CHARTERED INSTITUTE OF
STOCKBROKERS
ANSWERS
Examination Paper 2.1
Financial Accounting and Financial Statement Analysis
Economics and Financial Markets
Quantitative Analysis and Statistics
Professional Examination
March 2013
Level 2
1
SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
B
D
B
C
C
B
B
C
C
B
A
D
D
D
A
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
C
C
C
B
D
A
C
C
A
D
C
B
D
B
A
31
32
33
34
35
36
37
38
39
40
B
A
C
C
B
C
D
C
C
C
(40 marks)
SECTION B: SHORT ANSWER QUESTIONS
Question 2 - Financial Accounting and Financial Statement Analysis
Both the proportionate and equity method of consolidation pertain to Joint Venture.
Proportionate consolidation is an approach for in which items of income, expense, assets
and liabilities are included in a firm’s accounts in proportion to the firm's percentage of
participation in the venture.
(1 ½ marks)
On the other hand, the equity method calculates net income from a joint venture
partnership, proportional to the size of its investment. That is, in the equity method, the
investment is recorded at cost at first, and is then adjusted up or down, depending on the
current value and expenses. Should the company no longer have a "significant influence"
in control over the investment, then the equity method treatment must stop and the new
value is recorded at the current cost basis.
(1 ½ marks)
Total = 3 marks
2
Question 3 - Economics and Financial Markets
3(a)
A nation’s real GDP in any depends on the input of labour multiplied by labour productivity.
GDP (Total Output) = input of labour x labour productivity.
(2 marks)
3(b)
Discretionary fiscal policy is the deliberate manipulation of taxes and government spending
by government to alter real GDP and employment control inflation, and stimulate economic
growth.
(1 mark)
Total = 3 marks
Question 4 - Quantitative Analysis and Statistics
4(a)
i.
Index numbers are used to measure changes in the general price level of capital
market instruments such as shares, bonds and mutual fund. For example, market
capitalization of shares on the NSE and the All-share index
ii.
They are also used to measure changes in value of instruments in a particular sector of
the market e,g NSE 30 Index, NSE Oil and Gas 5 Index; NSE Insurance ; NSE Banking
Index
(1 mark each) = 2 marks
4(b)
This is a method of selecting sample members from a larger population, according to a
random starting point and a fixed, periodic interval. Typically, every "nth" member is
selected from the total population for inclusion in the sample population.
For example, if you wanted to select a random group of 1,000 people from a population of
50,000 using systematic sampling, you would simply select every 50th person, since
50,000/1,000 = 50.
Systematic sampling is still considered to be random, as long as the periodic interval is
determined beforehand and the starting point is random.
(2 marks)
Total = 4 marks
3
SECTION C: COMPULSORY QUESTIONS
Question 5 - Financial Accounting and Financial Statement Analysis
5(a)
Assets
Cash
Accounts receivable
Inventories
Fixed Assets
Total Assets
Amount (in N)
A = 128,000
B = 160,000
C = 192,000
Liabilities & Equity
Accounts payable
Long term debt
Equity
Amount (in N)
E = 300,000
F= 200,000
G= 500,000
D = 520,000
1,000,000
Total Liabilities & Equity
1,000,000
(7 marks)
Workings
Capital structure ratio = Total debts / Total assets = 0.5
Hence, Total debts = 1,000,000 · 0.5 = 500,000
¾
Equity = Total assets – Total debts = 1,000,000 – 500,000
Long-term debt / Equity = 40 %
¾ Long-term debt = 500,000 · 0.4
¾
= 500,000
= 200,000
Accounts payable = Total debts – Long-term debt = 500,000 – 200,000= 300,000
Asset turnover = Sales / Total assets = 1.6
Sales = 1,000,000 x 1.6 = 1,600,000
Gross margin = (Sales – Cost of goods sold) / Sales = 0.4
Sales – CGS = 0.4 x Sales
CGS = 0.6 x Sales = 1,600,000 x 0.6 = 960,000
Inventory outstanding period = Inventories · 365 / CGS = 73
¾ Inventories = (960,000 · 73) / 365
= 192,000
Collection period = Accounts receivable · 365 / Sales = 36.5
¾ Accounts receivable = 1,600,000 · 36.5 / 365
= 160,000
Current ratio = Current assets / Current liabilities = 1.6
Current assets = 300,000 · 1.6 = 480,000
¾
Fixed assets = Total assets – Current assets = 1,000,000 – 480,000
= 520,000
¾
Cash = Current assets – (Accounts receivable + Inventories) = 480,000 – (160,000
+ 192,000)
= 128,000
4
5(b)
Frontline Breweries
Overall, the performance of Frontline Breweries deteriorated significantly in 2011 from
60% in 2009 and 2010, to 49% in 2011. This suggests that the company was less efficient
at generating profits from invested capital in 2011.
However, for a comprehensive analysis of the factors that accounted for the observed
trend in ROE of Frontline Breweries, a three-stage DuPont analysis would be useful.
The three components of ROE and their contributions to Frontline Breweries ROE for the
three years under consideration are discussed below.
ROE = Net Margin x Asset Turnover x Leverage Factor
Net Margin
The level of performance of Frontline Breweries in terms of profit margin over the threeyear period was about the same. This means that despite the increasing competition in the
industry, the company was resilient and maintained its level of profitability.
The two factors that accounted for the differences in ROE are asset turnover and the
leverage factor.
Asset Turnover
Asset turnover deteriorated in 2011 to 1.15, from 1.53 and 1.62 recorded in 2009 and
2010 respectively. This apparently implies that the company did not generate enough
sales from its assets.
However from the case study, a plausible explanation for this is the huge investment of
N65 billion in 2011 to acquire two breweries as part of its expansion plans. This long term
investment is not expected to yield immediate sales that would match the level of
investment; rather it would likely impact future sales over a relatively long period, and
after a considerable time lag.
Leverage Factor
Leverage factor is a measure of the gearing of a firm. It is the equity multiplier of the
firm.
Although we were not given the equity multiplier directly in the scenario, we could deduce
from the total gearing ratio (which rose to 28% in 2011 from 0% in 2009 and 2010) that
the leverage factor increased appreciably in 2011.
5
The implication is that Frontline Breweries injected more debt capital in its capital
structure. This increase in leverage factor, due to the increasing use of debt to finance
operations, helped Frontline Breweries to moderate the negative impact of lower asset
turnover on ROE. Without this, the ROE in 2011 would have been even lower than the
49% recorded in 2011.
(11 marks)
5(c)
Item
I.
II.
III.
IV.
Comment
Increasing estimated
useful lives of noncurrent asset.
Reducing provision for
environmental damages.
Reducing the write-down
for obsolete and
damaged stocks.
Paying a dividend to
shareholders.
Impact : profit only
Effect: Increase in profit as a result of reduction in
annual depreciation charge.
Impact : profit only
Effect: Increase in next year’s profit as a result of
a reduction provisioning.
Impact : profit only
Effect: Increase in next year’s profit.
Impact : cash flow only
Effect: Increase in next year’s cash outflow and a
reduction cash balances.
(4 marks)
6(a)
The intent of a contractionary monetary policy would be shown as a leftward shift of the
aggregate demand (AD) curve.
(3 marks)
Price
(P)
P*
AS
P*1
AD'AD
y*1 y*
Real output
(3 marks)
A leftward shift at AD curve, with As remaining unchanged, would result in a decline in the
price level (or a reduction in the rate of inflation).
(3 marks)
(9 marks)
6
6(b)
In an open economy, the interest rate hike resulting from the contractionary monetary
would entice people abroad to buy securities in Nigeria. Because they would need Nigeria
Naira to buy these securities, the international demand for Naira would rise, causing the
Naira to appreciate. Net exports would fall, pushing the aggregate demand curve farther
leftward than in the closed economy.
(6 marks)
Price
AD
P*
P2
Y1 y*
AD
AD2 AD1
(3 marks)
Real output
Total (8 marks)
(Total = 17 marks)
Question 7 - Quantitative Analysis and Statistics
7(a) Let number of Road constructed and rehabilitated = X; and amount spent = Y
EX = 3,719
EY = 500
EXY = 155,207
EX2 = 3,632,217
EY2 = 31,750
(6 marks)
Product moment correlation coefficient
nExy – (Ex) (Ey)
(nEX2 – (Ex)2). (nEY2 – (EY)2)
10 (155207) –(3719) (500)
(10(3,632,217) – (3,719)2) (10(31,750) – (500)2)
=
- 307,430
1,232,134.98
= -0.2495
(3 marks)
7(b)
Since there is a negative correlation between X and Y, the amount of money spent does
not justify the number of roads constructed and rehabilitated.
(2 marks)
TOTAL = 11 marks
7