Why is information security important? How to ensure the security of information?

Right information in a right time is all about success of a business. Information is valuable commodity so it
should be kept secured. Security of information is important because

Unauthorized access, modification of information, deliberate or accidental disclosure of information can

make the business vulnerable to survive.

How to ensure security of information?

1. Prevention: It is impossible to prevent all threat so prevention is better than cure

2. Detection: Detection technique is combined with prevention technique
3. Deterrence: Personnel making misuse of systems should be identified and penalized
4. Recovery procedure: If the threat occurs, it consequences can be contained
5. Threat avoidance: Changing the design of the business having potential threat.

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Who are the users of financial information?

Present and potential investors:

 The risk and return of investment

 Ability to pay dividend

Employees:

 Assess the stability and profitability of the business

 Ability to pay remuneration, job opportunity and retirement benefits

Customers:

 Ability to be in operation
 Whether they are supply chain partners

Suppliers:

 Assess the likelihood of being paid when due

Lenders:

 Assess the solvency and liquidity to pay short term and long term debt with interest

Government and its agencies:

 The allocation of resource

 Regulating the activities
 Protecting the public interest
 Assess the taxation income

When the financial information is used?

Financial information is used when

 To make economic decision

 To assess the management stewardship

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What is the information financial position contains?

 The economic resources it controls

 The financial structure
 Liquidity
 Solvency
 Adaptability

What is the information financial performance contains?

 The ability of the business to generate cash using its existing resources
 The ability to how effectively employ the resources
 The potential changes in the business resources the business is likely to control

What are the objectives of financial statements?

The main objectives of the financial statements are to

 Provide information about the financial position, performance, changes in equity of the entity
which is useful to a wide range of users in making economic decision.
 Show the result of management’s stewardship of the resource entrusted to them.
 Assist the users in predicting the cash generating ability of the entity.

What are the qualitative characteristics of accounting information? (CURR)

 Comparability: Information should be produced in a consistent basis so that information can

be compared with the information of the previous period and with the information of the other
entities.
 Understandability: Information is to be produced so that everybody can easily understand it.
The users are assumed to have sound knowledge of business and economic activities.
 Relevance: Accounting information is relevant where it helps the users to evaluate past,
present and predict future events. The relevance of information is affected by its nature and
materiality
1. Materiality
2. Consistency
 Reliability: Information is reliable when it represents faithfully and when it is free from errors.
For this information should be prudent, complete, and neutral.
1. Completeness
2. Prudence
3. Substance over form
4. Neutrality

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 5. Faithfull representation

What are constraints on reliability and relevance of financial information?

 Timeliness: Timely and reliable. The overriding consideration is how best to satisfy the decision
making needs of the users
 Balance of cost and benefit: The benefit derived from the information must be greater than the cost
incurred.

What are the limitations of financial information?

 Conventionalized representation: Financial information are standardized and aggregated

 Backward looking of historical cost
 Omission of non-financial information such as opportunities, prospects, management policies and
narratives description

What are the effects of poor financial information?

Information is said to be poor if

 It does not meet the needs of the users

 It fails to display the qualitative characteristics of information

Effects of poor financial information:

 It undermines the integrity of financial information

 It fails to serve the public interest

How to implement physical access control?

1. Personnel: personnel including receptionist, security guard can help in controlling physical access.
2. Doors locks can be used where the frequency of use is low
3. Locks can be combined with
 Keypad system: to enter code for access
 Card entry systems: to swipe the card for access
4. Intruder alarm can be used

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Security control in the systems:

Security controls helps to prevent

1) Human error
 Entering incorrect transaction
 Processing wrong files
2) Technical error such as malfunctioning hardware or software
3) Deliberate action such as fraud
4) Commercial espionage
5) Malicious damage

Integrity control in the systems:

1) The original input is to be controlled in such a way to ensure that the output is correct and complete
 Data verification: The sources of data is to be matched with the data entered
 Data validation: It ensures that data entered is not incomplete and unreasonable such as
digit check, range check and limit check
2) Back up or archive strategy
3) Password: A logical access systems
4) Personnel selection; key persons will have the access
5) Segregation of duties

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 Chapter: 5

Introduction to risk management

The definition of risk given by COSO

The possibility that an event will occur and adversely affects the achievement of objectives is called risk.

Opportunity: The possibility that an event will occur and positively affects the achievement of objectives

How far does risk affect a business achieving it objectives?

Risk affects adversely the achievement of objectives of an organization. Pure risk describes the possibility
that something will go wrong. Speculative risk describes the possibility that something could go right than
expected on which the business flourishes.

It is helpful for business to think about in the context of managing risk in achieving its objectives.

What is the difference between risk and uncertainty?

Risk Uncertainty
The possible variation in the outcome from what is The inability to predict the outcome from an activity
expected to happen due to the lack of information.
Risk can be expressed in term of probability Uncertainty cannot be expressed in term of
probability
Risk can be minimized or removed Uncertainty cannot be removed
In case of risk, information is available In case of uncertainty, information is not available.
Risk can be quantified Uncertainty cannot be quantified

What are the risks generally faced by business?

1. Risk that trade condition might be poor for example sales fall, cost increase etc.
2. Risk of inadequate control that may result in through inefficiency
3. Risk of financial nature i.e. the way in which the business is financed

What is upside and downside risk?

Upside risk:

The risk that something will go right is called upside risk. For example, Budgeted profit is 10 crore, actual
profit is 12 crore.

Downside risk:

The risk that something will go wrong is called downside risk. For example, Budgeted profit is 10 crore,
actual profit is 8 crore.

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What are various types of financial risk?

Financial risk:

1. Credit risk: Credit risk is the risk that the customers are not going to pay.
2. Market risk: Market risk is the risk of losing the markets.
3. Liquidity risk: Liquidity risk is the risk of unexpected shortage of cash.
4. Default risk: It is the risk that debtor will not pay.
5. Foreign exchange risk: It is the risk due to the changes in the foreign exchange rate.

What are various types of operational risk?

Operational risk:

It is the risk of direct or indirect losses arising from inadequate internal processes, people and systems.

Process risk: It is the risk that business processes may be ineffective.

People risk: It is the risk of insufficient staff in the organization

Systems risk: It is the risk that arises from the information and communication systems such as systems
capacity, data availability, or data integrity.

Legal risk: It is the risk of loss for the fact that contract cannot be legally enforced.

Event risk: It is the risk of any event that may have serious far-reaching impact on the business.

What is risk management? How to manage the risk?

Risk management:

Risk management is a process of identification, analysis and economic control of risk that may threaten the
assets or earning capacity of a business.

The purpose of risk management:

1. To minimize cost effectively the business’s exposure to risk ;

2. To reduce the probability of risk occurring in the first place and then if they do occur
3. To limit the impact they will have on business

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How the risk is measured?

Risk is measured in term of exposure, volatility, impact and probability.

1. Exposure: It relates to nature of the organization. Some organization by nature is more prone to
risk exposure. For example aircraft, the chance of being injured in a fashion industry, the risk of
obsolescence.
2. Volatility: How is the factor to which the organization is exposed volatile?
3. Impact: It measures the amount of loss if the undesired event occurs?
4. Probability: It is how likely a particular event is going to happen?

When is risk management necessary?

1. When there is legal requirement; you are required by law to insure your car
2. When there is licensing or regulatory requirement
3. Listed Banking Company to follow risk based management approach as a requirement of
Bangladesh Bank.
4. Listed company in the US has to comply with Sarbanes Oxley act 2002.

What are the risks management processes?

1. Risk identification: Risk is identified through brain storming or using the past experience to
determine the risk exposure.
2. Risk analysis: It is assessment and measurement of risk. It considers how volatile the factors is,
what probability an event has.
3. Response and economic control: Risk can be avoided, reduced, shared or simply accepted.
4. Monitoring and reporting: It is continuous process that if a risky event occurs then the action is to
immediate review of risk management. So it is a form of control.

What are the possible responses to risk?

1. Risk avoidance: Risk can be avoided by not doing the risky activities. This may not be an option;
first we should consider do we need to do risky activity at all?
2. Risk Reduction: Risk can be reduced doing the activity and minimizing the probability of the event
and the impact it has is as small as possible by monitoring the market and environmental
phenomenon.
3. Risk Sharing: Risk can be shared by transferring it to hedge and insurance.
4. Risk Acceptance: If the other option is not viable, risk can simply be accepted.

How risk can be minimized and shared?

What are the purposes of risk management?

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 1. To minimize cost effectively the business’s exposure to risk
2. To minimize the probability of risk
3. To minimize the impact they have on the business

Crisis: An unexpected event that threatens the well being of the business, disrupts the operation of the
business that affects customers, suppliers, employees and other stakeholders is called crisis.

Define crisis management. What are different types of business crisis?

Crisis management is a process of identifying a crisis, planning a response to the crisis, confronting and
resolving a crisis. For example, natural disaster and terrorism have been seen to have an extreme effect in
the context of global trade.

Types of business crisis:

1. Financial crisis: Short term liquidity, cash flow problem and long term solvency problem.
2. Public relation crisis: Negative publicity that could adversely affect the success of business.
3. Strategic crisis: Changes in the business environment that call the viability of the business into
question. For example, Technology makes the product old and obsolete.
4. Industry crisis: Strike, break up of major supplier
5. Business crisis: Takeover, death of key personnel

How to address the crisis?

Crisis happens when the risk come to a reality.

a. Crisis prevention:

Business should prevent crisis by

1. Planning ahead
2. Projecting the likely outcome
3. Avoiding the decision having the potential to turn into crisis.
b. Contingency planning:

Business should make a contingency plan for the worst and/or most likely to occur and staff to be trained
up accordingly of how to implement it in the event of a crisis.

c. Effective action in the event of crisis:

1. Assess objectively the cause of crisis
2. Determine whether the cause has a long term or short term effect
3. Project the most likely course of actions
4. Focus on activity that will mitigate the impact
5. Look for opportunity.

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What should be the course of action in the event of public relation crisis?

1. To prevent or counter spread of negative information

2. To use media to counter the arguments

Disaster:

The business operation, or significant part of business operation break down for some reasons leading
potential loss of equipment, data and fund.

What is disaster recovery plan? What are the contents of disaster recovery plan?

Disaster recovery plan: Any systems that have suffered a disaster must recover as soon as possible so
that further losses are not incurred.

 Standby procedure: Some procedures are performed while normal service is disrupted
 Recovery procedures: The causes of breakdown has been identified and corrected
 Personnel management: To ensure that the above are implemented properly.

The contents of disaster recovery plan:

o Definition of responsibility: Each with defined responsibility

o Priority: Important tasks are prioritized
o Communication with the employees
o Public relation

What are the responses and controls based on sharing or reduction of disaster?

o Fire can be countered by fire Extinguishers and training to the staff of what to do on the occurrence
of fire
o Flooding can be countered by water proof ceiling and floors
o Threat from terror can be countered by physical access control
o IT collapse can be countered by recovery systems and backup plan.

How to calculate the expected return?

Expected return is the weighted average return, probability being the weight under different scenarios.

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What are the risks for the investors?

1. Risk for the lender: risk of insolvency whether the money invested will be recovered with interest.
2. Risk of shareholders:
a) Risk of no dividend
b) Risk of low dividend
c) Risk of fall in share price
d) Volatility of return

What do you mean by risk appetite?

The extent to which the business is prepared to take the risk to achieve the objectives is risk appetite.

What is the approach of risk appetite?

1. To decide what the business wants to achieve

2. To decide what the business’s risk appetite
3. To find strategies to achieve the objectives that does not involve risk more than the business is
willing to accept.

What are the attitudes towards risk?

1. Risk averse
 Investors want to avoid risk
 Investors are satisfied with lower secured return
2. Risk neutral: Investors try to take risk as per the expected return.
3. Risk seeking: Investors will take higher risk to achieve higher return.

Why was COSO established?

COSO (Committee of sponsoring organization)

The Committee of Sponsoring organization of US Treadway commission was established to continuously

improve the quality of financial information.

It deals with three aspects

 Corporate ethics
 Corporate governance
 Internal control systems

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 Types of Budgeting:

1. Incremental budgeting: The budget that is based on the past year experience is called
incremental budgets.
2. Zero Based Budgeting: It requires that all activities are justified and prioritized before the decision
is taken relating to the amount of resources allocated to each activity. The principal notion is that
instead of using current year as a base, all budgets must start from very beginning or zero.
3. Flexible budgeting: Adjusting the budget for a period to reflect actual level of activity in that
period.
4. Rolling Budgeting: As each month goes by, the budgets for the month ahead are reviewed and
revised if necessary so that they remain relevant for the remainder of the budget period.

What are the purposes of budgeting?

1. To guide the manager on how to achieve objectives

2. To allocate the resources
3. To coordinate the activities
4. To set target and allocate responsibility
5. To compel planning
6. To evaluate performance

What are the influences on the business’s pricing policies?

1. Cost: The price must be above the cost

2. Competitor: The cost of the product must be compared with those of competitors
3. Customer: How far the demand for the product is changed by the change in the price of the
product.
4. Corporate objectives: To maximize the profit at an acceptable level of risk, to achieve the target
revenue figure etc.

What does the finance function do?

Recording financial transaction:

1. To record the transaction either on credit or cash

2. To enter the summaries of transaction to permanent record
3. To ensure that the resources are controlled properly

Management accounting:

1. To provide information for manager for decision making, planning and controlling
2. To analyze capital investment decision
3. To determine sales and transfer price

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Financial reporting:

1. To prepare financial statements for the external purpose

2. To report to the tax authorities such as NBR
3. To report to regulatory authority

Treasury management:

1. To manage short term investment

2. To deal with the cash deficit and surplus
3. To analyze working capital
4. Preparing and reviewing cash budget

What are the costs for decision making?

1. Future cost: Future cost is the cost yet to incur. Future cost is the relevant cost for decision
making.
2. Sunk cost: The cost which had already been incurred and cant not be changed by present and
future decision is called sunk cost
3. Unavoidable cost: The cost which cannot be avoided or saved whether a particular course of
action is taken or not
4. Avoidable cost: The cost which can be saved taking a course of action
5. Marginal cost: The additional cost of extra one unit of product
6. Opportunity cost: Opportunity cost is the cost of opportunity lost. It is selecting one course of action
over sacrificing another course of action.
7. Relevant cost: The cost which makes difference in future decision is called relevant cost
8. Irrelevant cost: The cost which does not make any difference in future decision making is called
irrelevant cost

9. Controllable cost: The cost which can be controlled by the management decision is called
controllable cost
10. Uncontrollable cost: The cost which cannot be controlled by the management decision is called
uncontrollable cost such as general level of inflation.

What makes the information valuable?

Information is valuable when benefit exceeds the cost

1. Source of information: If the source is renowned and respected by all then its quality is high such
as information form BBC is reliable
2. Ease of assimilation: Information should be capable of being presented by color, graphs, sound
and movement
3. Accessibility: Information should be made available in an easily accessible place

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Who uses performance measures?

o Investors
o Lender
o Customers
o Employees
o Suppliers
o Government and its agencies

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 Chapter: 9

Working capital management and Treasury management

Working capital comprises of

1. Receivable
2. Inventory
3. Cash
4. Payable

Working capital and net working capital are not same

Working capital is the investment in current assets.

Net working capital= (Current assets-Current liabilities)

Working capital ratio= Net working capital/Current assets

Remember: CA+NCA-CL=Capital Employed (CE)

What is trade off?

Liquidity is to turn the cash round as soon as possible whilst ensuring that profitability is not undermined is
called trade off.

Profitability Vs Liquidity:

Liquidity determines the ability of business to pay short term obligation. It is how quickly the business can
turn its working capital into cash. It is to be done in such a manner that the profitability is not undermined.
This is called trade off. The component of working capital is to be managed by trading off liquidity and
profitability.

What actions can be taken to solve the liquidity problem?

1. To reduce the inventory holding period

2. To reduce the collection period
3. To increase the payment period

What is good practice in receivable management?

1. Look after key account: It often happens that 20% customers represent 80% debt that requires
special attention.
2. Managing Time Scale: To reduce the time between placement of order and receipt of cash from
customers
3. Issue credit note promptly

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 4. Pay commission to the sale person on cash collected
5. Set target for receivable days and percentage of overdue accounts

Treasury Management:

Business should trade off between cost of running out of cash and cost of holding cash that is
known as treasury management.

Cost of running out cash vs. cost of holding cash

1. Cost of holding cash:

Cash either in float or in current assets is the opportunity cost of what else could be done with the money.
Cash in hand is an idle asset that earns little or nothing. If the funds were put into investment it would earn
profit.

2. Cost of running out of cash:

 Loss of settlement discount
 Loss of goodwill with supplier
 Poor industrial relation
 Creditor petitioning for the winding up of the company

What are the reasons of holding inventory?

Though inventory is idle assets, there might be reasons to hold inventory.

The reasons are as follows

o To meet seasonal demand

o To ensure continuity of production
o To avail quantity discount ordering more
o To reduce ordering and transportation cost

What are the aims of cash management?

1) Accurate cash budgeting and forecasting

2) Planning short term finance i.e. Bank OD, short term bank loan, bond etc
3) Planning investment of surplus when necessary i.e. treasury bill, deposit, bonds etc
4) Cost efficient cash transmission: clearing house automated payment systems, bank automated
payment systems
5) Working capital management

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 6) Investigate about cash deficit and cash surplus

What are the underlying reasons for holding cash?

The reasons are as follows

1) Transaction motive: To meet day to day transaction i.e. purchases, salary payment etc.
2) Finance motive: To repay the loan and to purchase non-current assets
3) Precautionary motive: To give a cushion against unexpected expenditure
4) Investment motive: To take the advantage of market opportunities

What do you mean by overtrading? How can you avoid this in Business?

Overtrading happens at the very start of the new business as

1. Short credit period allowed by the suppliers who insists early payment
2. Long credit period allowed to the customers to enter into the market

This can lead the operating cycle out of balance. This problem can be avoided by sufficient short term
financing over the initial period.

Describe aggressive and defensive working capital. If a company moves from a defensive working
capital policy to an aggressive working capital policy, what will be the changes in risk and return?

Aggressive company:

 Current ratio is far less than1

 More short term credit than equity in capital structure
 High return at the cost of greater risk
 High profitability low liquidity

Defensive company:

 Current ratio is far more than 1

 Small short term credit
 Low risk low return company
 High liquidity low profitability

Average company:

 Current ratio is near about 1

 Healthy capital structure
 Trade off between profitability and liquidity

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 Chapter: 11

The regulation of accountancy profession

Why regulation of accountancy profession is necessary?

Regulation is necessary for the following reasons

1. To protect the interest of shareholders and public at large

2. To adopt and implement accounting standards
3. To deal with professional misconduct filed by the client
4. To regulate the members who are in public practices

What is oversight mechanism? Who are the participants of oversight mechanism?

Society no longer assumes good intent and action but requires proof. Any form of regulation requires an
oversight mechanism to ensure that it is achieving what it sets out to achieve. In case of self regulation it is
important that oversight mechanism be independent.

Key participants are as follows

 The government
 The regulators
 The member in profession
 The member in public

What are the features of oversight mechanism?

o Independence
o Knowledge of the profession
o Authority
o Good communication
o Sufficient resources

What are the core principles of IFAC’s code of ethics?

 Integrity: Integrity is being honest and straightforward

 Transparency
 Expertise

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Who can complain? What are the ground of complain?

Anyone can complain including

o Clients
o RJSC
o SEC
o Bangladesh bank

Grounds of complain:

o On the breach of contract

o Departure from guidance
o Bring the ICAB into disrepute

What is the ICAB’s complaints and disciplinary procedure?

The procedure for most complaints as follows

 Conciliation: When a client finds a problem with the member, firm or student then the first step is
conciliation. Conciliation means to find out a practical solution.
 Investigation by IDC : If not solved by conciliation; it is dealt with IDC
 Disciplinary proceeding: IDC carry out disciplinary proceeding like warning the member or
student with a penalty of Tk. not exceeding 10000, suspension of membership not more than 5
years etc.

How the accountancy profession is regulated in Bangladesh?

 By the direct regulation of government via legislation
 By the different regulation bodies established by the government (delegated
legislation)
o RJSC
o SEC
o Bangladesh Bank
 By the profession and the industry itself
 By the combination of the method

Write short notes on

1. CAPA
2. SAFA
3. IFAC

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CAPA:

1. CAPA stands for Confederation of Asian and Pacific Accountants

2. It was established in 1976
3. Largest regional accountancy body
4. It has 34 member institute

SAFA:

1. SAFA stands for South Asian Federation of Accountants

2. It was established in 1984
3. Apex accountancy body in SAARC region
4. It has eight member institute

IFAC:

IFAC stands for International Federation of Accountants. It works for the development of the accountancy
profession. It has 2.5 million members worldwide. It has initiated convergence project of accounting
standards between IASB and FASB.

What is governance?

Governance is the system by which the companies are controlled and directed. Governance incorporates
the concept of ethics, risk management, protection of the interest of stakeholders and extending way
beyond concept the management.

What is corporate governance? What are the objectives of the corporate governance?

Corporate governance is a set of relationships between the company’s management, BOD, Shareholders
and other stakeholders that provide a structure through which the objectives of the company are set,
attained and monitored. -OECD, Principles of corporate governance

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There are four perspectives of corporate objectives

A. Corporate perspective:
 To maximize the wealth of the shareholders conforming to the rules of the society.
B. Public policy perspective:
 To meet the objectives of the shareholders, stakeholders and the public, at large.
C. Stakeholders perspective:
 To ensure effective and efficient use of resource.
 To align the interest of shareholders and companies with those of stakeholders.
D. Stewardship perspective:
 To ensure that the directors act in the best interest of the company.

Why corporate governance is needed?

1. To protect the interest of the stakeholders

2. To promote transparency and accountability
3. To prevent systematic fraudulent activities by the management
4. To prevent corporate scandal like Enron, WorldCom, Parmalat etc.

What should be the roles of audit committee as per SEC corporate governance dated 3 July, 2012?

1. To oversee the financial reporting process

2. To monitor the choice of accounting policies and principles
3. To monitor the internal control risk management
4. To monitor the adequacy of internal audit functions
5. To oversee hiring and performance of external auditors
6. To review the management letter/letter of internal control weakness
7. To review along with the management the annual financial statements before the submission to the
board for approval
8. To review along with the managements the quarterly, half yearly financially statements before the
submission to the board for approval

What are the contents of code of corporate governance?

The contents are as follows

Board of Directors:

 The member should not be less than 5 and more than 20

 1/5 must be independent directors
 The chairman and CEO must be different person
 Directors’ report to the share holders

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Chief financial officers, head of internal audit and company secretary:

 The company shall appoint CFO, head of internal audit and company secretary
 The board will define the responsibilities and duties of them

Audit committee

 The company shall have audit committee as a sub-committee of BOD.

 The committee will consist of at least 3 members having one independent directors
 The board select one independent member as chairman of the committee
 The company secretary will be secretary of the committee
 The chairman should present in the AGM
 The quorum of audit committee should not consist without a independent directors

External auditors:

The company shall not engage its external auditors in the following service

 Appraisal or valuation service

 Financial information systems design and implementation
 Actuarial service
 Broker dealer service
 Book keeping service etc.
 Internal audit services

Directors Reports to the shareholders:

o Industry outlooks and possible future development
o Segment wise and product wise performance
o Risk and concern
o A discussion on cost of goods sold, gross profit and net profit
o The responsibility and fair presentation of financial statements lie with management
o BAS/IAS/BFRS have been followed in preparation of financial statements
o Proper books of accounts is maintained and kept by the company.

What is Sarbnes Oxley Act, 2002? Why Sarbox was passed?

Sarbanes Oxley act is a piece of US legislation that has had global reach. Under sarbox, the CEO and CFO
have explicit responsibility of financial reports, internal control, prevention of fraud and disclosure on
significant changes at a real time basis.

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Why passed Sarbox?

Sarbox was passed following the Enron and WorldCom scandals in 2002

1. To ensure corporate responsibility, corporate reporting, internal control, external audit and
prevention of frauds.
2. To control creative accounting
3. To disclose off-balance sheet transaction and other relation appropriately

Define corporate responsibility of financial reports.

The corporate responsibility of financial report lies with the management. The CEO and CFO will certify to
the board that they have reviewed the report and to their best knowledge and belief that

1. The statements do not contain any materially untrue information

2. The statements give true and fair view of the company’s affair and in compliance with accounting
standards and applicable laws

Submission of inaccurate certification may lead to fine up to $ 5 million plus prison term of up to 20 years.

What is best practice on corporate governance?

Apart from SEC order, SAFA has adopted best practice on corporate governance on September, 2005

Directors:

1. Effective composition of board

2. Division of responsibility of the chairman and CEO
3. Information for professional development for the board
4. Performance evaluation of the board

Remuneration:

1. Remuneration committee
2. Nomination committee

Accountability/audit:

1. Audit committee
2. Disclosure on share trading
3. Financial reporting and annual report

Relation with shareholders:

1. Right of shareholders

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What is meant by good practice in corporate governance? (Confusion be cleared)

Good practice in corporate governance is concerned with

o Disclosure of information
o Judging the performance of directors and stewardship
o Reducing the potential for conflict
o Reconciling the interest of shareholders and directors

Give example of at least 5 elements that support good practice in corporate governance (ICAB)

1. Board of directors
o Executive directors: Dependent of the company
o Non executive directors: Independent of the company
o Committee of the board of directors
2. Senior management
3. Shareholders
4. Internal auditors
5. External auditors

What are the possible structures of Board of directors?

There are two types of boards

Unitary board: It is responsible for both the management and reporting to the shareholders via financial
statement and shareholders meeting. It is found in UK statue

Supervisory board: The board is split between two parts

Managing board: Solely responsible for the management of the company

Supervisory board: Independent separate board elected by the shareholders and the employee.

Write down 5 principles given by OECD. (Organization of Economic Cooperation and Development)

1. Promoting transparent and efficient financial market

2. Protecting shareholders’ right
3. Ensuring equitable treatment of all shareholders including minority shareholders and
foreign shareholders
4. Ensuring timely and accurate disclosure
5. Recognizing the right of stakeholders established by laws

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What is statement of principle by ISC (Institutional Shareholder Committee)?

Statement of principle is the principle in which the institutional shareholder engages a dialogue with the
companies based on mutual understanding of the objective of the company. The principle includes

2. Set out the polices on how best to discharge their responsibility

3. Monitor the performance of the company in which they hold securities
4. Intervene whenever necessary
5. Evaluate the impact of their engagement

What is the role of Bangladesh Bank in promoting good corporate governance?

Bangladesh Bank is responsible for promoting high standards of corporate governance. It aims to do so by

1. Maintaining financial institution act 1993 and promoting its widespread application and
enforcement.
2. Influencing SEC, BEI and ICAB corporate governance development.
3. Encouraging shareholder’s engagement.

Ethical audit:

Ethical audit are now conducted by many companies to ensure whether the code of ethics are followed
effectively as intended and to improve transparency and accountability.

How can the ethical culture be promoted?

1. Leadership from the board of directors

2. Code of ethics and business conduct
3. Policies and procedures to support ethical behavior

What are the roles of external auditors in respect of corporate governance?

The corporate governance lies with the responsibility of directors and management. The roles of the
external auditors are to oversee whether the requirements imposed by SEC are complied or not.

As well as the annual financial statements, how far the board’s responsibility to provide balance
and understandable financial reporting extend?

It extends as well to interim report, other price sensitive public reports and report to regulators.

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What is market?

Market is a situation or network where the potential buyer and seller come together for the purpose of
exchange.

What is market mechanism?

The interaction between demand and supply is called market mechanism which determines the price of a
product in the market.

What is demand?

The quantity of goods that the potential or existing buyers would buy at a certain price level is called
demand.

What are demand schedule and demand curve?

Demand schedule is the different combination of different goods demanded at various hypothetical prices.
When the demand schedule is graphically presented then it is known as demand curve.

What factors determine the demand for a particular product?

1. Price: In most of the cases, the higher the price the less the quantity demanded other thing
remaining constant.
2. Substitute goods: Substitute goods are the alternative to each other. An increase in demand of one
goods will decrease the demand of other goods. If the demand for Pepsi increase that will
decrease the demand for coca cola. If the demand of perishable goods increases then the demand
for freeze will also increase.
3. Complementary goods: Complementary goods are bought together. An increase in demand of one
product will increase the demand for other products. Meat and Halim.
4. Inferior goods: Goods whose demand eventually falls even the income increases is called inferior
goods.
5. Fashion: If the fashion increase then the demand for goods increases
6. Expectation: if people expect that the price of certain product will increase the demand for the
product increases for the short term creating excessive demand for the product.

Why demand curve slopes downward?

Demand curve slopes downward for the following reasons

1. A fall in price of certain goods makes it relatively cheaper to afford the goods compared to other
goods so expenditure shifted to the goods whose price falls.
2. People with a lower income can afford the cheaper goods. So the relative market size increases.

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What is cross elasticity?

Responsiveness of demand of one goods to changes in the price of other goods.

What is supply?

Supply is the quantity of goods that the existing or potential producers are willing to produce at a certain
price level other thing remaining constants.

What is price elasticity of demand?

How far the demand for a product will increase in responsive to the changes in price is called price
elasticity of demand

PED= Changes of quantity demanded, as a percentage of original demand/changes in price as a

percentage of original price.

We have to ignore – sign in calculating the PED.

1. If PED> 1, Price is elastic

2. If PED< 1 Price is inelastic
3. If PED=0 Price is unit elastic

What is income elasticity of demand?

How far the demand of a product will go if there is a change in household income is called income
elasticity.

IED= Changes in demand as a percentage of original demand/Changes in income as a percentage of

original income.

What is market structure? What are different types of market structure?

Market structure:

A description of the number of buyers and suppliers in a market for a goods and their relative bargaining
power is called market structure.

Perfect competition: Perfect competition is characterized by (Often is seen as ideal state)

1. Many small buyer and seller who individually cannot influence the market price
2. No barrier to entry or exit
3. Perfect information in the markets
4. Homogenous products

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 5. No collusion between buyer and seller

Monopoloy: Monoploy is characterized by

1. One dominant suppliers

2. Many buyers
3. Barriers to entry

Monopolistic competition: It is characterized by

 Many buyers and seller

 Few barriers to entry
 Some product differentiation
 Some customers royalty
 Branding of product to achieve this differentiation

Is perfect competition (free market) the best structure?

The following arguments are put forward by the advocates of free markets

1. Free market is efficient: Suppliers and buyers react quickly and fairly to the changes in market
condition in making output and purchase decision.
2. Fee market is impersonal: Price and output level are arrived as a result of numerous decision by
the consumers and suppliers and not as the results of regulation.
3. The forces of demand and supply will result in efficient allocation of resources

Free markets are often seen efficient in resource allocation. Efficient in the context of what?

1. Social efficiency: Social efficiency is achieved on what goods to produce taking full account of
externalities.
2. Allocative efficiency: Allocative efficiency is achieved when goods demanded by the consumers
are produced at a minimum cost.
3. Technical efficiency: Technical efficiency is achieved when goods are produced using minimum
amount of resources.
4. Productive efficiency: Productive efficiency is achieved when the factors of production are
organized in such a way that the cost of production is at its average point.

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What is market failure? What are the reasons of market failure?

Market failure:

Market failure is a situation where the free market mechanism fails to produce the most efficient allocation
of resources.

Reason of market failure:

1. Market imperfection: One or few suppliers exerting the market power

2. Externalities: External cost and benefit
3. The existence of public goods that are gained by the third parties
4. Economic of scale: Large scale production will lower unit cost which is not matched by price
reduction.

What is free rider?

Taking the advantages of the services without contributing to its cost is called free riders.

For example, customers in a café are entertained by the professional musician who is hired by the café.
The customers benefit from the entertainment as they pay for it. At the same time, there are others in the
café who do not pay for the service they got. They are free riders

What is externality?

Externality is external cost and benefit. Less formally, externality is the external cost and benefits which
market mechanism fail to take into account because market responds to purely private signals.

What is economic of scale? What are the reasons of economic of scale?

Large scale production will lower per unit cost of production that is known as economics of scale.

Reasons of economic of scale:

1. Specialization of Labor: Labor forces are specialized in individual task where they can excel in.
But in a small company, a person performs variety of tasks. Jack of all trade masters of none.
2. Division of labor: Division of labor means work is divided among several persons to perform. For
example in building construction, there are Laborer, brick layers, plasters, plumber, electrician etc
3. Large and more specialized machinery: It facilitates in large scale production in cost effective
manner.

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What are public goods?

In case of public goods, the consumption of goods by an individual or a group cannot significantly reduce
the amount available for others. National defense is the best example of public good.

o Giffen goods: There is an income effect. Rises in the price goods will reduce the real income and
subsequently the consumers cannot afford expensive goods.
o Veblen goods: Higher price tag will make the goods more desirable to the consumer.
o Habit forming goods: Cigarette, tobacco etc that creates addiction

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 Chapter: Market Regulation

What is regulation? Why regulation of business is necessary?

Any form of state interference with the operation of free market is called regulation.

Regulation is necessary for the following reasons

 To address the market failure and externalities

 To protect the public interest
 To facilitate market competition
 To ensure transparency

What form does the regulation may take?

a. Formal legislation
b. Regulation from parliament
c. RJSC
d. SEC
e. Other statutory bodies i.e. ICAB

How does business respond to regulations?

1. Enhancement of particular practice

2. Mere compliance: to pass the cost of compliance
3. Full compliance: products and process are adjusted to comply with regulation
4. Innovation

What is market failure? How to address market failure?

Market failure is said to occur when market mechanism fails to result in economic efficiency. The allocation
of resource is sub-optimal.

How to address the market failure:

1. Providing public goods such as street light

2. Providing merit goods such as education
3. Redistribution of wealth through direct taxation
4. Controlling production by means of state ownership industries.
5. Influencing demand and supply through subsidy, indirect taxation and price regulation etc.
6. Regulating market through legislation

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What are the situations where regulation of market is most appropriate?

1. Market imperfection: where monopoly is leading to market inefficiency, government will intervene
the market
2. Externalities: The possible means of dealing with a problem of external cost and benefit via some
form of regulation is called externalities. For example, control on emission of pollutants, restriction
on the use of cars in urban areas.
3. Asymmetric of information: Informational inadequacies are undermining the efficient operation of
market.
4. Equity: Ensuring social justice i.e. prevention of racial and sexual discrimination, equal access to
health care etc.

Write short notes on the following

Insider trading:

People “in the know” may commit a crime if they use knowledge they have as business insiders to make
profit or to avoid loss in the back of that knowledge.

Whistle blowing:

Employees and auditors of listed companies are granted whistleblower protection against their employer if
they disclose private employer information involved in fraudulent activities.

What is cartel? Where the cartel is likely to occur?

Cartel is an agreement between businessmen not to compete with each others.

Cartel is likely to occur in the industry where

1. There is less competition

2. The product has similar characteristics
3. The industry is suffering from excess capacity
4. There is a general economic recession

Market abuse:

People engaged in the stock market should observe the standard of behavior that is reasonably expected
from them and if they fail to do so they may be imprisoned for market abuse. The abusive behavior includes

 Misusing the market information as insiders

 Distorting market price
 Misleading course of conduct

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Externalities:

The possible means of dealing with a problem of external cost and benefit via some form of regulation is
called externalities. For example, control on emission of pollutants, restriction on the use of cars in urban
areas.

What is real time disclosure?

Companies are required to disclose information on real time basis concerning material changes on the
financial conditions and operations.

What are the economic advantages of international trade fair?

 Countries specialize in items they produce comparatively most efficiently so resources are
allocated efficiently.
 Countries with surplus raw material can export and countries with deficit raw material can import.
 Competition is increased. Goods and services are at competitive price. It reduces the monopoly
 Larger market is created so the business can enjoy the economics of scale
 The development of trading links often provides foundation for closer political links

Higher transport cost negates the comparative advantages of international trade fair.

What are the barriers of free international trade?

1. Tariffs or Import duties: Tax is imposed upon the imported goods. The objectives of imposing tariff
are to increase the price of imported goods.
2. Import quotas: It is a restriction on the quantity of goods to be imported.
3. Embargoes: It is total ban on goods and services to be imported
4. Hidden subsidies and import restriction:
 An enormous government subsidies and assistance for export
 Deterrents for import

What are the arguments in favor of protectionist measures?

1. Protectionism measure is taken against the import of cheap goods that compete with domestically
higher price goods, to preserve output and create employment in domestic country.
2. Protectionism measure is taken to counter dumping
3. Protectionism measure is taken as a retaliation against measure taken by other countries
4. Protectionism measure is taken to flourish the infant industry in the domestic country.
5. Protectionism can help a country in short term in dealing with the problem of declining industry.

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Arguments against protectionist meaure:

 It will reduce the volume of internaltional trade

 Measure to reverse the balance of trade deficit is unlikely to succeed
 It will damage the prospect of economic growth
 Political ill will.

What are the issues that may prevent complete free international trade?

o The concentration of political and economic power

o International laws
o Currency management
o Collusion between states i.e. oil producing state OPEC on world economy
o Political instability

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 Chapter: Treasury management and working capital

What is cost associated with holding inventory?

1. Purchase cost: Cost of inventory

2. Holding cost
 Cost of insurance
 Warehouse cost
 Storehouse administration cost
 Interest cost ( if inventory is financed on borrowed capital)
 Cost of deterioration, obsolescence and pilferage
 Opportunity cost
3. Reorder cost: Cost of transportation
4. Shortage cost: Cost of stock out

What procedures are taken to speed up the collection from the customer?

1) To establish timing for issue of demand letter and point when further credit sale might stop
2) To decide whether to take outside assistance from solicitors, trade association and debt collection
agencies to collect cash
3) To assess whether it would be cheaper to collect cash through the help of court.

Financing Receivables:

Receivable is an asset like any other assets so it can be sold out in two ways

1. Invoice discounting: Selling the invoice to a discounter and repaying the discounter when the
customers pay. Here the receivable ledger, accounting function and credit control lie with the
company who sells the invoice.
2. Factoring receivable: Receivable is sold out to receivable factoring company at a lump sum
amount. Here the sales ledger, accounting function and credit control lie with the factoring
company who chases to the customer for collection.

What are the limitations of EOQ model?

1. It is cumbersome to apply
2. It ignores the discount advantages of bulk purchase
3. It is assumed that the annual usages is constant
4. It is also assumed that the ordering cost and carrying costs are constant over the period.

Just-In-Time: Purchase and production are closely related to the sales demand of product. Production is
initiated following an order from the customers resulting in negligible amount of inventory in hand.

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Features of JIT:

1. A strong supply chain management

2. Guaranteed quality of raw material
3. Geographical proximity of suppliers

What is financial intermediation? What are benefits of financial intermediation?

Bank takes deposit from the customers and lends to the other. This process is known as financial
intermediation.

Benefits of financial intermediation:

1. Deposit can be converted into long term borrowing

2. Small deposit deposited by the depositor can be lent to large business organization
3. Search cost is reduced as financial intermediation can be easily approached.

What is the ideal level of Trade receivable?

1. The costs of granting credit to customers i.e. finance cost, bad debt, and administration cost of
credit control department.
2. The benefit of granting credit to the customer i.e. increased profit.

The benefit of granting credit must be greater than cost. Moreover the trade off is considered in granting
credit.

What is primary and secondary market?

 Primary market: Primary market is one where new financial instruments are issued.
 Secondary market: Secondary market is one where existing financial instrument are traded.

What is inter-bank market?

The market for short term borrowing among the bank is called inter-bank market. The interest rate used in
the market is Bangladesh Bank rate.

What is inventory control system?

1. Reorder level: Quantity is to be ordered when the inventory falls at a predetermined level
2. ABC systems: The system best applies to the organization having several types of inventory.
Inventory is categorized into A, B and C as per the annual cost and usages. Category A requires
more control effort, B requires less and C requires less still.
3. EOQ: It determines the most economic order quantity to reduce the cost of inventory.
4. Perpetual inventory systems:
 There will be frequent replenishment points that triggers order
 Terminal of sale point will be automatically updated when each sale is made

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  Management can know what are fast moving items and what are slow moving items
5. JIT

What is cash operating cycle?

Cash operating cycle is the time between the paying cash for the input and receiving cash from the goods
sold.

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