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Cfm 203 Financial Statement Analysis (Day) Question Paper
Cfm 203 Financial Statement Analysis (Day)
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
1
UNIVERSITY EXAMINATIONS: 2010/2011
SECOND YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 203 FINANCIAL STATEMENT ANALYSIS (DAY)
DATE: DECEMBER2011 TIME: 2 HOURS
INSTRUCTIONS: Answer Question One and Any Other Two Questions
Question One
a) (i) Define the term business analysis (2 Marks)
(ii) Financial analysis is the use of financial statements to analyze a company’s financial
position and performance and to assess future financial performance. Describe the three
main areas of financial analysis (6 Marks)
b) (i) Describe five main parties demanding financial statement information (10 Marks)
(ii) Actions taken by various parties demanding financial statement information may
result to wealth redistribution among various stakeholders
Required
Discuss three major activities that may result to wealth redistribution from creditors to
shareholders of an organization. (6 Marks)
c) Discuss the three market forces affecting the content and timing of financial statement
disclosure (6 Marks)
2
Question Two
a) Describe the term horizontal analysis (2 Marks)
b) Consider the following statement of financial position of Rafik Company ltd
Rafik Company Ltd, Balance Sheet
December 31, 2008 and December 31, 2009
Shs (000) Shs (000)
Assets
Current assets:
Cash 160 192
Marketable securities 652 819
Receivables 2,346 2,050
Inventories 1,940 1,758
Pre-paid expenses and differed charges 578 312
Total current assets 5,667 5,131
Properties
Land, buildings, machinery and equipments
Less accumulated depreciation of Rs. 5,386
and Rs. 4,801 5,997 5,389
Long term receivables and non-current assets 488 258
12,142 10,778
Liabilities
Current liabilities:
Payables 2,989 1,828
Taxes payable 156 268
Dividends payable 180 210
Total current liabilities 3,325 2,306
Long term liabilities:
Long-term debentures 9888 409
Other long term liabilities 219 203
Deferred income tax liabilities 1,048 723
Total liabilities 5,580 3,641
Ownership:
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Equity capital 621 414
Preference capital 312 520
Treasury stock at cost (1,081) (728)
Total ownership 6,562 7,137
Total liabilities and ownership 12,142 10,778
Required:
Prepare a the comparative financial statement (year to year change analysis) (18 Marks)
Question Three
a) (i) Describe two models of predicting financial distress (4 Marks)
(ii) Explain 3 main parties who may be interested in prediction of financial distress of
firms (6 Marks)
(iii) Define the term financial distress (2 Marks)
b) ( i)Describe two main costs associated with disclosure of information ( 4 Marks)
(ii) Provide evidence of non-mandated voluntary disclosure of financial information
(4 Marks)
Question Four
a) The following is Afro corporation balance sheet for periods 2007 to 2009
Assets 2007 2008 2009
Shs Shs Shs
Cash 4,749 11,310 19,648
Account receivable 72,934 85,147 118,415
Inventory 86,100 91,378 118,563
Other current assets 5,637 6,082 5,891
Current assets 169,420 193,917 262,517
Fixed assets-net 91,868 94,652 115,461
Other long term assets 5,017 5,899 5,491
Total assets 435725 294,468 383,469
Liabilities and Net Worth
Accounts payable 31,857 37,460 62,725
Notes payable 25,623 14,680 17,298
4
Other current liabilities 7,330 8,132 15,741
Current liabilities 64,810 60,272 95,764
Long-term debt 959 1,276 1,917
Total liabilities 65,789 61,548 97,681
Preferred stock 200 0 2,054
Common stock 25,469 26,038 26,450
Capital surplus 33,297 45,883 63,049
Retained earning 141,570 160,999 194,201
Net worth 200,516 232,920 285,788
Total liabilities and net worth 266,305 294,468 383,469
Required
(i) Prepare Afro’s corporation common size balance sheet for the period 2007 to 2009
(15 Marks)
(ii) Comment on the increase in ratio of accounts receivable and a decline in inventory
ratios (5 Marks)
Naivas ltd has been operating for several years; an on December 31, 2009 presented the following
balance sheet.
Naivas ltd
BALANCE SHEET
December 31, 2008
Cash 40,000 Accounts 80,000
Receivables 75,000 Mortgage Payable 140,000
Inventories 95,000 Common Stock (1.00) Par 150,000
Plan Asset (Net) 220,000 Retained Earnings 60,000
Shs 430,000 Shs 430,000
The income for 2009 was shs 25,000. Assume that total assets are the same in 2008 and 2009.
5
Required
Compute each of the following ratios. For each of the ratios indicate the manner in which it is
computed and its significance as tool in the analysis of the financial soundness of the company.
(i) Current ratio (5 Marks)
(ii) Acid-test ratio (5 Marks)
(iii)Debt to Total Assets (5 Marks)
(iv) Rate of return on assets (5 Marks)
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