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Cfm 203 Financial Statement Analysis Question Paper
Cfm 203 Financial Statement Analysis
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
UNIVERSITY EXAMINATIONS: 2011/2012
YEAR 2 EXAMINATION FOR THE BACHELOR OF COMMERCE
CFM 203 FINANCIAL STATEMENT ANALYSIS- SATURDAY
DATE: APRIL 2012 TIME: 2 HOURS
INSTRUCTIONS: Answer Question One and Any other Two Questions
QUESTION ONE
a) State any FOUR differences between business analysis and financial statement analysis
(6 Marks)
b) Highlight any FIVE objectives of financial statements (4 Marks)
c) Write a brief notes on comparative statement, common size statement and trend analysis
(6 Marks)
d) You have been hired as an analyst for Mellon Bank and your team is working on an independent
assessment of Daffy Duck Food Inc. (DDF Inc.) DDF Inc. is a firm that specializes in the
production of freshly imported farm products from France. Your assistant has provided you with
the following data for Flipper Inc and their industry.
Ratio
2011
2010
2009
2011
(Industry Average)
Long-term debt 0.45 0.40 0.35 0.35
Inventory Turnover 62.65 42.42 32.25 53.25
Depreciation/Total Assets 0.25 0.014 0.018 0.015
Days’ sales in receivables 113 98 94 130.25
Debt to Equity 0.75 0.85 0.90 0.88
Profit Margin 0.082 0.07 0.06 0.075
Total Asset Turnover 0.54 0.65 0.70 0.40
2
Quick Ratio 1.028 1.03 1.029 1.031
Current Ratio 1.33 1.21 1.15 1.25
Times Interest Earned 0.9 4.375 4.45 4.65
Equity Multiplier 1.75 1.85 1.90 1.88
Required:
i. In the annual report to the shareholders, the CEO of Flipper Inc wrote, “2009 was a good year
for the firm with respect to our ability to meet our short-term obligations. We had higher
liquidity largely due to an increase in highly liquid current assets (cash, account receivables and
short-term marketable securities).” Is the CEO correct? Explain and use only relevant
information in your analysis. (4 Marks)
ii. What can you say about the firm's asset management? Be as complete as possible given the
above information, but do not use any irrelevant information. (4 Marks)
iii. You are asked to provide the shareholders with an assessment of the firm's solvency and
leverage. Be as complete as possible given the above information, but do not use any irrelevant
information. (6 Marks)
(Total: 30 Marks)
QUESTION TWO
a) State and briefly explain the objectives of fundamental analysis within the context of financial
statement analysis (4 Marks)
b) The diagram below shows the various component process analysis of a business.
Industry Strategy Analysis
Business
Environment
Accountin
g Analysis
Financial
Analysis
Prospective
Analysis
3
Required:
Explain how these component processes in business analysis can be used to determine the value of a
firm (16 Marks)
(Total: 20 Marks)
QUESTION THREE
a) Discuss any FOUR causes of corporate failure giving examples where possible from the local or
foreign market. (8 Marks)
b) State any FOUR ways of averting corporate failure (4 Marks)
c) The directors of Great Lakes Limited are contemplating going into a merger with Generations
limited in the year 2012. They are currently appraising the company before finalizing on the
intended merger. The financial data of the company is shown below:
Balance sheet as at 31 December 2011
Sh.’000’
Cash and marketable securities 195
Debtors 765
Stocks 1,250
Other current assets 150
Total current assets 2,360
Plant and equipment 3,400
Total assets 5,760
Current liabilities 715
Long-term debt 2,525
Shareholders’ funds 2,520
Total liabilities & Capital 5,760
Extracts from profit and loss accounts:
Turnover 7,575
Cost of goods sold 5,918
Operating expenses 658
Other income from operations 231
Earnings before interest and taxes 1230
Interest 350
Tax 160
Retained earnings for the year 720
Retained earnings b/f 80
Retained earnings c/f 800
4
Both companies are publicly listed in the Nairobi Securities Exchange and their shares are actively
being traded. The Great Lakes Limited’s stocks have a total market value of ksh. 5,600,000 by the
close of 2011.
The directors of the company have decided to use Multiple Discriminant Analysis (MDA) to test the
financial heath of their company ahead of the merger. They have engaged you as a financial analyst to
perform the analysis using the model put forward by Edward Altman as follows:
Z=1.2WC/TA + 1.4 RE/TA + 3.3 EBIT/TA + 0.6 MVE/TL + 1.0 SL/TA
Required:
Advise the board of directors on the financial health of the company (8 Marks)
(Total: 20 Marks)
QUESTION FOUR
The following balance sheets relate to Delaware ltd for the years 2008 to 2011
2011 2010 2009 2008
Fixed Assets Ksh. ‘000’ Ksh. ‘000’ Ksh. ‘000’ Ksh. ‘000’
Intangible 123,000 100,000 80,000 30,000
Tangible 2,079,500 1,636,000 1,030,000 1,027,000
Investments 10,000 10,000 0 0
2,212,500 1,746,000 1,110,000 1,057,000
Current Assets
Stocks 479,000 454,000 432,000 375,500
Debtors 1,774,500 1,585,000 1,629,000 1,263,000
Cash and short-term investments 5,000 20,000 40,000 241,200
2,258,500 2,059,000 2,101,000 1,879,700
Current liabilities
Trade creditors 956,500 767,000 714,000 679,000
Bank overdraft 504,000 274,500 24,700 -
Other curent liabilities 152,500 150,000 100,000 70,000
1,613,000 1,191,500 838,700 749,000
Net working capital 645,500 867,500 1,262,300 1,130,700
Total assets 2,858,000 2,613,500 2,372,300 2,187,700
Long-term Loans 124,000 248,000 372,000 496,000
Other long-term liabilities 33,000 15,000 5,000 2,000
5
total non-current liabilities 157,000 263,000 377,000 498,000
Share capital 300,000 300,000 300,000 300,0
00
Profit and loss account
Brought forward 2,350,500 1,995,300 1,689,700 1,324,400
Retained for year 50,500 55,200 5,600 65,300
Shareholder fund 2,701,000 2,350,500 1,995,300 1,689,700
Long-term liabilities & shareholders funds 2,858,000 2,613,500 2,372,300 2,187,700
Required:
i) Calculate any TWO liquidity and any TWO solvency ratios for the period beginning 2008 to
2011 (16 Marks)
ii) State any FOUR limitations of ratio analysis (4 Marks)
(Total: 20 Marks)
QUESTION FIVE
a) Compare and contrast “basic earnings per share” with “diluted earnings per share” for each of
the following:
i. The effect of dilutive stock options and warrants on the number of shares used in
computing earnings per share (4 Marks)
ii. The effect of dilutive convertible securities on the number of shares used in computing
earnings per share (4 Marks)
iii. The effect of anti-dilutive securities in computing earnings per share (4 Marks)
b) A company has 300 million ksh. 5 shares in issue. The company also has 6 million ksh50
convertible debentures. The debentures have an interest rate of 10%. The corporate tax rate =30%.
Each bond will be convertible into 4 shares. Earnings for the period were ksh 1,600 million.
Required:
a) Calculate the basic EPS (4 Marks)
b) Calculate the diluted EPS (4 Marks)
(Total: 20 Marks)
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