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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:2009
1
UNIVERSITY EXAMINATIONS: 2008/2009
SECOND YEAR STAGE III EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 203: FINANCIAL STATEMENT ANALYSIS
DATE: APRIL 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a)
i) Describe financial statement analysis ( 2 Marks)
ii) Recognize the limitations of financial statement analysis ( 3 Marks)
b)
i) Identify the tools of financial statement analysis (2 Marks)
ii) Common size analysis is an important tool in financial analysis.
Describe a common size financial statement. Explain how one is prepared (3 Marks)
Explain what a common –size financial statement reports communicates about a company
(4Marks)
c)
i) Define a ratio (2 Marks)
ii) Identity and describe limitations of ratio analysis ( 4 Marks).
d)
i) Under the market forces and supply of financial statements information, identify the
mechanism of reducing mis- presentation of this information in the capital Marks (4 Marks)
2
Wetu company Income statements for the years ended December 31, 2008 and 2007 show the
following:
2008 2007
Sales 672,500 530,000
Cost of goods sold. 410,225 344,500
Other operating expenses 208,550 133,980
Interest expenses 11,100 12,300
Income taxes 8,525 7,845
Total costs and expenses (638,400) (498,625)
Net Income 34,100 31,375
Earning per share 2.10 1.93
Required
For the years ended December 31, 2008 and 2007, assume all sales are on credit and then compute the
following: (a) days in receivables, (b) accounts receivable turnover, (c) inventory turnover, (d) days
sale inventory. Comment on the changes in the ratios from 2006 to 2008.
QUESTION TWO
a) Discuss how the circuit market hypothesis (EMH) depicts the reaction of market prices to
financial and other data ( 10 Marks)
b) Explain two key assumptions of the univariate models of distress prediction (2 Marks)
a) Explain any four anomalies that invalidate credibility of efficient market hypothesis.
( 8 Marks)
QUESTION THREE
The summarized accounts of hope (eternal springs) Ltd for the years 2007 and 2008 are given below
Trading and profit and loss accounts for the year ended 31 December
2007 2008
Kshs.000 Kshs. 000 Kshs. 000
Sales 200 280
Less cost of sales 150 210
Gross profit 50 70
Less 46
Administration
expenses
38 4
Debenture interest - 50
Net profit 12 20
3
Balance sheet as at 31 December
2007 2008 2007 2008
Kshs.000 Kshs.
000
Kshs.
000
Kshs. 000
Ordinary
share capital
100 100 Fixed assets, at
cost
Profit and loss
account-
30 41 Less depreciation 110 140
8%
debentures
- 50 Stock 20 30
Creditors 15 12 Debtors 25 28
bank 10 - bank - 5
155 203 155 203
Stock at 1 January 2007 was Kshs. 50,000
Required
a) Calculate the following ratios for 2007 and 2008
i. Gross Profit: Sales
ii. Stock Turnover
iii. Net Profit: Sales
iv. Quick (Acid Test)
v. Working Capital
vi. Net Profit: Capital Employed (12 Marks)
b) State the possible reasons for and significance of any changes in the ratios shown by your
calculations (8 Marks)
QUESTION FOUR
a) Is a past trend a good predictor of future trends? Justify your response ( 3Marks)
b) Describe the term forecasting ( 2Marks)
c) Describe three parties that make use of financial forecast (3 Marks)
d) Define the term time series analysis (2 Marks)
e) Describe four components of time series (4 Marks)
4
f) There is always a conflict between various stakeholders concerning financial statement
information.Briefly discuss this statement (6 Marks)
QUESTION FIVE
a) Outline the costs associated with disclosure of financial statement information (8 Marks)
b) The following Altman formula is used in predicting bankruptcy
Z Score = 1.2X1 + 1.4X2 + 3.3X3 + 1X4 + 0.6 X5
Where X1 = Working capital / total assets
X2 = Retained earnings / Total assets
X3= Earnings before interest and tax/Total assets
X4= Sales / Total assets
X5= Market value of Equity / Liabilities
In this model, a Z score of 2.7 or more indicate a firm that is not bankrupt and a Z score of 1.8
a below indicates bankruptcy.
The following information is provided in respect to four firms.
Working Retained Earnings Market Total Total Sale
FIRMS Capital Earnings before Value Assets Liabilities
Interest and of
Tax Equity
A 6 80 15 20 200 120 200
B 100 40 20 5 150 100 180
C 8 20 -30 50 1,000 850 1,500
D 40 300 40 60 1,800 1,200 2,000
Required
The Z-Score for each of the companies comment on the results obtained (12 Marks)
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