QUESTION ONE

i. The difference between accounting value and market value. Which is more
important to the financial manager? Why?

An accounting value is the net value of firm’s assets and provided on the statement of financial
position which is equivalent to the amount that shareholders would get when the company is
liquidated. It is also called the book value of accounting.

Whereon, market value is the company’s worth based on the total value of its shares in the
market which is its market capitalization.

Accounting value is the backward looking which focuses on the financial and book-keeping
transactional records whereas, the market value bases on the current prevailing price of an
asset in the market.

However, accounting value bases on the adjustment of the values/prices through

depreciations whereby, the market value relies on the exact amount figured on the current
sale.

For example,

A company buys a machine for $100,000 and subsequently records depreciation of $20,000
for that machine, resulting in a net book value of $80,000. If the company were to then sell
the machine at its current market price of $90,000, the business would record a gain on the
sale of $10,000.

Helps in conducting cost-benefit analysis: a finance manager should base more to the
market value since it gives clear understanding when performing cost-benefit analysis of the
firm in investment and financing decision. Dearden, J. (1973)

Helps in determining cash and cash equivalents. Cash and cash equivalents refer to the line
item on the statement of financial position that reports the value of a company's assets that are
cash or can be converted into cash immediately. Cash equivalents include bank accounts and
marketable securities, which are debt securities with maturities of less than 90 days. However,
oftentimes cash equivalents do not include equity or stock holdings because they can fluctuate in
value. Hence this can easily determine the market value of the assets rather than that of
accounting value. Arnold, J. and Hope, T. (1983)

Financial liquidity: refers to how easily assets can be converted into cash. Assets like stocks
and bonds are very liquid since they can be converted to cash within days. However, large assets
such as property, plant, and equipment are not as easily converted to cash.

ii. The income statement equation

INCOME= REVENUES-EXPENSES
Income Statement equation can be further extended as follows.

Gross Profit = Revenues – Cost of Goods Sold (cost of sale).

Operating Income = Gross Profit – Operating Expenses.

Net income = Operating Income + Non-operating Items.

iii. Why is accounting income not the same as cashflow?

Accounting income refers to the profit that the company retains after it has deducted all of its
expenses that is obtained from sales revenues earned. The accounting income is calculated based
on taking revenues and substracting all expenses.

But, cashflows, shows the movement of monies into and out of the businesses.

The major difference that is between the accounting income and the cashflow is that, a cashflow
provides the details on money movements from operations, investments and financing
while the accounting income provided only on the operating monies that is the revenues
and the expenses. Armey, L.R. and Egginton, D.A. (1973)

Question two.

a. To calculate all financial reverage ratio

total debt
Financial leverage ratio = shareholders equity
 Total debt= short term debt + long term debt
total debt
i. Debt to Assets ratio¿
total Assets

35,494
=0.132
268,621
Therefore, the total debt to asset ratio to TCC is 0.132

total debt
ii. to equity ratio¿
total equity
35,494
¿
171,925
=0.3
∴ Assets of 0.3 in TCC are financed by equity.

total assets
iii. Equity multiplier¿
total equity
268,621
= 171,925
=1.56
Therefore, the amount of debt used by TCC is 1.56m shillings
iv. Capital structure Debt

net profit before tax

Interest coverage¿
all interest expenses
54,090
¿
36
The ability of TCC to cover the interests is 1,502.5 TZS

b. All shareholders ratio

profit after tax

i. Earnings per share ¿
total number of share

35,924
¿
2,000
= 17.9
Therefore, the earning per share for TCC is 17.9
market price per share
ii. Price earning =
earning per share
 17,000
= 359

= 47.35 TCC price earning as per share

total dividend paid

iii. Dividend per share =
number of ordinary share

50,000
= 2,000
= 25
Therefore, the dividend per share is 25

dividend per share

iv. Dividend yields = ×100
marketing price per sare

25
= ×100
17,000

= 0.14%
Therefore the dividend yields of 0.14% that will allow TCC-shareholders to compare their
investment choice with other investment options.

c. liquidity ratio

current Assets
i. Current Ratio =
current liability
:1

173,874
=
77,917

= 2.2:1
Therefore, TCC-Current ratio is 2.2:1

current assets−stock
ii. Quick Ratio = current liability
:1

173,874−112,701
= :1
77,917

0.785 = 1.85:1
Therefore, TCC quick ratio is 1.85:1

d. activity ratio
 sales revenue
Net assets turnover=
capital employed

279,354
¿
190.704

¿ 1.46
Therefore, TCC-Net asset Turnover is 1.46

inventory
Stock/inventory turnover =
cost of sale
112,701
= x365
128,622
Therefore TCC-inventory turnover is 0.876 per annum which is 319.7 days

debtors( account receivable)

Receivables collection period = x365
credit sales

35,494
= x365
❑
e. return on ivestment ratio
earning before interest ∧tax
ROI=
capital employed

54,090
= 190,704
Return on investment= 0.28

net income
Return on assets¿
total assets

34,784
¿
268621

Return on assets =0.129

net income
Return on equity¿
shareholders equity

34,784
¿
171,925
Return on equity =0.2
REFERENCE
Arnold, J. and Hope, T. (1983) Accounting for Management Decisions. Prentice-Hall, Hemel
Hampstead, Herts.

Philip Kotler, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha: "Marketing
Management: A south Asian Perspective", (2009)

Armey, L.R. and Egginton, D.A. (1973) Management Accounting: A Conceptual Approach.
Longman, Harlow, Essex.

Dearden, J. (1973) Cost Accounting alld Financial Control Systems. Addison Wesley,
Wokingham, Berks.

Peter Doyle: Value-Based Marketing: Marketing Strategies for Corporate Growth and
Shareholder Value. Wiley, 2000.