BBM 314: FINANCIAL STATEMENT ANALYSIS ASSIGNMENT (Answer All Questions)

TO BE HANDED IN ON 6.03.2023 CLASS

1. Identify four limitations of financial statement analysis citing relevant examples (2 Marks).

2. ABC Company’s EBIT is Ksh. 5,000,000. Its interest expense for that period is Ksh. 2,500,000.

Calculate, the company's interest coverage ratio and indicate whether ABC's earnings should be

sufficient to enable it to pay the interest expense (4 Marks).

3. Below is the most recent income statement for Philippe. Prepare a common-size income statement

based on this information. How do you interpret the standardized net income? What percentage of

sales goes to cost of goods sold? (4 Marks)

PHILIPPE CORPORATION

2023 Income Statement (Kshs. in millions)

Sales 4,053

Cost of goods sold 2,780

Depreciation 550

Earnings before interest and taxes 723

Interest paid 502

Earnings before taxes 221

Taxes 75

Net income 146

Dividends 47

Retained earnings 99

4. Explain what comparative analysis entails. As a financial manager, how could you use the results

of comparative analysis to evaluate the performance of your firm? (5 Marks).

5. Discuss the importance of financial ratios for management and the specific ratios they typically use

to assess performance (5 marks).