CHARTERED INSTITUTE OF
STOCKBROKERS
ANSWERS
Examination Paper 1.1
Financial Accounting and Financial Statement Analysis
Economics and Financial Markets
Quantitative Analysis and Statistics
Professional Examination
March 2011
Level 1
1
SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
A
B
C
C
C
C
B
A
A
D
C
A
D
D
C
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
D
B
D
D
D
B
C
C
D
C
A
D
B
C
B
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
B
D
B
C
A
A
C
C
D
A
C
B
D
C
D
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
B
C
D
A
C
B
C
A
C
D
B
D
C
A
B
(60 marks)
SECTION B: SHORT ANSWER QUESTIONS
Financial Accounting and Financial Statement Analysis
Question 2
2a)
A contingent liability is a possible obligation arising from past events whose existence
will be confirmed by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity.
(1 mark)
or
A present obligation that arises from past events but is not recognized because
i. It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation or,
ii. The amount of the obligation cannot be measured with sufficient reliability
Treatment in the financial statement
Contingent liabilities should not be recognized in the financial statements but they should
be disclosed.
(1 mark)
2
2(b)
i.
Reduction in production cost leading ultimately to increase in profit after tax
ii.
Reduction in overheads leading ultimately to increase in profit after tax
iii.
Increase in turnover resulting in increase in profit after tax
iv.
Reduction in equity through share repurchase
v.
Reduction in equity capital through capital reconstruction
(1 mark each, any two reasons= 2 marks)
Total = 4 marks
Economics and Financial Markets
Question 3
3(a)
Y = C+I+G+ (X-M)
Where
Y
=
GDP
C
=
Consumption Expenditure
I
=
Investment Spending
G
=
Government Expenditure
(X-M) =
Net Export (Export less import)
(1½ marks)
3(b)
A production function specifies the technical relationship between the output of a firm,
an industry, or an entire economy, and all combinations of inputs. This function is an
assumed technological relationship, based on the current state of engineering
knowledge.
A production function can be expressed in functional terms as below:
q = f(X1,X2,X3,...,Xn)
where:
q = quantity of output
X1,X2,X3,...,Xn = quantities of factor inputs (such as capital, labour, land or raw
materials).
(1½ marks)
Total = 3 marks
Quantitative Analysis and Statistics
Question 4
Y = 4.57 + 0.86 x
for 2011, x = 9
= 4.57 + 0.86 (9)
(1 mark)
=
12.31
Expected sales for 2011 = 12,310 tonnes
(1 mark)
(1 mark)
Total =3 marks
3
SECTION C: COMPLUSORY QUESTIONS
Financial Accounting and Financial Statement Analysis
Question 5
5(a1) Current ratio.
Current assets = N140,000
Current liabilities = N56,000
Current ratio = Current assets/ Current liabilities = 140,000/56,000
=2.5 :1
(1 mark)
Comment
It is generally agreed that a current ratio of 2:1 is acceptable in most businesses.
On this basis, the company’s current ratio appears okay. However, we need more
information about the nature of the company’s business industry average ratio, and
the company’s current ratio trends to make better informed conclusions.
5(a2) Total gearing ratio.
Total Gearing =
Debt
Debt + Equity
Debt Capital = N80,000 + N120,000
Equity
= N200,000 + N40,000
Debt + Equity = N200,000 + N240,000
Total gearing = 200,000/440,000
= N200,000
= N240000
= N440,000
= 45.45%
(1½ marks)
Note: For the purpose of gearing computation, preference shares are normally treated as
debt capital since they impact the capital structure of a company more or less like debt
capital.
5(a3) Net asset turnover.
Net assets = Shareholders’ equity =
Turnover = N1,600,000
N360,000
Net asset turnover = Turnover/ Net assets = N1,600,000/ N360,000
= 4.44 times
(1½ marks)
5(a4) Return on equity.
Profit after tax and preference dividends = N180,000 – (6% x 120,000) =
N172,800
Equity = N 200,000 + N 40,000 = N240,000
ROE = Profit after tax / Equity = N172,800/ N240,000
= 72%
(1½ marks)
4
General comment on the ratios computed
Ratios on their own are meaningless figures. To be able to make informed
comments we need more information such as past trends within the company,
industrial average, similar ratios of companies in the same industry e.t.c, as a basis
for comparison.
(1½ marks)
5(b)
i.
ii.
iii.
iv.
v.
vi.
Ratios based on historical cost accounting are subject to distortions as assets are
carried at values that bear no relationship with their current and/ or replacement
values.
Financial statements are subject to manipulations.
No two companies have the same financial and business risk profile. Ratio analysis
does take these differences into consideration.
Comparison using industry averages may not be that revealing. A business may be
subject to factors which are not common in the industry
Ratios analysis neglects important qualitative factors such as quality of
management and workforce.
Inflation over a period will distort results and ratios.
(1 mark each, any three)
= 3 marks
Note: Markers should please note that this list is not exhaustive.
Total =10 marks
Economics and Financial Markets
Question 6
6(a)
An increase in sales tax of a good (say good x ) will increase production costs
and reduce supply. In contrast, subsidies are “taxes in reverse”. If government
subsidies the production of good x, it in effect lowers production costs and
increases supply. Thus we have the following graph.
Price of
good x
Decrease
in supply
S3
S1
S2
Increase
in supply
Quantity of good x supplied
(2 marks)
An increase in sale tax on good x is shown as a leftward shift of the curve from S1 to S3,
implying a decrease in supply. In contrast, the effect of subsidy is depicted as a
rightward shift of the curve from S1 to S3, indicating an increase in supply.
(2 marks)
5
6(b)
Effect of Petrol Subsidy on the Demand and Supply
S
Price of
petrol
P
P1
S1
e
e1
D
Q
Q1
(2 marks)
By passing a law granting petrol subsidy of N10, there is a rightward shift from S to S1
because of the cost reduction the sales of petrol. Assuming the demand schedule
remains unchanged, the equilibrium position changes from e to e1. The effects are for
the following:
•
An increase in the supply and demand from Q to Q1
•
A reduction in the price of petrol from P to P1
(4 marks)
Total =10 marks
Quantitative Analysis and Statistics
Question 7
7(a) The revenue function
Revenue, R = p.x
= (900 – 0.5x) x
R = 900 x – 0.5x2
7(b)
The profit function
Profit, π = R - C
= (900 x – 0.5X2) – (6,000 – 300x)
= 900x – 0.5x2 – 6,000 + 300x
π
7(c)
(1 mark)
(1 mark)
= 600x – 0.5x2 – 6,000
(1 mark)
(1 mark)
Differentiating the profit function
dπ
dx
= 600 – x
At max profit, d π
= 0
dx
i.e 600 – x = 0 i.e
x =
(2 marks)
(1 mark)
600 units
(1 mark)
Value of max. profit
π
= 600 (600) – 0.5 (600)2 – 6,000
= 360,000 – 180,000 – 6,000
= N174, 000
(1 mark)
(1 mark)
Total =10 marks
6