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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
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UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR STAGE 2 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 203: FINANCIAL STATEMENT ANALYSIS (SUNDAY CLASS)
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions
QUESTION ONE
a) Define ‘financial statement analysis’ and briefly explain the overall objective of financial
statement analysis. (2 Marks)
b) Explain why each of the following groups might want financial statements information.
i) The company’s existing shareholders
ii) Prospective investors
iii) Company managers
iv) Current employees
v) Commercial lenders who loaned money to the company
vi) Current suppliers (6 Marks)
c) There are four basic financial statements from which an analyst gets his information. Name
and briefly discuss these statements. (8 Marks)
d) The following information was extracted from the books of Chicago Refrigerator inc.
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Chicago Refrigerator Inc.
Balance Sheet, as December 31 (thousands)
1990 1991
Assets
Current assets:
Cash 210 215
Accounts receivables 355 310
Inventories 507 328
Total 1072 853
Fixed Assets
Property, plant and equipment 6085 6527
Total assets 7157 7380
Liabilities
Current liabilities:
Accounts payable 207 298
Notes payable 1715 1427
Total current liabilities 1922 1725
Long-term debt 1987 2308
Total liabilities 1924 4255
Shareholders’ Equity
Common stock and paid in surplus 1000 1000
Retained earnings 2248 2347
Total shareholders equity 3248 3347
Total liabilities and shareholders,
Equity 7157 7380
Chicago Refrigerator Inc.
Income Statement, Year Ending December 31 (thousands)
1991
Net sales 4053
Cost of goods sold 2740
Depreciation 550
EBIT 723
Interest expense 502
Taxable Income 221
Income tax (34%) 75
Net income 146
Required:
From the financial statements of Chicago Refrigerators inc., compute the Cash flow from Assets,
cash flow to creditors and cash flow to stockholders
(14 Marks)
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QUESTION TWO
a) The preparation and analysis of comparative balance sheets and income statements are
commonly applied tools of financial statement analysis and interpretation. Discuss the
inherent limitations of analyzing and interpreting financial statements for a single year.
(4 Marks)
b) The following data was extracted from the books of Ujuzi company.
2006 2005 2004
Cash 30,800 35,625 36,800
Accounts receivables 88,500 62,500 49,200
Inventory 111,500 82,500 53,500
Prepaid expenses 9,700 9,375 4,000
Plant assts, net 277,500 255,000 229,500
Total assets 518,000 445,000 372,500
Accounts payable 128,900 75,250 49,250
Long term debt 97,500 102,500 82,500
Common stck,10 par value 162,500 162,500 162,500
Retained earnings 129,000 104,750 78,250
Total liabilities and equity 518,000 445,000 372,500
Required:
Compare the year-end short term liquidity position of this company at the end of 2006, 2005 and 2004
by computing the following: (i) current ratio and (b) acid-test ratio. Comment on the ratio results
(6 Marks)
c) In addition to the information in (b) above, the company’s income statements for the years
ended December 31, 2006 and 2005 show the following:
2006 2005
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Sales 672,500 530,000
Cost of goods sold 410,225 344,500
Other operating expenses 298,550 133,980
Interest expense 11,100 12,300
Income taxes 8,525 7,845
Earnings per share 2.10 1.93
Required:
For the years ended December 31, 2006 and 2005, assume all sales are on credit and then compute the
following: (i) days’ sales in receivables, (ii) accounts receivable turnover, (iii) inventory turnover, and
(iv) days’ sales in inventory. Comment on the changes in the ratios from 2005 to 2006.
(10 Marks)
QUESTION THREE
Below are the Financial Statements of TeleTalk (T) co. ltd.
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a) From the information given, prepare horizontal analysis for the income statement and Balance
Sheet of TeleTalk (T) Ltd. Comment on the company undertakings in the past three years of
operation. (10 Marks)
b) From the information given, prepare vertical analysis for the income statement and Balance
Sheet of TeleTalk (T) Ltd. Comment on the company undertakings in the past three years of
operation. (10 Marks)
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QUESTION FOUR
You are given the following information for Makuti mining company.
MAKUTI MINING COMPANY
Financial Statements
Income Statement
Sales 4,250.0
Costs 3,876.0
Taxable income 374.0
Taxes (34%) 127.2
Net income 246.8
Dividends 82.4
Additions to retained earnings 164.4
Balance Sheet
Assets Liabilities and owner’s Equity
Current assets 900.0 current liabilities 500.0
Net fixed assets 2,200.0 long term debt 1,800.0
Total 3,100.0 owner’s equity 800.0
Total liabilities & owner’s equity 3,100.0
Based on the above information,
a) What is the EXTERNAL FINANCIAL NEED if sales are predicted to grow at 10%? Use the
percentage of sales approach and assume the company is operating at full capacity. The payout
ratio is constant (8 Marks)
b) What growth rate can Makuti maintain if no external financing is used?
(6 Marks)
c) What is the sustainable growth rate for Makuti? (6 Marks)
QUESTION FIVE
a) What is financial Distress? (1 Mark)
b) Discuss four possible effects of financial Distress (8 Marks)
c) Financial Analysis may be used to view some of the indicators of the financial distress. List the
three important ratios that can be considered to view some of the indicators. (3 Marks)
d) Discuss four possible factors that may influence the risk of financial distress costs
(8 Marks)
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