Apt Financial Consultants
Q1
CPA Reviews
(CPA Nov., 2005)
a)
NASACO Ltd., was completely destroyed by fire and all accounting and financial
information were burnt. However, on going through the Director of Finance’s briefcase
which was salvaged by the owner, the following key data for the accounts for the year ended
June 30, 2005 were found:
i)
Current ratio 1.75
ii)
Liquid Ratio 1.25
iii)
Stock Turnover (Cost of Sales / Closing Stock) 9
iv)
Gross Profit Ratio – 25% of sales
v)
Debt Collection Period – 1 1
vi)
Reserves and Profit and Loss to Capital – 2
vii)
Turnover to Fixed Assets – 1.2
viii)
Capital Gearing Ratio – 0.6
ix)
Fixed Assets to Net Worth – 1.25
x)
Sales for the year Shs. 1,200,000,000
2
months
REQUIRED: Reconstruct the Balance Sheet of NASACO Ltd., as at June 30, 2005 using the
above information. (12 Marks)
b)
Business A and Business B are both engaged in retailing, but seem to take a different
approach to this trade according to information available. This information consists of ratios,
as shown in the table below:
Current Ratio
Quick Ratio
Return on Capital Employed (ROCE)
Return on Owners’ Equity (ROE)
Debtors’ Turnover (days)
Creditors’ Turnover (days)
Gross Profit Margin
Net Profit Margin
Stock Turnover (days)
Business A
2:1
1.7:1
20%
30%
63 days
50 days
40%
10%
52 days
Business B
1.5:1
0.7:1
17%
18%
21 days
45 days
15%
10%
25 days
REQUIRED: Describe what this information indicates about the differences in approach
between the two businesses. If one prides itself on personal services to its
clients and one of them on competitive prices, which do you think is which
and why?
Your answer should include a discussion on the profitability, liquidity,
efficiency and gearing of the two businesses.
(8 Marks)
Ratio Questions
(Total: 20 Marks)
1
Apt Financial Consultants
Q2.
CPA Reviews
(CPA May 2001)
The financial information provided below is for two companies which operate in similar retail fields, using
the same business and accounting policies.
Balance Sheets as at 30 June 1995
Bungoni Ltd.
Tshs.'000'
Amana Ltd.
Tshs.'000'
350,000
65,000
185,000
470,000
35,000
287,000
55,000
64,000
Bank Overdraft
Trade Creditors
Other Current Liabilities & Provisions
21,000
97,000
42,000
20,000
132,000
48,000
Total Owners Equity & Liabilities
815,000
1,056,000
286,000
218,000
59,000
381,000
342,000
62,000
Stock
Trade Debtors
Cash
122,000
124,000
6,000
97,000
166,000
8,000
Total Assets
815,000
1,056,000
Share Capital & Reserves
Issued Capital
Capital Reserves
Revenue Reserves
Non Current Liabilities
10% Debentures
Current Liabilities
Non Current Assets at Book Values
Land and Buildings
Plant and Equipment
Motor Vehicles
Current Assets
Profit or Loss Accounts for the Year Ended 30th June 1995
Bungoni Ltd.
TShs.'000'
Sales
Cost of Sales
Opening Stock
Purchases
Closing Stock
Cost of Sales
Ratio Questions
Amana Ltd.
TShs.'000'
747,000
570,000
102,000
588,000
(122,000)
568,000
92,000
381,000
(96,000)
377,000
2
Apt Financial Consultants
CPA Reviews
Gross Profit
179,000
193,000
Selling and Distribution
Administration & Management
Finance Costs
64,000
31,000
9,000
60,000
29,000
8,000
Total Expenses
104,000
97,000
Profit for the Period
Taxation
Profit After Tax
Dividend Proposed
Transfer to Revenue Reserve
75,000
22,500
52,500
24,000
28,500
96,000
28,800
67,200
37,000
30,200
REQUIRED:
(a)
(i)
Calculate for each company, six ratios which you consider most appropriate
for indicating the efficiency of operations and short term financial strength of
the two firms.
(ii)
Interpret the results and point out weaknesses, if, any, in the computations
above
(iii) Indicate alternatives that might have been taken had more information been
available.
(b) Using the financial information provided above and the ratios you have calculated,
prepare a report which analyses and compares the efficiency of operations and
short term financial strength of Bungoni Limited and Amana Limited
QUESTION 2 (CPA May 2005)
The aim of companies publishing comparative figures and yearly summaries is to enable users to answer
the questions “How does the latest year compare with the previous year” and “what has been the trend
over a number of years”. Although current cost accounting allows for the impact of price changes in
arriving at the results for the year, the results of each year are expressed in the shillings of that year and the
problem of comparing the financial information of one year with another continues.
Extracts of the recently published 5 year summary of Sisi Bora Ltd are shown below:Year ended 31st December
Turnover (shs. Million)
Current cost before tax (shs. Million)
Current cost net assets per share
2004
488
38
0.716
2003
439
19
0.632
2002
381
16
0.572
2001
304
14
0.408
2000
268
13
0.358
The price index over the last five years has been:
Ratio Questions
3
Apt Financial Consultants
CPA Reviews
2004
2003
2002
2001
2000
Year end
188.4
204.2
239.4
275.6
308.8
Average
182.0
197.1
223.5
263.7
295.0
REQUIRED:
(i)
Outline alternative methods which can be used to achieve greater comparability of the figure over
five years.
(6 marks)
(ii)
Present a revised 5-year summary of Sisi Bora Limited giving reasons for the adjustments you have
made.
(10 marks)
(i)
Comment on any significant trends which are revealed by your revised 5 year summary.
(4 marks)
(Total: 20 marks)
QUESTION 4: (CPA Nov., 1995)
Selected data from the annual accounts of POLOS Ltd. for the past three years are reproduced below.
You are asked to evaluate the performance of the company over this period; and to discuss the possibility of
it becoming the target for a take-over bid.
To assist you in this assessment the following median performance indicators have been extracted from a
recent inter-firm comparison report on the industry in which POLOS is engaged
Profit before Tax
: Net Assets employed
Annual Sales
: Stock at year-end
Debtors
: Annual Sales/12
Annual Sales per employee
Average payroll cost per employee
-
28%
6.5 times
3 months
shs. 4,800
shs. 1,200
Your analysis however should not be confined to these few ratios.
(20 marks)
SUMMARISED FINANCIAL INFORMATION
(All figures are in shs. 000's except number of employees)
Year ending 31st December 1990
1991
1992
Sales - Home
1,948
2,763
2,805
- Export
715
802
985
3,663
3,565
3,790
Profit before Tax
222
360
250
After charging:
- Depreciation
75
80
78
- Payroll costs
1,295
1,310
1,275
Ratio Questions
4
Apt Financial Consultants
CPA Reviews
Deduct: Tax
Preference Div.
Ordinary Div.
82
15
170
15
70
105
167
Profit Retained
290
55
====
BALANCE SHEET AT YEAR END
Current Assets
Stocks
Debtors
Cash and Short-term Investments
105
228
70
====
22
====
1990
1991
515
1,117
228
440
Current Liabilities
Trade Creditors
Other
627
1,110
1,357
2,250
1,962
2,115
807
325
770
1,112
====
1,090
655
1,012
2,177
740
190
1,357
1992
448
1,860
580
Net Current Assets
Fixed Assets
Land & Buildings(Revalued 1990)
Others-at cost
Less: Depreciation
108
15
233
1,065
1,075
====
1,040
308
1,665
315
1,672
====
====
====
1,357
2,350
1,042
2,412
2,097
288
1,645
Net assets employed
2,735
2,777
Average number of employees
1,387
1,415
2,747
====
1,310
QUESTION 1 (CPA Nov., 2004)
(a)
Trends in accounting ratios may provide more useful insight into an entity’s financial performance
and position than the latest financial statements.
REQUIRED
Comment on this statement.
(b)
(5 marks)
Kalikamo Limited carries on business as a manufacturer of tractors. In 2004 the company was
looking for acquisitions and carried out investigations into a number of possible targets. One of
these was a competitor, Modern Tractors Ltd.
The company’s acquisition strategy was to acquire companies that were vulnerable to a takeover
and in which there was an opportunity to improve asset management and profitability.
The Chief Accountant of Kalikamo Limited has instructed his assistant to calculate ratios from the
financial statements of Modern Tractors Limited for the past three years and to prepare a report
based on these ratios and the industry average ratios that have been provided by the Chamber of
Commerce.
Ratio Questions
5
Apt Financial Consultants
CPA Reviews
The ratios prepared by the Assistant Accountant for Modern Tractors Limited and the industry
averages for 2004 are set out below:-
Sales growth
Sales/total assets
Sales/net fixed assets
Sales/working capital
Sales/debtors
Gross profit/sales
Profit before tax/sales
Profit before interest/interest
Profit after tax/total assets
Profit after tax/equity
Net fixed assets/total assets
Net fixed assets/equity
Equity/total assets
Total liabilities/total assets
Total liability/equity
Long-term debt/total assets
Current liabilities/total assets
Current assets/current liabilities
(Current assets – Stock)/Current liabilities
Stock/total assets
Cost of sales/stock
Cost of sales/creditors
Debtors/total assets
Cash/total assets
%
%
%
%
%
%
%
%
%
%
%
%
%
Modern Tractors Ltd. Industry average
2002
2003 2004
2004
30.00
40.00 9.52
8.25
1.83
2.05 1.60
2.43
2.94
3.59 2.74
16.85
-21.43 -140.00 38.33
10.81
37.50
70.00 92.00
16.00
18.67
22.62 19.57
23.92
8.00
17.62 11.74
4.06
6.45
26.57 14.50
4.95
9.76
27.80 13.24
8.97
57.14
75.00 39.58
28.90
62.20
57.07 58.54
19.12
3.64
1.54 1.75
0.58
18.29
37.07 33.45
32.96
81.71
62.93 66.55
69.00
4.47
1.70 1.99
2.40
36.59
18.54 29.27
19.00
45.12
44.39 37.28
50.00
0.84
0.97 1.11
1.63
0.43
0.54 0.72
0.58
17.07
18.54 14.63
41.90
8.71
8.55 8.81
4.29
6.10
6.25 6.17
12.87
4.88
2.93 1.70
18.40
15.85
21.46 25.08
9.60
Note:
Total assets = Fixed assets at net book value + Current assets
Net fixed assets = Fixed assets at net book value.
REQUIRED:
Assuming the role of the Chief Accountant, draft a brief report to be submitted to the Managing Director
based on the ratios of Modern Tractors Ltd. for 2002 to 2004 and the industry averages for 2004.
(15 marks)
(Total = 20 marks)
Ratio Questions
6