Established in 2010 and headquartered in Vadodara, Gujarat, ABC Fashions Ltd. (AFL), has built a strong reputation as a leading manufacturer,…

Established in 2010 and headquartered in Vadodara, Gujarat, ABC Fashions Ltd. (AFL), has built a strong reputation as a leading manufacturer, wholesaler, and exporter of high-quality shirts and T-shirts for men, women, and children. AFL operates three textile plants in remote areas of Vadodara, contributing to local community development. Through continuous process improvements and workforce training to minimize rework, the company has successfully enhanced quality and reduced costs. Cotton and viscose, essential materials for manufacturing shirts and T-shirts, were cost-effective for AFL due to their local availability. However, the production of these materials has significant environmental and social impacts. Cotton cultivation requires a substantial amount of water. Additionally, conventional cotton farming relies heavily on pesticides and fertilizers, which adversely affect the health of farmers and nearby communities. Viscose, a semi-synthetic fiber derived from wood pulp, is converted into fabric through the intensive use of chemicals and water. In response to these concerns, AFL has begun incorporating organic cotton into its production process. Organic cotton significantly reduces the need for chemical pesticides and fertilizers but its cultivation tends to require more water than conventional cotton, posing an additional environmental concern. AFL is deeply committed to sustainable water usage across its processing operations. In collaboration with local municipalities, the company has launched an innovative water management project that includes a 50 million litres per day (MLD) sewage treatment plant. This facility collects, transports, and treats public sewage, enabling AFL to recycle approximately 6 billion litres of water annually for use in its operations. To further enhance water availability, especially in the Vadodara region, AFL has developed multiple rainwater harvesting ponds. AFL's commitment to environmental responsibility extends beyond water. The company uses high-quality materials that ensure longer-lasting textiles. This approach reduces the frequency of purchases and improves the overall clothing experience for consumers. In line with its environmental goals, AFL diverted 75% of its textile waste from landfills through comprehensive reuse and recycling programs. As part of its broader sustainability strategy, AFL has: Planted 1,00,000 trees during the financial year 2024-25Installed solar panels across its facilities, reducing energy consumption by 25%Conducted a comprehensive carbon audit and committed to achieving net zero emissions by 2030 In the past two years, AFL has entered the poly clothing segment, successfully capturing a 5% market share. In addition to its environmental initiatives, AFL supports community development. The company has organized training programs for approximately 9,000 farmers, providing on-field assistance, productivity enhancement strategies, and access to government schemes. Nearly 60% of the workforce employed across AFL's three plants is drawn from local communities. A significant portion of the labour force resides in residential areas adjacent to the factory sites. By addressing the livelihood needs of its employees such as food, clothing, education, and healthcare - AFL has contributed to the economic development of these towns, creating alternative sources of income and supporting community welfare. The Human Resources (HR) department regularly conducts training programs aimed at enhancing employee skills and productivity. The company ensures compliance with local labour laws and provides fair wages to all workers. Mr. Sridhar, management accountant, has been assigned the task by CEO to work out the factors responsible for increase in operating income by 710 lakhs in 2024-25. For analysing increase in operating income, he spread analysis into three main areas i.e. Growth Component, Price Recovery Component and Productivity Component and worked out the following: Revenue & Cost effect of Growth Component in 2024-25 (in lakhs) Revenue & Cost effect of Price Recovery Component in 2024-25 (in lakhs) Cost Effect of Productivity Component in 2024-25 (in lakhs) Revenue 6,800(F) 360(F) Cost 6,500(A) 110(A) 160(F) Net effect on Operating Income 300(F) 250(F) 160(F) 'AFL' sold 44 lakh and 48 lakh pieces of shirts & T-shirts during the year 2023-24 and 2024-25 respectively. The market for shirts and T-shirts grew by 4% during 2024-25 and all other increase in AFL's sales were the result of its own strategic actions. AFL's export turnover in 2024-25 reached USD 7 million, marking an increase from the preceding three financial years, during which it was USD 2 million, USD 3 Million and USD 4 Million respectively. Based on its export performance, the Directorate General of Foreign Trade (DGFT) granted AFL a Status Holder Certificate, thereby conferring various privileges and benefits to the company under the Foreign Trade Policy. During the year 2024-25, a sitting fee of 2.4 lakhs was paid to Mr. Raman (independent director). Mr. Purva, the CEO, resides in a luxurious property owned by AFL. This property was acquired 10 years ago, and an annual depreciation of 1 lakh is provided for in the company's Profit & Loss account. The market rental value of a similar property is 12 lakhs per annum. Mr. Harish, a director of the company, is also a partner at the legal firm HKN & Associates, which specializes in GST and income tax matters. During the year, AFL paid 6 lakhs to HKN & Associates for legal services related to GST matters. These services were rendered by Mr. Gaurav, a senior partner at the firm, and Mr. Harish neither supervised nor had any influence over the services provided to the company. On 1st April 2024, the company entered into a lease agreement with PQR Inc. for the acquisition of machinery on lease for a period of five years. The lease arrangement stipulates annual lease payments of USD 18,000, payable at the end of each year. At the commencement date of the lease, the exchange rate was USD 1 = 83. The average exchange rate during the financial year 2024-25 was - 84, and the closing rate as on 31st March 2025 was - 86. The applicable incremental borrowing rate for a USD-denominated borrowing on the lease commencement date was 8% per annum. For entering this agreement services of Gordon Inc. of the USA were availed. The commission payable was 6% to be remitted by AFL to the Gordon Inc. in USA. At the same time some old machinery was also disposed. Statutory auditor while going through the machinery sale transaction also requested for review of the internal financial controls over such transaction. The matter was discussed with accounts department and accounting department head, Mr. Shashi, submitted the following: (a) Accounting policy Item of PPE is derecognized on disposal or when no future economic benefits are expected from its use. (b) Presentation in financial statements - The gain or loss on disposal is recognized in profit and loss. (c) Internal Financial Controls implemented - The disposed PPE item and its gain on derecognition is verified by inspection, confirmation, vouching etc. (d) Relevant calculation to be made - Difference between net disposal proceeds and carrying amount will depict the gain or loss on derecognition. 'AFL' has export receivables amounting to £ 2,50,000 as on 31.03.2025, which are due to be received from a U.K.-based customer in three months. The Finance Manager is concerned about potential adverse movements in the exchange rate due to recent volatility in the foreign exchange market. As of March 31, 2025, the spot exchange rate stands at 1 £ = 115.00/115.40, and the 3-month forward rate is 1£ = 116.70/117.00. Interest rates in India are 6% p.a. for deposits and 8% p.a. for borrowings, whereas in the United Kingdom, the deposit rate is 2% p.a. and the borrowing rate is 4% per annum. To hedge against currency risk, the company is also evaluating the use of currency options. A 3-month call option with an exercise price of 116 per pound is available at a premium of 1.40 per pound, and a put option at the same exercise price costs - 1.60 per pound. The manager has forecasted possible spot exchange rates for the end of the 3-month period with the following probabilities:114 with a probability of 0.20,116 with a probability of 0.50, and 118 with a probability of 0.30.