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
September 2012
Level 2
1
SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
B
C
D
A
C
A
D
D
A
D
D
C
B
B
C
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
B
B
A
B
B
C
D
A
D
B
A
A
A
C
D
31
32
33
34
35
36
37
38
39
40
A
D
D
B
C
A
A
B
A
B
(40 marks)
SECTION B: SHORT ANSWER QUESTIONS
Question 2 - Financial Accounting and Financial Statement Analysis
2(a)
The cash was invested years ago to acquire the asset. There is no cash implication this
year from the impairment now; it is just an accounting entry.
The amount by which the asset is impaired is charged against profit in the income
statement.
(1 ½ marks)
2(b)
When an asset is impaired it means that it is now less valuable. That is, it is less likely to
produce cash flow either when disposed or while in use.
(1 ½ marks)
Total = 3 marks
2
Question 3 - Economics and Financial Markets
IS – LM curves
r
LM
IS
As shown in the diagram,

IS is down sloping, indicating an inverse relationship between r and y
(1½ marks)

LM is up sloping, indicating a direct relationship between r and y
(1½ marks)
Total = 3 marks
Question 4 - Quantitative Analysis and Statistics
The four composite forces affecting Time Series data are:
(i) Secular Trend (T)
(ii) Seasonal Variation (S)
(iii) Cyclical Variation (C)
(iv)Irregular Variation (I)
(½ mark each) = 2 marks
Multiplicative model
Y=TxSxCxI
(1 mark)
Additive model
Y= T + S + C + T
(1 mark)
Total = 4 marks
3
SECTION C: COMPULSORY QUESTIONS
Question 5 - Financial Accounting and Financial Statement Analysis
5(a)
N
Opening net assets
6,000,000
Adjustments
Cash from debtors
Sale of stock
0
1 mark
+ 900,000
½ mark
-750,000
½ mark
5-year loan
+500,000
½ mark
Bad debt
- 50,000
½ mark
Closing net assets
6, 600,000
(3 marks)
5(b1)
A falling current ratio might show reduced liquidity and increased risk of default and
inability to pay creditors.
(2 marks)
5(b2)
It might show better working capital management as excess working capital can always be
paid back to shareholders.
Again, there is generally an inverse relationship between liquidityand profitability.
(2 marks)
5(c1)
Interest cover = PBIT/ Interest payable = N 75,000/ N30000 =
Dividend cover =PAT/Dividend for the year = N 30,000/ N10,000
2.5
=3
(1 mark)
(1 mark)
5(c2)
If interest of N25,000 was not capitalized then:
Interest payable = 30,000 + 25,000 =
Profit for the year = 30,000 - 25,000 =
N50, 000.
N5, 000 (assuming no change in tax payable).
4
Interest cover = PBIT/ Interest payable = N 75,000/ N50, 000 =
1.5
(1 mark)
Dividend cover =PAT/Dividend for the year = N 5,000/ N10,000
= 0.5
(1 mark)
5(c3)
Capitalization of interest of N25,000 has resulted in an improvement in the interest cover
and dividend cover of the company. This had made the performance of the company to
appear better than it really was.
Without capitalization of interest, it is clear that the company’s capacity to pay interest
expenses and declared dividend was quite weak.
(2 mark)
5(d)
Item
Acquisition of a
subsidiary
Impairment of
goodwill
Payment of
dividends to
shareholders
No impact on
cash flows
Impact on
cash flows
from
operating
activities
Impact on cash
flows from
financing
activities
X
X
X
Sale of a fixed asset
Increase of share
capital by issuing
bonus shares
Payments received
from customers
Increase of the
allowance for bad
debts
Payments to
suppliers
Granting a loan to
employees
Redemption of a
mortgage
Impact on
cash flows
from investing
activities
X
X
X
X
X
X
X
½ mark for each correct box
(Total 5 marks)
5
5(e)
Retained earnings in consolidated accounts
100% of parent’s retained earnings plus a proportion of the post acquisition reserves of
the subsidiary based on percentage of ownership (in this case 60%).
= 100% x 90, 000 + 60% (110,000 – 40,000)
= N132,000
(2 marks)
Question 6 - Economics and Financial Markets
6(a)
Potential GNP
Level of
economic activity
Boom
Actual GNP
Recession
Recovery
Depression
Time
(2 marks)
(i) A typical business cycle (or trade cycle) depicts fluctuations in the level of economic
activity (actual Gross National Product) alternating between periods of depression and
boom conditions.
(ii) The cycle is characterized by four phases (see the above). These are depression,
recovery, boom and recession.
Depression: a period of rapidly falling aggregate demand accompanied by low levels of
output and heavy unemployment.
(2 marks)
Recovery: a period characterized by an upturn in aggregate demand accompanied by
rising output and a reduction in unemployment.
(2 marks)
6
Boom: a situation of increasing aggregate demand, reaching its peak and exceeding
sustainable output levels. As the peak of the cycle is reached, full employment is attained
and the emergence of excess demand causes inflation.
(2 marks)
Recession: the boom is usually followed by recession. Aggregate demand falls, bringing
with it falls in output and employment.
(2 marks)
(Maximum 9 marks)
6(b)
Recessionary Situation and Cyclical Unemployment:

The recession phase arises from the fall in aggregate demand. There is therefore a
deficiency of total spending.

As the overall demand for goods and services decreases, employment falls and
unemployment rises.

Thus, cyclical unemployment is referred to as deficient-demand unemployment.
(4 marks)
6(c)
Monetary policy measures:

Monetary policy measures should aim at stimulating aggregate demand.

Such measures would require expansionary monetary measures: increased money
supply through the purchase of bonds and treasury bills in the O.M.O, reduction in
bank rate, reduction in cash / liquidity ratio and reduction in reserve requirements
etc.

The reduction in lending rate that will stimulate the components of aggregate
demand, notably consumption and investment.
(4 marks)
(Total = 17 marks)
7
Question 7 - Quantitative Analysis and Statistics
7(a1)
Marks (%)
25 – 34
35 – 44
45 – 44
55 – 64
65 – 74
75 – 84
85 – 94
100
Freq.
3
10
21
33
20
8
5
Cum. Freq.
3
13
34
67
87
95
100
_
Pr (M > 54) = 33+20+8+5
100
= 66 =0.66
100
(3 marks)
7(a2)
Pr (45
M
75) = 21+33+20
100
= 74 = 0.74
100
(3 marks)
7(a3)
Marks (%)
25 – 34
35 – 44
45 – 44
55 – 64
65 – 74
75 – 84
85 – 94
100
Freq.
3
10
21
33
20
8
5
Cum. Freq.
3
13
34
67
87
95
100
_
7(a4)
The best 10% of the candidates is represented by the 90th percentile:
P90 = L +
= 74.5 +
74.5 + 3.75 = 78.25 = 78%
(3 marks)
Total = 11 marks
8