INSTITUTE OF BANKERS IN MALAWI
DIPLOMA IN BANKING EXAMINATION
SUBJECT: FINANCIAL CONCEPTS B (IOBM – D207)
Date: Monday, 4th November 2013
Time Allocated: 3 hours (08:00 – 11:00 am)
INSTRUCTIONS TO CANDIDATES
1
This paper consists of TWO Sections, A and B.
2
Section A consists of 4 questions, each question carries 15 marks.
Answer ALL questions.
3
Section B consists of 4 questions, each question carries 20 marks.
Answer ANY TWO questions.
4
You will be allowed 10 minutes to go through the paper before the start of
the examination, you may write on this paper but not in the answer book.
5
Begin each answer on a new page.
6
Please write your examination number (not your student number) on
each answer book used. Answer sheets without examination
numbers will not be marked.
7
DO NOT open this question paper until instructed to do so.
SECTION A
(60 MARKS)
Answer ALL questions from this section.
QUESTION 1
(a)
Mention two limitations of breakeven charts.
(2 marks)
(b)
Explain the difference between fixed and variable costs. Use an example
for each to further explain your answer.
(c)
(6 marks)
Briefly explain two ways in which breakeven calculations/analysis would
be useful to a banker during credit risk assessment.
(d)
(4 marks)
Luso Manufacturers Limited makes a product which has a variable cost of
K10 per unit. If fixed costs are K84,000 per annum, calculate the selling
price per unit if the company wishes to breakeven with a sales volume of
12,000 units.
(3 marks)
(Total 15 marks)
QUESTION 2
(a)
The balance sheet of Thukuta Limited includes the following information:
K
Fixed Assets
220,600
Current Assets
120,900
Current Liabilities
55,250
What is the value of working capital?
(b)
Mention
any
two
consequences
(1 mark)
of
ineffective
working
management.
(c)
capital
( 4 marks)
Kulima Limited wishes to forecast its financial performance and position
for the forthcoming year. The forecast model used by the company
incorporates the following relationships:
Sales : total assets employed
2.5:1
Fixed assets : current assets
1.0:1
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Current assets : current liabilities
1.8:1
Quick assets : current liabilities
1.2:1
If sales for the forthcoming year are expected to be K800,000.00, what is the
forecast closing stock figure?
(10 marks)
(Total 15 marks)
QUESTION 3
(a)
The directors of Mundawanga Ltd are considering making an investment
in Kupalira Ltd, one of their materials suppliers. The directors wish to
clarify how any investment will be treated for financial reporting purposes.
They are aware that it will be necessary to prepare consolidated financial
statements, and that, depending on a number of factors, the investee will
be treated as either a subsidiary or an associate. However, they are not
sure what factors govern the classification of an investment as either a
subsidiary or an associate, or the difference in accounting treatment in the
consolidated financial statements.
Required to explain:
(i)
The factors which govern whether an investee is treated as an
associate or a subsidiary in the consolidated financial statements.
(5 marks)
(ii)
The difference in accounting treatment of an associate and a
subsidiary in the consolidated financial statements.
(b)
(3 marks)
Suppose that a parent company Kulima plc has one subsidiary, in which it
holds 90% of the shares. The profits after tax of Kulima plc were K5 million
and the profits of its subsidiary Khasu Limited were K3 million. Kulima plc
has proposed a final dividend of K4 million to its shareholders. Khasu
Limited has proposed a final dividend of K2 million.
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Required to calculate:
(i)
The total consolidated profits for the year.
(2 marks)
(ii)
The minority interest in the group profits.
(2 marks)
(iii)
The group share of the profits.
(3 marks)
(Total 15 marks)
QUESTION 4
(a)
List down any five sources of working capital.
(5 marks)
(b)
Suppose that a retailer buys an item from a supplier, and holds it in stock
for 60 days. The retailer pays the supplier 30 days after the purchase. The
item is then sold on credit to a customer, who pays for it 40 days later.
Calculate the cash cycle.
(2 marks)
(c) (i) Explain what you understand by the term operating cash cycle.
(4 marks)
(ii) Discuss why the concept of operating cash cycle is important to the
financial management of a company.
(4 marks)
(Total 15 marks)
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SECTION B
(40 MARKS)
Answer ANY TWO questions from this section.
QUESTION 5
(a) What do you understand by a master budget? Into what sections is it
usually divided, and what are the purposes of the division?
(b) State any two duties of the Budget Controller.
(3 marks)
( 2 marks)
(c) A company making for stock in the first quarter of the year is offered
overdraft facilities. The relevant budget figures follow:
Sales
Purchases
Wages
MK
MK
MK
November
60,000
41,500
4,900
December
64,000
48,000
5,000
January
36,000
81,000
4,000
February
58,000
82,000
3,800
March
42,000
89,500
5,200
Budgeted cash at the bank at January 1st is K8,600. Credit terms of sale are
payment by the end of the month following the month of supply. On average, one
half of the sales are paid on the due date, while the other half are paid during the
next month. Creditors are paid during the month following the month of supply.
You are required to prepare a cash budget for the quarter January 1 st to March
31st, showing the amount of overdraft required at the end of each month.
(15 marks)
(Total 20 marks)
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QUESTION 6
(a)
Suppose for example that a company has achieved the following results.
Year 5
Year 4
Year 3
Year 2
Year 1
K’ 000
K’ 000
K’ 000
K’ 000
K’ 000
Turnover
4,360.7
4,250.6
4,165.0
4,123.8
3,885.0
Profit after taxation
53.8
48
45.7
45.9
42.8
Earnings per share (tambala) 8.4
7.6
7.3
7.5
7.0
Equity
251.4
249.1
246.8
243
funds
per
share 255.5
(tambala)
The index consumer price levels as at the end of each year are as follows
Year 1
245.9
Year 2
253.3
Year 3
268.5
Year 4
273.9
Year 5
282.0
Perform a trend analysis using end-of-year 5 prices as a common price level and
comment on the results.
(Total 20 marks)
QUESTION 7
(a)
How does Altman’s Z-score model work?
(b)
The results for Goldman plc for the most recent financial year are as
( 2 marks)
follows:
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K’ mn
K’mn
Fixed assets
85
Current assets
60
Current liabilities
(25)
35
120
Long term debt
(40)
80
Share capital and reserves
80
K
Sales turnover
50.0
Profit before interest and tax
14.0
Interest
(8.0)
Profit before tax
6.0
Taxation
2.0
Profit after taxation
4.0
Dividends
1.5
Retained earnings
2.5
Assuming that all current liabilities are treated as debt, and given a market value
for the company’s shares of K90million, calculate a Z-score for the firm using
Altman’s model.
(16 marks)
(d) Mention any one weakness of corporate failure prediction models.
(2 marks)
(Total 20 marks)
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QUESTION 8
(a)
In most cases, the financial statements of an incorporated entity must be
subject to a statutory audit.
Required:
Explain the value of the statutory audit.
(b)
(6 marks)
An unqualified audit opinion will state that the financial statements are
‘fairly presented’.
Required:
Explain what is meant by the term ‘fairly presented’ and the limitations of the
audit opinion.
(8 marks)
(c) Explain the relevance of the auditor’s report to a lender (banker).
(6 marks)
(Total 20 marks)
END OF THE EXAMINATION PAPER
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