FINANCIAL STATEMENT ANALYSIS REGULAR

BAC 406: FINANCIAL STATEMENT ANALYSIS REGULAR

 

SECTION A (COMPULSORY)

QUESTION ONE

  1. a) DiscussTOUR reasons why ratios are considered an essential component in financial statement analysis (4 Marks) b) Outline the limitations of ratio analysiS when relied in decision making

(3 Marks)

  1. c) The following information has been extracted from the accounts of Madaraka Investments Ltd.

for the year ended 3 1 December 2015. Comparable figures for the previous year are also shown.

2014 2015
She “000” 5,200 She “000”
Sales 72. o
Cost of goods sold 7 ,soo 42,00
Gross profit 30,000
Less: Trading ex enses 19,800 16,200
Less: Debenture interest

Net rofit before taxation

24,600 13,800
900 900
23,700 1 , oo
Less: Co oration tax 11,520 5.760
Net profit after taxation 12,180 7,140
Less: Ordinary share dividend 6,300 4,500
Undistributed rofit for the year 5,880 2,640

Statement of Comprehensive Income for the year ended 31 December:

Balance sheet as at 31 December

  2014 2015
  ShstOOO’ Sh.’OOO’ Sh.’OOO’ Sh.’OOO’
Assets em loyed: Fixed assets at cost   44.400   33.600
Depreciation   9000   7,200
    35,400   26,400
Cun•ent assets:        
  Stock 19,800   14,400  
  Debtors 12,600   9,000  
  Cash   32 400 2,880 26,280
    67,800   52,680
Less: Current liabilities        
  Creditors 7,200   5.220  
  Taxation 11,520   5,760  
  Pro osed dividends 6,300   4,500  
  Bank overdraft 2,340 27,360   15,480
  Net assets   40 440   3 7,200
Financed by:        
Ordin share ca ital        
Authorised, issued and fully paid (Sh.25 per share)   18,000   18,000
Undistributed rofits   16,080   10,200
    34,080   28,200
         
Lon -term loan:   6 360   9,000
debentures secured)   40 440   37, 200

Required:

i).      Calculate TWO ratios under profitability, liquidity and turnover ratios for both 2014 and 2015 that would help in assessing the profitability and liquidity positions of

Madaraka Investments Ltd.  (12 Marks) ii). Comment on Madaraka Investmentts liquidity position. (4 Marks) iii). Comment on Madaraka investmentts profitability position. (4 Marks)

  • Bonus shares of Sh. 20, 0,000 were issued as par Kng the year by utilizing the revaluation reserve Bongo Ltd’s rdinary shares have a par ue of Sh. 20.
  • Interest expense arged to the profit and los account for the year amounted to Sh. 8,000,000.
  • During the y , tax amounting to Sh. was paid.
  • Total diyi ends for the year (both int’Km and proposed) amounted to Sh. 5,000,000. 7) The py6fit after tax for the year am&unted to Sh. 8,000,000.

Required:

Cash flow statement (in accordance with the requirements of IAS 7) for the year ended 31 March 2015.

(14 Marks)

practical and current Kenya examples, explain the term corporate financial

(2 Marks) b) Highlight and explain FOUR indicators and symptoms that a firm is undergoing financial distress         (4 Marks)

  1. Notable Kenyan companies are struggling to stay afloat and in business. Discuss THREE turnaround strategies for a firm threatened with bankruptcy and liquidation

(6 Marks)

  1. The Altman Z score model is considered a robust tool in predicting chances company failure and is summarized as follows:

Z score = 1.2X1+ 1.4X2 + 3.3X3 + 0.6M + 1.0X5

Where:

Xl = working capital/total assets

X2 = retained earnings/total assets

X3 = earnings before interest and tax/total assets X4 = market value of equity/total liabilities

Profit statement for ended 30

2013

June

2014 Sh.

  Sh.
Sales
Less: cost of goods sold 650 000 2 700 000
Gross rofit
Less: tradin ex enses 675 000 825 000
Tradin rofit 675,000
Less: Debenture interest 37 500 37 500
Net rofit before taxation 637,500 1,275,000
Less: Cor oration tax 240.000 480 000
Net profit after taxation 397,500 757,500
Less: Ordin share dividend 187 500 262 500
Undistributed rofit for th.e year 210,000 495,000
 

X5 = sales/total assets

June
    She Sh.  Sh.
Fixed assets at cost  
Less: Depreciation 300 000 375 000 1,725,000
Current assets:    
Stock 600,000  
Debtors 375,000   525,000  
Cash 120 000      
Less: current liabilities     1 350 000
Creditors 217,500 300,000  
Taxation 240,000   480,000  
Proposed dividend 187,500   262,500  
Bank overdraft     97 500  
    (64±000.)   (1.140,000)
    1 50 0   1 5 00
Financed by:        
Ordinary share capital

(Authorised and issued)

  750,000   750,000
Undistributed rofits   525,000  
10% debentures   375.000   165 000
    50 oo   1 935 oo

Additional Information:

  1. The book value of a share for Munyah Limited for both years was Sh 10 per share while the

 

market value was Sh 25 per share.

Required:

Compute the Z score for both years and interpret your results                     (8 Marks)