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A month later, you receive the following email:
From: Hesham El-Sayed. Independent Non-executive
To: Romuald Marek. Chief Finance Officer
Subject: Collapse of fuel supplier
I am writing to give you some advance notice of an internal audit investigation that has been commissioned by the Audit Committee
Just over a year ago. Planejoos, a newly formed company, approached the management team at Airfield's Capital City International (CCI) airport and offered to take over refueling operations at Starport Planejoos offered a higher percentage of revenue than the existing supplier was paying CCI's management team agreed and appointed Planejoos rather than renew the existing supplier's contract.
CCI was unable to conduct the usual background and credit checks on Planejoos for two reasons. Firstly, Planejoos was a new company and so did not have an extensive credit history that could be checked Secondly CCI was under time pressure to reach a decision on whether to renew the existing supplier's contract or allow it to expire
CCI's management team claimed that it had acted quickly in order to benefit from the additional revenue that could be earned from dealing with Planejoos The management team was acting on the basis that it had an ethical duty to maximise the wealth of Airfield's shareholders and that maximising revenues from fuel sales through this agreement with Planejoos was consistent with that ethical duty.
Unfortunately, as a new company. Planejoos struggled to obtain trade credit and the high demand for fuel put the company's cash flows under extreme pressure Receipts from sales lagged behind payments for inventory Planejoos has now collapsed, leaving a large trade receivable that CCI will have to write off as uncollectable CCI had permitted this receivable to accumulate rather
than pressing for payment and so putting Planejoos under further pressure.
Fortunately, the previous fuel supplier was prepared to return to CCI.
See the explanation below.
The acceptance of Planejoos at Capital City International airport with out credit rating check is a sign of poor internal audit practices. The CCI is the biggest airport the Arrfied owned and amongst the world big airports. The Planejoos is a newer and inexperienced company without sound credit and financial history, the collapse of aviation fuel provider at a major airport is credit and reputaional risk
The internal audit performance laking in Arrfied which is in the aviation business could put the business in danger and needs to be corrected. The poor performance of internal audit by not inusring compliance could make damage i.e. a terrorist could attack the aircraft and landside if properchecking are not done. The aviation business are vulnerable to hijacking, human trafficking and smuggling. A special attention must be invited to internal audit.
The overall performance of the internal audit and audit committee is questionable here. The audit committee is not formulated correctly. No non-executive director have sound financial expertise. Martin Harris is the only NED with financial expertise and taking him out of audit committee is not sign of good corporate governance. The new leadership at the audit committee with savvy of financial knowledge must be on the board.
Martin Harris should be taken on the board in replacement of Carmelita Tante. Revamp the internal audit department and startup a credit department which is also responsible to rating checking.
Arrfield must also think about to formulate a risk committee to check the risk and ensure that the risks are properly managed.
Requirement : 2
It is the duty of the management to maximize the shareholder’s wealth, but a proper care must be taken while making any decision on behalf of the shareholders. It seems due care is not given to the decision and the decision was made in haste.
It is not only duty of the management to maximize wealth of the shareholder, they are supposed to protect the wealth of the shareholders. Any decision no taken within the risk appetite of the company may leads to breach of ethical principles.
The shareholders trust on the management that they will make the decisions in best interest of the company even if this is not is their own interest. Incase of the Planejoos the management has neglected the credit rating check any made the decision solely on the basis of prices that Planejoos quoted. It seems that this decision does not fit in the risk appetite and risk tolerance of the Arrfield.
I have attached a news article
Arrfield does not set the price for aviation fuel sold at our airports, but we do receive a percentage of the revenues earned by the fuel companies.
I need your help to prepare for a Board meeting to discuss this matter Please write a paper covering the following
* Firstly, explain the impact that the criticisms voiced by the environmental campaigners will have on the frequent PESTEL analysis that Arrfield's Board conducts.
[sub-task (a) = 34%
* Secondly, evaluate the commercial logic of Arrfield's strategy of basing charges for non-aeronautical services (such as fuel sales and retail activities) on percentages of the revenues generated by the companies that operate at its airports
[sub-task (b) = 33%)
* Thirdly, recommend with reasons whether Arrfield should attempt to justify strategic decisions to its shareholders when the commercial logic of those decisions is not immediately obvious
[sub-task (c) = 33%}
Chief Finance Officer
See the answer below in explanation.
The criticism from the environmental campaigns for sale of cheap fuel at the Arrfield airports is not a good sign but the prices of the fuel are not set by the Arrfield. In most of the countries the fuel prince are regulated through Oil and Gas regulatory authorities. As the Arrfield airports are providing the facilities to airlines to refill fuel at the airport which is necessary for the flying of the plane on commission bases, it contribute a significant portion of profit of the Arrfield.
The environmental campaigners criticism is on the usage use of fuel which cause carbon emissions. The Govt, of the Norland may set the price of the fuel in Norland and regulate the prices of the fuel in Norland. After the criticism Govt, of Norland may think to not allowing the fuel companies to pass the cheap fuel import to the airlines. This may be hostile of the Arrfiled business. Many airline may choose the Norland for the flight operation due to gaining advantage of cheaper fuel refill.
As the airlines are buying more fuel which makes the plane heavier and burn more fuel which harm to the environment is a great concern. This could lead to legal and environmental litigation and penalties. The reputation risk is also here if corrective actions are not taken by Arrfield.
As the Airfield also rely heavily on the non-aeronautical revenues to make profits and the it increase from a substantial percentage in 2020 as to the preceding year. The fuel companies operate in Arrfied airports which is intrinsic in the airport business. It will be difficult for the Arrfield to provide the fuel by itself. It is worthwhile that the Arrfieid earning commission without involving the fuel operations.
As the Norland is being liked by the airlines for refueling its plane is good for the Arrfield to make profit. Arrfield earn commission as much as the airline buy fuel from fuel companies. But by decreasing the price of the fuel it is also worth mentioning that the Arrfield commission is also remains at lower side.
There are three elements in the scenario: 1- Higher sale higher commission. 2- Sale at lower price lower commission. 3-Reputational and environmental risk involved.
The shareholders are major stakeholders of the company. They are key players have high amount of power and high level of interest. The Arrfield must communicate true affairs of the business to its shareholders. If the commercial logic of decision are not obvious then the poor understanding of the affairs may lead to chaos. The managers are representative of the shareholders and should do everything in the best interest of the shareholders. If they will make the decisions which are not logically understandable then, the shareholders may lose their trust in the management.
The shareholders must not be justified to the shareholder if they are not commercially valuable. Whether or not the decisions are profitable these may be communicated to shareholders which represent true picture of the decisions breach of CIMA ethical principles.
Three months has passed since the discussion concerning Fouce Oil’s proposal.
You have received the following email from William Seaton, Director of Finance:
From: William Seaton, Director of Finance
To: Finance Manager
Subject: Fouce Oil’s proposal to collaborate on exploration
After deliberating at length on the various discussions that we have had with Fouce Oil since its initial approach, we have decided to proceed.
We need to work out some important details, otherwise this venture will be a disaster.
Please draft a report that covers the following matters:
Should we create a formal coaching and mentoring scheme, whereby members of Fouce Oil’s exploration staff will receive guidance from their counterparts at Slide? Please explain the advantages and disadvantages of doing so very clearly.
Please explain how best to organise a formal coaching and mentoring scheme, if we decide that we should create one.
How should we manage the business relationship between the two companies’ exploration staff for the duration of this arrangement?
What are the difficulties associated with decision-making on exploration issues and how should we address those?
The collaboration goes live in a few weeks and so I need your input urgently so that I can get things moving.
Complete your answer and submit.
You have just received the following email:
From: William Seaton, Director of Finance
To: Finance Manager
Subject: Oil reserves
This email arrived from the Head Geologist earlier today. I am concerned that many of our colleagues understand very little other than rock formations and drilling reports. They certainly misunderstand accounting issues. I have already had some very confused discussions with the other members of the Board.
I need a very clear report from you that I can circulate to the other Board members. I am not particularly interested in the technical accounting rules. I do not think that you necessarily require an accounting standard to tell you that a particular disclosure is misleading.
I need your report to cover the following:
Should we make a public announcement of this information? I would like a clear indication of the implications for our
relationship with our various stakeholders AND the ethical issues that you feel are relevant.
What are the implications for our share price? I would like your analysis to consider the factors that will indicate how
our share price will change upon the announcement.
The email referred to above can be found by clicking on the Reference Materials button.
Complete your answer and submit.
You are sitting in your office when you hear Marcus Svenson, the Finance Director, speaking on the telephone. You can hear only Marcus’ side of the conversation:
"Hello, I would like to speak to Sally Walker please. It is Marcus Svenson here. (pause)
Hi Sally, you contacted me six months ago to discuss a job opportunity that you thought I’d be suitable for. I said that I didn’t wish to pursue it at that time because I was committed to Wodd. Things have changed since then and I would like to be considered for a finance directorship in another company. (pause)
Yes, I’m still with Wodd. (pause)
Yes, I realise that there was an unfortunate story in the business press about the problems that the weak USD is causing us, but there was very little that I could do to prevent that. (pause)
I am sorry to hear that. I had hoped to move on." (sound of telephone hanging up and door opening)
Marcus discovers that you are sitting at your desk and realises that you would have heard his side of the call.
"Please don’t tell anybody what you heard. Would you regard it as unethical to respect my privacy?
I suspect that the CEO knows that I am thinking of leaving. He commented on the need for Board members to be loyal to Wodd at the last Board meeting. But don’t you agree that the shareholders can better protect themselves against currency fluctuations than the directors?
The crazy thing is that I suspect that the Chairman will dismiss me next month. If that happens, I get a year’s salary as a severance package. That will really annoy the shareholders. How can I justify accepting the severance package if I am effectively being dismissed for failing to manage Wodd’s finances properly?
I need to explain at the next Board meeting why it would have been difficult to evaluate the risk of the USD weakening. According to an article I read, it has been picked up as a serious problem for us. How would you advise me to explain that?"
Complete your answer and submit.