Apt Financial Consultants CPA Reviews

Q1 (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 – 11 months

2
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

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:

Business A Business B
Current Ratio 2:1 1.5:1
Quick Ratio 1.7:1 0.7:1
Return on Capital Employed (ROCE) 20% 17%
Return on Owners’ Equity (ROE) 30% 18%
Debtors’ Turnover (days) 63 days 21 days
Creditors’ Turnover (days) 50 days 45 days
Gross Profit Margin 40% 15%
Net Profit Margin 10% 10%
Stock Turnover (days) 52 days 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 profitability, liquidity, efficiency
and gearing of the two businesses.

(8 Marks) (Total: 20 Marks)

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Apt Financial Consultants CPA Reviews
Q2. (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. Amana Ltd.
Tshs.'000' Tshs.'000'
Share Capital & Reserves

Issued Capital 350,000 470,000

Capital Reserves 65,000 35,000
Revenue Reserves 185,000 287,000

Non Current Liabilities

10% Debentures 55,000 64,000

Current Liabilities

Bank Overdraft 21,000 20,000

Trade Creditors 97,000 132,000
Other Current Liabilities & Provisions 42,000 48,000

Total Owners Equity & Liabilities 815,000 1,056,000

Non Current Assets at Book Values

Land and Buildings 286,000 381,000

Plant and Equipment 218,000 342,000
Motor Vehicles 59,000 62,000

Current Assets

Stock 122,000 97,000

Trade Debtors 124,000 166,000
Cash 6,000 8,000

Total Assets 815,000 1,056,000

Profit or Loss Accounts for the Year Ended 30th June 1995
Bungoni Ltd. Amana Ltd.
TShs.'000' TShs.'000'

Sales 747,000 570,000

Cost of Sales
Opening Stock 102,000 92,000
Purchases 588,000 381,000
Closing Stock (122,000) (96,000)
Cost of Sales 568,000 377,000

Gross Profit 179,000 193,000

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Apt Financial Consultants CPA Reviews

Selling and Distribution 64,000 60,000

Administration & Management 31,000 29,000
Finance Costs 9,000 8,000

Total Expenses 104,000 97,000

Profit for the Period 75,000 96,000

Taxation 22,500 28,800
Profit After Tax 52,500 67,200
Dividend Proposed 24,000 37,000
Transfer to Revenue Reserve 28,500 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 2004 2003 2002 2001 2000

Turnover (shs. Million) 488 439 381 304 268
Current cost before tax (shs. Million) 38 19 16 14 13
Current cost net assets per share 0.716 0.632 0.572 0.408 0.358

The price index over the last five years has been:

Year end Average

2004 188.4 182.0
2003 204.2 197.1
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Apt Financial Consultants CPA Reviews
2002 239.4 223.5
2001 275.6 263.7
2000 308.8 295.0

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 - 28%

Annual Sales : Stock at year-end - 6.5 times
Debtors : Annual Sales/12 - 3 months
Annual Sales per employee - shs. 4,800
Average payroll cost per employee - 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
Deduct: Tax 82 170 108
Preference Div. 15 15 15
Ordinary Div. 70 105 105
167 290 228
Profit Retained 55 70 22
==== ==== ====
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Apt Financial Consultants CPA Reviews

BALANCE SHEET AT YEAR END

Current Assets 1990 1991 1992
Stocks 515 627 655
Debtors 1,117 1,110 1,012
Cash and Short-term Investments 228 440 448
1,860 2,177 2,115
Current Liabilities
Trade Creditors 580 740 807
Other 190 325 233
770 1,065 1,040
Net Current Assets 1,090 1,112 1,075
==== ==== ====
Fixed Assets
Land & Buildings(Revalued 1990) 1,357 1,357 1,357
Others-at cost 2,250 2,350 2,412
Less: Depreciation 1,962 1,042 2,097
288 308 315
1,645 1,665 1,672
Net assets employed 2,735 2,777 2,747
==== ==== ====
Average number of employees 1,387 1,415 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. (5 marks)

(b) 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.

The ratios prepared by the Assistant Accountant for Modern Tractors Limited and the industry
averages for 2004 are set out below:-

Modern Tractors Ltd. Industry average

2002 2003 2004 2004
Sales growth % 30.00 40.00 9.52 8.25

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Apt Financial Consultants CPA Reviews
Sales/total assets 1.83 2.05 1.60 2.43
Sales/net fixed assets 2.94 3.59 2.74 16.85
Sales/working capital -21.43 -140.00 38.33 10.81
Sales/debtors 37.50 70.00 92.00 16.00
Gross profit/sales % 18.67 22.62 19.57 23.92
Profit before tax/sales % 8.00 17.62 11.74 4.06
Profit before interest/interest 6.45 26.57 14.50 4.95
Profit after tax/total assets % 9.76 27.80 13.24 8.97
Profit after tax/equity % 57.14 75.00 39.58 28.90
Net fixed assets/total assets % 62.20 57.07 58.54 19.12
Net fixed assets/equity 3.64 1.54 1.75 0.58
Equity/total assets % 18.29 37.07 33.45 32.96
Total liabilities/total assets % 81.71 62.93 66.55 69.00
Total liability/equity 4.47 1.70 1.99 2.40
Long-term debt/total assets % 36.59 18.54 29.27 19.00
Current liabilities/total assets % 45.12 44.39 37.28 50.00
Current assets/current liabilities 0.84 0.97 1.11 1.63
(Current assets – Stock)/Current liabilities 0.43 0.54 0.72 0.58
Stock/total assets % 17.07 18.54 14.63 41.90
Cost of sales/stock 8.71 8.55 8.81 4.29
Cost of sales/creditors 6.10 6.25 6.17 12.87
Debtors/total assets % 4.88 2.93 1.70 18.40
Cash/total assets % 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