Scope and Objectives of Financial Management

Original descriptive practice: 30 saved, 5 at 3 marks, 20 at 5 and 5 at 10. Investment, financing, payout, cash/value, CFO roles, agency and distress applications. Original practice, not ICAI questions or official marking schemes. Native tables scroll on phones. Original preparation is not a live or complete official question bank.

Boundaries: share price x shares is equity value; total value is labelled separately. Finance cash schedules do not rewrite accrual recognition. Tax advantage is conditional, not universal exemption. Distress discussion is not a legal insolvency ruling. Risk is not a guarantee of realised return.

FM-C01-D001 · 5 marks

Orion plans a new production line, considers a term loan or new equity, and proposes retaining part of this year's distributable profit. Its chairman calls all three "fund raising". Required: Classify the decisions, explain their links and identify the omitted daily funding issue. (5 marks)

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Marks	Credit	Working / case application
1	Investment decision	Choosing the production line concerns allocation of funds to assets, not merely procuring funds.
1	Financing decision	Loan/equity choice concerns sources, cost, risk and control.
1	Dividend decision	Retention versus distribution concerns payout; retained funds also affect financing.
1	Interdependence	Project size/cash needs affect funding, while payout reduces internal funds; assess the decisions together.
1	Working capital	Plan cash, inventory, receivables and current obligations for operating the line, not only its purchase cost.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 3

FM-C01-D002 · 3 marks

A start-up raises Rs 40 lakh successfully but keeps Rs 28 lakh idle while a viable production order cannot be funded. The founder says financing success proves good financial management. Required: Evaluate this claim. (3 marks)

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Marks	Credit	Working / case application
1	Two aspects	Financial management includes procurement and effective utilisation of funds.
1	Apply idle funds	Successful procurement does not prove appropriate use; investigate why funds are idle and available funds fail to support the order.
1	Cost/risk and objective	Assess purposeful allocation, cash commitments and returns relative to funding cost/risk instead of celebrating money raised alone.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 7

FM-C01-D003 · 5 marks

A promoter prefers debt solely because its quoted interest rate is below shareholders' expected return. Cash flows are uncertain, repayments start immediately, and new equity would dilute voting control. Required: Explain the financing considerations without calculating WACC or prescribing a universal debt-equity ratio. (5 marks)

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Marks	Credit	Working / case application
1	Cost	Compare relevant funding costs; the lowest quoted rate alone is incomplete.
1	Cash risk	Debt interest/repayments impose commitments even during weak cash generation.
1	Control	New equity may dilute existing voting control; treat this as one factor, not an absolute veto.
1	Balance	Seek funding suited to business cash flows and acceptable cost/risk/control trade-offs, not debt in every case.
1	Tax boundary	Any tax advantage depends on stated law/deductibility/rate assumptions; interest is not universally tax-free to all parties.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 5

FM-C01-D004 · 5 marks

A profitable manufacturer spends nearly all available cash on an oversized machine. Suppliers and wages fall due before customers pay; inventories accumulate. Management dismisses the shortage because accounting profit is positive. Required: Identify the finance failures and an appropriate response. (5 marks)

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Marks	Credit	Working / case application
1	Over-investment	Oversized fixed-asset investment can block funds needed for operations.
1	Cash timing	Collections and due obligations differ in timing; reported profit is not cash available to pay.
1	Current asset management	Excess inventory/slow collections can tie up working funds; assess rather than assume all stock is unnecessary.
1	Liquidity planning	Prepare cash timing/funding plan, prioritise due obligations and improve the operating cycle.
1	Balanced utilisation	Choose fixed assets and working capital together to preserve solvency and appropriate returns; profit alone does not settle allocation.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 10

FM-C01-D005 · 5 marks

A training note gives three descriptions: (A) raising funds only at mergers or expansion with emphasis on lenders; (B) attention to day-to-day funds analysis and control; (C) integrated investment, valuation and risk-based decision analysis. Required: Match the phases and explain why today's finance function cannot stop at A. (5 marks)

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Marks	Credit	Working / case application
1	Traditional	A reflects occasional event-based procurement and outsiders' needs.
1	Transitional	B expands attention to recurring funds analysis, planning/control.
1	Modern	C reflects the broader analytical decision function.
1	Application	Routine cash/working-capital and allocation decisions persist outside special transactions.
1	Modern objective	Evaluate investment, financing and payout together with value/risk/timing, not merely complete borrowing paperwork.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 7

FM-C01-D006 · 5 marks

Two proposals report the same headline profit. One earns cash promptly with modest uncertainty; the other delays receipts for years and exposes the firm to large losses. The report does not define whether "profit" means annual total, long-run total or rate of return. Required: Evaluate profit-only selection and the better decision approach. (5 marks)

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Marks	Credit	Working / case application
1	Ambiguity	An undefined profit measure cannot provide a consistent comparison.
1	Timing	Equal accounting totals conceal different timing of cash receipts.
1	Risk	Profit-only ranking ignores uncertainty and potential losses.
1	Cash/value approach	Assess relevant cash benefits/costs with time value and risk, not an unexplained profit total.
1	Recommendation boundary	Do not declare a numerical winner without sufficient comparable cash/risk information; seek it while identifying why the original ranking fails.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 13

FM-C01-D007 · 5 marks

To raise current profit, a firm postpones necessary repairs and cuts product-safety checks. The manager says shareholder wealth permits ignoring customer and worker consequences. Required: Critically assess the decisions. (5 marks)

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Marks	Credit	Working / case application
1	Short-run appearance	Lower current expense may increase reported profit without sustainable benefit.
1	Future impact	Breakdowns or product defects can damage future cash flows and reputation.
1	Stakeholders	Worker/customer obligations and ethical conduct are not erased by the value objective.
1	Value assessment	Assess long-run cash benefits/costs, timing and risk, including consequences of the cuts.
1	Correct recommendation	Evaluate justified repair/safety spending rather than automatically minimise expenditure or maximise this year's profit.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 13

FM-C01-D008 · 10 marks

Delta can fund only one of two mutually exclusive proposals. The finance analyst supplies the following risk-adjusted present values, all in Rs lakh; the figures are already discounted appropriately and no further discounting is required. Proposal A: cash benefits PV 96; cash costs PV 82; reported current-year profit 18; cash receipts start after 18 months. Proposal B: cash benefits PV 89; cash costs PV 71; reported current-year profit 12; cash receipts start after 3 months. Both are lawful and operationally feasible. Management favours A because it reports more current profit and has a larger gross benefit PV. Delta must also meet near-term wages; neither proposal's PV summary is a cash payment schedule. Required: Calculate value added, recommend on the supplied value basis, explain the flaws in management's two rankings, and explain the separate liquidity check. (10 marks)

Rs lakh; see scenario for assumptions.

Proposal	Benefits PV	Costs PV	Current-year profit	Receipts start
A	96	82	18	18 months
B	89	71	12	3 months

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Marks	Credit	Working / case application
1	A value	96 - 82 = Rs 14 lakh.
1	B value	89 - 71 = Rs 18 lakh.
1	Incremental comparison	B adds Rs 4 lakh more present value than A on supplied comparable assumptions.
1	Choice	Choose B on the given mutually exclusive value basis, subject to the stated feasibility and separate liquidity review.
1	Profit ranking flaw	Higher current accounting profit is not the same as higher risk/timing-adjusted cash value.
1	Gross-benefit flaw	Benefits alone omit the different cash cost PVs.
1	Avoid double adjustment	The supplied PVs already incorporate appropriate timing/risk; do not discount them again or add an arbitrary risk deduction.
1	Liquidity distinction	Positive net PV is not cash on hand when wages fall due.
1	Cash timing check	Prepare receipts/payments schedule and identify bridging cash needs before committing.
1	Decision discipline	Retain justified investment selection and suitable financing; do not solve timing gaps by ignoring obligations or reject all positive-value long-term investment automatically.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 14

FM-C01-D009 · 3 marks

A company has 2 lakh equity shares quoted at Rs 45 each and debt with market value Rs 30 lakh. A report calls 2 lakh x Rs 45 the combined equity-plus-debt value. Required: Calculate and label both values on this exercise's stated convention. (3 marks)

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Marks	Credit	Working / case application
1	Equity market value	200000 x Rs 45 = Rs 90 lakh.
1	Combined value	Rs 90 lakh + Rs 30 lakh = Rs 120 lakh, equity plus debt on the stated convention.
1	Correct labels	Shares x price alone is equity value; do not confuse it with the combined measure or silently deduct/add cash under an unstated enterprise-value convention.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 15

FM-C01-D010 · 10 marks

Vega sells all goods on credit for Rs 24 lakh, with Rs 15 lakh of related operating expenses incurred. Cash collected during the month is Rs 6 lakh. Cash paid for those operating expenses is Rs 7 lakh. It opens with Rs 2 lakh cash and has no other cash movements. At month end, a further Rs 4 lakh obligation is immediately due; this amount is not included in the Rs 7 lakh already paid. Assume the stated accounting treatment is valid and ignore tax/non-cash expenses. The director wants to pay Rs 3 lakh in dividends immediately because the month was profitable. No dividend-law compliance or distributable-reserve conclusion is supplied. Required: Calculate profit, month-end cash before the further obligation, immediate cash shortfall, assess the director's reasoning and state a finance response without replacing accrual accounting. (10 marks)

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Marks	Credit	Working / case application
1	Accounting profit	24 - 15 = Rs 9 lakh under the supplied accrual assumptions.
1	Cash movement	6 - 7 = Rs 1 lakh net outflow.
1	Closing cash	2 + 6 - 7 = Rs 1 lakh before the further obligation.
1	Shortfall	Rs 4 lakh due less Rs 1 lakh available = Rs 3 lakh immediate gap.
1	Profit is not available cash	Credit revenue/unpaid expense timing explains why profitable operations can lack liquidity.
1	Dividend effect	A Rs 3 lakh payout cannot be supported by this Rs 1 lakh cash balance and would worsen the unresolved obligation gap.
1	Legal boundary	Do not infer legal dividend permission/distributable reserves from monthly profit; the scenario provides no legal determination.
1	Immediate response	Plan collections and appropriate short-term funding/payment arrangements for due obligations, without assuming an unapproved lender facility exists.
1	Operating response	Manage customer credit/collections and align spending/payment timing while preserving viable operations.
1	Accounting distinction	Cash-flow focus supports finance decisions; it does not change valid accrual revenue/expense recognition or prove insolvency automatically from one gap.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 22

FM-C01-D011 · 5 marks

The board hires a CFO but restricts her to preparing historic reports and tax filings. A proposed acquisition, product-pricing change and outsourcing decision are made without finance input. Required: Explain the omitted modern CFO responsibilities and how finance should support these decisions. (5 marks)

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Marks	Credit	Working / case application
1	Beyond reporting	Historic accounting and filing remain useful but do not exhaust the modern finance role.
1	Strategic partner	Finance contributes to planning/growth and advises the CEO/board rather than only reports past totals.
1	Acquisition	Assess acquisition funding, cash consequences, risk and expected value before commitment.
1	Pricing/outsourcing	Evaluate customer/product profitability and the cash/cost implications of pricing and outsourcing choices.
1	Integration	Work with operating teams using evidence and controls; CFO involvement does not mean replacing every specialist or guaranteeing success.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 20

FM-C01-D012 · 5 marks

Atlas targets 40% sales growth but has not assessed capacity, asset needs or the funding cycle. Its CFO is asked only to negotiate a loan after the expansion contract is signed. Required: Apply the financial analysis/planning role before expansion. (5 marks)

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Marks	Credit	Working / case application
1	Size and growth	Assess the feasible scale/rate of growth instead of accepting a revenue target as a funding plan.
1	Asset composition	Evaluate capacity/fixed assets and relevant current assets required for growth.
1	Funds forecast	Prepare expected receipts/payments and identify investment plus working-capital needs.
1	Sources and risk	Compare suitable funding and commitments against cash capacity before signing; no loan amount can be inferred from the percentage alone.
1	Control	Use budgets and monitoring to review outcomes and change the plan where forecasts fail, not only arrange borrowing after the event.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 19

FM-C01-D013 · 3 marks

The CEO says "higher risk always gives higher realised profit" and directs finance to accept the riskiest project without reviewing expected cash returns. Required: Explain the error and the finance objective. (3 marks)

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Marks	Credit	Working / case application
1	Expected versus guaranteed	Higher risk is not a guarantee of a higher realised profit; adverse outcomes remain possible.
1	Compensation for risk	Investors normally require adequate expected return for greater risk, which must be assessed rather than presumed.
1	Objective	Seek risk-appropriate value/return and avoid unnecessary risk; project selection needs evidence, not a maximum-risk rule.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 18

FM-C01-D014 · 5 marks

A retailer has repeated difficulty paying wages and suppliers. Demand has fallen, input prices have risen and debt service is heavy. Management says distress can arise only when the profit statement is negative. Required: Explain the financial warning and the factors to address, without declaring an insolvency-law event. (5 marks)

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Marks	Credit	Working / case application
1	Cash criterion	In the chapter's economic sense distress concerns inadequate cash inflows to meet current obligations, not only reported losses.
1	Operating drivers	Demand/pricing and input-cost changes can weaken cash generation.
1	Debt burden	Interest/repayment obligations can intensify the pressure; do not assume debt alone proves failure.
1	Response	Review cash forecasts, collections/costs and funding obligations with realistic corrective plans.
1	Boundary	Continuing inability can worsen into insolvency in economic discussion, but statutory legal tests/proceedings require separate facts/law; do not pronounce them from this summary.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 21

FM-C01-D015 · 5 marks

An accountant supplies valid accrual statements. The manager says finance must either ignore them entirely or recognise every sale only when cash arrives. Required: Explain the relationship and correct the two extremes. (5 marks)

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Marks	Credit	Working / case application
1	Useful input	Accounting information supports assessment of performance and financial planning.
1	Accrual distinction	Valid accrual revenue/expense recognition need not coincide with receipts/payments.
1	Cash focus	Finance forecasts actual cash availability to fund assets and discharge obligations.
1	No recognition rewrite	Decision-oriented cash schedules do not replace accrual books or justify changing valid recognition rules.
1	Combine evidence	Use statements plus collection/payment forecasts and decision analysis, not cash-only ignorance of accounting or profit-only ignorance of liquidity.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 22

FM-C01-D016 · 5 marks

Marketing proposes extended customer credit to increase sales. Production requests larger raw-material holdings to avoid stoppages. Both ask finance to approve independently without considering the other proposal. Required: Explain finance's role across the disciplines. (5 marks)

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Marks	Credit	Working / case application
1	Marketing cash effect	Longer credit may support sales but delays cash and changes collection/risk requirements.
1	Production funds effect	More stock may protect production but ties up cash and can create holding/obsolescence risks.
1	Combined assessment	Evaluate both projected cash flows and working funds together, not approve each as free of financial consequences.
1	Quantitative support	Use appropriate forecasts/models and realistic assumptions to analyse trade-offs; precise optimum cannot be invented from this information.
1	Collaborative decision	Work with specialist teams on demand/capacity/availability and funding while maintaining the financial objective, not dictate operations from isolated accounting totals.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 23

FM-C01-D017 · 5 marks

A hired managing director chooses a prestige office and luxury benefits that bring him personal satisfaction but no supported business cash benefit. Shareholders cannot observe every decision and bear the cost. Required: Explain the agency issue, distinguish it from ordinary managerial error and propose controls. (5 marks)

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Marks	Credit	Working / case application
1	Principal-agent	Shareholders delegate management; separation of ownership/control creates scope for differing interests.
1	Personal goal conflict	Prestige/perks are chosen for the director's benefit at owners' expense on the supplied facts.
1	Distinguish error	A poor outcome alone would not prove self-interest; here the stated personal motive/unsupported benefit grounds the conflict.
1	Monitoring	Use board oversight, approval limits and transparent expenditure reporting to constrain misuse.
1	Alignment	Link incentives appropriately to sustainable long-term objectives with controls, not just current profit or unchecked discretion.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 24

FM-C01-D018 · 5 marks

Shareholders can introduce independent oversight costing Rs 1.2 lakh yearly. On the case's credible comparable estimates it reduces avoidable annual diversion of funds from Rs 5 lakh to Rs 1.5 lakh. The chair rejects oversight because any monitoring cost lowers profit. Required: Calculate the expected net benefit and evaluate the proposal with limitations. (5 marks)

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Marks	Credit	Working / case application
1	Avoided diversion	5 - 1.5 = Rs 3.5 lakh expected reduction.
1	Net benefit	3.5 - 1.2 = Rs 2.3 lakh annual expected net benefit on the supplied comparable estimates.
1	Agency cost	Oversight is a monitoring cost incurred to reduce manager-owner conflict, not inherently pointless overhead.
1	Decision	Expected net benefit supports the proposal on these assumptions; do not reject solely because oversight has a cost.
1	Limits	Verify estimates and effectiveness, avoid double counting and consider proportional controls; not a guaranteed saving or automatic proof that more monitoring always helps.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 24

FM-C01-D019 · 5 marks

After borrowing on moderate-risk terms, managers plan additional debt and a risky asset change benefiting shareholders if successful but increasing lender exposure. A covenant limits further borrowing; the CEO says it is irrelevant to finance because it is "only legal paperwork". Required: Apply agency considerations and a compliant finance response. (5 marks)

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Marks	Credit	Working / case application
1	Conflicting interests	Shareholder/manager choices can impose greater risk on lenders after financing.
1	Covenant purpose	Borrowing restrictions can constrain such risk shifting and protect the lender's agreed position.
1	Financing relevance	Covenants affect practical funding choices and risk, so they are not financially irrelevant paperwork.
1	Compliant review	Check the actual contract and obtain required consent/change the plan rather than assume the covenant can be breached.
1	Balance	Assess feasible sources/project risks with creditor and owner interests; do not conclude that every covenant forbids all new investment or that shareholder value excuses default.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 24

FM-C01-D020 · 10 marks

Nova has Rs 30 lakh of cash funds available for the next quarter. A proposed plant consumes Rs 18 lakh immediately. The operating plan requires Rs 9 lakh of net working funds and a minimum Rs 4 lakh cash reserve, both additional to the plant. Shareholders ask for a Rs 5 lakh payout. There are no other available cash sources; the CFO has not secured any new facility. The plant's supplied comparable cash-benefit PV is Rs 25 lakh and cash-cost PV is Rs 21 lakh, already risk/timing adjusted. Assume reserve/working-fund needs are justified, but no legal payout conclusion is supplied. Required: Assess cash funding gaps with and without payout, the plant's value contribution and the linked decisions/next steps. (10 marks)

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Marks	Credit	Working / case application
1	Needs before payout	18 + 9 + 4 = Rs 31 lakh.
1	Gap before payout	31 - 30 = Rs 1 lakh.
1	Needs with payout	31 + 5 = Rs 36 lakh.
1	Gap with payout	36 - 30 = Rs 6 lakh; payout increases the gap by Rs 5 lakh.
1	Plant value	25 - 21 = Rs 4 lakh net present value on supplied assumptions.
1	Do not confuse measures	Positive value does not supply the Rs 1/6 lakh immediate cash gaps; PV cost Rs 21 is not another immediate outflow to add to Rs 18.
1	Linked decisions	Plant choice is investment, arranging funds is financing, and distribution/retention is dividend decision, with working capital/reserve constraints.
1	Payout caution	Do not promise immediate Rs 5 lakh distribution from the stated funding plan; verify legal capacity separately.
1	Feasible action	Consider suitable additional funding, timing/scale adjustment or retention while preserving justified operating/reserve needs; no unapproved facility is treated as cash already obtained.
1	Recommendation	Keep value and liquidity analyses together, compare actual financing terms/risk and decide only on a workable plan; neither positive NPV nor shareholder pressure alone settles it.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 9

FM-C01-D021 · 5 marks

Managers earn bonuses only from current-year profit. They postpone value-supporting maintenance and reject a project that depresses this year's profit but has a credibly positive risk-adjusted cash value. The board proposes linking pay only to tomorrow's share-price movement. Required: Evaluate both incentive designs and propose a better approach. (5 marks)

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Marks	Credit	Working / case application
1	Short-term bias	Current-profit-only pay may reward decisions harming longer-term value.
1	Case application	Maintenance delay/project rejection can reflect incentive conflict rather than sound value appraisal on these facts.
1	Price-only limitation	One-day share-price movements need not reveal the decision's durable effect; no guaranteed mapping exists.
1	Alignment	Use appropriately designed long-term value/performance measures and horizons with transparent review.
1	Controls	Combine incentives with monitoring/approval and safeguards against manipulation; neither profit nor a single price tick mechanically eliminates agency problems.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 25

FM-C01-D022 · 3 marks

A firm plans to retain part of available distributable earnings for expansion. An analyst labels retention only a dividend decision and says it cannot affect financing. Required: Explain the two connected effects. (3 marks)

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Marks	Credit	Working / case application
1	Payout allocation	Retention determines the amount not distributed, so is part of the dividend decision.
1	Internal financing	Retained funds support future investment and reduce or alter external financing needs.
1	Combined assessment	Evaluate payout, growth funding and shareholder return together; do not count the same retained money twice or treat retention as new external cash.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 9

FM-C01-D023 · 5 marks

Two proposals have equal reported profit. Proposal R has more credible cash collections but requires funds now; proposal S has delayed uncertain collections. No full cash schedules, comparable cost PVs or risk adjustment are supplied. An analyst selects S because its customers promise larger eventual sales. Required: Identify missing decision information and explain why an automatic winner is unjustified. (5 marks)

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Marks	Credit	Working / case application
1	Cash flows	Need relevant expected receipts and payments, not sales promises or profit alone.
1	Timing	Need their timing, including immediate funding needs and delayed benefits.
1	Risk	Need uncertainty and appropriate risk treatment for collection assumptions.
1	Costs/value	Compare relevant benefits against costs on a consistent present-value basis rather than gross sales.
1	No false certainty	The qualitative concerns warrant investigation, not an unsupported numerical winner or automatic rejection of every delayed project.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 14

FM-C01-D024 · 5 marks

A finance manager proposes zero inventories and zero cash to avoid idle funds. Production needs a buffer, supplier delivery is variable and payments fall due before receipts. Another director instead wants unlimited inventory and cash "for safety". Required: Assess the two extremes. (5 marks)

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Marks	Credit	Working / case application
1	Zero-stock risk	Necessary operating buffer must be considered; zero inventory can cause stoppages on the supplied facts.
1	Zero-cash risk	Due-payment timing may require liquidity; removing all cash can endanger solvency.
1	Excess funds cost	Unlimited stock/cash blocks resources and may reduce effective utilisation or add stock risks.
1	Balanced level	Seek adequate rather than maximum/minimum working funds based on operating needs, cash timing, cost and risk.
1	Evidence/control	Use forecast/replenishment/collection evidence and monitor, not invent a precise optimum from incomplete data.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 7

FM-C01-D025 · 5 marks

The CFO delegates cash reporting to an accountant and believes this removes her responsibility for cash forecasts, funding gaps and investment advice. The accountant's reports are accurate but backward-looking. Required: Explain the finance responsibilities that remain. (5 marks)

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Marks	Credit	Working / case application
1	Accounting input	Accurate records are valuable input, not an automatic forward-looking finance plan.
1	Forecasting	Assess future cash inflows/outflows and funding needs.
1	Allocation	Evaluate asset/investment uses against objectives and risk/return.
1	Funding	Arrange suitable financing and assess cost/risk/control rather than only record past receipts.
1	Decision accountability	Delegating data preparation does not eliminate the CFO's financial planning/control/advisory role; collaborate rather than blame the accountant for unassigned decisions.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 19

FM-C01-D026 · 10 marks

An owner-appointed manager prefers an office upgrade giving personal prestige. Its appropriately adjusted cash-benefit PV is Rs 12 lakh and cost PV Rs 17 lakh. A competing process improvement has cash-benefit PV Rs 22 lakh and cost PV Rs 15 lakh, but lowers current reported profit by Rs 1 lakh. Both are mutually exclusive and operationally feasible. The manager's bonus is based only on current profit and he withholds the process report from the board. No independent oversight is present. Required: Calculate value contributions, recommend on the stated basis, analyse the agency conflict/incentive failure and propose controls without claiming any control guarantees value. (10 marks)

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Marks	Credit	Working / case application
1	Office value	12 - 17 = negative Rs 5 lakh.
1	Process value	22 - 15 = positive Rs 7 lakh.
1	Value difference	The process alternative provides Rs 12 lakh more present value than the office upgrade.
1	Recommendation	Choose the process alternative on supplied comparable value/feasibility assumptions, not prestige or current-profit appearance.
1	Profit criterion flaw	Temporary Rs 1 lakh profit reduction need not mean lower long-term cash value.
1	Agency conflict	Personal prestige and withholding information put manager goals ahead of owners' interests.
1	Incentive failure	Current-profit-only bonus can discourage value-supporting investment.
1	Monitoring	Require transparent competing-project evidence and independent board/approval review.
1	Alignment	Use long-term performance/value-related incentives with appropriate safeguards, not automatic reward for a single price movement.
1	Limits	Controls and incentives have costs and imperfect effectiveness; verify assumptions/monitor outcomes rather than guarantee success or count the same value difference twice.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 24

FM-C01-D027 · 3 marks

A student reads that debenture interest gives a tax advantage and writes "the interest is tax-free to the lender and deductible in every case". The exercise gives no law, deductibility or investor tax assumptions. Required: Correct this statement without a current tax-law computation. (3 marks)

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Marks	Credit	Working / case application
1	Borrower versus lender	A possible borrower tax deduction does not establish tax-free income to the lender.
1	Conditional advantage	Any tax benefit depends on applicable rules, qualifying deductibility and relevant tax assumptions.
1	No invented conclusion	Compare financing costs with explicit assumptions; do not teach universal exemption/deductibility from the module shorthand.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 5

FM-C01-D028 · 5 marks

A firm's share price falls for one day during a broad market decline. The board concludes a recently approved investment necessarily destroyed wealth, without examining its cash forecasts or risk. Another director says price can never convey performance information. Required: Evaluate both statements. (5 marks)

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Marks	Credit	Working / case application
1	Market-value relevance	Share price reflects market participants' assessment and is relevant to shareholder value.
1	Decision link limitation	A one-day change need not identify the causal effect of one particular financial decision.
1	Other influences	Broad market information and expectations may affect price; the supplied decline is not automatic proof of project destruction.
1	Project evidence	Assess appropriate cash benefits/costs, timing/risk and updated feasibility to review the project.
1	Balanced conclusion	Use market signals alongside financial evidence; reject both guaranteed causal attribution and complete dismissal of price.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 17

FM-C01-D029 · 5 marks

A lender offers attractive finance but only for an asset that has no supported productive use in the firm. The CFO argues that borrowing cheaply automatically creates wealth and proposes purchasing it, even though maintenance and storage cash costs are expected. Required: Assess this reasoning. (5 marks)

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Marks	Credit	Working / case application
1	Procurement not enough	Cheap procurement does not establish effective use or value creation.
1	Asset benefits	Need credible relevant benefits from the proposed asset, not merely loan availability.
1	Costs	Assess purchase, maintenance/storage and other relevant cash costs on a consistent basis.
1	Risk/commitments	Borrowing creates repayment/interest commitments and suitability constraints even if quoted cost is attractive.
1	Decision	Reject automatic approval; compare feasible productive uses/funding and value, without claiming a precise loss before complete cash data.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 7

FM-C01-D030 · 10 marks

Solace opens April with Rs 5 lakh cash. All figures below are Rs lakh and refer to cash, not accrual profit. Minimum desired closing cash each month is Rs 2 lakh. No borrowing is currently arranged. May's planned Rs 6 lakh equipment payment can be deferred to July without penalty or changing operating receipts/payments. June's Rs 3 lakh payout is optional but has not been legally assessed. April: operating receipts 10; operating payments 9; equipment 0; payout 0. May: operating receipts 8; operating payments 10; equipment 6; payout 0. June: operating receipts 14; operating payments 11; equipment 0; payout 3. Required: Prepare cumulative closing cash before financing under the initial plan; show the effect of deferring May equipment and withholding June payout; identify reserve gaps and distinguish temporary distress from a legal insolvency verdict. (10 marks)

Rs lakh; see scenario for assumptions.

Month	Operating receipts	Operating payments	Equipment	Payout
April	10	9	0	0
May	8	10	6	0
June	14	11	0	3

Show answer and marking

Marks	Credit	Working / case application
1	April closing	5 + 10 - 9 = Rs 6 lakh.
1	May original	6 + 8 - 10 - 6 = negative Rs 2 lakh before financing.
1	June original	-2 + 14 - 11 - 3 = negative Rs 2 lakh; do not reset June opening cash to Rs 5 lakh.
1	Reserve gaps	To reach Rs 2 lakh closing reserve requires Rs 4 lakh cumulative additional cash by May; June original remains Rs 4 lakh below reserve before financing.
1	Revised May	Deferring equipment gives 6 + 8 - 10 = Rs 4 lakh, removing the May reserve gap.
1	Revised June	With revised May opening and no payout, 4 + 14 - 11 = Rs 7 lakh.
1	Payment not erased	The Rs 6 lakh equipment need moves to July, so extend the cash plan; it is not a saving or cancelled cost.
1	Feasibility	Deferral is explicitly penalty-free/operationally feasible here; otherwise verify its business/value effects before using it as a remedy.
1	Payout/funding	Do not commit payout from the failing initial plan or assume an arranged loan; evaluate legal payout capacity and feasible funding if the initial plan is retained.
1	Distress boundary	Cash inadequacy signals financing/obligation stress, but a forecast shortfall alone is not a statutory insolvency adjudication; plan and monitor corrective actions.

Original case; indicative capped allocation, not an official marking scheme. Equivalent correct reasoning credited; no duplicate credit.

Official concept source, PDF page 21