“Several techniques have been developed to help in prediction why companies fail.” – Describe the Altman: Z Score Model in this regard.

“Several techniques have been developed to help in prediction why companies fail.” – Describe the Altman: Z Score Model in this regard.

The Z-Score model is a quantitative model developed by Edward Altman in 1968, to predict bankruptcy or financial distress of a business. The Z-score is a multi variate formula that measures the financial health of a company and predicts the probability of bankruptcy within 2years. This model involves the use of a specified set of financial ratios and a statistical method known as a Multiple Discriminant Analysis. (MDA). The real world application of the Altman score successfully predicted 72% of bankruptcies two years prior to their failure.


The model of Altman is based on a linear analysis in which five measures are objectively weighted and summed to arrive at an overall score that then becomes the basis for classification of companies into one of the two a priori groupings that is bankrupt or non-bankrupt. These five indicators were then used to derive a Z-Score. These ratios can be obtained from corporations‘ financial statements.

The five Z-score constituent ratios are:

(i) Working Capital/Total Assets (WC/TA):- a firm with negative working capital is likely to experience problems meeting its short-term obligations.
(ii) Retained Earnings/Total Assets: - Companies with this ratio high probably have a history of profitability and the ability to stand up to a bad year of losses.
(iii) Earnings Before Interest & Tax/ Total Assets: - An effective way of assessing a firm‘s ability to profit from its assets before things like interest and tax are deducted.
(iv) Market Value of Equity/ Total Liabilities: - A ratio that shows, if a firm were to become insolvent, how much the company‘s market value would decline before liabilities exceed assets.

(v) Sales/Total Assets: - A measure of how management handles competition and how efficiently the firm uses assets to generate sales.

Based on the Multiple Discriminant Analysis, the general model can be described in the following form:

Z=1.2WC/TA + 1.4 RE/TE + 3.3 EBIT/TA + 0.6 MVE/TL + 1.0 SL/TA

Probability of failure according to the Z-Score result:

Z-Score                                              Probability of Failure 
Less than 1.8                                      Very High 
Greater that 1.81 but less than 2.99       Not Sure 
Greater than 3.0                                   Unlikely 

Calculation of the Z-Score for a fictitious company where the different values are given to calculate the Z-Score.

Describe Transition Risk

Transition Risk
Risk usually arises when technological obsolescence suddenly overtakes the company. This
risk can be traced partly to the complacencies developed by the firms in certain industries
under a protected economy when a favorable import duty structure is levied by the
Government so that the indigenous industry is able to thrive. However, these approaches
have led to a state where these protected companies, become secure due to their
continuing profitability and do not recognize the obsolescence of their technology as they
are insulated from the onslaught of new technology.
Many industrial estates in India that thrived during the middle of the 20th century came to
grief towards the end of the century when globalization and liberalization gained pace hand
in hand. This was because the state-of-the-art technology that was espoused by advanced
nations helped place their products with better quality at lower prices. This phenomenon has
also happened in the IT field when new products were introduced very frequently based on
new technology. The life of a technology which had been normally a decade or more,
today suddenly finds itself reduced to a period of less than five years. This unexpected
change of events in the history of IT has posed a transition risk for many industries. Technology
has made many factors of productions namely men, machinery, and capital suddenly redundant. As the time frame required for a turnaround or transition from one technology to another differs, companies face transition risk, according to their preparedness and their position in the life cycle. In addition, consumer behaviour has become an enigma clue to the wide variation and aspiration of different customers. This wide variety in the requirements of customers is also one of the factors leading to the extinction of technology that is no longer relevant to the customer, such as the case of black and white televisions.

“Risk management process refers to the process of measuring or assessing risk and then developing Strategies to manage risk. In the risk management, the following steps are taken up to minimize the risk”- Discuss the steps which are taken to minimize the risk.

“Risk management process refers to the process of measuring or assessing risk and then developing Strategies to manage risk. In the risk management, the following steps are taken up to minimize the risk”- Discuss the steps which are taken to minimize the risk.


Risk management process refers to the process of measuring or assessing risk and then developing strategies to manage risk. In the risk management, the following steps are taken up to minimize the risk: 

Step 1: Risk Identification and Assessment This step involves event identification and data collection process. The institution has to put in place a system of capturing information either through key risk drivers (KRIs) or through a rating system. Once risks are identified, combine like risks according to the following key areas impacted by the risks — people, mission, physical assets, financial assets, and customer/stakeholder trust. 

Step 2: Risk Quantification and Measurement The next step is to Quantify and Measure risks. This means risks according to probability and impact. Various standard tools are used by financial institutions to measure risk and understand their impact in terms of capital or its importance to the organization through a scoring technique. 

Step 3: Risk Analysis, Monitor and Reporting The next step is risk analysis, monitoring and reporting. This will help one to get the big picture and decided on the approach to risk management.

Step 4: Capital Allocation Risk Analysis, Monitoring & Reporting sends information to the top management of the organization to take strategic decisions. Capital allocation plays key role in management decision making. 

Step 5: Risk Management and Mitigation After the above step, the last step is to make strategic decisions to manage the risk in order to mitigate the risk.

List the steps to start of Total Productivity Management (TPM)

Total Productivity Management: Total Productive Management (TPM) provides a system for coordinating all the various improvement activities for the company so that they contribute to the achievement of corporate objective. Starting with a corporate vision and broad goals, these activities are developed into supporting objectives, or targets, throughout the organization. The targets are specifically and quantitatively defined. This seminar therefore emphases how to improve the competitiveness of products and services in quality, price, cost and customer responsiveness, thereby increasing the profitability, market share, and return on investment in human, material, capital, and technology resources. 

Steps to start TPM are 
Identifying the key people 
Management should learn the philosophy. 
Management must promote the philosophy. 
Training for all the employees. 
Identify the areas where improvements are needed. 
Make an implementation plan. 
Form an autonomous group.

Describe Capital Cost

Capital Costs – How much funding is the organization willing to put into e-commerce activities? E-commerce platforms can be high priced, depending on the level of sophistication. A development organization undertaking e-commerce activities should consider whether it wants to incur higher costs, with the possibility of cost recovery from an expected higher level of sales. What are the possibilities of receiving financial assistance from donor agencies or partner organizations for this activity? Development organizations pursuing e-commerce activities may have to decide between varieties of options for their online selling activities, depending on their financial capacities. These options can be divided into 1) technical hardware and 2) site design and maintenance. The organization will have to decide whether it wants to invest in setting up its own in-house server, depending on the organization's size and computing requirements, or find a third party that is willing to host the site on its server. Is the third party another development-focused organization, or is it a private company/ISP? Regarding design and maintenance of the e-commerce site, is the organization able to hire in-house technical personnel to handle design, development, and maintenance, or is it more cost effective to hire an outside party to handle these tasks? Developing an e-commerce site that generates high levels of revenue will have to respond to the changes in e-commerce platforms in the commercial sector. The development organization may want to consider using security encryption software for credit card payment, increasing costs to an extent yet benefiting from increasing customer confidence in the transaction process. Will the site be eye-catching, with the hope of attracting customers, possibly increasing site development costs for higher level graphics and design? Pan Partners currently do not have to bear all of the above-mentioned capital costs, but may one day have to consider them when they initiate an e-commerce site on their own.

Marketing – As evident from the discussion above, a good marketing strategy forms the basis of the operational strategy, in order to attract customers to the e-commerce site and ensure a steady pattern of sales. Development organizations often need not employ capital-intensive marketing programs in order to have a successful marketing campaign. The marketing strategy can be divided into two main categories: 1) online markets and 2) offline markets.

Describe Resource Expansion

Resource Expansion – Is the main goal of selling goods and services online the generation of revenue to offset operational costs? If so, how much revenue does the organization expect/wish to generate? These strategic questions will allow the organization to assess how much funding will go toward e-commerce activities. If the organization is approaching e-commerce as a means of covering not only the costs of producing the goods and services and disseminating development-focused products, but wishes to expand its revenue base to support other project costs, then it may want to develop an e-commerce platform and strategy that can attract customers. The organization may have to approach e-commerce as a resource expansion activity that uses business strategies and a full marketing approach. This leads to the question of whether this fits in with the development mandate of the organization and its charitable organization status. Will e-commerce activities distort the tax-free status of the development organization? Is the organization liable in the case of legal conflicts? Most development organizations have already faced these questions if they sell publications and other products by "traditional" means.

Describe the objectives of Management Information Systems.

Management Information System is a systematic process of providing relevant information in right time in right format to all levels of users in the organization for effective decision making. MIS is also defined to be system of collection, processing, retrieving and transmission of data to meet the information requirement of different levels of managers in an organization. 

According to CIMA- MIS is a set of procedures designed to provide managers at different levels in the organization with information for decision making, and for control of those parts of the business for which they are responsible. MIS comprises of three elements viz., management, information and system. 

Objectives of MIS : 
To provide the managers at all levels with timely and accurate information for control of business activities 
To highlight the critical factors in the operation of the business for appropriate decision making 
To develop a systematic and regular process of communication within the organization on performance in different functional areas
To use the tools and techniques available under the system for programmed decision making To provide best services to customers 
To gain competitive advantage To provide information support for business planning for future

Discuss the importance of Decision Support Systems for gaining the Competitive Advantage

In a world of constant flux, informed and thoughtful decision-making is the cornerstone of business success. As a manager, you must make decisions that affect your business every day, some critical and some not so important. Decision Support Systems allow faster decision making, identification of negative trends, and better allocation of business resources all to the benefit of you and your organization. 

Decision Support Systems (DSS): DSS are a specific class of computer-based information systems that support your decision-making activities. A decision support system analyzes business data and provides interactive information support to managers and business professionals during the decision-making process, from problem recognition to implementing your decision. Decision Support Systems use 
(1) Analytical models, 
(2) specialized databases, 
(3) a decision maker‘s own insights and judgments, and 
(4) an interactive, computer-based modeling process to support semi-structured business decisions. A key component to any DSS is Business Intelligence reporting tools, processes, and methodologies. These provide you with rich reporting, monitoring, and data analysis, which are necessary for effective and fast decision-making.

Gain competitive advantage with Decision Support Systems In today‘s competitive business environment, what you need for maximum performance is to achieve competitive advantage. Without competitive advantage, your company will not be able to operate and will eventually cease to exist. One way of gaining competitive advantage is through the use of computerized Decision Support Systems. The simplest and most tangible benefit of a Decision Support System is the ability to help you toward making better decisions. Your decisions are better in the sense that, once they are implemented, they have such effect as reducing costs, using assets more efficiently, increasing revenue, reducing risks, improving customer service, and so on. However, Decision Support Systems can provide your company with many other benefits including: 
Speeding up process of decision making 
Increasing organizational control 
Speeding up problem solving in an organization 
Helping automate managerial processes 
Improving personal efficiency 
Eliminating value chain activities

Explain the following terms:- (i) Business 2 Business, (ii) Business 2 Customer, (iii) Customer to Business, (iv) Customer to Customer.

(i) Business to Business (B2B) Business to Business or B2B refers to e-commerce activities between businesses. These transactions are usually carried out through Electronic Data Interchange or EDI. This allows more transparency among business involved; therefore business can run more efficiently. 

(ii) Business to Customer (B2C) Business to Customer or B2C refers to e-commerce activities that are focused on consumers rather than on businesses. 

(iii) Customer to Business (C2B) Customer to Business or C2B refers to e-commerce activities, which uses reverse pricing models where the customer determines the prices of the product or services. There is increased emphasis on customer empowerment. 

(iv) Customer to Customer (C2C): Customer to Customer or C2C refers to e-commerce activities, which uses an auction style model. This model consists of person-to-person a transaction that completely excludes businesses from the equation.

Explain Technical and operational factors of E-commerce

Technical and Operational Factors of E-commerce
(i) Protocol (Standards) Making Process
A well-established telecommunications and Internet infrastructure provides many of the necessary building blocks for development of a successful and vibrant ecommerce marketplace.
(ii) Delivery Infrastructure
Successful e-commerce requires a reliable system to deliver goods to the business or private customer.
(iii) Availability of Payment Mechanisms
Secure forms of payment in e-commerce transactions include credit cards, checks, debit cards, wire transfer and cash on delivery.
(iv) General Business Laws
The application of general business laws to the Internet will serve to promote consumer protection by insuring the average consumer that the Internet is not a place where the consumer is a helpless victim.
(v) Public Attitude to E-commerce
The public attitude toward using e-commerce in daily life is a significant factor in the success of ecommerce.
(vi) Business Attitude to E-commerce

The willingness of companies to move away from traditional ways of doing business and develop methods and models that include e-commerce is essential.

Describe the advantages and disadvantages of Return on investment

Advantages of Return on Investment:
ROI has the following advantages

(i) It relates net income to investments made in a division giving a better measure of divisional Profitability.
(ii) It can be used as a basis for other ratios which are useful for analytical purposes.
(iii) It is easy to understand as it is based on financial accounting measurements.
(iv) It may be used for inter firm comparisons, provided that the firms whose results are being compared are comparable size and the same industry.

Disadvantages of Return on Investment:

ROI has the following limitations:

(i) Satisfactory definition of profit and investment are difficult to find. Profit has many concepts such as profit before interest and tax, profit after interest and tax, controllable profit, profit after deducting all allocated fixed costs. Similarly, the term investment may have many connotations such as gross book value, net book value, historical cost of assets, and current cost of assets, assets including or excluding intangible assets.

(ii) While comparing ROI of different companies it is necessary that the companies use similar accounting policies and methods in respect of valuation of stocks, valuation of fixed assets, apportionment of overheads, treatment of research and development expenditure etc.

(iii) ROI may influence a divisional manager to select only investments with high rates of return (i.e. rates which are in line or above his target ROI). Other investments that would reduce the division‘s ROI but could increase the value of the business may be rejected by the divisional manager. It is likely that another division may invest the available funds in a project that might improve its existing ROI (which may be lower than a division‘s ROI which has rejected the investment) but which will not contribute as much to the enterprise as a whole. These types of decisions are sub-optimal and
can distort an enterprise‘s overall allocation of resources and can motivate a
manager to make under investing in order to preserve its existing ROI.

State the objectives of Supply Chain Management

Supply chain management is a set of approaches utilized to efficiently integrate
suppliers, manufactures, warehouses and stores, so that merchandise is produce and
distributed at the right quantities, to the right locations, and at the right time, in order
to minimize system wide costs while satisfying service level requirements.

Objective of Supply Chain Management:

(i) Supply chain Management takes into consideration every facility that has an impact
on cost and plays a role in making the product conform to customer requirements:
from supplier and manufacturing facilities through warehouses and distribution
centers to retailers and stores.

(ii) The supply chain management is to be efficient and cost –effective across the entire
system; total system wide costs from transportation and distribution to inventories of
raw materials, work – in-process and finished goods are to be minimized.

(iii) Finally, supply chain management revolves around efficient integration of suppliers,
manufacturers, warehouses and stores; it encompasses the firm‘s activities at many
levels, from the strategic level through the tactical to the operational level.

Explain the role of the Management Accountant in Value Chain Analysis

Role of the Management Accountant in Value Chain Analysis Management Accountants should recognize that the traditional, functional, internally oriented information m is inadequate or the Firm engaged in global competition. In order to facilitate Value Chain Analysis, should be a change in focus for Management Accounting. The Management Accountant's role will be scant in the following areas-

(i) Need for education, training and awareness:
Management Accountants should bring the importance of customer value to the forefront of Management's strategic thinking. They should take the initiative to bring the Value Chain message to major players in the Firm through seminars, articles, Value Chain examples and Company-specific applications.

(ii) Exploring for information:
VCA requires expertise in internal operations and information and also remands a great deal of external information. Management Accountants must seek relevant financial and non-financial information from sources outside the Firm.

(iii) Creativity:
Management Accountants must integrate databases and potential sources of timely information on competitive forces confronting the business. This calls for innovation and creativity in gathering and analyzing information for management decisions.

(iv) System design:
Designing internal and external information systems to assist managers in planning, monitoring and improving value-creating processes is another challenge facing Management Accountants.

(v) Cooperation:
Management Accountants should solicit support from all senior managers for
allocating resources to develop and improve Value Chain-oriented Information
Systems. The Management Accountant should ensure that the Top Management is committed to Value Chain Analysis and the organizational changes necessary for its successful implementation.

State the components of performance Management

Any effective performance management system includes the following components:

(i) Performance Planning: Performance planning is the first crucial component of any performance management process which forms the basis of performance appraisals. Performance planning is jointly done by the appraise and also the review in the beginning of a performance session. During this period, the employees decide upon the targets and the key performance areas which can be performed over a year within the performance budget, which is finalized after a mutual agreement between the reporting officer and the employee.

(ii) Performance Appraisal and Reviewing: The appraisals are normally performed twice in a year in an organization in the form of mid reviews and annual reviews which is held in the end of the financial year. In this process, the appraise first offers the self filled up ratings in the self appraisal form and also describes his/her achievements over a period of time in quantifiable terms. After the self appraisal, the final ratings are provided by the appraiser for the quantifiable and measurable achievements of the employee being appraised. The entire process of review seeks an active participation of both the employee and the appraiser for analyzing the causes of loopholes in the performance and how it can be overcome. This has been discussed in the performance feedback section.

(iii) Feedback on the Performance followed by personal counseling and performance facilitation: Feedback and counseling is given a lot of importance in the performance management process. This is the stage in which the employee acquires awareness from the appraiser about the areas of improvements and also information on whether the employee is contributing the expected levels of performance or not. The employee receives an open and a very transparent feedback and along with this the training and development needs of the employee is also identified. The appraiser adopts all the possible steps to ensure that the employee meets the expected outcomes for an organization through effective personal counseling and guidance, mentoring and representing the employee in training programmers which develop the competencies and improve the overall productivity.

(iv) Rewarding good performance: This is a very vital component as it will determine the work motivation of an employee. During this stage, an employee is publicly recognized for good performance and is rewarded. This stage is very sensitive for an employee as this may have a direct influence on the self esteem and achievement orientation. Any contributions duly recognized by an organization helps an employee in coping up with the failures successfully and satisfies the need for affection.

(v) Performance Improvement Plans: In this stage, fresh set of goals are established for an employee and new deadline is provided for accomplishing those objectives. The employee is clearly communicated about the areas in which the employee is expected to improve and a stipulated deadline is also assigned within which the employee must show this improvement. This plan is jointly developed by the appraise and the appraiser and is mutually approved.


(vi) Potential Appraisal: Potential appraisal forms a basis for both lateral and vertical movement of employees. By implementing competency mapping and various assessment techniques, potential appraisal is performed. Potential appraisal provides crucial inputs for succession planning and job rotation.

Describe the limitations of Value Chain Analysis

A value chain is the sequence of business functions in which utility is added to the products or services of the firm. Through proper analysis of each segment of the value chain, customer value is enhanced. No-value creating activities are eliminated.
In value chain analysis, each of the business functions is treated as an essential and value contributor and is constantly analyzed to enhanced value relative to the cost incurred. Like business functions, in value chain approach also, it is important that the efforts of all functions are integrated and co-ordinate to increase the value of the products or services to the customers.
Limitations of Value Chain Analysis are given below:
(i) Non availability of Data
Internal data on costs, revenues and assets used for Value Chain Analysis are derived from financial of a single period. For long term strategic decision- making, changes in cost structures, market prices and capital investments etc. May not readily available.
(ii) Identification of stages
Identifying stages in an industry‘s value chain is limited by the ability to locate at least one firm that participates in a specific stage. Breaking a value stage into two or more stages when an outside firm does not compete in these stages is strictly judgment.
(iii) Ascertainment of costs of Revenues and Assets
Finding the Costs, Revenues and Assets for each value chain activity poses/gives rise to serious difficulties. There is no specific approach and much depends upon trial and error and experiments methods.
(iv) Identification of cost Drivers
Isolating Cost Drivers for each value creating activity, identifying Value chain Linkages across activities and computing supplier and customer profit margins present serious challenges.
(v) Resistance from employees
Value chain Analysis is not easily understandable to all employees and hence may face resistance from employees as well as managers.

What is Process Analysis? Describe the objectives of Process Analysis

Process analysis is an approach that helps managers improves the performance of their business activities. It can be a milestone in continuous improvement. Process analysis approach consists of the following steps:
(i) Definition of the scope and the objectives of the study,
(ii) Documentation of the status quo and definition of performance measures,
(iii) Assessment and performance evaluation, and
(iv) Development of recommendations.

Objectives of Process Analysis For many organizations their goals and objectives are fulfilled once they complete the review process and the Process Capture project stops at that point. For others it is important to move beyond the basic process documents and analyze the data collected and documents. In working with many organizations over 20 years, a good strategy with analysis is to look at the process through three angles to analyze and identify areas for change. These are Understanding, Quality and Efficiency. By systematically reviewing the process through each of these steps, a much improved and comprehensive analysis will result.

The objectives of analyzing the process include:
(i) Identify what makes maps difficult to understand and use
(ii) E valuate completeness
(iii) Isolate bottlenecks
(iv) Find redundancies
(v) Examine resources allocation
(vi) Measure process times

“Competitive intelligence is a process of gathering data, creating information and making decisions. Management accountants are trained to gather data, assimilate data into information and make decisions based upon information, frequently with their management counterparts.” – Justify the statements.

The above statement is related to the Role of Management Accountant in Competitive Intelligence. Competitive intelligence may also be viewed as a competitiveness audit, a concept that management accountants are familiar with. Management accountants‘ training and experience make them well-suited to the requirements of the competitive intelligence process. Management accountants may be actively involved in introducing a competitive intelligence process in several ways:
(i) Identifying the need for a new or improved competitive intelligence process;
(ii) Educating top management and other senior managers about that need;
(iii) Developing a plan along with cross-functional team members for designing, developing and implementing the new, improved competitive intelligence practice, including its underlying architectures;
(iv) Identifying the appropriate tools and techniques for conducting competitor analysis;
(v) Providing financial input, analysis and expertise to the competitive intelligence effort;
(vi) Contributing to and using competitive intelligence in target costing;
(vii) Ensuring that the competitive intelligence efforts are tied to the firm‘s goals, strategies, objectives and internal processes, as appropriate; and,
(viii) Continually assessing the new, improved competitive intelligence process and its implications for the organization and continually improving the process.

ICMAI / ICWAI Practice Test Papers - Syllabus - 2012

ICMAI / ICWAI Practice Test Papers - Syllabus - 2012