BAF4101 FINANCIAL STATEMENT ANALYSIS-CAT1 &2

ATTEMPT ALL QUESTIONS

QUESTION ONE

a) Explain the indicators of financial distress and suggest the options available to an organization
in times of distress to control the situation (8 marks)

b) Discuss the techniques of financial statement analysis (7)

QUESTION TWO
The following are the summarized financial statements of MURANO limited:

Trading and profit and loss account for the year ended 31 October.
2002 2003
Sh.’000 Sh.’000
Sales 93,500 111,350
Cost of sales (55,120) (72,970)
Gross profit 38,380 38,380
Expenses (26,230) (23,960)
Net profit before interest and tax 12,150 14,420
Loan interest _(450) __(375)
Net profit before tax 11,700 14,045
Taxation (3,510) (5,413.5)
Net profit after tax 8,190 8,631.5
Dividend (6,00) (6,000)
Retained profit 2,190 2,631.5

Balance sheet as at 31 October

2002 2003
Sh.’000 Sh.’000 Sh.’000 Sh.’000
Fixed assets:
Freehold premises 10,500 10,500
Plant and equipment 7,200 9,500
Motor vehicles _5,350 23,050 _7,300 27,300
Current assets:
Stock 12,500 11,800
Debtors 9,850 8,900
Bank balance and cash in hand _5,950 28,300 5,864.5 26,564.5
Current liabilities:
Creditors 8,350 7,830
Taxation 3,510 5,413.5
Dividend 3,000 (14,860) 3,000 (16,243.5
)
36,490 37,621
Ordinary share capital 30,000 30,000
Reserves _3,490 _5,121
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 33,490 35,121
15% loan _3,000 _2,500
36,490 37,621

Note:
1. 80% of the sales are on credit
2. The stock as at 31 October 2001 was valued at Sh.13,000,000

Required:
(a) Calculate two ratios for each classification identified below for the financial years ended 31 October
2002 and 2003:
(i) Profitability ratios (4 marks)
(ii) Liquidity ratios (4 marks)
(iii) Gearing ratios (4 marks)
(iv) Activity ratios (4 marks)

Answers:

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(b) Comment on MURANO Ltd’s profitability and liquidity positions. (4 marks)
Answer:
i) Profitability
The ratios show a small growth in profitability of the enterprise as portrayed by an increase in

ROCE of 5 % from 33.3% in 2002 to 38.3% in 2003. This indicates that the company has been
utilizing it’s assets optimally so as to come up with high profits i.e. the returns from assets
investment has increased.

ii) Liquidity
Current ratio = 0.3 x 100 = 16 % decline 1.9

Quick ratio = 0.2 x 100 % = 18 % decline

1.1

The decrease in the two liquidity ratios show that the companies ability to meet its short term
maturing obligations (i.e. current liabilities) has decreased and as such the companies operations
are riskier now.

The current liabilities have increased at a higher rate than the current assets.

iii) Gearing
The gearing ratio as indicated by the Debt Equity ratio and the gearing/debt ratio has decreased
slightly from 9% in both cases to 8.5%. This indicates that the companies use of non owner
supplied funds i.e. debt has decreased slightly. This means that the company has become less riskier
to invest in.

This could have been caused by a decrease in the 15% loan from Shs 3,000,000 to Shs 2,500,000
which may have been due to repayment of part of it. Further the Revenue reserves of 2003 are
higher than those of 2002

QUESTION THREE

Given below is information relating to TULOW Ltd for the year 2020 and 2019
TULOW LTD

COMPARATIVE BALANCE SHEETS

DECEMBER 31,2019 AND 2018

2019
2018
ASSETS
 
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CURRENT ASSESTS
$
$
Cash
79,000
42,000
short-term investments
65,000
96,000
Accounts receivables, Net
120,000
100,000
Merchandise Inventory
250,000
265,000
Total Current Assests
514,000
503,000
Plant Assets
 
 
Store Equipment net
400,000
350,000
Office Equipment net
45,000
50,000
Buildings
625,000
675,000
Land
100,000
100,000
Total Plant Assets
1,170,000
1,175,000
TOTAL ASSETS
1,684,000
1,678,000
 
 
 
LIABIILITIES
 
 
CURRENT LIABILITIES
 

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Accounts Payables
164,000
190,000
Short Term notes Payable
75,000
90,000
Taxes Payables
26,000
12,000
Total current liabilities
265,000
292,000
Long Term Liabilities
 
 
Notes payable(secured by mortgage on building)
400,000
420,000
Total Liabilities
665,000
712,000
Stockholders Equity
 
 
Common stock, $5 par value
475,000
475,000
Retained Earnings
544,000
491,000
Total Stockholders Equity
1,019,00
966,000
Total liabilities & Equity
1,684,000
1,678,000

COMPARATIVE INCOME STATEMENTS

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FOR YEARS ENDED DECEMBER 31,2019 AND 2018
 
2019
2018
Sales
2,486,000
2,075,000
Cost of Goods Sold
1,523,000
1,222,000
Gross profit
963,000
853,000
Operating Expenses
 
 
Advertising Expenses
145,000
100,000
Sales Salaries Expenses
240,000
280,000
Office Salaries Expenses
165,000
200,000
Insurance Expense
100,000
45,000
Supplies Expense
26,000
35,000
Depreciation Expense
85,000
75,000
Miscellaneous Expenses
17,000
15,000
Total Operating Expenses
778,000
750,000
Operating Income
185,000
103,000
Interest Expense
44,000
46,000
Income before Taxes

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 141,000
57,000
Income Taxes
47,000
19,000
Net Income
94,000
38,000
 
 
 
Earnings Per Share
0.99
0.4

Required:

i. Prepare a comparative income statement for TULOW ltd. ( 10 MARKS)

Answer:

Income Statement

2020
2019

2020
2019

Sales
$ 2,486,000
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$ 2,075,000
$ 411,000
20%
100%
100%

Cost of Goods Sold

1,523,000
1,222,000
$ 301,000
25%
61%
59%

Gross Profit
963,000
853,000
$ 110,000
13%
39%
41%

Operating expenses

$ -

Advertising Expense
145,000
100,000
$ 45,000
45%
6%
5%

Sales salaries Expense

240,000
280,000
$ (40,000)
-14%

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 10%
13%

Office salaries expense

165,000
200,000
$ (35,000)
-18%
7%
10%

Insurance expense
100,000
45,000
$ 55,000
122%
4%
2%

Supplies expense
26,000
35,000
$ (9,000)
-26%
1%
2%

Depreciation expense
85,000
75,000
$ 10,000
13%
3%
4%

Misc. espense
17,000
15,000
$ 2,000
13%
1%
1%

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 Total operating expenses
778,000
750,000
$ 28,000
4%
31%
36%

Operating Income
185,000
103,000
$ 82,000
80%
7%
5%

Interest expense
44,000
46,000
$ (2,000)
-4%
2%
2%

Income before taxes

141,000
57,000
$ 84,000
147%
6%
3%

Income taxes
47,000
19,000
$ 28,000
147%
2%
1%

Net Income
$ 94,000
$ 38,000

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$ 56,000
147%
4%
2%

ii. Balance sheet

Answer:

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 Balance Sheet
-

2020
2019
$

2020
2019

Assets:

$ -

Current

$ -

Cash
$ 79,000
$ 42,000
$ 37,000
88%
5%
3%

Short-term investment
65,000
96,000
$ (31,000)
-32%

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 4%
6%

Accounts receivable, net

120,000
100,000
$ 20,000
20%
7%
6%

Merchandise Inventory
250,000
265,000
$ (15,000)
-6%
15%
16%

Total Curent Assets

514,000
503,000
$ 11,000
2%
31%
30%

Plant assets

$ -
-

Store Equipment, net

400,000
350,000
$ 50,000
14%
24%
21%

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 Office equipment, net
45,000
50,000
$ (5,000)
-10%
3%
3%

Building, net
625,000
675,000
$ (50,000)
-7%
37%
40%

Land
100,000
100,000
$ -
0%
6%
6%

Total plant assets

1,170,000
1,175,000
$ (5,000)
0%
69%
70%

Total assets
1,684,000
1,678,000
$ 6,000
0%
100%
100%

iii. Comment on the performance of TULOW ltd (5 marks)

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Answer:

- The performance is inconsistent

- Does not adhere to current norm

- Comparative analysis for both income and balance sheet is of low percent.

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