FINANCIAL STATEMENTS ANALYSIS FOR CREDIT MANAGERS APRIL 2023 PAST PAPER

TUESDAY: 25 April 2023. Morning 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.           Summarise SIX steps followed in analysing the financial statements of an entity.    (6 marks)

2.         Highlight FOUR red flags that credit analysts should focus on when conducting the analysis of financial statements for lending purposes.     (8 marks)

3.          Explain THREE challenges faced in the analysis of the financial statements.     (6 marks)

(Total: 20 marks)

 

QUESTION TWO

1.          Explain the meaning of the following terms as used in credit analysis:

Credit risk analysis.     (2 marks)

Structural credit analysis model.    (2 marks)

Reduced-form credit analysis model.  (2 marks)

2.          Describe FOUR components of a credit analyst’s report.     (4 marks)

3.         Explain FOUR reasons that would motivate a credit manager to issue low quality credit report.    (4 marks)

4.          The following financial information relates to PM Limited for the year ended 31 December 2022:

Required:

Calculate the length of the cash operating cycle.      (6 marks)

(Total: 20 marks)

 

QUESTION THREE

1.         The following is an extract of Blue Bell Ltd. financial statements for the last two years as at 31 March:

Sales amounted to Sh.350,000,000 in year 2022 and Sh.300,000,000 in year 2023.

Required:

For each of the years ended 31 March 2022 and 2023, calculate the following ratios:

Short term solvency.    (2 marks)

Quick ratio.   (2 marks)

Inventory current asset ratio.     (2 marks)

Long term solvency ratio.   (2 marks)

Proprietary ratio.     (2 marks)

2.         The following statements were obtained from the financial records of Summer Limited for the years ended 31 March 2022 and 31 March 2023:

Statement of profit or loss for the year ended 31 March:

Required:

Horizontal analysis statements of profit or loss for the year ended 31 March 2023.   (10 marks)

(Total: 20 marks)

 

QUESTION FOUR

1.          Outline SIX limitations of Bankruptcy Prediction Models.   (6 marks)

2.          The following draft cash flow statement for the year ended 30 September 2022, was extracted from the financial records of Cossim Limited:

Additional information:

1. The average current liabilities was Sh.18,040,000.
2. The total liabilities both current and non-current amounted to Sh.52,900,000.
3. The earnings before interest and taxes amounted to Sh.14,840,000.
4. The net income was Sh.7,430,000

Required:

Current liabilities ratio.    (2 marks)

Cash flow coverage ratio/solvency ratio.   (2 marks)

Cash interest coverage ratio.   (2 marks)

Operating cash flow ratio.  (2 marks)

Cash flow net income.    (2 marks)

3.          Comment on the result of (b) (i-v) above.     (4 marks)

(Total: 20 marks)

 

QUESTION FIVE

1.           Financial statement analysis is done in different ways using various tools and techniques.

With reference to the above statement, explain THREE tools and techniques available for financial statement analysis.    (6 marks)

2.         With regard to credit risk analysis, clearly distinguish between “quantitative credit analysis” and “qualitative credit analysis”.    (4 marks)

3.         The following trial balance was extracted from the books of Mondana Limited as at 31 March 2023:

Directors have proposed a dividend of Sh.2 per share after transferring Sh.1.2 million to general reserves.

Required:

Statement of profit or loss for the year ended 31 March 2023.   (10 marks)

(Total: 20 marks)