CHAPTER ONE

PRESENTATION OF FINANCIAL STATEMENTS (IAS 1) OF COMPANIES

1.1. Introduction

IAS 1 Presentation of Financial Statements sets out the overall requirements for financial statements, including
how they should be structured, the minimum requirements for their content and overriding concepts such as
going concern, the accrual basis of accounting and the current/noncurrent distinction. The standard requires a
complete set of financial statements to comprise a statement of financial position, a statement of profit or loss
and other comprehensive income, a statement of changes in equity and a statement of cash flows. IAS 1 was
reissued in September 2007 and applies to annual periods beginning on or after 1 January 2009.

1.2. Summary of IAS 1

Objective of IAS 1
The objective of IAS 1 (2007) is to prescribe the basis for presentation of general-purpose financial statements,
to ensure comparability both with the entity's financial statements of previous periods and with the financial
statements of other entities. IAS 1 sets out the overall requirements for the presentation of financial statements,
guidelines for their structure and minimum requirements for their content. Standards for recognising, measuring,
and disclosing specific transactions are addressed in other Standards and Interpretations.
Scope
Applies to all general-purpose financial statements based on International Financial Reporting Standards
General purpose financial statements are those intended to serve users who are not in a position to require
financial reports tailored to their particular information needs.

1.3. Objective of financial statements

The objective of general-purpose financial statements is to provide information about the financial position,
financial performance, and cash flows of an entity that is useful to a wide range of users in making economic
decisions. To meet that objective, financial statements provide information about an entity's:

• assets
• liabilities
• equity
• income and expenses, including gains and losses
• contributions by and distributions to owners
• cash flows
That information, along with other information in the notes, assists users of financial statements in predicting
the entity's future cash flows and, in particular, their timing and certainty.

1.4. Components of financial statements

A complete set of financial statements should include:

• a statement of financial position (balance sheet) at the end of the period

• a statement of comprehensive income for the period (or an income statement and a statement of
comprehensive income)
• a statement of changes in equity for the period

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 • a statement of cash flows for the period
• notes, comprising a summary of accounting policies and other explanatory notes
When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in its financial statements, it must also present a statement of
financial position (balance sheet) as at the beginning of the earliest comparative period.
Financial statements should provide a fair presentation of the results, which is achieved by compliance with
IFRSs.
Additionally, the entity should also disclose the following to make the financial statements more understandable:

• The name of the reporting entity

• Whether the financial statements are the individual or group financial statements
• The reporting date and the period covered by the financial statements
• The presentation currency
• The level of rounding used in presenting the amounts within the financial statements
Reports that are presented outside of the financial statements – including financial reviews by management,
environmental reports, and value-added statements – are outside the scope of IFRSs.
Fair presentation and compliance with IFRSs
The financial statements must "present fairly" the financial position, financial performance and cash flows of an
entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and
conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses
set out in the Framework. The application of IFRSs, with additional disclosure, when necessary, is presumed to
result in financial statements that achieve a fair presentation.
IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved
statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs
unless they comply with all the requirements of IFRSs (including Interpretations).
Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by
notes or explanatory material.
IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an
IFRS requirement would be so misleading that it would conflict with the objective of financial statements set
out in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed
disclosure of the nature, reasons, and impact of the departure.
Going concern
An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant
concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If
management concludes that the entity is not a going concern, the financial statements should not be prepared on
a going concern basis, in which case IAS 1 requires a series of disclosures.
Accrual basis of accounting
IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual
basis of accounting.
Consistency of presentation

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The presentation and classification of items in the financial statements shall be retained from one period to the
next unless a change is justified either by a change in circumstances or a requirement of a new IFRS.
Materiality and aggregation
Each material class of similar items must be presented separately in the financial statements. Dissimilar items
may be aggregated only if they are individually immaterial.
Offsetting
Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS.
Comparative information
IAS 1 requires that comparative information shall be disclosed in respect of the previous period for all amounts
reported in the financial statements, both face of financial statements and notes, unless another Standard requires
otherwise. If comparative amounts are changed or reclassified, various disclosures are required.

1.5. Structure and content of financial statements in general clearly identify:

• The financial statements
• The reporting enterprise
• Whether the statements are for the enterprise or for a group
• The date or period covered
• The presentation currency
• The level of precision (thousands, millions, etc.
Financial statement may be prepared either internal use or for external use.

For internal use:

There are financial statements prepared for managers and people within the organisations. They are prepared
following some internal rules and usually prepare by entities such as sole proprietorship, partnership and Private
Limited Companies (LTD). Thus, our normal (usual) income statement and statement of financial position are
for internal use.

For external use (or for publication):

These are financial statements prepared for external users (e.g. Shareholders, present and potential investors,
government, creditors etc.) and also called published financial statements. Published financial statements are
prepared by Public Limited Companies (PLC) because the law obliges them to do so, thus published financial
statements are prepared using some inter rules, the GAAP and other external standards such as the International
Accounting Standards (IAS), International Financial reporting Standards (IFRS) and OHADA.

The income statement and the statement of financial position

A) Income statement for publication:
It shows the financial performance of the company during the financial period. It discloses the income and the
expenses and thus the net profit. IAS requires income and expenses to be classified in the Published income
statement in two ways: by function or by nature

i) Classifying income and expenses by function: Under this format expenses of the company are
classified into five (5) major categories
• Cost of sales = [Opening stock + (Purchases - return outward + carriage inwards] - closing stock
• Distribution cost: Transport cost, carriage outwards, bad debts, commission, provision for bad
and doubtful debts etc.

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 • Administrative Expenses: salaries and wages, postage, telephone, rent and rates etc.
• Finance cost: Interest on loans and bank overdraft, dividend to redeemable preference shares.
• Other expenses: This refers to all other groups of expenses which do not fall under the above.

Note: There are certain types of income and expenses that do not fall within the ordinary activities of the
company e.g. profit or loss on disposal of property and other non-current assets etc. The standard requires that
if the above income and expenses are material, they can either be classified as part of other expenses or shown
separately on the face of the income statement. The company should give addition of information about such
items in the notes to the account.
ABC PLC
Published Income statement for the year ended 31/12/20XX

“000” CFAF “000” CFAF

Revenue or Turn over Net sales X
Less cost of sales X
Gross profit / gross loss X
Add other incomes X
Total gross income X
less Expenses:
Distribution cost X
Administrative cost X
Other expenses X (x)
Profit before interest and tax X
Less Finance cost (x)
Net profit/(loss) before tax x/(x)
Less corporation tax (x)
Net profit after tax X
Add retained profit B/F X
X
Less:
- transfer to general reserves x
- transfer to fixed assets replacement reserves x
- preference share dividend x
- ordinary share dividend x X
Retained earnings C/F X

B) Published Statement of Financial Position:

The statement of financial position for publication is presented using a vertical format. It shows the financial
position of the company as at a particular period. The standard requires that assets and liabilities to be
classified in their non-current and current portion i.e. long-term and short-term.
The first part of the published statement of financial position shows the total assets (non-current assets +
current assets) and the second part shows equity and liabilities. Equity is the shareholders’ funds (share capital,
retained earnings and reserves) while liability is the total of the non-current liability and current liability.

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 ABC PLC
Published Statement of Financial position as at 31/12/20XX
ASSETS “000” CFAF “000” CFAF
Non-current Assets:
Property, plant and equipment X
Intangible assets X
Financial assets X
XX
Current Assets:
Inventory X
Account receivable X
Short term investment X
Cash and bank balance X
Other receivables X XX
Noncurrent asset held for sales XX
TOTAL ASSET YY
Equity & Liabilities
Ordinary share capital X
Share premium X
Preference share capital X
General reserves X
Revaluation reserves X
Retained earnings C/F X
Total Equity XX
Non-Current Liabilities:
Debentures X
Loan notes and bonds X
Deferred tax X
Current Liabilities:
Account payables X
Income tax X
Dividends X
Other payables X XX
EQUITY AND LIABILITIES YY

4) Notes to Accounts: The notes to the accounts provides additional information on the policies that the
company has adopted to highlight some of the items appearing on the face of the financial statement
and additional information on it.
The standard requires the approach to be used when presenting the note on the account.
- The company should state the basis of financial statements. (most cases, historical basis of
accounting)
- The company should present the significances policy adopted
- The make-up of some items appearing in the financial statement e.g. raw materials, Work in
progress, finished goods etc.
- Explanation of the item not found in the final account e.g., Dividend
c) The Statement of changes in Equity:

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Example 1:
Apex Ltd. has prepared the following trial balance as at 30 September 2022:
‘000’CFAF ‘000’CFAF
Freehold land at cost 60,000
Buildings at cost 50,000
Plant and equipment at cost 120,000
Motor vehicles at cost 32,000
Accumulated depreciation:
Buildings 20,000
Plant and equipment 74,000
Motor vehicles 16,800
Inventory as at 1 October 2021 74,000
Trade receivables and trade payables 122,500 99,800
Bank and cash 3,500
Sales 249,760
Purchases 134,630
Returns inward and returns outward 12,900 4,875
Discounts allowed and discounts received 3,200 1,850
Administrative expenses 22,150
Selling and distribution costs 6,900
Ordinary shares of 100cfaf each 100,000
Retained earnings 69,695
Suspense account - 5,000
TOTAL 641,780 641,780
Additional information:
1. Inventory as at 30 September 2022 was valued at 12, 875,000 CFAF.
2. As at 30 September 2022, the following balances were relevant:
Accruals Prepayments
“000” CFAF “000” CFAF
Administrative expenses 500 12,000
Distribution costs 5,300 8,000

3. Depreciation is to be provided as follows:

Assets Rate per annum Classification/allocation
Buildings 4% on cost Administrative expenses
Plant and equipment 20% on cost Cost of sales
Motor vehicles 25% on reducing balance Distribution costs

4. Motor vehicles acquired for 14 million CFAF in total and written down to 6 million CFAF as at 1
October 2021 were sold for 5 million CFAF. The cash proceeds were posted in the suspense account.
5. Estimated tax for the year is 15 million CFAF.
Required:
a) Income statement for the year ended 30 September 2022.
b) Statement of financial position as at 30 September 2022.

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Example 2:
The following trial balance has been extracted from the records of MEAL WALL Limited at 31st December,
2023
“000” CFAF “000” CFAF
Revenue 30 780
Purchases 17 180
Inventory at 1st January, 2023 2 890
Distribution cost 3 040
Administrative expenses 2 240
Land at valuation 1st January 2023 21 840
Building at re-valued amount 16 000
Factory plant and equipment at cost 26 640
Warehouse plant and equipment at cost 2 400
Accumulated depreciations:
Building 4 430
Factory plant and equipment 5 140
Warehouse plant and equipment 1 040
Trade receivables and payables 8 520 4 660
Cash at bank 800
Ordinary shares at 1 FCFA each 28 000
Debenture interest 120
Dividends 300
Share premium account 6 000
Retained earnings 9 320
Revaluation reserves 6 700
Bank interest 60
Long term bank loan 2 000
3% Debentures 4 000
Corporation tax 40
102 070 102 070

The following items are to be adjusted in the preparation of financial statements for the year ended 31st
December 2023:

1) Depreciation is to be provided as follows:

- Building 2% per year on re-valued amount
- Plant and equipment 20% reducing balance
Depreciation on Buildings is to be charged fully to Factory costs (cost of sales)
2) Closing inventory at 31st December 2023, is valued at cost of 3 250 000 FCFA. Included in the inventory
at 31st December 2023 are goods which had cost 500 000 FCFA. Due to a down turn in demand, these
goods were sold at auction sale on 15th January 2024 for 300 000 FCFA. Auctioneer’s fees were 3% of
sales proceeds.
3) The taxation charge of 40 000 FCFA included in the above trial balance is in respect of an under
provision in the previous year. The estimated tax charge for the current year is 940 000 FCFA.
4) Included in trade receivables is a balance of 120 000 FCFA which is considered a bad debt and is to be
written off. The directors have decided to make an allowance for doubtful debts of 3% of outstanding
trade receivables.

Required:
Prepare in a form suitable for publication, the company’s statement of comprehensive income for the year ended
31st December 2023.
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Example 3:
The following balances were extracted from the books of Upendo Ltd. for the year ended 31 December 2022:

“000” CFAF
Ordinary shares 120,000
8% preference shares 40,000
Inventory (31 December 2022) 83,852
Trade receivables 27,200
Bank balance 7,796
10% debentures 16,000
General reserves 28,000
Gross profit for the year 81,508
Bad debts 340
Salaries and wages 28,200
Insurance and rates 1,410
Telephone expenses 620
Electricity expenses 1,216
Debenture interest 800
Directors' fees 2,500
General expenses 3,108
Motor vehicles at cost 29,100
Accumulated depreciation on motor vehicles 22,300
Office equipment at cost 44,640
Accumulated depreciation on office equipment 17,200
Land 100,000
Buildings at cost 32,200
Trade payables 13,722
Revenue reserves (I January 2022) 24,252
Additional information:
1. Accrued electricity expenses as at 31 December 2022 amounted to 548,000 CFAF.
2. The amount for insurance includes a premium of 300,000 CFAF paid in September 2022 to cover the
company for six months from 1 October 2022 to 31 March 2023.
3. Depreciation is to be provided as follows:
Office equipment - 15% per annum on cost
Motor vehicles - 20% per annum on cost
4. Provisions are to be made for:
• Directors’ fees - 5,000,000 CFAF
• Audit fees - 1,200,000 CFAF
• Outstanding debenture interest.
5. The directors have recommended the following:
• 12,000,000 CFAF be transferred to general reserves.
• Dividends on preference shares be paid.
• Payment of a 10% dividend on ordinary shares.
Note: Ignore depreciation on buildings
Required:
a) Income statement for the year ended 31 December 2022.
b) Statement of changes in Equity for the year ended 31 December 2022.
c) Statement of financial position as at 31 December 2022.
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Example 4:
The trial balance of Zanken Ltd, a company quoted on the stock exchange, as at 31st March 2023 was as follows
“000” CFAF “000” CFAF
Turn over 529,600
Purchases 333,800
Interest 600
Selling and distribution expenses 102,800
Administrative costs 69,000
Interim dividend 1,200
Inventory (1st April 2022) 88,800
Trade receivables and payables 109,000 86,800
Cash and cash equivalents 5,600
2 million ordinary shares of 10 cfaf each 20,000
Share premium 48,800
General reserve 114,000
Retained earnings 69,800
4% loan 30,000
Land and buildings (land 12 million CFAF) 76,000
Plant and equipment 51,600
Investment property 109,600
Depreciation: buildings 12,800
Plant and equipment 25,200
Rental income 9,600
Proceeds from sales of plant and equipment 1,400
TOTAL 948,000 948,000

Additional information:

1. Inventory cost as at 31st March 2023 amounted to 77, 600,000 CFAF. The amount included inventory
purchased at 3,000,000 CFAF which was expected to realize 1,600,000 CFAF.
2. The income tax liability is estimated at 5,400,000 CFAF.
3. During the year Zanken Ltd disposed of equipment which had cost 3 million CFAF. The accumulated
depreciation of this equipment was 600,000 CFAF. There were no other additions or disposals during
the year.
4. Land and buildings were revalued on 1st April 2022 at Sh.160million which included 20 million CFAF
for land. The land and buildings were acquired on 1st April 2012. The buildings are being depreciated
over their useful life of 50 years.
5. Plant and equipment are depreciated on a reducing balance basis at the rate of 20% per annum. No
depreciation is provided in the year of disposal. Depreciation on plant and equipment is classified under
cost of sales.
6. The fair value of investment property as at 31st March 2023 was 117,200,000 CFAF. The company
recognizes investment property in the books at a fair price.

Required

a) Statement of comprehensive income for the year ended 31st March 2023.
b) Statement of financial position as at 31st March 2023.

Application exercise
1. The trail balance of FALTA PLC as at 30th April 2023 is given below
“000” CFAF “000” CFAF
Share capital: authorised and issued 200 000
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 Stock at 30th April 2022 102 994
Debtors and creditors 227 219 54 818
8% Debentures 40 000
Fixed assets replacement reserves 30 000
General reserve 15 000
Retained earnings 30th April 2022 12 411
Debenture interest 1 600
Equipment at cost 225 000
Motor vehicles at cost 57 200
Bank 4 973
Cash 62
Purchases and sales 419 211 880 426
Returns inwards 18 400
Carriage inwards 1 452
Wages and salaries 123 289
Rents, business rates and insurance 16 240
Discount allowed 3 415
Directors’ remuneration 82 400
Provision for depreciation:
- Equipment 32 600
- Motor vehicles 18 200
1 283 455 1 283 455

The following information applies on the 30th April 2023:

(i) Stock 30 April 20023 was valued at 111 317 000 FCFA
(ii) The share capital consisted of 300 000 Ordinary shares of 500 FCFA each and 50 000, 12%
Preference shares of 1 000 FCFA each. The dividend f preference shares were proposed to be
paid as well as a dividend of 18% on the Ordinary shares.
(iii) Accrued: rents 802 000 FCFA, Director’s remuneration 6 000 000 FCFA
(iv) Debenture interest ½ year’s interest owing
(v) Depreciation on cost: Equipment 20% and Motor Vehicles 25%.
(vi) Transfer to reserves: general reserves 5 000 000 FCFA and Fixed assets replacement reserves 10
000 000 FCFA.
(vii) Corporation tax for the year is calculated at 30%.

Required:
In so far as the information permit, prepare FALTA PLC
a) Statement of comprehensive income for the year ended 30th April 2023
b) Statement of financial position as at that date for publication.

2. The Trial balance of DRID Limited Company shows the following information as at 31 st December
20X3 is presented below:
CFAF CFAF
000 000 000 000
Ordinary share capital 150
Share premium 10
Contingency reserves 10
Accumulated profit 1st January 20X3 25
Inventory of goods at 1st January 20X3 30
Sales revenue 500
Purchases 270

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Purchase returns 13
Sales returns 14
Carriage outwards 14
Warehouse wages 40
Salespersons' wages 30
Administrative wages 20
Warehouse plant and machinery 63
Delivery vehicle hire 10
Accumulated depreciation-plant and machinery 1 January 20X3 25
Goodwill 50
Distribution expenses 5
Administrative expenses 15
Directors’ salaries 15
Rents receivable 8
Trade receivables 165
Cash at bank 30
Trade payables 30
771 771

Additional information:
• The inventory of goods at 31st December 20X3 is valued at 50 000 000 FCFA
• Annual depreciation of 16 000 000 FCFA should be constituted on warehouse plant and machinery.
• Income tax for 20X3 25 000 000 FCFA, due 30th April 20X4
• Depreciation of goodwill for 5 000 000 FCFA.
Required:
a) Prepare the published Income statement
b) Balance sheet for the 20X3 financial year.
3. CAMCCUL is a public limited company and the following information is a trial balance extracted
from her books for the period ended 31/12/22.
CAMCCUL Trial balance as at 31 December 2022
CFAF CFAF
10% preference share capital 20,000
Ordinary share capital 70,000
10% debentures (repayable 2025) 30,000
Goodwill at cost 15,000
Buildings at cost 95,000
Equipment at cost 8,000
Motor vehicles at cost 17,500
Provision for depreciation: equipment 01/01/2022 2,400
Provision for depreciation: motor vehicles 01/01/2022 5,160
Stock 01/01/2022 22,690
Sales 98,200
Purchases 53,910
Carriage inwards 1,620
Salaries and wages 9,240
Directors’ remuneration 6,300
Motor expenses 8,120
Business rates and insurances 2,930
General expenses 560
Debenture interest 1,500
Debtors 18,610
Creditors 11,370
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Bank 8,390
General reserve 5,000
Share premium account 14,000
Interim ordinary dividend paid 3,500
Profit and loss account 31/12/2022 16,940
273,070 273,070
The following adjustments are carried after the review of the record by the CFO:
i. Stock at 31/12/2022 was 27,220.
ii. Depreciation; motor vehicles 3,000; equipment 1,200.
iii. Accrue debenture interest 1,500.
iv. Provide for preference dividend 2,000 and final ordinary dividend of 10%.
v. Transfer 2,000 to general reserve.
vi. Write off goodwill 3,000.
vii. Authorised share capital is 20,000 for preference shares and 100,000 for ordinary shares.
viii. Provide for corporation tax 5,000.
Required:
a) Prepare a trading, profit and loss account of CAMCCUL for the year ended 31/12/22.
b) Prepare the balance sheet of CAMCCUL.
4. CAMAIR-CO company ltd had an authorized capital of 200 000 FCFA divided into 100 shares of 2000
FCFA each and 8% preference share of 50 FCFA each. The following balances remained in the
accountants of the company after the trading and profit and loss account had been prepared for the year
ended 31/12/2021.
CAMAIR-CO trial balance as at 31/12/2021
CFAF CFAF
Premises at cost 86,000
General reserve 4,000
Ordinary shares: fully paid 100,000
8% Preference shares: fully paid 50,000
Electricity 100
Cash at bank 13,100
Profit and loss account balance 31/12/2010 14,500
Debtors and creditors 20,000 12,900
Net profit (year ended 31/12/2011) 16,500
Machinery and plant at cost 60,000
Provision for depreciation on machinery and plant 40,000
Stock 60,000
Provision for bad debts 4,000
Insurance 900
Preference share dividend paid 2,000
Total 242,000 242,000

Additional information:
i. The Directors have recommended the following:
ii. A transfer of 5,000 FCFA to general reserve
iii. An ordinary dividend of 0.15FCFA per share
iv. A provision for the unpaid preference shares dividend.
Required:
a) Prepare the profit and loss appropriation account for year ended 31/12/2021.

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b) Prepare the balance sheet of CAMAIR-CO company ltd for the period ended 31/12/2021 showing clearly
the working capital and the shareholders’ funds.
c) Identify and calculate the firms:
i) Profitability ratios (any two)
ii) Liquidity or solvency position (any two)
d) using (c) above comment on the firm’s financial position.

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 CHAPTER TWO
CASH FLOW STATEMENTS (IAS7)
2.1. Introductions
Users of financial statements need information on the liquidity, viability and financial adaptability of entities.
Deriving this information involves the user making assessments of the future cash flow of the entity.
Future cash flows are regarded (in financial management theory and increasingly in practice in large companie
s) as the prime determinant of the worth of a business.
2.2. Definition
A cash flow statement is a financial statement that shows the movement of money into and out of the firm during
the accounting period. Thus, a simple cash book may be regarded as a cash flow statement.
A cash flow statement is needed as a consequence of the difference between profit and cash. For example, why
is the business making a profit yet has overdraft in the bank or why did the company make a loss yet has cash
in hand and at bank?
This statement helps us to:
- Provide additional information in business activities.
- Help assess the current liquidity of the firm.
- Allow the users to see the major types of cash flows in and out of the business.
- Help the user to estimate future cash flow.
- Determine the cash flows generated from credit transactions as oppose to other sources of cash flow.
2.3. Presentation of Cash Flow Statement
The cash flow statement is often prepared with information from the statement of financial position and the
income statement of the enterprise. The presentation starts with a reconciliation of operating profit and operating
cash flow. IAS 7 requires that cash flow statements be represented using three standard recordings. These
standard headings are:
- Operating activities (income statement, current assets, and current liabilities).
- Investing activities (non-current assets).
- Financing activities (non-current liabilities, equity and reserves).
i. Operating Activities
This section of statement is aimed at determine the net cash flow from operating. This section is prepared with
information from the income statement and working capital i.e. current assets and current liabilities.
There are two methods used to determine the net cash flow from operating activities, namely, the direct and
indirect method.
• The direct method: It is so called because it records the gross operating (cash flow from ordinary
activities, e.g. Sales, purchases, debtors and creditors, expenses and other short-term incomes) cash
flows. The information for the direct method could be found in the account records or retrieved from the
financial statements using control accounts (to calculate the cash received from debtors and cash paid to
creditors); and other adjustments accounts of expenses and income prepaid or accrued (to calculate the
cash paid for such expenses and cash received from such incomes).
• The indirect method: This method determines the net cash flow from operating activities beginning with
profit and not cash as is the case of the direct method. Starting from the Net profit before tax, the adjusted
profit is calculated by making adjustment for non-cash expenses and non-incomes. The non-cash expenses
(for example depreciation, bad debts, increase or decrease in bad debt provision, and loss on disposal of
non-current assets and decrease in revaluation of non-current assets) that reduced the net profit in the
income statement are added back in the cash flow statement and the non-cash incomes (for example bad
debts recovered, profit on disposal of non-current assets, decrease in provision for doubtful debts, increase
in revaluation in non-current assets) that increased the net profit in the income statement are subtracted.
To the adjusted profit (operating profit before working capital changes), the change in working capital
(inventory, account receivables and payables, prepayments and accruals) is added. The corporation tax paid and
interest paid for the period is also subtracted to have the net cash flow from operating activities.
ii. Investing Activities
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This section of the cash flow statement is prepared using movements in the non-current assets. For example,
proceeds on disposal on non-current assets, purchases of non-current assets, increase in investment (shares
brought in other companies), and dividend from investment.
Investing Activities FCFA FCFA
Purchase of non-current assets (xx)
Cash received on disposal of non-current assets xx
(increase) / decrease in investment (xx)/xx
Dividend or interest received from investment xx
Net cash flow from investing activities xx/(xx)

iii. Financing Activities

This section of the cash flow statement is prepared using movements in the non-current liabilities and equity
(capital and reserves). For example, loan obtained or repaid, proceeds from issues of shares, proceeds from share
premium, dividend paid, and redemption of debentures.
Financing Activities FCFA FCFA
Proceeds from issue of shares xx
Proceeds from share premium xx
Loan obtained / (loan repaid) xx/(xx)
Dividend paid (xx)
Net cash flow from Financing Activities xx/(xx)

iv. Cash And Cash Equivalents

These are highly liquid short-term investments that are rapidly convertible in to known amount of cash and
which are subject to insignificant risk of changes in value. Cash refers to cash in hand and at bank (which may
be bank overdraft) and cash equivalents may be treasury bills, bills of exchange and promissory notes.
The sum of the operating activities, the investing activities and the financing activities gives the net cash and
cash equivalents.
The cash and cash equivalent at the start of the period (the sum of cash in hand, cash at bank and treasury bills,
bill of exchange etc. at the beginning of the period), is added to the net cash and cash equivalents and the balance
obtained gives the cash and cash equivalent at the end of the period (the sum of cash in hand and at bank and
treasury bills etc. at the end of the period).
2.4. Format of Cash Flow Statement
NAME OF THE COMPANY
STATEMENT OF CASH FLOW FOR THE YEAR ENDED 31/12/20XX INDIRCT METHOD
FCFA FCFA
CASH FLOW FORM OPERATING ACTIVITIES:
Profit before taxation xxx
Adjustment: Depreciation and amortisation xxx
(Gain)/Loss on disposals xxx
Increase in stock (xxx)
Increase in debtors (xxx)
Increase in creditors xxx
Decrease in stock xxx
Decrease in debtors xxx
Decrease in creditors (xxx)
Cash generated from operations xxxx
Interest paid (xxx)
Taxation paid (xxx)
Net cash flow from operating activities xxxx
CASH FLOW FROM INVESTING ACTIVITIES:
Dividend from joint ventures xxx
Dividend from associates xxx
Page 15 of 32
 Interest received xxx
Payment for purchase of fixed assets (xxx)
Receipts from Sales of fixed assets xxx
Purchases of businesses as subsidiaries (xxx)
Sales of businesses as subsidiaries xxx
Net cash flow from investment activities xxxx
CASH FLOW FROM FINANCING ACTIVITIES:
Ordinary and preference dividends paid (xxx)
Issues of shares and debentures xxx
Redemption of debentures and other loans (xxx)
Net cash flow from financing activities xxxx
Net increase/(decrease) in cash for the period xxx
Cash at beginning of the year xxx
Cash and cash equivalent at end of the year xxx
Note that for the direct method only item 1 is affected and will appear as follows:
1. Cash flow from Operating Activities: FCFA FCFA
Cash receipts from customers xxx
Cash payment to suppliers and employees (xxx)
Cash generated from operations xxx
Interest paid (xxx)
Taxation paid (xxx)
Net cash flow from operating activities xxxx
2.5. Adjustment to be Made on Cash Flow
1) Profit before tax
2) Depreciation and amortisation
3) Interest charges on the income statement
4) Gain or loss on disposal of noncurrent assets
5) Adjustment of working capital
6) Adjustment on interest, taxation and dividends
Cash flow statement for the year ended 31st December 20XX
FCFA FCFA
Net cash flow from Operating Activities X/(X)
Net cash flow from Investing activities X/(X)
Net cash flow from Financing Activities X/(X)
Net cash and cash equivalents X/(X)
Add cash and cash equivalents at start X/(X)
Cash and cash equivalents at close X/(X)

Non-current asset Account

FCFA FCFA
Balances B/F X Depreciation ?X
Cash and bank (purchases value) ?X Disposal (NBV) X
Balance C/D X
Y Y

Page 16 of 32
 Expense Account
FCFA FCFA
prepayments B/F X Arrears B/F X
Cash and bank ? Income and expenditure A/C X
Arrears C/D X prepayments C/D X
Y Y

Income Account
FCFA FCFA
Arrears B/F X prepayments B/F X
Income and expenditure A/C X Cash and Bank ?
advances C/D X Arrears C/D X
Y Y

Sales ledger control Account

FCFA FCFA
Debtors B/F X Cash and cheques from debtors ?
Credit sales X Bad debts X
Dishonoured cheque X Returns inwards (credit note) X
Discount allowed X
Debtors C/D X
Y Y

Purchases ledger control Account

FCFA FCFA
Cash and cheques to creditors ? Creditors B/F X
Returns outwards (debit note) X Credit purchases X
Creditors C/D X
Y Y

Example 1:
The following are the summarised balance sheet of WAAM PLC as at 31st December of the last two years:
2019 2020
“000” CFAF “000” CFAF “000” CFAF “000” CFAF
Fixed assets:
Lands and buildings 2 112 000 2 352 000
Plant and machinery 648 000 695 520
Office equipment 165 600 132 000
2 025 600 3 179 520
Current assets:
Stock 99 600 85 440
Debtors 61 920 53 640
Bank and cash 50 760 76 920
212 280 216 000
Liabilities less than 1 year:
Creditors 64 080 74 520
Corporation tax 49 200 57 600

Page 17 of 32
Proposed dividend 96 000 78 000
209 280 210 120
Net current assets 3 000 5 880
Net assets 2 928 600 3 185 400
Financed by:
Capital and reserves:
Ordinary share capital 1 000 FCFA each 2 040 000 2 448 000
Share premium 576 000 168 000
Revaluation Reserves -------- 240 000
Profit Reserves 94 200 154 200
Profit and loss 218 400 175 200
2 928 600 3 185 400
Additional information:
- During 2020, machinery costing 234 000 000 FCFA was purchases. There was no disposal of
machinery
- Office equipment with a book value of 9 600 000 FCFA was sold in 2020 for 7 800 000 FCFA. This
had been replaced new office equipment cost 22 800 000 FCFA
- During 2020, there was a bonus issue of one ordinary share for every five already held. This was
done by using part of the share premium.
Required:
Prepare a cash flow statement in accordance with IAS 7 for the year ended 31st December 2020. Use indirect
method.
Example 2:
The balance sheet of RAPH LTD is given as at 31/12/2018 and 31/12/2019
31/12/2018 31/12/2019
000 FCFA 000 FCFA 000 FCFA 000 FCFA
FIXED ASSETS:
Tangible Fixed Assets 150 000 178 100
Accumulated Depreciation (65 000) (75 500)
85 000 102 600
Investment 24 000 28,900
CURRENT ASSETS:
Stock 19 000 15 900
Investment in treasury bills 5 000 3 000
Debtors 8 200 6 000
Bank and cash 7 300 9 540
39 500 34 440
Creditors: Amount due in a year
Trade Creditors and Accruals 8 100 11 600
Ordinary Dividend Payable 2 000 6 000
10 100 17 600
Working capital (Net Current Assets) 29 400 16 840
Capital employed 138 400 148 340
NON-CURRENT LIABILITIES (5 000) (13 000)
133 400 135 340
FINANCED BY:
Capital and Reserves :
Ordinary share capital 1 FCFA 50 000 70 000
Share premium 8 000 12 000
Profit retained 75 400 53 340
133 400 135 340
Page 18 of 32
Additional information:
a) A fixed asset cost 9 000 000 FCFA with a book value 8 200 000 FCFA was sold at a profit of 500
000 FCFA
b) Interest of 500 000 FCFA was paid on the bank loan during 2019
c) Interim dividend paid for the year 2019 were 9 000 000 FCFA, also outstanding dividend for the
year 2018 was paid in 2019
d) Investment cost 5 000 000 FCFA were sold at a loss of 1 000 000 FCFA, the company purchased
more during the year
e) A bonus issue of 1 for 5 shares held at the beginning of the year 2019 was made. During the year,
the company issued shares for cash at a premium during the year.
f) Treasury bills costing 2 000 000 FCFA were sold for cash for 2 500 000 FCFA
Required
In so far as the information permit, prepare a cash flow statement for the year ended 31/12/2019 for RAPH LTD
in conformity with IAS 7.
. Example 3:
The following are extracts from the financial statements of SOY Ltd as at 31 March;
2023 2022
‘000’ CFAF ‘000’ CFAF
Non-current assets 50,400 36,000
Freehold land and buildings 17,580 19,050
Plant and machinery 10,800 11,250
Investment at cost 8,400 8,700
Goodwill 87,180 75,000
Current assets
Inventory 30,150 26,100
Trade receivables 18,420 23,400
Short term investments 5,130 2,520
Cash in hand 600 1,290
54,300 53,310
Total Assets 141,480 128,310
Equity and Liabilities
Ordinary share capital 54,000 45,000
Share premium 4,500 2,250
Revaluation reserve 13,500 -
Revenue reserve 18,450 15,750
90,450 63,000
Non-current liabilities
14% loan stock 22,500 27,000
Current liabilities
Trade payables 17,550 15,750
Bank overdraft 7,170 19,600
Proposed dividend 1,350 1,140
Taxation 2,460 1,800
28,530 38,310
Total equity and liabilities 141,480 128,310

Additional information; -

1. The income statement extracts for the year ended 31 March 2023 is as follows: -
‘000’ CFAF ‘000’ CFAF
Profit before tax 7,200
Less corporation tax 2,700
Profit after tax 4,500
Page 19 of 32
 dividends: Interim paid 450
Proposed 1,350 1,800
Retained earnings 2,700

2. During the year, plant with a net book value of 2,250,000 CFAF was sold for 4,410,000 CFAF. The plant
had originally cost 9,000,000 CFAF.
3. Part of the investment was sold during the year at a profit of 480,000 CFAF.
4. Depreciation on plant and machinery amounting to 3,450,000 CFAF was charged to the income
statement during the year.
5. During the year impairment of goodwill was estimated to be 1,260,000 CFAF.
6. The revaluation reserve relates to freehold land and building

Required;
a) In so far as the information permit, prepare a statement of cash flow in accordance with international
accounting standard (IAS) 7 “Statement of Cash flow”
Application exercise
1. The following draft financial statements were extracted from the financial records of Maalum Limited,
a public limited entity, as at 30 April 2023 with comparatives for the year ended 30 April 2022.
Statements of financial position as at 30 April:
2023 2022
Assets: “000” CFAF “000” CFAF
Non-current assets:
Property, plant and equipment 36,300 27,450
Intangible assets 6,750 6,150
43,050 33,600
Current assets:
Inventory 13,300 11,445
Trade receivables 9,230 7,080
Cash and cash equivalents 900 510
Total assets 66,480 52,635
Equity and liabilities:
Share capital and reserves:
Ordinary share capital (10 CFAF par value) 7,500 6,000
Share premium 1,350 1,050
Revaluation surplus 2,550 -
Retained earnings 28,065 25,980
Total equity 39,465 33,030
Non-current liabilities:
10% loan notes (2026) 8,250 5,250
Government grants 3,150 2,400
Deferred tax 1,920 810
Current liabilities:
Trade payables 10,200 7,770
Current tax 2,685 2,775
Government grants 810 600
Total equity and liabilities 66,480 52,645
Statement of profit or loss and other comprehensive income for the year ended 30 April 2023:
“000” CFAF

Page 20 of 32
 Revenue 54,975
Cost of sales (43,860)
Gross profit 11,115
Other operating income – government grant 750
11,865
Other operating expenses (2,970)
Profit from operations 8,895
Finance costs (705)
Profit before tax 8,190
Income tax expense (2,655)
Profit for the year 5,535
Other comprehensive income:
Gain on property revaluation 2,550
Total comprehensive income for the year 8,085

Additional information:
1. Maalum Limited acquired some new plant during the year to 30 April 2023 at a cost of 1,800,000 CFAF
from a finance company. An arrangement was made at the date of acquisition for the liability for the
plant to be settled by Maalum Limited issuing at par a 10% loan note dated 2026 to the finance company.
The value by which the loan note exceeded the liability for the plant was received from the finance
company in cash.
2. The company’s motor vehicle haulage fleet with a cost of 2,630,000 CFAF and accumulated CFAF
depreciation of 1,165,000 CFAF was disposed of during the year for cash proceeds of 1,810,000 CFAF.
The profit on disposal has been included in the other operating expenses.
3. Depreciation charged on property, plant and equipment during the year was 5,490,000 CFAF and was
included in the cost of sales.
4. Intangible assets were amortised during the year and amortisation charged to profit or loss amounted to
540,000 CFAF.
5. During the year ended 30 April 2023, Maalum Limited made a bonus issue of ordinary shares of one
new share for every ten shares held utilising the share premium account.
Required:
A statement of cash flows for Maalum Limited for the year ended 30 April 2023 using the indirect method in
accordance with International Accounting Standard (IAS) 7 “Statement of Cash Flows”.
2. Shark Ltd. has presented the following financial statements:
Income statement for the year ended 31 August 2022
CFAF
Sales 11,510,100
Cost of sales (5,928,500)
Gross profit 5,581,600
Investment income 22,680
Distribution cost (1,963,680)
Administrative expenses ( 1,363,520)
Operating profit 2,277,080
Finance cost (316,000)
Profit before tax 1,961,080
Income tax expense (631,480)
Profit for the year 1,329,600

Statement of financial position as at 31 August:

2022 2021
CFAF CFAF
Assets:

Page 21 of 32
 Non-current assets at cost 26,100,540 21,410,160
Accumulated depreciation (5,919,340) (5,003,760)
Net book value 20,181,200 16,406,400
Current assets:
Inventory 6,601,760 5,825,920
Trade receivables 2,485,500 3,465,280
Cash and cash equivalents 237,840 214,160
9,325, 100 9,505,360
29,506,300 25,911,760
Equity and liabilities:
Ordinary share capital 8,400,000 6,000,000
Share premium 3,156,800 2,570,000
Revaluation reserve 2,981,600 1,636,800
Retained earnings 7,989,600 7,276,000
22,528,000 17,482,800
Non-current liabilities:
9% loan stock 2,693,600 3,530,000
Current liabilities:
Trade payables 3,802,200 4,380,480
Taxations 482,500 518,480
4,284,700 4,898,960
29,506,300 25,911,760

Additional information:

1. The company made a profit of 26,400 CFAF on tile sale of equipment whose cost was 359,220 CFAF
and whose accumulated depreciation was 79,220 CFAF.
2. The only revaluation on non-current assets was for a piece of freehold land.
3. An interim dividend of 616,000 CFAF had been declared and paid in the course of the year.

Required:

a) Statement of cash flow in accordance with International Accounting Standard (IAS) 7 "Statement of
Cash Flows" for the year ended 31 August 2022.
b) Discuss three categories of financial ratios
3. a) Explain three reasons why in many organisations the cash flow for a given period differs from the
profit realised by the organisation in the same period.
b) The following are the statements of financial position of Big Ben Ltd. as at 30. September 2021 and
30 September 2022
2021 2022
“000” CFAF “000” CFAF
Assets
Non-current assets:
Property, plant and equipment 38,180 57,612
Investments available for sale 2,500 1,000
40,680 58,612
Current assets:
Inventories 8,280 10,350
Trade receivables 4,140 5,038
Cash in hand and bank 1,700 -
14,120 15,388
Total assets 54,800 74,000
Equity and liabilities:
Page 22 of 32
 Ordinary share capital 31,600 45,400
Share premium 2,760 5,520
Retained profit 6,900 11,040
41,260 61,960
Non-current liabilities:
10% debentures 5,260 1,000
Current liabilities:
Trade payables 2,760 4,140
Taxation 3,450 4,140
Dividends 2,070 2,070
Bank overdraft - 690
Total equity and liabilities 8,280 11,040
54,800 74,000

The following is an extract from the income statement of Big Ben Ltd. for the year ended 30
September 2022:
“000” CFAF “000” CFAF
Operating profit 12,520
Finance cost (100)
Profit before tax 12,420
Income tax expense (4,830)
Profit after tax 7,590
Dividends – Paid (1,380)
- Proposed (2,070) (3,450)
Retained profit 4,140

Additional information:

1) An item of plant was disposed of during the year ended 30. September 2022 for 2,070,000 CFAF. The
item had cost 4,140,000 CFAF and had an accumulated depreciation of 1,380,000 CFAF. At the same
time new premises were acquired at a cost of 25,200,000 CFAF.
2) There was no acquisition or disposal of investments.

Required:
Statement of cash flows for the year ended 30 September 2022 in conformity with International Accounting.
Standard (IAS) 7 - statement of cash flows.

Page 23 of 32
 CHAPTER THREE
FINANCIAL STATEMENT ANALYSIS (RATIO ANALYSIS)
3.1. Introduction
A financial ratio is the relationship between financial variables and it helps to ascertain (measure) financial
conditions of the firm.
Ratio analysis is a means of comparing and quantifying relationships between financial variable in the
statement of comprehensive income and the statement of financial position. With ratios, financial statement
can be interpreted and usefully applied to satisfying the needs of the users of financial statements.
3.2. Classification of Ratio
Ratios can be classified into five categories which are:
- Liquidity ratio
- Leverage or gearing ratio
- Activity or efficiency ratio
- Profitability ratio
- Investment or shareholders ratios

i) LIQUIDATION RATIO
These ratios measure the firm’s ability to meet it short term obligation as and when they fall due. Ratios
here include:
- Current ratio
- Acid test or quick ratio
a) Current ratio
This is the ratio of total current assets and total current liabilities. It is also called working capital ratio and
is calculated as follows

If the current ratio is greater than one then the current assets can be finance the current liabilities, that is the
company can meet up with it short term debts, thus it is solvent.

b) Acid-test ratio or quick ratio

This is the ratio of current assets excluding stock to current liabilities. A firm with a satisfactory current
ratio may actually be in poor liquidity position when inventories form most of the current assets. The acid
test ratio is calculated as follows

ii) GEARING RATIO OR LEVERAGE RATIO

This ratio measures the extent to which a company use its assets which have been financed by non-owners’
supply funds. It measures the financial risk of the company, the higher the ratio the higher the financial risk.
- Capital gearing ratio or Debt ratio
Gearing refers to the amount of debts finance a company uses relative to its equity finance. This is the ratio
of debt capital or fixed interest bearing securities (preference and debentures) to owners‟ equity.
Debt capital or fixed interest bearing securities refer to debenture and preference share capital meanwhile
owners‟ equity refer to ordinary share capital, share premium, reserves and retained earnings. Capital
gearing is calculated as:

Page 24 of 32
If the ratio is greater than one then the company is highly geared meaning the company is highly financed by
debt capital. If the gearing ratio is less than one, then the company is lowly geared meaning it is more financed
by the owners’ equity (ordinary shares and reserves). Investors will always invest in companies that are lowly
geared

iii) PROFITABILITY RATIOS

They measure the management’s effectiveness as shown by the returns generated on sales and on investment.
They indicate how successful management has been generating profit for the company. Ratios here include:
a) Return on capital employed (ROCE)
This measures the efficiency with which a company uses long-term funds or permanent assets to generate
returns to the shareholders. It is calculated as+

Capital employed can either be calculated as follows:

• Capital employed = total assets – current liability or Non-current assets + working capita
Total assets = Non-current assets + current assets
Working capital = current asset – current liability
• Capital employed is also calculated as the sum of the shareholders fund (ordinary share capital, preference
share capital, share premium, reserves and retained earnings) and non-current liabilities
b) The gross profit margin (margin rate)
This is the gross profit express as a percentage of net sales. It is simple called margin rate and it is calculated as
follows

c) Net profit margin (NPM)

This is the net profit expressed as a percentage of sales. It is calculated as follows

d) Net asset turn over:

It gives a guide to productive efficiency that is how well assets have been used in generating sales. It is calculated
as follows:

e) Return on investment (ROI)

This measures the efficiency in which the firm uses its total funds on capital employed to generate return to
owner’s funds. It is calculated as follows

f) Return on equity (ROE)

This is the ratio of the residual profit (earnings to equity shareholders) to equity (ordinary shares). It is calculated
as

Page 25 of 32
N.B: returns to equity is the profit to ordinary shareholders

iv) EFFICIENCY OR ACTIVITY RATIOS

These ratios measure the efficiency with which the firm uses its assets to generate sales. There are also called
turnover ratio as they indicate the rate at which assets are converted into sales. Ratios here include:

a) Debtors turn over

This shows the number of times debtors pay within a year. It indicates how efficient the firm is in the
management of credit. The higher the ratio the more efficient management is in managing its credit policy. It is
given as

b) The average collection period (Debtors’ days)

It is also called the debtor’s day; it shows the average period of credit taken by customers. Thus, it is the number
of days the dates that credit sales were made and the dates that the money was received /collected from
customers.
A low average collection period is very good since indicates that the company converts its Debtors (accounts
receivables) in to cash within a short period.
It is calculated as follows:

OR

c) Creditors (accounts payable) turn over

This refers to number of times creditors are paid by a company during the year. It is the ratio of credit purchases
to average creditors. It is given as

d) Average payment or deferred period (Creditors’ days) it is also called the creditor’s days. It indicates
the average time that suppliers allowed to the company to settled its debts. The longer the average payment
period, the more efficient the company is in pay its creditors meanwhile if the average payment period is
short, the company will need cash on a continuous basis to pay its creditors. It is given as follow:

OR

Page 26 of 32
 e) Stock or inventory turnover
This is the ratio of the cost of sales to average stock. It shows the number of times average stock is sold or used
during the year. It indicates how efficient the firm is in the management of its stock. The higher the ratio the
more efficient management is in managing its stock. This is because stock is not held for a long time and this
reduces storage cost. It is given as

f) Inventory (stock) days or Average convention period

This refers to the number of days it takes for inventory to turn in to sales. A low inventory day is good since it
shows how fast stock is converted. It is calculated as follows:

OR

g) The working capital cycle or the operating cycle

Working capital cycle = (average collecting period + stock convention period) – average
deferred payment period

h) Cost turnover or operating turnover =

i) Fixed asset turnover =

v) INVESTMENT RATIOS
These are ratios which are used to assess the performance of the company’s shares. These ratios are of great
interest to ordinary shareholders as well as potential investors, analysts and competitors. Ratios here include:

a) Earnings per Share (EPS) =

b) Dividend per share (DPS) =

c) Dividend cover (DC): This is the ratio of the dividend per share (DPS) to the earnings per share (EPS). It
is calculated as follows:
Dividend Cover (DC) =

d) Earnings yield (EY): This is the ratio of the earnings per share (EPS) to the market price per share (MPS).
It is calculated as follows:
Earnings yield (EY) =

e) Dividend yield (DY): This is the ratio of the Dividend per share (DPS) to the market price per share
(MPS). It is calculated as follows:
Dividend yield (DY) =

Page 27 of 32
 f) Price earnings ratio (PER): This is the ratio of the market price per share (MPS) to the earnings per share
(EPS). It is calculated as follows:
Price earnings ratio (PER) =

Example 1:
The following financial statements were extracted from the books of Majengo Ltd. for the years ended 31
December 2021 and 2022:
Income statements for the years ended 31 December:
2021 2022
‘000’CFAF ‘000’CFAF
Sales (all on credit) 200,000 200,000
Cost of sales (120000) (100,000)
Gross profit 80,000 100,000
Expenses (60,000) (60,000)
Net profit 20,000 40,000
Dividends 20,000 (20,000)
Retained profit - 20,000
Balance carried forward 25,000 25,000
Balance brought forward 25,000 45,000

Statements of financial position as at 31 December:

2021 2022
‘000’CFAF ‘000’CFAF
Non-current assets:
Land 63,000 44,000
Plant and machinery at cost 6,000 8,500
Buildings at cost 79,000 60,000
Investments at cost 80,000 53,000
228,000 165,500
Current assets:
Inventory 65,000 55,000
Trade receivables 50,000 40,000
115,000 95,000
Current liabilities:
Trade payables 60,000 40,000
Proposed dividend 20,000 20,000
Bank balance 4,000 2,500
(84,000) (62,500)

Net current Assets 31,000 32,500

Net Assets 259,000 198,000

Financed by:
Ordinary share capital 50,000 40,000
Share premium 14,000 13,000
Revaluation reserve 20,000
Revenue reserve 25,000 45,000
10% debentures 150,000 100,000
259,000 198,000
Additional information:

Page 28 of 32
 1. Ordinary shares with a nominal value of 10,000,000 CFAF were repurchased at a premium during the
year. All necessary approvals were obtained for this transaction.
2. Part of the debentures was redeemed at par during the year.
3. Ignore taxation.
Required:
The following ratios for Majengo Ltd. for the years ended 31December 2021 and 2022:
i) Gross profit margin.
ii) Net profit margin.
iii) Trade receivables turnover.
iv) Acid test ratio.
v) Dividend cover.
vi) Gearing ratio.
vii) Return on capital employed (ROCE)
Example 2:
Janet and Ruth are sole proprietors carrying on business as wholesalers. Their financial statements for the year
ended 31 March 2023 were as follows:
Income statements for the year ended 31 March 2023:
Janet Ruth
"000"CFAF "000"CFAF
Sales 144,000 140,000
Cost of sales
Opening inventory 28,000 3,200
Purchases 124,000 121,600
152,000 124,800
Closing inventory (32,000) (4,800)
120,000 120,000
Gross profit 24,000 20,000
Distribution costs (7,200) (2,800)
Administrative expenses (8,160) (9,500)
Net profit 8,640 7,700

Statement of financial position as at 31 March 2023:

Janet Ruth
"000"CFAF "000"CFAF
Assets
Non-current assets
Freehold property 20,000 14,000
Fixtures, fittings and equipment 21,750 13,840
Motor vehicles 12,000 6,000
53,750 33,840
Current assets
Inventories 32,000 4,800
Accounts receivable 28,800 11,200
Bank balances 8,950 11,360
69,750 27,360
Total assets 123,500 61,200
Capital and liabilities 108,000 30,800
Capital 15,500 30,400
Accounts payable 123,500 61,200
Total capital and liabilities

Additional information:

Page 29 of 32
 1. The amounts of accounts receivable and accounts payable have not changed significantly over the year.
All the sales are on credit.
2. All the non-current assets are at written down values.
3. Assume that inventories increased evenly over the year.

Required:

a) For each business, compute the following:

i) Three (3) profitability ratios.
ii) Current ratio.
iii) Acid test ratio.
iv) Inventory turnover ratio.
v) Total assets turnover ratio.
vi) Accounts receivable turnover ratio
Using the ratios computed in (a) above, comment on the performance of each business
Application Exercise
1. Sunny Side Ltd. began its operations on 1 July 2021 by raising 52 million CFAF ordinary share capital
and issuing 18% per annum debentures.
The following information was extracted from the books of the company for the year ended 30 June 2022:
1.
Items “000” CFAF
Cash and bank balance 2,500
Operating costs (excluding finance cost) 31,320
Total non-current assets at net book value 60,000
2. The total current assets as at 30 June 2022 consisted of:
• Trade receivables.
• Inventory.
• Cash and bank balance.
3. The total current liabilities as at 30 June 2022 consisted of:
• Trade payables.
• Taxation charge for the year.
4. Taxation is to be provided for at the rate of 30% per annum.
5. 20% of the total sales for the year were made in cash.
6. Credit purchases during the year amounted to 28,800,000 CFAF
7. The accountant provided the following ratios which were obtained from the financial statements of the
company:
• Inventory turnover 4.4 times
• Non-current asset turnover 1.8 times
• Gross profit margin 45%
• Average debt collection period 84 days
• Interest covers 4 times
• Average credit repayment period 90 days
Required:
a) Income statement for the year ended 30 June 2022.
b) Statement of financial position as at 30 June 2022.
Note: Assume a year has 360 days.
2. Some of the financial ratios of two companies in Douala are calculated for the year ended 31/12/2010
and are given as follows:
Ratios Company A Company B
Gross profit margin 45% 70%
Net profit margin 30.75% 53%

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 Current ratio 2.2119 1.30237
Acid-test ratio 1.68104 1.07929
Stock turnover ratio 10 times 8 times
Debtors collection period 91.25 days 54.75 days

Additional information:
• The following information was extracted from the books of company A:
- Net profit 61 500 FCFA
- Current asset consisted of stock 11 000 FCFA, Debtors 37 500FCFA and Bank 1 500FCFA
• The opening stock of both companies is equal to the closing stock
• The sales realised by company B is 3 ½ times that of company A
• The current assets of company B sum up to 153 250FCFA and company B made all its sales on credit.

Required: Calculate for each company:

(a) Turnover
(b) Gross profit
(c) Current liabilities
(d) Cost of sales
3. Dougla Ltd and Tongla Ltd are two companies of a similar size and in the same industry. The following
ratios were calculated for Dougla Ltd for the year to 31, December, 2023:
Gross Profit 32.61%
Current ratio 2.84:1
Stock turnover 5.25 times
Debtors’ collection period 29 days
Return on capital employed 12.17 %

The summarised final accounts of Tongla Ltd are as follows:

Trading and profit and loss Account for 2023
Opening stock 4,480,000
Purchases 61,440,000
65,920,000
Less closing stock 5,120,000
Cost of Good Sold 60,800,000
Overhead costs 14,720,000
Net Profit 1,280,000
Sales (on Credit) 76,800,000

Balance sheet at 311, December 2023.

Liabilities Assets
Share Capital 12.800,000 Fixed Assets 14,080,000
P & L Account 6.400,000 Stocks 5,120,000
Long term creditors 3.200,000 Debtors 11,520,000
Other creditors 10.880,000 Bank 2,560,000
Total 33.280,000 Total 33.280,000
Required:
(i) For Tongla Ltd calculate the same ratios as calculated for Dongla Ltd
(ii) Compare four of the ratios calculated in (i) above with those of Dongla Ltd

4. Mr Ayouba was considering the purchase of one of two businesses. However, he had only been presented
with limited information about the businesses, as follows:
Summarised financial information for the year ended 31st December, 2023
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 Information Business X Business Y
Cost of sales 400 000 000 FCFA 600 000 000 FCFA
Administrative expenses 50 000 000 FCFA 60 000 000 FCFA
Average stock at cost 40 000 000 FCFA 50 000 000 FCFA
Working Capital as at 31st December 2023 90 000 000 FCFA 250 000 000 FCFA
Selling and distribution expenses 15 000 000 FCFA 35 000 000 FCFA
Proprietor’s capital as at 1st January, 2023 200 000 000 FCFA 350 000 000 FCFA
Mark-up rate 20% 25%
Additional Information:
i. Average stock has been calculated using the year’s opening and closing stocks. Subsequently, it
was discovered that Business Y had over valued its stock on the 31st December, 2023 by 10 000
000 FCFA.
ii. Business X’s administrative expenses included a payment for rent of 15 000 000 FCFA, which
covered a three-year period to 31st December, 2025.
iii. A sum of 2 500 000 FCFA was included in the administrative expenses of Business Y in respect
of a holiday taken by the owner and his family.
iv. Cash drawings for the year ended 31st December, 2023 were:
• Business X 20 000 000 FCFA
• Business Y 25 000 000 FCFA
v. The owners of the businesses had stipulated the following prices for their businesses:
• Business X 190,000,000 FCFA
• Business Y 400,000,000FCFA
Required:
a. Based on the information available, carry out the necessary adjustments and prepare the comparative
income statement for the year ended 31st December, 2023.
b. Calculate the stock turn over for each firm
c. Calculate the Net worth of each business and advise Mr Ayouba on which business he should purchase.

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