Department of Commerce, Bahauddin Zakariya University, Multan

Final Examination of M.COM -4th semester (Morning )

Subject: Financial Statement Analysis Marks: 50 Instructor: Dr Muhammad Sadiq Shahid Time:02Hr
Instructions for the exam
1. Please provide your answer as handwritten.
2. Write your name and roll number on top of each answer sheet which must be numbered(e.g.,1/4).
3. Answer your question by providing “answer to question 1” for example. Do not reproduce the question pl.
a. Having finished the exam, scan it and send it by email at dcomexam@gmail.com and sshahidmalik@bzu.edu.pk
5. Do not submit your paper in the group.
Question 01: [15 Marks]
[A]:PTCL Company issued 3%, 10-year convertible bonds on January 1, 2015, at their par value of $600 million. Each $1,000 bond is
convertible into 50 shares of PTCL’s $1 par value common stock. Use the template below to show the financial statement effects under U.S.
GAAP and IFRS of the following transactions.
(a). Original issue. For the IFRS treatment, assume that PTCL would have borrowed at 10% if it did not offer a conversion privilege. (b).
Recognition of one year’s interest effect. (c). Conversion of the bonds when a share of PTCL common stock trades at $40. (1) Using the
“book value method” and (2) Using the “market value method”
Assets = Liabilities + Shareholdersʼ Equity
CC AOCI RE
Journal entry:
[B]: Assume that a start-up manufacturing company raises capital through a series of equity issues. a). Using the financial statement template
below, summarize the financial statement effects of the following transactions. Identify the account affected and use plus and minus signs to
indicate the increases and decreases in the specific element of the balance sheet (assets, liabilities, components of shareholders’ equity).
(1) Issues 100,000 shares of $1 par value common stock for $10 per share. (2) Receives land in exchange for 10,000 shares of $1 par common
stock when the common stock is trading in the market at $15 per share. The land has no readily determinable market value. (3) Receives
subscriptions for the issue of 40,000 shares of $1 par value common.
Share issue price is $20, of which 30 percent is received as a down payment. Subsequently, remaining 60% is received.
Assets = Liabilities + Shareholdersʼ Equity
CC AOCI RE
Journal entry:
b). In each case, how does the company measure the transaction? What measurement attribute is used?
Question 02: [15 Marks]
[A]: Discuss the types of bankruptcy prediction models.
[B]: Define the Altman z-score. Discuss its role in bankruptcy prediction.
[C]: Altman’s bankruptcy risk model utilizes the values of the variables at a particular point in time (balance sheet variables) or for a period
of time (income statement values). For the most part, Beneish’s earnings manipulation risk model utilizes changes in variables from one
period to the next. Why might the levels of values in Altman’s model be more appropriate for predicting bankruptcy and changes in values in
Beneish’s model be more appropriate for identifying earnings manipulation?
Question 03: [05+15 Marks]
[A]: The shareholders’ equity section of All-Wood Doors on a day its common stock is trading at $125 per share.
Common stock ($2 par value, 45,000 shares issued and outstanding) $ 90,000
Additional paid-in capital on common stock 1,600,000
Retained earnings 3,500,000
A). Use the financial statement template below to show the financial statement effects of the following dividend events.
(1) Cash dividend declaration and payment of $1 per share (2) Property dividend declaration and payment of shares representing a short-term
investment in Screen Products, Ltd., with a fair value of $10,000 (3) 10 percent stock dividend (4) 100 percent stock dividend (5) 3-for-1
stock split (6) 1-for-2 reverse stock split
Assets = Liabilities + Shareholdersʼ Equity
CC AOCI RE
Journal entry:
b). Which events changed the book value of common equity? what conditions will these events lead to future increases and decreases in
ROE?
[B]:Delta Air Lines is one of the largest airlines in the United States. It has operated on the verge of bankruptcy for several years. Financial
data for Delta Air Lines for each of the years ending December 31, 2016, to December 31, 2018.
2016 2017 2018
Sales $15,002 $15,657 $14,087
Interest Expense $ 824 $ 380 $ 499
Net Income (Loss) (1,272) $1,216 $ 828
Current Assets $ 3,606 $ 3,567 $ 3,205
Total Assets $21,801 $23,605 $21,931
Current Liabilities $ 5,941 $ 6,403 $ 5,245
Long-Term Debt $12,507 $11,040 $ 5,797
Total Liabilities $27,320 $19,581 $16,354
Retained Earnings $ 4,373 $ 2,930 $ 4,176
Shareholders’ Equity $ 1,157 $ 4,024 $ 5,577
Cash Flow Provided by Operations $ 225 $ 236 $ 2,898
Common Shares Outstanding 123.4 123.2 123.0
Market Price per Share $ 7.48 $ 11.81 $ 29.26
(a) Compute the value of each of the following risk ratios (at the end of 2005–2009)
(1) Current Ratio ; (2) Operating Cash Flow to Current Liabilities Ratio (3) Liabilities to Assets Ratio ; (4) Long-Term Debt to Long-Term
Capital Ratio ; 5) Operating Cash Flow to Total Liabilities Ratio (6) Interest Coverage Ratio
(b). Compute the value of Altman’s Z-score for Sun Microsystems for each year from 2005–2009.
(c). Using the analyses in Parts a and b, discuss the most important factors that signal the likelihood of bankruptcy of Sun Microsystems in
2010.