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Hbc2105:Financial Statement Analysis Question Paper
Hbc2105:Financial Statement Analysis
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2013
QUESTION ONE – 30 MARKS
(a) Explain the key differences between the weighted moving average and simple Exponential smoothing forecasting methods. (4 marks)
(b) Karachi Ltd would like to find the relationship between sales and advertisement. The following data were produced as below. Sales (sh 000’) Advertisement (sh ‘000’) 100,000 2,000 150,000 3,000 125,000 2,500 50,000 1,000 170,000 3,500 13,500 2,750 Required: i. Determine the linear relationship between sales and advertisement. (10 marks)
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ii. Calculate the sales in shillings if the advertisement will be Ksh 4,200,000. (3 marks) (c) What are the circumstances under which qualitative forecasting methods are used.(6 marks)
(d) Discuss the importance of financial analysis to a firm. (7 marks)
QUESTION TWO –20 MARKS (a) Discuss the standards for financial statement analysis.
(b) Njeri is considering an investment in one of the two fast food restaurant chains because she believes the trend towards eating out more often will continue. Her choices were narrowed to eat fast and drink fast, whose balance sheets and income statements follows. Balance sheet sh ‘000 Assets Eat fast Drink fast
Cash sh.2,000 sh 4,500 Account receivable 2,000 6,500 Inventory 2,000 5,000 Property, plant and equipment (net) 20,000 35,000 Other assets 4,000 5,000 Total assets 30,000 56,000 Liabilities and stockholders’ equity Accounts payable 2,500 3,000 Notes payable 1,500 4,000 Bonds payable 10,000 30,000 Common stock (sh 1per value) 1,000 3,000 Premium on common stock 9,000 9,000 Retained earnings 6,000 7,000 Total liabilities and stockholders’ equity 30,000 56,000 Income statement Sales 53,000 86,000 Cost of goods sold 37,000 61,000 Gross margin from sales 16,000 25,000 General operating expenses Selling expenses 7,000 10,000 Administrative expense 4,000 5,000 Interest expense 1,400 3,200 Income tax expense 1,800 3,400 Total operating expense 14,200 21,600 Net income 1,800 3,400
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Required: a) Conduct a liquidity analysis by calculating: i. Current ration ii. Quick ratio iii. Receivable turnover iv. Average days sales uncollected b) Conduct a profitability analysis by calculating: i. Profit margin ii. Assets turn over iii. Return on assets iv. Return on equity c) Conduct a long term solvency analysis by calculating i. Debt to equity ratio ii. Interest coverage ratio d) In what ways would having access to prior years information be helpful in this analysis?
QUESTION THREE – 20MARKS (a) Discuss the functions of financial forecasting. (5 marks)
(b) Explain the indicators of financially distressed firms. (5 marks)
(c) Condensed financial data for smart Ltd for the year ended 31 December 2011 were as follows: 31 Dec 2011 Cash 160,800 Receivables 123,200 Inventories 112,500 Investment 90,000 Plant asset 240,000 726,500 Accounts payable 130,000 Mortgage payable 50,000 Common stock (Par value sh. 10 each) 175,000 Retained earnings 371,500 726,500
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Income statement for the year ended:
31 Dec 2011 Sales 460,000 Less cost of sales 130,000 330,000 Selling and administrative expense 52,000 Income taxes 5,000 Net interest charges 15,000 72,000 Net income 258,000 Dividend paid 20,000 Income retained in business 238,000 The companies market value of common stock is sh.12 each. - Calculate Altman Z score and interpret your result. (10 marks)
QUESTION FOUR – 20 MARKS (a) Write short notes on the following: i. Information asymmetry (4 marks) ii. Technically insolvent (4 marks) iii. Trend analysis (4 marks)
(b) The following is an income statement extract for Bidii ltd for the year ended 31st December, 2011 and 2012. 31st Dec 2012 2011 Net sales 1,000,000 600,000 Cost of goods sold 700,000 360,000 Gross profit on sales 300,000 240,000 Expenses including taxes 250,000 180,000 Net income 50,000 60,000
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Required: i. Prepare common size income statement for Bidii ltd and interpret your answer. (4 marks)
ii. Compute horizontal analysis for Bidii Ltd and interpret your answer. (4 marks) QUESTION FIVE – 20MARKS (a) Start group companies have maintained a stable and relatively high ROE of approximately 18% over the last three years. The companies selected balance sheet and income statement were as given below:
Start group of companies Selected balance sheet and income statement items(millions)
Year 2003 2004 2005 Net income 21.5 22.3 21.9 Sales 305 350 410 Equity 119 124 126 Assets 230 290 350
Required: Use traditional dupont analysis to decompose this ROE into its three components and comment on the trends in company performance. (12 marks)
(b) Write short notes on the following qualitative methods of forecasting. i. Sales force composite (4 marks) ii. Delphi method (4 marks)
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