FINANCIAL ACCOUNTING (B2)

REVIEW QUESTIONS ON FINANCIAL STATEMENT

ANALYSIS

Prepared By
Godson Mkaro [MSc in Finance & Investments, BSc in Computer Science (Hons), ATEC II, CPA (T)] &
Emmanuel Christopher [MBA (Finance), BCom Accounting (Hons), CPA (T)]

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 FINANCIAL ACCOUNTING REVIEW QUESTIONS ON FINANCIAL STATEMENT ANALYSIS

10.1. Review Questions on Ratio Analysis

QUESTION01
XYZ LTD's STATEMENT OF FINANCIAL POSITIN AS AT 31 st December 2015
ASSETS
Fixed Assets 142,000
Current Asset
Stock 28,000
Debtors 36,000
Bank 24,000
Total Current Assets 88,000
Total Assets 230,000
LIABILITIES AND OWNERS EQUITY
Share Capital:
100,000 Ordinary Share Capital @ $1 each, issued and fully paid 100,000
10% 50,000 Preference Shares @ $1 each and fully paid 50,000
Revenue Reserves 20,000
170,000
Long term Liabilities:
12% $1 Debenture 30,000
Current Liabilities:
Creditor 18,000
Taxation 12,000 30,000
Total Liabilities and OE 230,000

XYZ LTDS STATEMENT OF PROFIT/LOSS AND OTHER COMPREHENSIVE INCOME 31st Dec 2015
Sales 532,000
Opening stock 20,000
Add purchases 480,000
Cost of goods available for sale 500,000
Closing stock 28,000
Sostof sales 472,000
Gross profit 60,000
Administrative Expenses 28,000
Selling & Distribution Expense 9,000
Financial Expenses ( include debenture capital) 4,000 41,000
Net profit 19,000
Taxation 12,000
Profit after tax 7,000
Preference dividend(gross) 5,000
PAT and preference dividends 2,000

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 FINANCIAL ACCOUNTING REVIEW QUESTIONS ON FINANCIAL STATEMENT ANALYSIS

Additional information
• The market price for ordinary share is 1.20
• Dividend declared per share is 1% of the nominal value of the share
• Out of total sales, credit sales were 448,000
Required:
Calculate all possible ratios for the following categories
i. Profitability
ii. Liquidity
iii. Efficiency
iv. Gearing or capital structure
v. Market based ratios

QUESTION 02

a) NASACO Ltd. was completely destroyed by fire and all accounting and financial
information was burnt. However, on going through the Director of Finance’s briefcase
which was salvaged by the owner, the following key data for the accounts for the year
ended June 30, 2005 were found:
i) Current ratio 1.75
ii) Liquid Ratio 1.25
iii) Stock Turnover (Cost of Sales / Closing Stock) 9
iv) Gross Profit Ratio – 25% of sales
v) Debt Collection Period – 1 1 months
2
vi) Reserves and Profit and Loss to Capital – 2
vii) Turnover to Fixed Assets – 1.2
viii) Capital Gearing Ratio – 0.6
ix) Fixed Assets to Net Worth – 1.25
x) Sales for the year Shs. 1,200,000,000

REQUIRED: Reconstruct the Balance Sheet of NASACO Ltd., as at June 30, 2005 using the above
information. (12 Marks)

a) Business A and Business B are both engaged in retailing, but seem to take a different
approach to this trade according to information available. This information consists of
ratios, as shown in the table below:

Business A Business B
Current Ratio 2:1 1.5:1
Quick Ratio 1.7:1 0.7:1
Return on Capital Employed (ROCE) 20% 17%
Return on Owners’ Equity (ROE) 30% 18%

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 FINANCIAL ACCOUNTING REVIEW QUESTIONS ON FINANCIAL STATEMENT ANALYSIS

Debtors’ Turnover (days) 63 days 21 days

Creditors’ Turnover (days) 50 days 45 days
Gross Profit Margin 40% 15%
Net Profit Margin 10% 10%
Stock Turnover (days) 52 days 25 days

REQUIRED: Describe what this information indicates about the differences in approach between the
two businesses. If one prides itself on personal services to its clients and one of them on competitive
prices, which do you think is which and why?
Your answer should include a discussion on profitability, liquidity, efficiency and gearing of the two
businesses. (8 Marks) (Total:20 Marks)

QUESTION 03

APEX Co achieved a turnover of TZS 16 million in the year that has just ended and expects a turnover
growth of 8.4% in the next year. Cost of sales in the year has just ended was TZS 10.88 Million and other
expenses were TZS 1.44 Million. The financial statement of APEX CO. for the year that has just ended is
as follows:

Statement of financial position

AMOUNT(TZS Mil)
Assets
Non- Current Assets 22.0
Current Assets
Inventory 2.4
Trade Receivables 2.2
Total Assets 26.6
Equity and Liabilities
Equity Finance
Ordinary shares 5.0
Reserves 7.5
Long term loan 10.0
Trade payable 1.9
Overdraft 2.2
Total Equity and Liabilities 26.6

The long-term bank loan has a fixed annual interest of 8% per year. APEX CO. pays taxation at annual
rate of 40% per year .the following accounting ratios have been forecasted for the next three years :

Gross profit margin 30%

Operating profit margin 20%
Dividend payout 50%
Inventory turnover 110 days

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 FINANCIAL ACCOUNTING REVIEW QUESTIONS ON FINANCIAL STATEMENT ANALYSIS

Trade receivables period 65 days

Trade payables period 75 days

Overdraft interest in the next year is expected to be TZS 140,000. No change is expected in the in the
level of non-current assets and depreciation should be ignored.

REQUIRED

(a) Prepare the following forecasted statements for APEX CO.:

(ί) A statement of income for the next year (7 marks)
(ί ί) A statement of financial position at the end of the year (7 marks)
(b) Analyze and discuss the working capital financial policy of APEX CO ( 6 marks)

QUESTION 04

(a) Liquidity is one of the useful aspect in analyzing various financial statements of entities

Required: State importance of understanding liquidity of an entity to different users of financial

statements, giving examples of different ratios of liquidity that can be computed.

(b) Sanjiro products plc has a current ratio on 30th September 2015 of 2:1, before the following
transactions were completed
• Sold a building for cash
• Exchanged old equipment for new equipment (no cash was involved)
• Declared a cash dividend on a preferred stock
• Sold merchandise on account (at profit)
• Retired loan notes that would have matured in 2023
• Issued a stock dividend to common stockholders
• Paid cash for a patent
• Temporarily invested cash in government bonds
• Purchased inventory for cash
• Written off an account receivable as uncollectible, amount is less than the balance for
uncollectible account
• Paid the cash dividend on preferred stock that was declared earlier
• Purchased a computer and gave a two-year promissory notes
• Collected accounts receivable
• Borrowed from the bank on a 120-day promissory note
• Discounted a customer’s note, interest expense was involved

Required
Considering each transaction independently of others;

(i) Indicate whether amount of working capital will increase, decrease or be unaffected
by each of the above transactions.
(ii) Indicate whether current ratio will increase, decrease or be unaffected by each of the
above transactions.

(Use tabular format to present your answer, one table can suffice answering both parts (i) and (ii)

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