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Financial Statement Analysis Question Paper
Financial Statement Analysis
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 203: FINANCIAL STATEMENT ANALYSIS
DATE: AUGUST 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) Distinguish between financial statement analysis and business analysis
b) Explain the four main objectives of financial analysis (4 Marks)
c) Describe the three main Market forces that determine the supply of financial statement
information (6 Marks)
d) A firm has an opening and closing inventory of shs 56,000 and shs 44,000 respectively. The
firm has sold goods for shs 5,000,000 at a gross profit margin of 20%
Required
Calculate the inventory turn-over (2 Marks)
e) (i)Despite great limitations of structural forecasting, forecasting techniques are invaluable to
the economic needs of businessman and the government. Explain (4 Marks)
f) How can one benefit from determining past patterns (2 Marks)
g) The working capital of ABC Ltd has deteriorated in recent years and now stands as under :
2
Current
Assets
Shs Current Liabilities Shs
Inventory
Debtors
Cash
560,000
3,350,000
70,000
3,980,000
Creditors
Bank loan
490,000
210,000
___________
700,000
Required
i.) Compute the current and quick ratios. (4 Marks)
ii.) A further bank loan of shs. 50,000 against debtors is under negotiations. Assuming the loan is
received; calculate the revised current and quick ratios. (4 Marks)
QUESTION TWO
Upendo Company has been operating for several years; an on December 31, 2009 presented the
following balance sheet.
Upendo Company
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.
Required
Compute each of the following ratios. For each of the four indicate the manner in which it is computed
and its significance as tool in the analysis of the financial soundness of the company.
3
a) Current ratio [5 Marks]
b) Acid-test ratio [5 Marks]
c) Debt to Total Assets [5 Marks]
7Rate of return on assets [5 Marks]
QUESTION THREE
a) In an effective Market, security prices will instantaneously adjust to new information, when it is
placed in the public domain, it will not be possible to develop trading strategies, based on publicly
available information, however there are inconsistent with the efficient Market model
Required
b) Describe three such Market anomalies [6 Marks]
i.) Described four informational sources about financial distress [4 Marks]
ii.) Distinguish between unvariate model and multivariable model of distress prediction[2 Marks]
iii.) What are two key assumptions in the invariant models of distress predictions [2 Marks]
iv.) Briefly explain how the capital Market reacts to financial distress (6 Marks)
QUESTION FOUR
a)
i. Describe the Altman’s z-score model [ 2 Marks]
ii. What are the limitation of the Z-score model [3 Marks]
iii. The Altman’s Z-score model classifies or predicts the likelihood on bankruptcy or nonbankruptcy.
Required
a) Describe the five ratios that are included in the Z-score and what they reflect [10 Marks]
b) Describe five parties who may be interested with the prediction of financial distress [10 Marks]
QUESTION FIVE
Describe the term horizontal analysis [2 Marks]
4
ABC 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 shs. 5,386
and shs 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:
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 [18 Marks]
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