FAR670 – JUL 2021

SUGGESTED SOLUTION: FAR670 JULAI 2021

ANSWER 1

a) Vertical common-size

2019 2020
% %
ASSETS
Current assets
Cash and equivalents 11.8/ 11.8/
Short-term marketable securities 0.3/ 0.4/
Accounts receivable 13.1/ 17/
Inventory 35.5/ 32.5/
Prepaid expenses and other current asset 7.1/ 6.1/
Total current assets 67.9/ 67.8/
Property, plant and equipment, net. 26.4/ 26.3/
Intangible assets 5.8/ 6/
Total assets 100 100

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities
Accounts payable 40.0/ 40.0/
Total current liabilities 40.0 40.0
Long term bonds 15.3/ 13.8/
Total Liabilities 55.3/ 53.8/

Total shareholders ‘ equity 44.7/ 46.3/

Total liabilities and shareholders’ equity 100 100

(24 / x 1/3 = 8 marks)

b) SMHS Bhd is the retailing/merchandising firm√ due to the heavy investment in

inventory√ (ranging from 32.5% - 35.5%) and receivables (ranging from 13.1% - 17%)
with limited fixed assets.√ Current assets is the single-largest asset√ category which
would be typical for a retailer.√ It shows that 68%√ of total assets represent the current
assets.

(6√ x 1 = 6 marks)

c) Common-size analysis is the restatement of financial statement information in a

standardized form√. It expresses comparisons in percentages.√ The use of percentages
is usually preferable√ to the use of absolute amounts. The use of common-size analysis
makes comparisons of firms of different sizes much more meaningful.√ Care must
be exercised in the use of common-size analysis with small absolute amounts because a
small change in amount can result in a very substantial percentage change√. Common-
size analysis involves expressing comparisons in percentages√.

Vertical common-size analysis uses the aggregate value in a financial statement for a
given year as the base,√ and each account’s amount is restated as a percentage of the
aggregate. For the Balance Sheet the aggregate amount is total assets√. For the Income
Statement the aggregate amount is revenues or sales√.

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 FAR670 – JUL 2021

Horizontal common-size analysis uses the amounts in accounts in a specified year as

the base,√ and subsequent years’ amounts are stated as a percentage of the base
value√. It is useful when comparing growth of different accounts over time√.

The advantages of Common-Size Statement are: (Maximum of 2 points for each

answer)
(1 mark for each point and 1 mark for brief explanation)

i. Easy to Understand: √
Common-size Statement helps the users of financial statement to make clear about
the ratio or percentage of each individual item to total assets/liabilities of a firm. For
example, if an analyst wants to know the working capital position he may ascertain
the percentage of each individual component of current assets against total assets
of a firm and also the percentage share of each individual component of current
liabilities.
ii. Helpful for Time Series Analysis: √
A Common-Size Statement helps an analyst to find out a trend relating to
percentage share of each asset in total assets and percentage share of each
liability in total liabilities.
iii. Comparison at a Glance: √
An analyst can compare the financial performances at a glance since percentage of
increase or decrease of each individual component of cost, assets, liabilities etc.
are available and he can easily ascertain his required ratio.
iv. Helpful in analysing Structural Composition: √
A Common-Size Statement helps the analyst to ascertain the structural relations of
various components of cost/expenses/assets/liabilities etc. to the required total of
assets/liabilities and capital.

Limitations of Common-Size Statement: (max of 2 points)

(1 mark for each point and 1 mark for brief explanation)
i. Standard Ratio: √
Common-Size Statement does not help to take decisions since there is no standard
ratio/percentage regarding the change of percentage in the various component of
assets, liabilities, sales etc.
ii. Change in Price-level: √
Common-Size statement does riot recognise the change in price level i.e.
inflationary effect. So, it supplies misleading information’s since it is based on
historical cost.
iii. Following Consistency: √
If consistency in the accounting principle, concepts, conventions is not maintained
then Common Size Statement becomes useless.
iv. Seasonal Fluctuation: √
Common-Size Statement fails to convey proper records during seasonal
fluctuations in various components of sales, assets liabilities etc. e.g. sales and
closing stock significantly vary. Thus, the statement fails to supply the real
information to the users of financial statements.
v. Window Dressing: √
Effect of window dressing in financial statements cannot be ignored and Common-
Size Statements fail to supply the real positions of sales, assets, liabilities etc. due
to the evil effects of window dressing appearing in the financial statements.
vi. Qualitative Element: √
Common-Size Statement fails to recognise the qualitative elements, e.g. quality of
works, customer relations etc. while measuring the performance of a firm although
the same should not be ignored.

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 FAR670 – JUL 2021

vii. Liquidity and Solvency Position: √

Liquidity and solvency position cannot be measured by Common-Size Statement. It
considers the percentage of increase or decrease in various components of sales,
assets, liabilities etc. In other words it does not help to ascertain the Current Ratio,
Liquid Ratio, Debt Equity Capital Ratio, Capital Gearing Ratio etc. which are applied
in testing liquidity and solvency position of a firm.

Explanation on common size analysis 12√ x 1 = 12 marks)

4 marks for advantanges and 4 for limitations = 8 marks)

(Total: 34 marks)

ANSWER 2

a)
i. The short-term liquidity of the firm has NOT improved between 2019 and 2020√. The
short-term liquidity of the firm has reduced√ from 2019 to 2020. As compared to the
industry, in 2019 showed that the current ratio was at par but worsen√ in 2020. The
acid-test ratio is slightly lower√ than industry in 2019 and has reduced
significantly√ in 2020. This implied that the company unable to pay√ current liability
with the liquid asset after deducting inventory. Using a rule of thumb of two for the
current ratio and one for the acid-test, this firm needs to improve its current liquidity
position√.

The collection period in days showed that that the company did not manage its
accounts receivable effectively√. The industry average collection period was 20
days whereas the company had longer√ collection period in 2019 and 2020 which
was 23 days and 28 days respectively√.

The inventory turnover in days was better√ than industry in 2019. However, it held
the inventory longer than industry in 2020√. This implied that the company was
unable to sell the inventories and this also reflects√ in the acid-test ratio.
(Any 8√ x 1 = 8 marks)

ii. The acid-test ratio relates the most liquid assets√ to current liabilities. The acid-test
ratio is considered to be a better guide to short-term liquidity than the current ratio
when there are problems√ with the short-run liquidity of inventory√. Some problems
could be in determining a reasonable dollar amount in relation to the quantity on
hand√, the inventory has been pledged√, or the inventory is held for long period of
time√ which possibly obsolete√. A valuation problem√ with inventory also exists
because it is stated as a cost figure that can be materially different from fair current
valuation and the inventory may be slow-moving√.
(Any 7√ x 1 = 7 marks)

b.
i. Interest = 1,500,000 X 12% = 180,000

TIE = (4,100,000 – 3,610,000)

180,000

= 490,000 √ = 2.72 times

180,000√

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 FAR670 – JUL 2021

Debt Ratio = (3,520,000 – 1,800,000)

3,520,000

= 1,720,000√ = 48.9%
3,520,000√

Times interest earned indicates a firm’s long-term debt-paying ability from the income
statement view √. Adequate TIE indicates lower risk that the firm will not be able to
pay its interest obligation. Higher times interest earned indicates a better interest
coverage. It seems that the times interest earned is 2.72 times, shows that Les Ardan
Bhd has a strong the long-term debt position.√

Debt ratio indicates the percentage of assets financed by creditors, and it helps to
determine how well creditors are protected in case of insolvency√. Lower debt ratio
shows a lower proportion of assets have been financed by creditors. The debt ratio
of Les Ardan Bhd is considered at average of 48.9%√.

Overall, the solvency position of the company is good, where TIE is above 1 and debt
ratio is within a reasonable range of 49%%.√ This means that the company is is
considered to be less risky for creditors to approve the loan and able to pay its debt.
√
(10√ x 1 = 10 marks)

ii. The information for only one year is NOT SUFFICIENT√. To evaluate the adequacy
of coverage , the TIE should be computed for a period of three to five years√ and
compared √ to competitors and / or industry average√. Computing for only one year√
will not provides insight on the stability √of the interest coverage.

(any 5 √ x 1 = 5 marks)

(Total: 30 marks)

ANSWER 3

A.
i. Operating income margin is a ratio which can be used to measure the efficicency of
the firm in managing operating cost of the firm. √ The results show that the
operating income margin shows an increasing trend√ for the four years period from
2016 to 2019, increasing trend from 20.1% in 2016 to 30.8% in 2019√. However, in
2020, it declined to 26%√. The lower OPM in 2020 may indicates that the company
is less efficient in managing their operating costs√ that resulted in lower profit for the
year. Since no information is provided on the revenue generated for the year in
terms of price or total revenue, the lower income/profit for the year 2020√ can also
be due to the fact that the company may have lowered their selling price √resulting in
lower income in the year. √ (8√ x 1 = 8
marks)

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 FAR670 – JUL 2021

ii. The results of ROA shows that the company’s ability to utilize its assets to create
profits improving√ for the first four years from 2016 to 2019 as shown by the
increasing trend√ of ROA. It increases from 0.2% in 2016 to 3.3% in 2019√.
However, the ROA drops in 2020 to 2.4%.√ the results is explained by the dropped
in the NPM √of the firm in 2020.
5√x1 = 5 marks

iii. Using DuPOnt analysis, ROA = NPM X Total assets turnover√. Based on the
analysis, the lower ROA in year 2020 is due to a lower NPM√ √ for the year. The
NPM drops from 14.9% in 2019 to 10.3% in 2020√. Total asset turnover continue to
increase√ from 22% to 23%√. Therefore, the reason for a decline in ROA√ is due to
lower NPM√. The company continue to show an increase in their ability √to
generate sales through the use of the assets√.
Any 8√x1 = 8 marks

iv.
a. Dividend yield = DPS/ price per share. The higher DY in 2020, increased from
1.67%in 2019 to 1.97% IN 2020√ is due to the increase in dividend per share√
from 14 sen in 2019 to 15 sen in 2020√. At the same time the market price per
share √ dropped significantly from RM8.38 to RM7,60√ per unit in 2020. Both
factors of higher DPS and lower MP per share√ contributed to the higher DY in
2020√.
Any6√x1 = 6 marks

b. PE ratio increased from 20.8 in 2019 to 26.3 in 2020√. The increase is due to a
lower price per share √in 2020 and a significant drop in eps√ in 2020. Even
though there is only marginal dropped in price√, the eps shows a significant or
big drop√ in 2020, dropped from 40.37 sen per share in 2019 to 28.9 sen in
2020√

Any 5 x 1 = 5 marks.

v. NO√. The higer PE ratio in 2020 does not indicate the greater confidence by the
market on the future earning power of the firm√√. This is explained by the lower
price per share √ in 2020 in comparison to 2019 which is generally due to lower
demand√. The higer PE ratio is basically due to the lower demnominator of eps√.

Any 4√ x 1 = 4 marks

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 FAR670 – JUL 2021

END OF SOLUTION

6
 FAR670 – FEB 2021

FAR670 FEB 2021

ANSWER 1

a.

Company AB Company XY
% %
ASSETS
Current assets
Cash and equivalents 25.6/ 6.2/
Short-term marketable securities 23.1/ 0.0
Accounts receivable 12.8/ 32.3/
Inventory 7.7/ 29.2/
Total current assets 69.2/ 67.7/
Property, plant and equipment, net. 30.8/ 23.1/
Intangible assets 0.0 6.2/
Goodwill 0.0 3.1/
Total assets 100 100

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities
Accounts payable 16.7/ 36.9/
Total current liabilities 16.7 36.9
Long term bonds 11.5/ 24.6/
Total Liabilities 28.2/ 61.5/

Total shareholders ‘ equity 71.8/ 38.5/

Total liabilities and shareholders’ equity 100 100

21/ x 1/3 = 7marks

b.

i. Company AB is highly financed by equity/ i.e 71.8% of total assets /whereas

cpmpany XY is highly financed by debt / where 61.5% /of their total assets are
financed by liabilities.

The large portion of both companies assets are in the form of current assets
/where 69.2% /of total assests represented by current assets for company AB
and 67.7%/ for company XY. Out of more than 67% of current assets in XY, only
6.2%/ are in terms of cash and marketable securities / whereas for company AB,
48.95% / are in terms of cash and marketable securities) /. Company AB
therefore in a very much higher liquidity position than company XY//.

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 FAR670 – FEB 2021

In terms of liability, Company XY has more than double liabilities/ (total

liabilities 61.5%) than company AB (28.2%)/. 36.9% are in terms of accounts
payable /and another 24.6% are LT liabilities/. Company AB on the other hand
has only 16.7% /current liabilities to total assets i.e only half the current
/liabilities of company XY.

Any 18 / x 1 = 18 marks

ii.

company AB is in a strong liquidity position/ compared to XY/. More than half of

their current assets/ (70% of current assets) are in the form of cash and marketable
securities/ which are highly liquid and can be converted into cash immediately/ to
meet their current liabilities. AB has RM 1.9 million in cash and cash equivalent to
meet its current liabilities of only RM 650,000/ or almost three times/ cash and cash
equivalent to cover their current liabilities.

On the other hand, for company XY, only about 9.1% /of the current assets are in
the form of cash and cash equivalent /while another 90.9%/ of current assets are in
the form of inventory and accounts receivable/. At the same time the company has
60% / of their total liabilities in the form of current liabilities/ which require to be
settle in a short period of time using liquid assets/. Other current assets are in terms
of receivables and inventory/ which may take quite some time to be converted /into
cash. To pay near term oligations/, company XY need to collect large amount of its
accounts receivables/, sell more inventory for cash/, borrow from a bank/ or raise
more LT capital/.

In general, we can say that AB has no problem in meeting their short or long term/
debt obligations in comparison to XY/

Any 20/ x 1 = 20 marks

Total 45 marks

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 FAR670 – FEB 2021

ANSWER 2

a.
i. Operating cycle

2017 2018 2019

Accounts receivable 10 times 15 times 20 times
turnover
Inventory turnover in 25 30 30
days
Operating cycle= 365/10 // + 25/ = 365/15// + 30/ = 365/20/ /+ 30 /=
AR turnover in days + 61.5 days/ 54.33 days/ 48.25 days/
Inventory TO in days
/12/3 =4 marks

ii.
• The company’s operating cycle shows an improving trend/ from 61.5 days in
2017 /decrease to 54.33 days/ in 2018 and further decrease to 48.25/days in
2019.
• Even though their operating cycle improving, the company’s ability to sell its
inventory/ is deteriorating /as shown by the increasing trends in the number
of days/ taken to sell their inventory/ ( or higher their inventory turnover in
days)
• The better operating cycle/ is contributed by the efficiency /of the company
in collecting their accounts receivable/. It managed to reduce the number of
days to collect from 36.5 days in 2017/ to 24.3 days in 2018/ and further
reduced to 18 days in 2019/ OR their accounts receivables turnover increased
from 10 times in 2017 to 15 times in 2018 and 20 times in 2019///.

ANY 12 / x 1 = 12 marks

b.

i. If Sinar sells its inventory at a profit, receivables increase/ by more than inventory
decrease/, and current ratio increase/,
ii. If Sinar sells its inventory for its carrying value, inventory decreases/ and receivables
increase by the same amount/, and the curret assets are unchanged. current ratio
remain the same/.
iii. Accounts payable decrease, quick assets remain unchanged/, quick ratio increase/
because denominator decreases/

9/ x1 = 9 marks

TOTAL 25 MARKS

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 FAR670 – FEB 2021

ANSWER 3

a. Capitalizing the training cost will result in lower expenditure recognized in the year of
capitalization / compared to immediately expensing and higher profit / of the
company. In subsequent period, the firm will report lower profit /compared to
expensing /because the capitalized expenditure will be allocated to the income
statement/ through depreciation/. (6 x 1/ = 6 marks)

b. 2,000,000/ x 3/12/ =500,000

2,400,000 /x 6/12/ =1200,000
2,200,000//x 3/12 / = 550,000 OR
Weighted average =2250,000

Basic EPS = (NI-Preferred Div)/ Weighted average

= 2,500,000/-200,000/) /2250,000/
= 1.02
10/ x ½ = 5 marks

c. Based on fundamental OF INVESTING, the information shows that the company

stock has become more expensive/ despite a decreasing trend/ in the stock’s earnings
per share/ Therefore, investor should not purchase the stock now/,
(4x/ = 4 marks)

One possible explanation for the higher price despite a lower EPS is that the investor
estimates there is a high growth potential for the company//. Investors are willing to
pay high price/. for the stock of ompanies with high growth opportunities/. resulting
in high PE ratio.
(4x/ = 4 marks)

Other acceptable explanation

Company stock is a speculated stocks/. Market may speculate there will be
certain future event/ that may increase the future earnings /of the company and
market will react to this positive news/ resulting in higher price for the lower
EPS.

d. poor cash flow position will:

• Limit the company in taking advantage of bulk purchases/
• Limit in getting higher trade discounts for cash purchases/

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 FAR670 – FEB 2021

• Limit the company in getting discounts on payables. They will not be

able to take advantage of the discounts offered by crediotrs to pay in a
shorter period of credit //
The limitation on the above will make the company to operate at a higher
cost of prodution/. Therefore they cannot offer their products at the best
price/ and may lose competitive advantage to their competitor/. Sales will
drop and it will affect their profit/.
Alternatively, if the company match/ the competitor’s price. They will be
operating at a lower profit margin /and this will finally affect the
profitability of their company/.

(11 x / = 11 marks)

END OF SOLUTION

5
SET 1 FAR670

ANSWER 1

A. KREETAX BHD

2019 2018
RM'000' % RM'000' %
Net revenues 40,386 100 41,932 100
Cost of sales 25,786 63.8 28,088 67.0
Gross profit 14,600 36.2√ 13,844 33.0√
Marketing, administration 9,044 22.0 8,862 21
and research costs
Asset impairment and exit -√ 1,024 2.4√
costs
(Gains)/ losses on disposal 6 0.0 92 0.2
of business unit
Amortisation of intangibles 26 0.1 23 0.1
Operating income 5,524 14.1√ 3,843 9.2√
Interest and other expenses 1,237 3.1 1,240 3.0
Earnings from continuing 4,287 10.6* 2,603 6.2*
operations before tax
students may calculate OPM or EBT

*marks to be allocated for % in vertical above or in terms of ratio below

2019 2018
GPM 36.2%* 33%*
OPM 14.1%* 9.2%*
EBT 10.6%* 6.2%*

Based on the ratios calculated above, it shows that the company operating profit
margin increased√ from 9.2%* in 2018 to 14.1%* in 2019 (or they may give EBT in %).
The significant increase in profitability in 2019 was not driven by an increase in
revenues√ and in fact, net revenues were lower√ than 2018. Instead the company's
improved profitability in 2009 was driven primarily by its higher gross profit margin√ (or
lower COS**) that increased from 33% *in 2018 to 36.2%* √ in 2019. Another driver
of the company's improved profitability in 2019 was a lower amount or no asset
impairment and exit costs√.

12 √ X 1 = 12 MARKS

B.

Net profit margin = Net income

Net Sales

2019 2018
 =RM280,000/ RM3,500,000 =RM249,000/
RM4,150,000
=8% = 6%

Total assets turnover= Net income

Average total assets

2019 2018
=RM280,000/ RM1,000,000 =RM249,000/
RM1,200,000
= 3.5 times = 3.46 times

ROA = Net profit margin x Total asset turnover

2019 2018
=8%√ x 3.5√ =6%√ x3.46√
=28%√ = 20.76%√

Based on the dupont analysis, the result shows that a significant increase in
ROA√ from 20.76% to 28% in 2019 is due to the increases in NPM√ that
increased from 6% to 8% in 2019√. Total assets turnover remained almost the
same for both years√

10√ x 1 mark = 10 marks

Total (22 marks)

Answer 2

i. The ratios present a contradictory picture of the company's liquidity√. Based

on the increase in its current ratio√ from 1.6 to 2.1√, the company appears to
have strong and improving liquidity√√. However, based on the decline√ of teh
quick ratio√ from 1.0 to 0.8, its liquidity appears to be deteriorating√. Becasue
both ratios have exactly the same denominator, current liabilities, the difference
must be the result of changes in some asset that is included in the current ratio
but not in the quick ratio√ √ (e.g.inventory).
(10/ X 1 = 10 marks)

ii. The company says sales in inventory has deteriorated√ from 30 days to 55
days√, meaning that the company is holding increasingly larger amounts of
inventory relative to sales√√. The decrease in days sales in receivables√
implies that the company is collecting receivables faster√√. If the proceeeds
from from the collections were held as cash√, there would be no effect√ on
 either the current or quick ratio√. However if the proceeds from the collections
were used to purchased inventory, there would be no effect on the current ratio
and a decline in the quick ratio as shown in this company√. Collectively, the
ratios suggect that liquidity is declining√. The lower quick ratio in 2019 which
is on contracdiction to an increase in current ratio is explained by the higher
days sales in inventory√which indicates that company may have an inventory
problem√.
(14/ X 1 =14 marks)

B. TWO situations are:

i. When during the year the company declares a convertible bond / convertible
preferred stock issue into shares of new common stock
ii. When certain stock options or warrants are exercised
iii. When company declares a stock dividend.
(any 2 x 2 = 4 marks)

Total (28 marks)

ANSWER 3

In evaluating the solvency position, students need to calculate the following ratios:

i. debt ratio = total debt/ total assets

ii. debt to equity ratio = total debt / shareholders equity
iii. TIE = EBIT / interest

Nidia Bhd Win Bhd

(RM ‘000) (RM ‘000)
2019 2018 2019 2018
Short-term borrowings 14,280 7,140 1,639 2,831
Current portion of long-term interest- 3,140 1,730 3,903 3,068
bearing debt
Long-term interest-bearing debt 26,910 2,030 25,026 21,320
Total shareholders’ equity 142,080 147,730 140,823 134,112
Total assets 395,820 375,990 285,684 245,117
EBIT 19,660 12,350 16,252 30,646
Interest payments 14,200 5,800 1,689 1,513

Nidia Bhd Win Bhd

2019 2018 2019 2018

Debt ratio 44330/395,820 10900/375990 30568/285684 27219/245117
=11.2%√ =2.9%√ =10.7%√ =11.1%√
 Debt to equity 44330/142,080 10900/147730 30568/140823 27219/134112
= 31.2%√ =7.4%√ =21.7%√ =20.3%√

a. Nidia’s leverage ratios ( debt and debt to equity ratios) all increased significantly in
2019√ (refer % in table). Nidia’s debt ratio increased from 2.9% to 11.2% √and its
debt/equity ratio increased from 7.4% in 2018 to 31.3% in 2019√. On the other hand,
Win’s leverage ratios appear fairly similar√ for 2018 and 2019. Debt ratio in fact,
dropped slightly√ in 2019 from 11.1% to 10.7% and its debt/equity ratio only increased
slightly √from 20.3% to 21.7%. In 2018 all two Nidia’s leverage ratios were significantly
lower than Win bhd√. However, In 2019, the opposite √was true where both ratios are
higher than Win Bhd. Win’s capital structure seems fairly constant√ over the 2 years,
whereas Nidia's capital structure has shifted toward more debt√. The incresaed in
both leverage ratios suggeting weakening solvency √√for Nidia's.

(20/ x 1 = 20 marks)

b. Comparing year-to-year, we observe that leverage ratios of Nidia Bhd increased

because of significant increase√ in all types of borrowings√. short term borrowings
and current portion of long-term interest borrowings doubled√ the amount of 2018 in
2019. In 2019, the long-term interest bearing debt is 13 times more than the amount
in 2018√ or an inncreased of about 1225.6%√ from 2018. The increased in debt is
without a similar increase in total assets√√and shareholders’ equity√. Total assets
increased by about 5.3% in comparison to a very large increased of 1225.6% in total
debt√√. For debt/equity ratio, the increased in total debt is not supported by the
increased in equity√ and in fact the equity decreased √from RM 147,730 to RM
142080 in 2019.

(12/ x 1 = 12 marks)

Nidia bhd Win bhd

2019 2018 2019 2018
TIE 19660/14,200 12350/580 16252/1689 30646/1513
=1.38X√ =21.3X√ =9.6X√ =20.3X√
note: marks for tie can be given in the computation or in the body of student's answer
(refer to * in answer below).

c. the ability to carry debts is evaluated based on TIE RATIO√. The results of TIE show
that both companies interest coverage ratio (TIE) decreased√ from 2018 to 2019. The
decreased is mainly due to the decreased in EBIT√and an increased in interest
payment√. Win’s TIE dropped√ from 20.3x* to 9.6x* in 2019 due to a significant
decrease in EBIT√ from 30,646 to rm16,252. the interest for 2019 only increase
slightly√ from 1513 to 1689√. however, the TIE for Win Bhd is still high in 2019√.
for Nidia bhd, the TIE has dropped sigificantly from 21.3x* to only 1.3x* in 2019√. the
small tie in 2019 is mainly due to a very large increase in long term interest bearing
debt√ in 2019 (1225.6%)√ not supported by the same increase in EBIT√. In general
for the year 2019, Nidia’s ability to cover interest paymets is weaker than Win bhd √

18√ x1 = 18 marks

Total = 50 marks
 FAR670 – JUNE 2017

FAR670
SUGGESTED SOLUTION
PART A
Question answer
1 D
2 C
3 A
4 A
5 E
6 A
7 E
8 D
9 C
10 E
11 A
12 C
13 E
14 B
(20 marks)
PART B

QUESTION 1
a. Suria Bhd and Ecowell Bhd have the same amount of working capital. Suria Bhd has a current
ratio of 2 to 1, while Ecowell Bhd has a current ratio of 1.29 to 1. Suria is in a better short-term
financial position than Ecowell because its liabilities are covered better with a higher current
ratio. Working capital is not very significant because the amount of working capital does not
indicate the relative size of the companies and the amount needed.
(8 marks)
b. Suppliers of raw material
Potential stockholder
Bondholders’
(3 marks)
c. i. liquidity
profitability
Long term borrowing ability
(1.5 marks)
ii. Reason:

Suppliers of raw materials would be most interested in liquidity since their goods and
related obligations​ ​are primarily short-term.

Potential stockholders would be most interested in the earning ability of the firm since
they share in residual profits.

Bondholders would be most interested in the long-term borrowing capacity​ ​since this
measures the risk of default.
(4.5 marks)

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 FAR670 – JUNE 2017

QUESTION 2

a. Vertical Common-Size Analysis

Gross profit decreased materially between 2014 and 2016. this was caused by the increase in
cost of sales from 82.3% in 2014 to 84% in 2016

Selling, general and administrative expenses increased moderately in 2015 from 17.5% to 18.4%.
It is then decreased materially to 15.2% in 2016

Asset impairments decreased materially between 2014 and 2016.

The increase in cost of sales, and selling and general expenses in 2015 resulted in a material
increase in losses for 2015. However, a significant material decrease in Selling, general and
admin expenses and assets impairment in 2016 resulted in minor profit in 2016.
(8 marks)

b. i.

2017 2016 2015 2014

Sales 469.2 315.4 192.3 100.0%
Cost of Sales 458.9 313.1 191.1 100.0%
Net Income 496.0 320.6 192.5 100.0%
Cases of Blocks Shipped 447.6 306.5 187.8 100.0%
(6 marks)

ii. Sales have risen rapidly. The cost of sales have also risen but more slowly than sales.
Also, there has been a much faster rise in net income than in sales. The cases of blocks
shipped have increased more slowly than sales dollars, indicating a rise in selling price or
an improved mix of sales towards more expensive blocks.
(6 marks)

QUESTION 3

a. (i)
Net Profit Margin = Net Income
Net Sales
2015 2014
RM105 000 RM80 000
RM2 100 000 RM2,000,000

= 5.00% = 4.00%

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 FAR670 – JUNE 2017

(ii) Return on Assets = Net Income

Average Total Assets

2015 2014
RM105 000 RM80,000
RM460,000 RM400,000

= 22.83% = 20.00%

(iii) Total Asset Turnover = Net Sales

Average Total Assets

2015 2014
RM2,100,000 RM2,000,000
RM460,000 RM400,000

=4.57 times =5.00 times

(iv) Return on Common Equity = Net Income

Average Common Equity

2015 2014
RM105 000 RM80,000
RM340,000 RM320,000

= 30.88% = 25.00%
(8 marks)

Lay Bhd has had a substantial rise in net profit margin from 4% to 5% in 2015, even though it is
somewhat tempered by a reduction in asset turnover. ROA and ROE increased even though the
average total assets and common equity shows a slight rise in 2015. The increase in ROA and
ROE is due to a substantial rise in NPM
(4 marks)

b. Gross profit ratio only considers the cost of goods sold in its calculation. This ratio measures how
profitable a company sells its inventory or merchandise. Essentially its the percentage markup
on merchandise from its cost. ​This is the pure profit from the sale of inventory that can go to
paying operating expenses
Net Profit ratio on the other hand considers other expenses. It measures the amount of net
income earned with each dollar of sales generated by comparing the net income and net sales of
a company. In other words, the profit margin ratio shows what percentage of sales are left over
after all expenses are paid by the business. This ratio also indirectly measures how well a
company manages its expenses relative to its net sales.
(6 marks)

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 FAR670 – JUNE 2017

QUESTION 4

a. Solvency ratios, also called leverage ratios​, ​measure a company's ability to sustain operations
indefinitely by comparing debt levels with equity, assets, and earnings. In other words, solvency
ratios identify going concern issues and a firm's ability to pay its bills in the long term i.e. focus
more on the long-term sustainability of a company. Better solvency ratios indicate a more
creditworthy and financially sound company in the long-term.
(5 marks)

b.
i. The debt ratio is relatively constant, indicating stable/low risk. Times interest earned
has declined. This can be caused by a decline in income generated by the company
(4 marks)

ii. Since the debt ratio is relatively constant, the problem of declining TIE does not appear
to be due to increasing debt. Rather, higher interest rates or lower income ​appear to be
the problem. So, if problem persist and income keeps declining, there is a possibility the
company may have difficulty to meet its liability when due.
(6 marks)
(Total: 15 marks)

QUESTION 5

a. Although the ​net cash flow indicated a negative balance​, the ​company’s net income is RM98
million and net cash inflow from operation is RM121 million. This showed that the company has
improved its income performance and cash flow from operating activities compared to previous
financial year of RM 39.6 million.

The probable reasons for a negative balance might be due to a number of acquisition that were
made during the financial year as shown by the purchase of land, building and equipment. If
there was no acquisition then the net cash inflow would significantly be higher i.e. RM65 million.
(8 marks)

b. A low dividend yield may indicate that the firm is retaining its earnings for growth. The investor
might expect to get his/her returns in the form of market price appreciation
(2 marks)

END OF SOLUTION

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 FAR670 – JAN 2018

ANSWER SCHEME FAR 670 – JANUARY 2018

PART A

Question no Answer
1 E
2 E
3 C
4 C
5 D
6 D
7 B
8 E
9 B
10 D
11 A
12 D
(16 marks)
PART B.

QUESTION 1

Average Gross Receivable

a. i. Accounts Receivable Turnover (in days)
= Net Sales/365

(RM3600 + RM3200)/2
= 19.70 days
RM63000/365

Average Inventory
i Inventory Turnover (in days) =
Cost of Goods Sold/365

(9600+ RM7800)/2
= 70.57 days
RM45000/365

Inventory
Operating Accounts Receivable
ii = + Turnover
Cycle Turnover in Days In Days
= 19.70 days + 70.57 days

= 90.27 days
(7 marks)

b. i. The acid test ratio evaluates a corporation immediate liquidity position after removing
inventory. However, comparison needs to be made with past ratios and industry
because different industry ​may require different level of liquidity, for example grocery
store or restaurant business which sell only for cash can have an acid-test ratio
substantially below the conventional guideline (1.00) and still have adequate liquidity.

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 FAR670 – JAN 2018

(5 marks)
ii. A relatively low sales to working capital does not give an indication of efficient use of
working capital. Instead, it indicates unprofitable use of WC. The amounts of sales
generated are not adequate in relation to available working capital.
(4 marks)

(Total: 16 marks)

QUESTION 2

a. 2016 2015​
Sales 100.0% 100.0%
Cost of Sales 75.0​ 72.0​
Gross Profit 25.0 28.0
Operating Expenses 14.5​ 17.4​
Operating Income 10.5 10.6
Interest Expense 1.7​ 1.6​
Earnings Before Tax 8.8 9.0
Income Taxes 4.2​ 4.0​
Net Income 4.6​% 5.0​%

(8 marks)

b. Cost of sales as a percent of sales have risen substantially. This increase is nearly offset
by a decline in operating expense. Interest expense and taxes have both risen slightly in
relation to sales.
(6 marks)

c. Creditors and investors use this ratio to measure how effectively a company can convert
sales into net income. Investors want to make sure profits are high enough ​to distribute
dividends while creditors want to make sure the company has enough profits to pay back its
loans. In other words, outside users want to know that the company is running efficiently.
(6 marks)
(Total: 20 marks)

QUESTION 3

a. Gross Profit Margin =

2016 2015 2014
sales RM30,500 RM25,600 RM22,900
less: COGS (12,600) (10,300) (8,350)
Gross Profit/ RM17,900 RM15,300 RM14,550

GP Margin = GP/Net sales 17900/30500 15300/25600 14550/22900

RM25,600 RM22,900
58.69% 59.77% 63.54%

(3 marks)

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 FAR670 – JAN 2018

b. Operating Profit Margin = 2016 2015 2014

9.75% 18.59% 21.7%

(1.5 marks)

c. Both gross and operating profit margin of the company show a declining trend for the
period from 2014 to 2016. The GP margin decline from 63.5% in 2014 to 58.7% in 2016
The operating profit margin is also on a declining trend, from 21.7%% in 2014 to 9.75%
in 2016.
(1.5 marks)

The declining trend in gross profit margin is due to the increased in costs of goods sold
over the three years period. The COGS in 2014 is RM 8350 and it increased by 23.4%
in 2015 ​and further increased by another 22% in 2016. The increased in COGS is at a
faster rate than the increased in net sales for the three years period.

This negative trend in operating profit margin is mainly due to the sharp increase in all
three types of costs. Selling expenses increased by 9.1% in 2015 and continue to
increase by 56% in 2016 from RM 5025 to RM 7875. General and R&D expenses also
recorded a significant increase of 26.8% and 28.5% respectively. Selling expenses, in
particular, impaired 2016 profit
(10 marks)
(Total: 16 marks)

QUESTION 4

a. The debt to equity ratio shows the percentage of company financing that comes from
creditors and investors. Each industry has different debt to equity ratio benchmarks, as
some industries tend to use more debt financing than others. A debt to equity ratio of 1
would mean that investors and creditors have an equal stake in the business assets. ​A
higher debt to equity ratio indicates that more creditor financing (bank loans) is used
than investor financing (shareholders). Companies with higher debt to equity ratio are
considered more risk to creditors and investors than companies with a lower ratio. Thus,
a lower debt to equity ratio usually implies a more financially stable business. The debt
to equity ratio indicates the ability of the company to pay its long-term debt, as well as
shows how well the creditors are protected in the case of insolvency. The lower the ratio
indicates the better prospective of the company’s debt position.
(6 marks)

b. Anastasia’s debt to equity ratio for both years is higher than its competitor. This shows
that Anastasia’s business is riskier than its competitor and is less stable. If there is a
decline in the net income for both companies, Anastasia would suffer more than its
competitor. Conversely, if there is a hike in profit, Anastasia’s investors would gain more
than the investors of the competitor company.
(4 marks)

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 FAR670 – JAN 2018

c. Debt equity ratio compares the total debt with total shareholders’ equity. The ratio helps
to determine how well creditors are protected in case of insolvency
Debt ratio indicates the percentage of assets financed by creditors. The ratio indicates
the firms long term debt-paying ability.
(4 marks)
(Total: 14 marks)

QUESTION 5

a. i. Operating cash flow to current maturities of long-term debt and current notes payable
(i.e. current debt) Indicates the ability of the company to meet current maturities of debt.
The higher ratio is better as the company able to meet current maturities of debt; it also
shows better liquidity.

ii. Operating cash flow to total debt –shows the company’s ability to cover total debt with
operating cash flow; higher ratio is good and better. Total debt used to be more
conservative.

iii. Operating cash flow per share (= operating cash flow – dividend of preferred share
capital /diluted weighted average share capital)
It is a complimentary ratio to EPS. But not a substitute. Indicate fund flow per share,
usually substantially higher than earnings per share because excluding dividend. It
shows company’s ability to make capital expenditure decisions and pay dividends rather
than is earnings per share. Higher ratio is better.

iv. Operating activities cash flow to cash dividend = Operating activities cash flow
Indicates a company’s ability to cover cash dividend with the yearly operating cash flow.
Higher ratio is better cover of dividend.
(8 marks)
b.
Net Income – Preferred Dividends
i. Earnings Per
= Weighted Average Number of
Share
Common Shares Outstanding

Year 1 Year 2
$40,000 – $22,500 $42,000 – $27,500
38,000 38,000

$0.46 $0.38
(4 marks)

ii. The decline in earnings per share is caused mainly by increase in preference dividend in
year 2. ​There has been new issuance of preferred share capital in year 2. PS increase
from 450,000 to 550,000 in year 2. As a result, more preferred dividend is payable in
year 2 than in year 1. This has resulted the decline in EPS from 0.46 sen to 0.38 sen
although there is an increase in the net income, it is not adequate to maintain its first
year EPS
(6 marks)
(Total: 18 marks)

END OF SOLUTION

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 FAR670 – JUNE 2018

FAR670
SUGGESTED SOLUTION
PART A

1. D
2. B
3. D
4. A
5. C
6. C
7. C
8. D
9. B
10. D
11. B
12. C
(12 marks)

PART B
QUESTION 1

i. Preference as to dividends means the current year’s preferred dividend must be paid before a
dividend can be paid to common stockholders. A preference as to dividends however does not
guarantee that a preferred dividend will be paid in a given year. The BOD must declare a
dividend before a dividend is paid.
(5 marks)

ii. Firm prefer to issue preferred stock than bond because:

● A preference as to dividend does not guarantee that a preferred dividend will be
paid in a given year. The BOD must declare a dividend before dividend is paid
● The lack of a fixed commitment to pay dividend unlike bonds
● The lack of a due date on the principal
● Consequence of not paying deferred dividend is less serious than not paying
interest on bond.
(5 marks)

iii.
i. TIE = EBIT / Interest expense. Time interest earned indicates a firm ability to meet its
interest obligation. If the TIE is adequate little danger exists that the firm will not be
able to meet their interest obligation. The firm with good coverage of the interest
obligation should be able to refinance the principal when it comes due. Companies that
maintain a good record can finance a relatively high proportion of debt in relation to
equity and, at the same time, obtain funds at favorable rates. To evaluate the adequacy
of coverage, the TIE ratio should be computed over a period of 3 to 5 years and
compared to competitors and industry average.
(5 marks)

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 FAR670 – JUNE 2018

ii. Debt ratio = Total Liabilities/total assets. Debt ratio indicates the percentage of assets
financed by creditors. It helps to determine how well creditors are protected in case of
insolvency. If creditors are not well protected, the company is not in a position to issue
additional long-term debt. The lower the ratio, the better the company’s position. The
debt ratio should be compared with competitors and industry averages. Industries that
have stable earnings can handle more debt than industries that have cyclical earnings.
(5 marks)
QUESTION 2

i. working capital = current assets – current liabilities

=237,000 – 183,000
=54,000
ii. current ratio = ​current asset
current liabilities
= 237,000
183,000
=1.29 times
iii. quick ratio = ​cash + marketable securities + account receivable
current liabilities
= ​5,000 + 10,000 + 100,000
183,000
= 0.63 times
(4 marks)

b. Cendana Bhd’s current ratio is slightly better than the industry average. However, its quick ratio is
significantly below than the industry average. It shows that Cendana Bhd has more in current
liabilities than in highly liquid assets or (higher proportion of its current assest are in the form of
inventory). Therefore, Cendana Bhd has poor liquidity position in comparison to industry averages.
(3 marks)

c. The current ratio is considered to be more indicative of the short-term debt paying ability than the
working capital because the current ratio takes into account the relative relation between the size of
the current assets and the size of the current liabilities. Working capital only determines the
absolute difference between the current assets and the current liabilities.
(5 marks)

d. Two situations
1. Unused bank credit lines would be a positive addition to liquidity. They are frequently disclosed
in notes
2. A firm may have some long-term assets that could be converted to cash quickly.
3. A firm may be in a very good long-term debt position and therefore have the capability to issue
debt or stock.
(4 marks)

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 FAR670 – JUNE 2018

QUESTION 3
a.
GoodBuy Bhd Smart Tyreen
services manufacturer
Cash and cash equivalents 6.5% 8.8% 8.4%
Receivables 23.4% 4.8% 12.5%
Inventories 33% 1.2% 25.0%
Plant, property, and equipment (net) 30% 82.7% 52%
Investments 7.1% 2.5% 2.1%
Total Assets 100% 100% 100%

Total current liabilities 29.5% 11.5% 22%

Long term debt 18.5% 24.8% 37.6%
shareholders’ equity 52% 63.7% 40.4%
Liabilities and stockholders’ equity 100% 100% 100%
(12 marks)
b. The results from vertical common –size analysis for the three companies show that:
i. Good Buy Bhd has the highest % of receivables on total assets in comparison to others. As
merchandising companies, Good Buy may have a large amount of sales on credit and thus
have relatively large receivables balance.
3√ x 1 = 3 marks
ii. Both Merchandising Company and Manufacturing Company have a very much higher
proportion of inventory on total assets (33% and 25%) than only 1.2% of total assets for
Service Company. This is explained by the fact that a service firm generates its revenue
from the service provided. Because service cannot typically be stored inventory is low or
even non existence for certain company.
Manufacturing firm will usually have large inventories composed of raw materials, WIP and
finished goods. Merchandising firm will have large inventories of finished goods.
(5 marks)
QUESTION 4

a. Both firms have identical return on assets of 8% in year 2016 and 10% in year 2015√. Both forms
also show a decreasing trend in return on assets.
(2 marks)
b. Firm A has lower ROA in year 2016. The NPM for both years remain the same at 4%. The lower ROA
is because of lower asset turnover in year 2016, dropped from 2.5 in 2015 to 2.0 in 2016. This has
resulted in lower ROA in 2016. Firm A is less efficient in managing their investment in asset.

(4 marks)
Firm B ROA dropped from 10% in 2015 to 8% in 2016. The lower ROA is due to the lower NPM
reported by the firm in 2016 from 4% dropped to 3.2%. It indicates that firm B is generating less
profit per every ringgit of sales in 2016.
(4 marks)

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 FAR670 – JUNE 2018

c. 2 main reasons are:

i. Stockholders derive revenue in the form of dividends. Dividends are normally paid based on the
profitability position of the firm.
ii. Other than dividend, stockholders can generate revenue from capital gain. Profitability of the
firm is one of the factors which determine whether company can sustain its operation, can
cause a rise in share market price, and leading to capital gains.
(6 marks)
QUESTION 5
a.
i. Management may use the statement of cash flows to determine cash generated from business
operation be used to expand the business√, determine dividend policy or investment policy /
financing policy
(2 marks)
ii. Creditors use statement cash flows to determine the firm’s ability to pay debts with cash from
operations and the % of cash from operations in relation to cash from financing.
(2 marks)
b. Operating CF indicates the funds flow per common share outstanding. It is different from earnings
per share because depreciation has not been deducted and therefore is more accurate in indicating
the availability of cash for further investment or payment of dividend. It is usually substantially
higher than eps.
(4 marks)
c.
i. Price/Earnings Ratio = Market Price
Fully Diluted Earnings Per Share

2017 2016
RM12.94 RM15.19
RM1.08 RM1.14

= 11.98% = 13.32%

ii. Dividend Yield = Dividends Per Share

Market Price Per Share

2017 2016
RM0.80 RM0.76
RM12.94 RM15.19

= 6.18% = 5.00%

iii. The price/earnings ratio has declined as a result of the drop in price. This decline indicates lower
shareholder expectations.
Dividend yield is up, caused by the rise in dividends and more so by the drop in price.
(4 marks)

END OF SOLUTION

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 FAR670 – DEC 2018

ANSWER SCHEME FAR 670 – DEC 2018

PART A

Question Answer Question Answer

1 B 7 C
2 A 8 B
3 D 9 B
4 B 10 B
5 D 11 D
6 B 12 C

PART B

QUESTION 1

a. i. The ratio captures only the amount of current assets, but the components of
current assets differ significantly in their nearness to cash (e.g. marketable securities
versus inventory).
ii. Determining whether a ratio for a company is within a reasonable range for an industry.
iii. Whether A ratio signifies a persistent condition or reflects only a temporary condition
iv. Overall, evaluating specific ratios requires an examination of the entire operations of a
company, its competitors, and the external economic and industry setting in which it is
operating.

b. i. Companies that have naturally slow-moving inventories and receivables

ii. Companies that highly speculative

c. i. Investing public is interested in specific types of analysis. They are concerned

with the financial position√ of the entity and its ability to earn future profit√. The
investor uses an analysis of past trends√ and current position √to project the future
prospects √of the entity.
ii. Short term creditors are interested in the current resources that appear on the financial
statement√ to determine if an entity has the ability to pay their short term obligation
when it is due√ and to determine if credit should be extended

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 FAR670 – DEC 2018

QUESTION 2

a. 2017 2016
Net sales 100 100
Other income 1.41 1.61

Manufacturing cost of products sold 40.99 36.00

Research and development 8.51 8.73
General and selling expenses 33.14 34.45
Interest 1.18 0.89
Other expenses 0.98 0.56

Earnings before tax and NCI 16.60 20.97

Income tax 7.21 9.40

Net earnings 8.70 10.59

b. i. Net profit margin = NI/Net sales

2017 2016

476,408 274,220
3,178,300 2,589,932

= 8.70% = 10.59%

ii. Return on Assets = Net income before MI

and non-recurring items
Ending Total Assets

2017 2016

276,408 274,220
2,875,272 2,364,220

= 9.61% = 11.60%

iii. Total Asset Turnover = ​ et Sales

N
Ending Total Assets

2017 2016

3,178,300 12,589,962

2
 FAR670 – DEC 2018

2,875,272 12,364,220

= 1.11 times = 1.10 times

iv. DuPont Analysis

Return on Assets = Net profit margin x Total Asset Turnover

2017: 9.66 = 9.70% x 1.11

2016: 11.65 = 10.59% x 1.10

c. Liquidity – with exception of the inventory turnover ratio, the company liquidity ratios were
adequate to good. The current ratio is above 2.0 and higher than industry average. The company
also collects their accounts receivable faster√ than average industry i.e 21.9 days in comparison
to 25 days taken by industry (or higher receivable turnover than industry). Even though the
current ratio is much higher than industry, the company quick ratio is however lower than 1
√and almost similar to industry average. The lower quick ratio is explained by the lower
inventory turnover of the company which resulted in higher current assets in terms of inventory.

Financial leverage – the company used more debts to finance investments than the peer group,
which we saw in higher-than- average debt ratio (53.8%) and below average TIE of 5.67 times.
This suggests that the firm is exposing itself to a higher degree of financial risk than is the norm
for firms in its industry. In other words, there’s a greater risk it might not be able to meet its
debt obligations.

QUESTION 3

a. These ratios indicate that the company has improved on all three measures of activity over the
four years period. The company appears to be managing its inventory more efficiently, is
collecting receivables faster, and is generating a higher level of revenues relative to total assets.
The overall trend appears good.

b. Because the relative size of a firm may be expanding or contracting, comparing the WC is
meaningless because of size differences.

c. Credit terms is the number of days credit is given to customers. A change in terms can be by
shortening or lengthening the credit terms. Shortening the credit terms indicates there will be

3
 FAR670 – DEC 2018

less risk√ in the collection of future receivables and lengthening the credit terms indicates a
greater risk√. Lower credit terms indicates higher quality receivable and longer credit terms
indicates lower quality receivables.

QUESTION 4

2017 2016
RM RM
Income before tax and extraordinary items 35 68
Plus: Interest expense 28 22
63 90

i. TIE = EBIT/Interest expense

2017 2016

TIE 63/28 90/22

= 2.25 times = 4.09 times

The ability of the firm to cover its interest has declined substantially as shown by TIE of
4.09 times in 2016 drops to 2.25 in 2017. The decline is due both to rising interest and
falling income.

ii. The statement by the firm representative is false. The only reason that net income was at
RM20,000 in 2016 was because of the extraordinary fire loss. Recurring profits dropped from
RM38,000 to RM20,000.

QUESTION 5

a. EPS = ​Net income – Pref share dividends

Weighted average no. of common shares
= ​2,500,000 – 200,000
1,125,000
= RM2.04

Months shares are Shares outstanding Fraction of year Weighted average

outstanding outstanding
Jan – March 1,000,000 3/12 250,000
4
 FAR670 – DEC 2018

April – Sept 1,200,000 6/12 600,000

Oct - Dec 1,100,000 3/12 275,000
1,125,000

b. All major segments of cash flows were negative. Net cash outflow from operating activities was
negative by RM3,000, and yet dividends were paid√ in the amount of RM21,000. Also, the
company had a negative cash flow from investing activities due to purchases of plant assets.

The net negative cash flow would have been higher than RM22,000 had the mortgage not
acquired and common stock were not issued, without these the net negative cash would have
been RM 39,000 (22,000 + 11,000 + 6,000).

END OF SOLUTION

5
 FAR670 – JUN 2019

PART A
Question answer mark
1 C 1
2 C 1
3 B 1
4 B 2
5 A 1
6 A 2
7 D 1
8 D 1
9 B 1
10 B 1
TOTAL 12 marks

PART B
ANSWER 1.

a.
STOCK SPLIT
● A drastic device to change the market
value of individual shares
● A 2 for 1 split should reduce the market
value per share to one-half the amount
prior to the split
● Lowering market value by stock split is
sometimes desirable for expensive
stock (stock selling at high prices)
● Stock split can increase demand for the
stock (improves liquidity in the market)
● Par value is changed in proportion to
the stock split
● No change is made to retained
earnings, additional paid in capital or
capital stock
Any 2​ points x 1 = 2 marks
STOCK DIVIDEND
● Is a return of profits to the owners of
corporation in the form of stock
● The overall effect of stock dividend
leaves total stockholders’ equity and
each owner’s share of stockholders’
equity unchanged
● Should reduce the market value of
individual shares
● Total market value considering all
outstanding shares should not change
in theory
Any 2​ points x 1 = 2 marks

b. The main reason to declare stock split is to reduce the market value per share​√√ when the
management perceived the stock is selling at high prices​√√ and therefore become s less readily
traded​√√​. Stock split can therefore influence the demand for the stock​√​.

Any 4​√​ x 1 mark = 4 marks

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 FAR670 – JUN 2019

ANSWER 2
a)

Ratio Grand Taste Industry Average

i. Account receivable 365/16.67 = 21.9 days​√√ 365/14.6 = 25 days​√√
turnover (days)
ii. Inventory turnover 365/8.36 = 43.7 days​√√ 365/13.4 = 27.2 days​√√
(days)
iii. Operating cycle 21.9 + 43.7 =65.6 days​√√ 25 + 27.2 = 52.2 days​√√

(12​√​ x 0.5 = 6 marks)

b. In general the company liquidity ratios were adequate to good. The current ratio is high with a
ratio of 4.23 in comparison to 2.55 of IA​√​. The quick ratio is however much lower ​√​than IA and
below conventional acceptable level of 1​√​. With a quick ratio of much lower than 1, the
company may have difficulty in meeting their current debt obligations​√​. (4​√​ x1 = 4 marks)

c. The primary concern in the liquidity position of the company is their quick ratio which is lower
than the IA and the acceptable level of 1​√​. A very much lower quick ratio in comparison to their
current ratio perhaps can be explained by the company’s inventory turnover and operating
cycle. Even though the company is more efficient​√ in collecting their receivables​√ in
comparison to industry, however, they take a longer time to sell their inventory​√​. The company
took 43.7 days √​ ​to sell in comparison IA only take about 27 √
​ ​days to convert their inventory to
sales. Because of the longer period to sell, most of their current assets are in terms of
inventory​√ as reflected in their higher current ratio than IA​√​. In general, the company takes a
longer operating cycle of 65.6 days in comparison to 52.2 days of IA​√​.
(any 8​√​ x 1 = 8 marks)

ANSWER 3
a.
i. Horizontal Common Size Analysis
BETA BERHAD​√
Income Statement for Year Ended 31 Dec 2018, 2017 & 2016​√

2018 (%) 2017 (%) 2016 (%)

Net Sales (all credit) 148.82√ 129.41√ 100.00
Cost of goods sold 187.00√ 143.48√ 100.00
Gross profit 117.46√ 117.86√ 100.00
Selling & Distribution expenses 137.87√ 136.88√ 100.00
Depreciation Expenses 92.35√ 105.93√ 100.00
Administration costs 128.02√ 111.01√ 100.00
Earnings before interest and taxes 109.72√ 120.57√ 100.00
Interest 102.85√ 134.15√ 100.00
Earnings before taxes 110.40√ 119.23√ 100.00
% in Taxation 110.41√ 119.24√ 100.00
Net Income 110.39√ 119.23√ 100.00

2
 FAR670 – JUN 2019

(24√ x 1/3 mark = 8 marks)

ii.
Based on the above result, comparing with the base year, Beta Berhad net sales
increased to 129.41% in 2017​√ and 148.82% in 2018​√​. In the same years, the cost
of goods sold has also increased by 43.48% in 2017 ​√​and 87% in 2018​√​. The
COGS is, however, rose at a much faster rate (almost double) √ than the increased in
​ ​for both years. COGS increased by nearly 44% in 2017​√​, and it increases
net sales √
by 87% in 2018​√​. Therefore, it has resulted in almost the same increase in gross
profit for both years (117.86 and 117.46%).

The company’s net profit for the year 2018 is lower than the net profit reported in
2017​√​. The net profit increased by 19% in 2017 ​√​but only increased by 10% in
2018 in comparison to the base year 2016​√​. The lower net profit in 2018 is due to
very much higher admin costs incurred in 2018​√​. Other expenses remain almost the
same in comparison to 2017​√​. Primarily, the lower net profit made by the company
in 2018 is attributable to substantially higher COGS ( double than the increase in
2017).​ √

Any 12 x ½ = (6 marks)

b. Calgate earned around 11 cents per Ringgit of sales or 11% profit margin​√​,
In contrast to almost 14% ​√​ in 2017 a drop of 3%​√​ per ringgit of sales. Prima facie,
this is not a good sign because it suggests the inability of the company to pass its cost
on to its customers​√​. Further analysis shows that the COGS remained roughly
proportional to the sales revenue​√√,​ resulting in a stable gross profit margin​√​.
Therefore it suggests that the company cost of production has remained under control​√​.
Selling, general and admin expenses however, have been increasing​√​ significantly by
almost 3% ​√​ in 2018. In addition, other expenses have gone up by 1.3% of sales​√√​.
Together, these two items​√​ explain the decrease​√​ in income before taxes.
(Any 12 √x ½ = 6 marks)

c. Uses of common-size analysis

It is useful for intercompany comparison ​√​because financial statements of different
companies are recast in common size format ​√√​ . it helps in comparison of disparate
size firm​√​. It can highlight differences in account makeup and distribution​√√
(any 4√x 1 = 4 marks)
(Total: 24 marks)

ANSWER 4
2017 2018
A Debt to equity ratio
0.55 0.45

3
 FAR670 – JUN 2019

i. The debt to equity ratio indicates the ability of the company to pay its long term
debt​√​, as well as shows how well the creditors are protected​√​ in the case of
insolvency​√​. The lower the ratio​√​ indicates the better the company’s debt
position​√.​

In this case, the debt equity ratio for 2018 is lower than 2017​√​. This lower ratio
indicates that the company is in a better debt position​√​, higher solvency ​√​ and
better able to cover​√​ its long-term liabilities. Further, the lower debt/equity ratio
enable the company to obtain additional debt​√​ finance from the bank for further
expansion because of the lower risk​√​ to the bank.
Any8​√​ x ½ = 4 marks

ii. Debt ratio is considered as a conservative computation of company’s debt position

or company’s ability to pay their debt because all of the liabilities and near
liabilities are included in the computation of total liabilities​√√​. Current liabilities
for example are included in the total liabilities whereas they are not long –term
sources of funds​√√.​ At the same time, assets are under-stated ​√​because no
adjustments are made​√​ for assets that have a fair market value ​√​greater than book
value​√.
Any 4​√​ x 1 = 4 marks
B.
i. One obvious reason for the substantial decline in NPM from the highest of
9.4% in 2015 to 7.6% in 2018 is the decline in GPM​√​. Gross profit margin has
declined slightly (from the highest of 40% in 2015) to 38.5% in 2018​√​, indicating a
continuing rise in the cost of goods sold ​√​over the period. Other main cause of the
decline is the higher interest expenses​√√​. This is shown from the decline in TIE​√
from 6.0x in 2014 to 4.6x in​√ 2018. The lower TIE ​√​is due to higher interest expense
√​for the period and finally it affects net profit ​√ ​of the company. Operating expenses
to net sales has remained relatively stable​√​ (only slight changes over the period)​.
(any 8​√​x1 = 8 marks)

ii. DuPont analysis.

Return on = Net Profit x Total Asset

Total Assets Margin Turnover
(ROA/NPM)
2018 9.4​√ = 7.6​√ x 1.24​√

2017 9.6​√ = 8.6​√ x 1.12​√

2016 9.6​√ = 8.9​√ x 1.08​√

2015 10.0​√ = 9.4​√ x 1.06​√

2014 10.7​√ = 9.3​√ x 1.15​√

4
 FAR670 – JUN 2019

(15​√ x 1/3 = 5 marks)

This computation shows that the decline in ROA ​ ​from 10.7% in 2014 to 9.4%​√​ in 2018 is
due to the decline in net profit margin​√​ over the period. The total assets turnover shows
an increasing ​√​ ​trend from 1.15x in 2014 to 1.24x ​√​ ​in 2018 indicating efficient ​√​ ​used of
assets to generate sales.

(any 3​√ x 1 = 3 marks)

Answer 5
a. Operating Cash Flow/Total Debt

2018 2017
i. Operating Cash Flow/Total Debt 110m/230m 60m/254m
= 47.8%​√ = 23.6%​√
This ratio has increased significantly​√ in 2018 and it indicates that Disa Bhd is able to
cover total debt with the yearly operating cash flow​√​.

ii Operating Cash Flow/Cash Dividends 110m/58 60m/30m

= 1.89 times​√ = 2 times​√
The ratio of operating cash flow/cash dividend is slightly decreased​√ for 2018
however, it is still above 1.0 indicating that Disa Bhd is able to cover its cash dividend
in both years​√​ using operating cash flow.

(8√ x 1 mark = 8 marks)

i.

RM 60 000 000 ​√
1 000 000​√
= RM 60​√

ii.

​= RM 6 000 000​√​ – 600 000​√√

1 000 000 shares​√

= RM 5.40 per share​√

5
 FAR670 – JUN 2019

(8​√ X 1/2 = 4 marks)

c.
A firm with a substantial growth record and/or substantial growth
prospects needs funds for expansion​√√​.​ They utilize them in this
manner √ ​ ​ (plough back into the business ) ​rather than paying them
out to the owners​√​.

(any 3 x 1 = 3 marks)

END OF SOLUTION

6
Past Year DEC 2019

Part A

Questions Answers
1 B
2 B
3 D
4 A
5 D
6 C
7 A
8 C
9 C
10 B

Part B

Question 1

a) Compute Novo Bhd total debt to assets, and total debt-to-equity ratios for 2018 and
2017

Novo Bhd
Ratios 2017 2018
Debt to Asset Total Debt
= 3578 + 650 + 5300
Asset =
23736
750 + 173 + 3200
= 40.14%
18896
21.81%
Total debt-to-equity Total Debt 3578 + 650 + 5300
Equity 23736
750 + 173 + 3200 = 67.06%
=
14773
= 27.91%
b) Elaborate on any changes in the calculated solvency ratios for Novo Bhd.

Both ratios for Novo increased from 2017 to 2018 suggesting weak solvency. Novo Bhd
debt to asset increased from 21.81% to 40.14% shows that the percentage of debts used
to finance it assets has increased almost two times than 2018. Novo’s debt to equity ratios
has increase significantly from 27.91% to 67.06%, this shows that the protection for
creditors in case of solvency in 2018 will be much lower compare to 2017. From the data,
we can see that the increase of leverage ratios comes from the increasing significantly of
the short term and long term debt but decreased in shareholders’ equity. The total assets
are increase in 2018 but not as much as the debt increase.

c) Compute each company’s interest coverage ratio for 2018 and 2017

Nova Bhd
2017 2018
Interest coverage EBIT 7985
=
Interest 3200
7985 = 1.32
=
3200
= 2.50

d) Elaborate on the interest coverage ratio of Novo

Novo’s interest coverage ratio decreased from 2017 to 2018 shows that Nova has lower
times that they could pay for the interest compare to 2017. This is because Nova has more
than double in increase for the interest payment on 2018 whereas EBIT just slightly
increase from 2017 to 2018. However, Novo’s interest coverage ratio still above 1 shows
that they still have sufficient earnings to pay the interest payment.
Question 2

a)

Industry
2017 2018 Average

Ordinary shares 15.6 21.0 20.9

Retained profit 45.3 43.8 42.8
Non-controlling interest 6.0 5.9 6.0
Borrowings 13.1 11.0 12.1
Trade payables 20.1 18.3 18.2

100.0 100.0 100.0

Property, plant and equipment 36.5 33.7 35.6

Intangibles 11.7 13.1 14.8
Inventory 16.3 12.1 13.2
Trade receivables 28.1 35.0 26.7
Short-term investments - 5.5 6.4
Cash at bank 7.4 0.6 3.4

100.0 100.0 100.0

b) Areas that Reenfare Bhd should focus on in order to improve its liquidity position are
trade receivables and cash at bank. Reenfare trade increase from 28.1% to 35% for
for year 2017 and 2018 and higher than average industry which is the total assets is
only 26.7%. Reenfare Bhd’s cash is lower (0.6%) in comparison to competitor’s cash
balance of 3.4% of its total assets in 2018. The cash percentage of total assets
declined significantly from 7.4% in 2017 to 0.6% in 2018, the lower cash balance
perhaps can be explained by increasing higher trade receivables in 2018. This ratio
indicates that the company is holding its receivables longer which will lead to liquidity
problem as shown by a low percentage in cash.
c) Possible actions that the management should take to overcome the problem.

i) Improve debt collection management

Monitoring the receivables account. Reenfare Bhd’s should always check the
receivables to see the debt has already collected or not. Gives reminders will also
help speeding up collection process.

The company may offer the receivables a payment plan for their debt like pay early
may received discount. Everyone likes to received discount, this will help Reenface
Bhd to receive the debt early.

ii) Improve cash flows

Don’t buy new asset instead lease the asset. By leasing, Reenfare Bhd pay in
small increments, which will helps improve cash flow. An added bonus is that
lease payments are a business expense, and thereby can be written off on your
taxes.

Reenfare Bhd also can improve it by improving their Inventory. Reenfare Bhd
should make a list of those goods that they buy that aren't moving at the same
pace as other products. Those products should be gotten rid instead keeping it as
it will hurts more on their cash flows.
Question 3

a) In general, except for acid test ratio, the company is in a better liquidity position in
comparison to industry. The company’s current ratio is higher than average and above
the minimum acceptable level. However, its quick ratio is below 1 and below the
industry average ratio. This is because Arham Bhd has significantly lower inventory
turnover. Arham Bhd inventory turnover is about half of the industry ratio which
indicates the company is less efficient in converting their inventory into sales resulting
in lower quick assets. The lower than average acid test ratio is however not expected
to result in a threat to the liquidity position of the company because the company is
able to collect their receivables faster than average as they took only 21 days to collect
rather than 25 days that reported by industry. In conclusion, even though the quick
ratio is low, the company is expected to be able to meet their short term debt obligation
if they can continue to manage their account receivables well.

b) Two (2) comparison issues that we need to be caution in comparing companies

inventory turnover ratio.

i) Different divisions may need comparison to different industry averages. We

cannot use the same ratio to all industry because it will not be accurate.
Different industries have different item and way to calculate their inventory
turnover ratio.
ii) Difference in accounting policies. Two companies in the same industry or over
separate industry can have different accounting policy with regards to
depreciation methods. This skews the results of comparison of fixed assets
turnover ratio over the industry.
Question 4

a) Compute the following for both years

2018 2017
Net Profit = Net Income/ Net sales = 160,000/4,000,000
Margin = 210,000/4,200,000 = 4.0%
= 5.0%
Return on = Net income/ Average Total Assets =160,000/800,000
Asset = 210,000/ 920,000 =20.0%
= 22.8%
Total = Net Sales/ Average Total Assets = 4,000,000/ 800,000
Asset =4,200,000/920,000 =5.0 times
Turnover =4.6 times
Retun on = Net income/ Average Common Equity = 160,000/ 640,000
Common = 210,000/680,000 =25.0%
Equity = 30.9%
DuPoint = NPM x Total Assets turnover = 4% x 5
ROA = 5% x 4.57 = 20.0%
= 22.9%

vi) The higher ROA in 2018 (22.9%) is due to higher NPM generated by the company,
5% comparison to on ly 4%in 2017.
Question 5

a) i. Donated capital results from donations to the company by stockholders, creditors, or

other parties.
ii. Treasury stock represents the stock of the company that has been sold,
repurchased, and not retired. It is subtracted from stockholders' equity so that net
stockholders' equity is for shares outstanding only.

b) The basic justification for a statement of cash flows is that the balance sheet and the
income statement do not adequately indicate changes in cash. The balance sheet
indicates the position of the firm at a particular point of time. The income statement
shows the income or loss for a period of time, but it does not indicate cash generated
by operations. Neither the balance sheet nor the income statement summarizes the
cash flows related to investing or financing activities. Neither presents such items as
sale of stock, retirement of bonds, purchase of machinery, or sale of a subsidiary.
Thus, there is a need to summarize the cash flows in another statement.

c) The purpose of the statement of cash flows is to provide information on why the cash
position of the company changed during the period.

d) The amount of dividend per share tends to be relatively fixed because any reduction
in dividends has been shown to result in a disproportionate large reduction in share
price.