CMA Final Paper 18 (CFR) cheat sheet

CAS applicability under Companies (Cost Records and Audit) Rules: Class 1 companies must maintain cost records, and cost audit applies when turnover thresholds (₹35 crore overall or ₹50 crore for exports) are crossed; regulated sectors have separate thresholds.

CAS 1 classifies costs by nature: material, labour, power, depreciation, and other overheads; classification is the foundation for every subsequent CAS allocation and absorption rule.

CAS 2 defines capacity levels: installed, available, normal, and actual. Idle capacity cost arises when actual output is below normal capacity; abnormal idle capacity cost is charged to the cost statement separately, never absorbed into product cost.

CAS 3 covers overheads: production overhead is absorbed on a pre-determined base (machine hours, labour hours, direct wages). Under/over-absorption is adjusted to cost of sales, not to inventory, unless immaterial.

CAS 4 (revised) deal with cost of production for captive consumption: transfer price is built up from direct material, direct labour, direct expenses, and a share of overheads; profit margin is excluded.

CAS 5 covers average (equalized) cost of transportation: freight is averaged over normal load; abnormal empty runs and abnormal delays are excluded and charged separately.

CAS 6 (revised) covers material cost: valuation at weighted average or FIFO; abnormal wastage, spoilage, and rework are excluded from product cost and reported as abnormal losses.

CAS 7 covers employee cost: direct employee cost is traceable; indirect employee cost is apportioned. Idle time, overtime premium, and abnormal wastage of labour are separately identified and not absorbed into normal product cost.

Cost records must be maintained in Form CRA-1 (or prescribed formats) for the specified product or service; records must be preserved for eight financial years.

Cost records must reconcile with the general ledger and audited financial statements; material differences must be explained in the cost audit report.

Maintenance of cost records is mandatory for specified industries (e.g., regulated sectors like electricity, petroleum, telecom, drugs, fertilisers, sugar, cement, steel) irrespective of size, subject to thresholds in the Rules.

Records must capture capacity utilisation, input-output ratios, wastage, and by-product/co-product credits for each cost object; these feed the cost auditor's efficiency findings.

CRA-1 requires disclosure of the cost accounting policy adopted, including basis of allocation and absorption of overheads, and any change in policy with its impact.

Where a company is covered for cost records but not cost audit, it still must maintain records and file CRA-2 (notice of appointment) only when audit applies.

Cost records for a product must be maintained at the cost-object level (product, service, or activity) and reconciled with the financial cost of goods sold in the statutory accounts.

Non-maintenance or false maintenance of cost records attracts penalties under Section 469 read with the Rules, and the cost auditor must report the default in the cost audit report.

Cost auditor is appointed by the Board on the recommendation of the Audit Committee; appointment is ratified by members at the general meeting within 180 days of the financial year start.

Eligibility: a cost accountant in whole-time practice holding a Certificate of Practice; the cost auditor cannot be the statutory auditor or internal auditor of the same company.

Cost audit report is in Form CRA-3, with the auditor's report and annexure; it is submitted to the Board, and the company files it with MCA in e-form CRA-4 within 30 days of receipt of the signed report.

The cost auditor's report must state whether cost records are adequate, whether the cost accounting policies are consistent, and whether the cost statements reconcile with the financial statements.

Cost audit is in addition to, not in substitution of, statutory audit; the cost auditor reports on cost records and cost statements, not on the financial statements.

The cost auditor must report qualifications, reservations, or adverse remarks; if the company does not reply, the auditor may state the fact and the report is filed with MCA.

Cost auditor's powers mirror those of a statutory auditor under Section 143: access to books, records, and information, and right to require explanations from officers.

The cost auditor's report includes a statement on the adequacy of the cost accounting system and on the company's compliance with CAS; non-compliance must be disclosed with reasons.

Companies (Indian Accounting Standards) Rules, 2021, notify Ind AS; the roadmap applies to listed companies and unlisted companies above turnover/borrowing thresholds; others use AS.

Section 129 requires financial statements to give a true and fair view and to comply with accounting standards; Schedule III prescribes the form and content of the balance sheet, P&L, and notes.

Section 133 empowers the Central Government to prescribe accounting standards; where standards are not complied with, the company must disclose the deviation and its financial effect.

Section 134 requires the Board's report, directors' responsibility statement, and the auditor's report to be attached to the financial statements; the auditor reports on the accounts under Section 143.

Consolidation is mandatory under Section 129(3) read with Ind AS 110 / AS 21 for companies with subsidiaries, associates, or joint ventures; a statement in Form AOC-1 is attached.

Schedule III requires division into current/non-current, disclosure of share capital, reserves, borrowings, and a note on CSR expenditure under Section 135.

Ind AS 1 requires fair presentation, going concern, accrual basis, materiality, and consistency; comparative information for the prior period is mandatory.

Section 128 requires books of account to be kept at the registered office (or other place with Board resolution) and preserved for eight years; inspection is allowed to members.

Balance sheet under Schedule III: equity and liabilities (shareholders' funds, non-current liabilities, current liabilities) and assets (non-current, current); classification is by liquidity and maturity.

Statement of profit and loss: revenue from operations, other income, expenses, exceptional and extraordinary items, and tax; EPS (basic and diluted) is disclosed on the face.

Cash flow statement under Ind AS 7 / AS 3 splits operating, investing, and financing activities; interest and dividends are classified consistently and disclosed.

Material prior-period items and changes in accounting policies are applied retrospectively with restatement of comparatives, unless impracticable.

Current/non-current classification: an asset is current if realised within 12 months or held for trading; a liability is current if due within 12 months or payable on demand.

Share capital disclosures: authorised, issued, subscribed, and paid-up capital; reconciliation of shares outstanding at the beginning and end of the year; rights and preferences of each class.

Notes must disclose contingent liabilities, commitments, related-party transactions (Ind AS 24 / AS 18), and segment information (Ind AS 108 / AS 17).

Going concern assessment: management evaluates at least 12 months from the reporting date; material uncertainties must be disclosed in the notes.

Ind AS 115 five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price to obligations, and recognise revenue on satisfaction.

Revenue is recognised when control transfers (point in time) or over time if the customer receives and consumes benefits, the asset has no alternative use and the entity has an enforceable right to payment.

Variable consideration (discounts, rebates, penalties) is included only to the extent it is highly probable that a significant reversal will not occur; use expected value or most likely amount.

Contract costs: incremental costs of obtaining a contract are capitalised if recoverable; costs to fulfil a contract are capitalised if they relate directly, generate resources, and are expected to be recovered.

Principal vs agent: an entity is a principal if it controls the good or service before transfer; otherwise it is an agent and recognises commission only.

Warranty: assurance-type warranty is a provision under Ind AS 37; service-type warranty is a separate performance obligation.

Ind AS 115 requires disaggregation of revenue and disclosure of contract balances (receivables, contract assets, contract liabilities) and remaining performance obligations.

Under AS 9 (for non-Ind AS companies), revenue is recognised when significant risks and rewards of ownership transfer and no effective control is retained; the two frameworks differ in timing and allocation.

Ind AS 103: acquisition method-identify the acquirer, determine the acquisition date, recognise and measure identifiable assets acquired and liabilities assumed at fair value, and recognise goodwill or a bargain gain.

Goodwill = consideration transferred + non-controlling interest + previously held interest – net fair value of identifiable assets and liabilities. Goodwill is not amortised; it is tested annually for impairment.

Non-controlling interest may be measured at fair value (full goodwill) or at the proportionate share of net identifiable assets; the choice is made per transaction.

Bargain purchase (negative goodwill) is recognised in profit or loss after reassessing the identification and measurement of assets and liabilities.

Contingent consideration is measured at fair value at the acquisition date; subsequent changes classified as equity are not remeasured, while liability-classified changes go to P&L or OCI.

Transaction costs are expensed, not included in consideration; costs to issue debt or equity are accounted for under Ind AS 32/109.

Common control combinations are outside Ind AS 103; they are accounted for using the pooling of interests method at carrying values.

Measurement period is up to 12 months from the acquisition date to adjust provisional fair values; adjustments to goodwill are made retrospectively.

Control under Ind AS 110: power over the investee, exposure to variable returns, and ability to use power to affect returns; control is reassessed when facts change.

Consolidation: combine like items, eliminate intragroup balances, transactions, income, and expenses in full; eliminate the parent's investment against the subsidiary's equity.

NCI is presented in equity separately from owners of the parent; profit or loss and OCI are attributed to NCI even if it results in a deficit balance.

Uniform accounting policies and the same reporting date must be used; if a subsidiary's date differs by more than three months, adjustments are made for significant transactions.

Associates (significant influence, usually 20% or more) are accounted for by the equity method under Ind AS 28; joint ventures under Ind AS 111 are also equity-accounted.

Step acquisition: remeasure previously held interest to fair value at the date control is obtained; the gain or loss is recognised in P&L.

Loss of control: derecognise assets and liabilities, recognise any retained interest at fair value, and recognise the resulting gain or loss in P&L.

Form AOC-1 discloses subsidiaries, associates, and joint ventures: name, relationship, shareholding, and net assets/share in profit or loss.

Ind AS 109 classification: amortised cost if the business model is hold-to-collect and cash flows are solely payments of principal and interest; FVOCI if hold-to-collect-and-sell; otherwise FVTPL.

Expected credit loss (ECL) model: loss allowance = probability of default × loss given default × exposure at default, discounted, with forward-looking information; applies to financial assets at amortised cost.

Effective interest method: amortise premiums/discounts and transaction costs over the expected life to recognise interest at a constant rate on the carrying amount.

Ind AS 32: a financial liability exists if the issuer has an obligation to deliver cash or another financial asset; puttable instruments and contingent settlement provisions may reclassify.

Ind AS 116 lessee: recognise a right-of-use asset and a lease liability at the present value of lease payments; the ROU asset is depreciated and the liability accretes interest.

Short-term leases (12 months or less) and low-value asset leases are exempt and expensed on a straight-line basis.

Lessor accounting under Ind AS 116: finance lease if substantially all risks and rewards transfer; otherwise operating lease. Sale-and-leaseback gains are limited to rights retained.

Hedge accounting under Ind AS 109: fair value, cash flow, and net investment hedges; effectiveness is assessed prospectively and the ineffective portion is recognised in P&L.

Integrated Report framework: six capitals (financial, manufactured, intellectual, human, social and relationship, natural) and the value creation process over the short, medium, and long term.

Guiding principles: strategic focus and future orientation, connectivity of information, stakeholder relationships, materiality, conciseness, reliability and completeness, and consistency and comparability.

Content elements: organisational overview and external environment, governance, business model, risks and opportunities, strategy and resource allocation, performance, outlook, and basis of preparation.

Materiality in : a matter is material if it could substantively affect the organisation's ability to create value over time; the assessment is entity-specific.

BRSR (Business Responsibility and Sustainability Report) under SEBI LODR: mandatory for top 1,000 listed companies; nine principles of the National Guidelines on Responsible Business Conduct.

BRSR Core requires reasonable assurance for specified KPIs (greenhouse gas footprint, water, energy, waste, employee wellbeing, gender diversity) in a phased manner.

Management commentary (IFRS Practice Statement 1) covers nature of business, objectives, strategy, resources, risks, relationships, results, and forward-looking prospects.

Sustainability reporting frameworks: GRI for impact reporting, ISSB IFRS S1/S2 for enterprise value and climate disclosures, and TCFD for governance, strategy, risk management, and metrics.

Current ratio = current assets / current liabilities; quick ratio excludes inventory and prepayments. A ratio below 1 signals potential liquidity stress.

Debt-equity ratio = total debt / shareholders' equity; interest coverage = EBIT / interest expense; a coverage below 1.5 is generally a covenant concern.

Return on equity = net profit after tax / average shareholders' equity; DuPont decomposition: net margin × asset turnover × equity multiplier.

Gross margin = (revenue – cost of goods sold) / revenue; operating margin = EBIT / revenue; a falling gross margin with stable operating margin suggests cost reclassification.

Working capital cycle = inventory days + receivable days – payable days; a rising cycle absorbs cash and increases borrowing needs.

Earnings quality: compare cash flow from operations with net profit; a persistent gap indicates aggressive revenue recognition or weak receivables collection.

Common-size analysis expresses each P&L line as a percentage of revenue and each balance sheet line as a percentage of total assets; trend analysis compares across periods.

Altman Z-score = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5; a score below 1.81 indicates financial distress.

ICAI Code of Ethics: integrity, objectivity, confidentiality, professional competence and due care, professional behaviour, and technical standards; the conceptual framework requires identifying, evaluating, and addressing threats.

Threats: self-interest, self-review, advocacy, familiarity, intimidation; safeguards include disclosure, rotation, independent review, and declining the engagement.

Independence: the cost auditor cannot be the statutory auditor or internal auditor of the same company; a cooling-off period applies after a statutory audit before accepting a cost audit.

Confidentiality: client information may be disclosed only with consent or where required by law or professional duty; whistleblowing obligations override confidentiality in some cases.

Section 141/142 of the Companies Act: disqualifications for auditors include indebtedness above ₹5 lakh, business relationships, and relatives holding securities; the cost auditor is subject to analogous disqualifications.

Whistleblower policy and vigil mechanism under Section 177: listed companies and prescribed classes must establish a mechanism; the auditor must report fraud under Section 143(12).

Case application: when a client pressures for a favourable cost report, the auditor documents the disagreement, issues a qualified report, and considers resignation with communication to the Board.

Professional scepticism: question management representations, corroborate with external evidence, and document the basis for judgements on material cost allocations.