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 2012
Level 2
1
SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
D
D
C
B
D
C
A
C
D
C
B
A
B
B
A
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
A
D
D
D
A
D
B
A
A
C
A
D
B
C
D
31
32
33
34
35
36
37
38
39
40
D
B
A
A
A
A
D
A
C
D
(40 marks)
SECTION B: SHORT ANSWER QUESTIONS
Question 2 - Financial Accounting and Financial Statement Analysis
Item
The impairment of an intangible
asset.
A new issue of bonus shares to
shareholders.
Impact
When an intangible asset is impaired, its carrying
amount is reduced, and the impaired amount is
written off to the operating statement. This
reduces the amount of earnings, and hence the
EPS, all else being equal.
(1 mark)
A new issue of bonus shares results in an
increase in total number of shares outstanding.
All else being equal, this results in a reduction in
published EPS.
(1 mark)
Profit on the sale of a property.
Profit on the disposal of property results in
increase in total earnings, which in turn results in
an increase in EPS, all other things being equal.
(1 mark)
2
Question 3 - Economics and Financial Markets
3(a)
Economic profit is the revenue a firm receives in excess of all its explicit cost and
implicit cost (opportunity cost).
The Accounting profit of a firm is its revenue less only its explicit costs (i.e out-ofpocket expenses).
(1 mark)
3(b)
GDP = C + I + G + (X - M)
Where X – M = Net Exports = GDP – (C + I + G)
= N3,452b – N(2,343 + 865 + 379)b
Net Export = -N135 billion
(2 marks)
Total = 3 marks
Question 4 - Quantitative Analysis and Statistics
Data-mining bias refers to the errors that result from relying too heavily on data-mining
practices. In other words, while some patterns discovered in data mining are potentially
useful, many others might just be coincidental and are not likely to be repeated in the
future - particularly in an "efficient" market.
(2 marks)
Survivorship bias is the tendency to exclude failed companies or managers from
performance evaluations or studies simply because they do not exist. This situation can
result in skewed findings in a study, and lead a casual reader to believe that a study
shows a rosier picture than it really does.
(2 marks)
Total = 4 marks
3
SECTION C: COMPULSORY QUESTIONS
Question 5 - Financial Accounting and Financial Statement Analysis
5(a)
The balance sheet as at 31/12/2011
US Dollars
Rate
Naira
Assets
Property, plant and equipment
300
160??
48,000??
Inventories
80
160??
12,800??
Net monetary current assets
60
160??
9,600 ??
Total assets
70,400??
440
40
160 ??
6,400 ??
Share capital
300
155 ??
46,500??
Retained profit
100
??
15,000??
Long term loans
Equity
??
Exchange
difference
2,500 ??
70,400??
440
Income statement for the year
ended 31/12/ 2011
600
150 ??
90,000??
Cost of sales
-400
150 ??
-60,000??
Gross profit
200
Depreciation
-50
150 ??
-7,500 ??
Other expenses
-50
150 ??
-7,500 ??
Sales
100
30,000??
15,000??
(12 marks)
4
5(bi)
Computation of receivables collection period
Receivables collection period = Trade receivables X 365 days
Sales
2010
N5,000,000 X 365 days
N50,000,000
=
36.5 days
=
54.75 days
2011
N9,000,000 X 365 days
N60,000,000
(2 marks)
5(bii)
Apparently, the policy appears to have benefited the company. Sales grew by 20% from
N50m in 2010 to N60m in 2011, while profit equally grew by 40% from N4m to N5.6m.
A possible explanation for this is that by relaxing credit policy, customers had an incentive
to buy from Zimbre Limited rather than from its competitors. The company may have
gained a higher market share in the process, especially if the company’s competitors did
not follow suit by relaxing their own credit policy.
(4 marks)
5(biii)
With an increase in receivables collection period from 37 days in 2010 to 55 days in 2011,
the company would likely be facing a tighter liquidity position, which would likely impact
negatively on cash flow. This may make it more difficult for Zimbre limited to meet its ongoing financial obligations in the nearest future.
Although the total amount of earnings have risen considerably (by 40%) between 2010
and 2011, there is the possibility that the quality of earnings will deteriorate. With a
significant increase in the total amount of closing trade receivables, coupled with an
increase in receivables collection period, it is likely that the proportion of bad debt to total
sales would rise, unless the company puts in place an effective process for credit
monitoring, follow-up and collection.
5
Question 6 - Economics and Financial Markets
6(a)
i. Credit Squeeze: this is a policy phase of credit restrictions, a situation that will
ultimately result in the reduction of money supply.
(1 mark)
ii. Deficit Budget: this is when current expenditures are in excess of current income.
It is a situation where government income, tax receipts, fails to cover government
expenditure.
(1 mark)
iii. Closed Economy: this is a concept used mainly in theoretical models to describe
an economy with no external trade, which will be completely self-sufficient and
insulated from external forces.
(1 mark)
6(b)
The two problems confronting the nation are rising inflation and unemployment
both of which are captured in the economic term referred to as stagflation, a
problem that often comes along with economic recession.
(3 marks)
6(c)
i. By deciding on credit squeeze, the central bank attempts to curb the rising inflation.
The credit restrictions limit money supply in the economy, raise interest rate and
curtail aggregate demand. By this development, inflationary gap is gradually
eliminated and thus, curbs rising prices.
(2 marks)
ii. The decision of the Central Government to embark on budget deficit, is a fiscal policy
response meant to address the rising unemployment problem. It is expected that the
excess current expenditures will in this case boost aggregate demand. Increased
aggregate demand with the attendant multiplier effect will translate into greater
employment opportunities.
(2 marks)
iii. However, the two policy responses of the two authorities could undermine the
effectiveness of the policy target of each of the authority when implemented
simultaneously. Some trade-off in policy packaging in this kind of situation is
inevitable and hence makes policy coordination imperative.
(2 marks)
6
6(d) The IS-LM Model.
(i)
As indicated earlier, the decision on credit squeeze is tantamount to
decrease in money supply. This is depicted in the IS-LM Model as a leftward
shift in the LM curve. (1 mark)
LM’
Interest
rate
LM
(1 mark)
IS
Y1
s
Y0
Ys
s
(Income Output)
As shown in the diagram, the shift from LM to LM’ will result in
Increase in interest rates from r0 to r1
•
Decrease output from
to
•
(2 marks)
(ii)
The decision to implement budget deficit will invariably increase aggregate
demand. This is depicted in the IS-LM Model as a rightward shift in the IS
curve.
LM
(1 mark)
r
1
IS`
IS
(output)
Ys
As indicated in the diagram, the shift from IS to IS’ will result in
to
• Increase in interest rates from
• increase in output rates from
to
7
(2 marks)
Question 7 - Quantitative Analysis and Statistics
7(a)
Mutual Fund 1
RG = {(1.162)(1.203)(1.093)(0.889)(0.830)}1/5 - 1
= 2.43%
(2 marks)
Mutual Fund 2
RG = {(1.092)(1.038)(1.131)(1.016)(0.870)}1/5 – 1
= 2.53%
(2 marks)
7(b)
Mutual Fund 1
20.3% - (- 17%) = 20.3% + 17%
= 37.3%
(1 mark)
Mutual Fund 2
13.1% - (- 13%) = 13.1% + 13%
= 26.1%
(1 mark)
Based on the computed ranges, mutual fund 1 is riskier, as its returns are more dispersed
than the returns of mutual fund 2.
(1 mark)
7(c)
Let proportion of funds invested in mutual fund 1 be y.
Therefore proportion of fund invested in mutual fund 2 will be (1-y).
It follows that: 2y + 8(1-y) = 6.5
(1 mark)
2y + 8- 8y =6.5
6y = 1.5
Hence, y= 1.5/6 = 0.25 =
25%
1-y = 1- 0.25 = 0.75
75%
=
(1.5 marks)
(1.5 marks)
Therefore, invest 25% and 75% of funds in Mutual Fund 1 and Mutual Fund 2
respectively.
Total = 11 marks
8