FINANCIAL STATEMENT ANALYSIS DECEMBER 2023 PAST PAPER

THURSDAY: 7 December 2023. Afternoon Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.

QUESTION ONE

1. Explain the term “financial reporting framework” as used in financial statements analysis. (2 marks)

2. Describe THREE analytical tools and techniques used in financial statements analysis. (6 marks)

3. Analyse the recognition and measurement of non-current assets held for sale according to the International Financial Reporting Standards (IFRS) 5 – Non Current Assets Held for Sale and Discontinued Operations. (2 marks)

4.  Propose FOUR indicators of poor quality financial statements. (4 marks)

5. Motown Ltd. sponsors a defined benefit pension plan. The corporation’s actuary provides the following information about the plan:

Required:
Calculate the amount of other comprehensive income (gain/loss) as at 31 December 2022. Assume that on 1 January 2022 the balance was zero. (6 marks)

(Total: 20 marks)

 

QUESTION TWO

1. Explain “income smoothing patterns” as an earnings management strategy. (2 marks)

2. Analyst forecasts, reports and recommendations along with other alternative information sources are a major competitor for accounting information.

Required:
Explain THREE advantages offered by these alternative sources of information for analysis. (6 marks)

3. The following information relates to Kiwi Ltd.:

Required:
Calculate the following for the year 2022:

Return on Net Operating Assets (RNOA). (4 marks)

Return on common equity (ROCE) as a function of return on Net Operating Assets (NOA), financial
leverage and spread. (4 marks)

4. Wyatt Ltd. has a deferred tax asset account with a balance of Sh.150,000 at the end of year 2021 due to a single cumulative temporary difference of Sh.375,000. At the end of year 2022, this same temporary difference has increased to a cumulative amount of Sh.500,000. Taxable income for year 2022 is Sh.850,000. The tax rate is 30% for all years.

Required:
Determine and record income tax expense, deferred income taxes and income taxes payable for year 2022, assuming that it is probable that the deferred tax asset will be realised. (4 marks)

(Total: 20 marks)

QUESTION THREE

On 1 October 2021, Hunters Limited acquired an 80% controlling interest in Spear Limited when retained earnings of Spear Limited amounted to Sh.230 million. The acquisition consideration comprised of an immediate cash payment of Sh.404 million and a share exchange on the basis of one (1) ordinary share of Hunters Limited for every two (2) ordinary shares acquired in Spear Limited. The fair value of Hunters Limited’s shares at 1 October 2021 was Sh.20 per share.
No accounting entries have been made in respect of the share exchange consideration.

The following draft statements of financial position relate to Hunters Limited and Spear Limited as at 30 September 2023:

Additional information:
1. The fair values of Spear Limited’s net assets approximated their carrying values with the exception of an item of plant whose fair value exceeded its carrying amount by Sh.50 million. The plant had a remaining useful life of five years on 1 October 2021.
2. The group policy is to measure the non-controlling interests at their proportionate share of net assets in subsidiaries at the date of acquisition.
3. During the year ended 30 September 2023, Spear Limited sold goods worth Sh.100 million to Hunters Limited and reported a gross profit margin of 20% on this sale. Three quarters of the goods had been sold to third parties by Hunters Limited as at 30 September 2023.
4. On 1 October 2021, Hunters Limited also acquired 25% shareholding in Arrow Limited for Sh.78 million paid in cash. The retained earnings of Arrow Limited as at 30 September 2021 and 2023 were Sh.228 million and Sh.372 million respectively.
5. Impairment tests on 30 September 2023 revealed that goodwill on acquisition of Spear Limited was impaired to the extent of 10%. Investment in Arrow Limited was not impaired.

Required:

Determine the value of investment in Arrow Limited as at 30 September 2023. (2 marks)

Calculate the value of goodwill arising on acquisition of Spear Limited. (6 marks)

Prepare a consolidated statement of financial position as at 30 September 2023. (12 marks)

(Total: 20 marks)

 

QUESTION FOUR

1. Highlight FOUR objectives of benchmarking to a financial analyst. (4 marks)

2. Explain THREE steps followed while conducting financial statements analysis. (6 marks)

3. The shareholders’ equity section of the statement of financial position for Kaunda Ltd. included the following accounts as at 31 December 2020

During the year 2021, the following transactions affected the stock of the firm:
1. On March 2021, the firm issued 10 million of its 9.2% preferred shares, Sh.1 par value per share for
Sh.44 per share.
2. On November 2021, 1 million common share, Sh.1 par value per share, were issued in exchange for
customised machine. The firm stock was listed at Sh.10 per share.
3. On November 2021, 1 million of the common shares and Sh.1 million preferred shares were sold for
Sh.60 million. The preferred shares had not traded since March and their market value was uncertain.
4. The net income for 2021 was Sh.400 million and preferred shareholders were paid Sh.1 million cash
dividends.
During year 2022, the firm reacquired common shares and sold shares in two separate transactions later
that year as follows:
5. The firm purchased 6 million shares at Sh.10 per share.
6. The firm sold 2 million shares at Sh.12 per share.
7. The firm sold 2 million shares at Sh.7 per share.
8. The net income for year 2022 was Sh.400 million and preferred shareholders were paid Sh.1 million cash dividends.

Required:
Prepare the shareholders’ equity section of the firm’s statement of financial position as at the years ended 31 December 2021 and 31 December 2022 assuming the shares traded in 2022 are considered to be treasury stock. (10 marks)

(Total: 20 marks)

 

QUESTION FIVE

1. Explain the term “DuPont analysis” as used in financial statement analysis. (2 marks)

2. Discuss THREE challenges currently facing financial analysts in your country while undertaking financial statements analysis. (6 marks)

3.  Gerand Karim is a financial analyst who is following Tala Ltd., and has used the following proforma income statement and statement of financial position for year ended 31 October 2023 and is projecting the firm’s earnings per share for year ending 31 October 2024 and the statement of financial position for further analysis. He makes the following assumptions for year 2024 compared with year 2023:

1. Unit sales will rise by 7% and prices will remain the same.
2. Synergies from acquisitions will add an additional Sh.200 million to sales.
3. Gross profit margin as a percentage of net sales will improve by 1.5 percentage points.
4. Selling, general and administrative expenses as a percentage of net sales will improve by 0.7 percentage points.
5. Depreciation expense will rise by 5 per cent.
6. Goodwill amortisation will rise by Sh.10 million.
7. Long term debt expense will remain the same.
8. Interest rates will decrease, reducing interest expense by Sh.10 million.
9. The income tax rate will rise by 0.5%.
10. Average share outstanding will remain the same.
11. Dividend per share will rise by 10%.
12. The average collection period of accounts receivable will decrease from 53 days to 48 days based on
year-end accounts receivable.
13. Average days inventory will decrease from 92 to 80 based on year-end inventory.

Selected projected items of the year 2024 statement of financial position are provided below:

Required:
Prepare the following for the year ending 31 October 2024:

Projected income statement. (6 marks)

Projected statement of financial position. (6 marks)

(Total: 20 marks)

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