FINANCIAL STATEMENTS ANALYSIS FOR CREDIT MANAGERS AUGUST 2023 PAST PAPER

TUESDAY: 22 August 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. Credit managers are expected to apply cash flow management strategies when undertaking credit planning and forecasting.
In relation to the above statement, explain TWO cash flow management strategies. (4 marks)

2. In the context of credit risk analysis for credit finance, explain the following risks:

Default risk. (2 marks)

Concentration risk. (2 marks)

Downgrade risk. (2 marks)

3. Explain how benchmarking in finance is used in financial statements analysis. (4 marks)

4. List SIX importances of working capital management. (6 marks)

(Total: 20 marks)

 

QUESTION TWO

1. Explain the term “financial statements analysis”. (2 marks)

2. Highlight SIX advantages of financial statements analysis. (6 marks)

3. Identify TWO reasons for readjustment of income statement for lending purposes. (2 marks)

4. The following draft financial statements for the year ended 30 June 2023 were extracted from the financial records of Ridge Limited with a view of cash flow statement analysis:

Additional information:
1. During the year ended 30 June 2023 an item of plant was disposed of for cash proceeds of Sh.2,600,000. The plant had cost Sh.5,500,000 and had an accumulated depreciation of Sh.3,180,000. Any gain/loss on disposal of plant has been included within cost of goods sold.
2. Depreciation charged on property, plant and equipment amounted to Sh.5,680,000 during the year to 30 June 2023.
3. In the year ended 30 June 2023 the company issued new bank loans amounting to Sh.6,000,000.
4. Investment income appearing on the income statement comprises of interest received from interest-bearing debt investment.

Required:
Statement of cash flows for Ridge Limited for the year ended 30 June 2023. (10 marks)

(Total: 20 marks)

 

QUESTION THREE

1. The conceptual framework under planning regulations of published financial statements states that “information contained in the statements should have certain specified quantitative characteristics”.
Outline TWO quantitative characteristics of information from published financial statements. (4 marks)

2. Describe the term “CAMEL rating system”. (4 marks)

3. Explain how trend analysis is used to evaluate the financial health of an organisation. (2 marks)

4. The following final accounts were obtained from the books of Cosmos Ltd. for the year ended 30 June 2023 and 30 June 2022.

Required:

Statement of profit or loss trend analysis. (4 marks)

Statement of financial position trend analysis. (6 marks)

(Total: 20 marks)

QUESTION FOUR

1. Highlight TWO types of financial risks in a business. (2 marks)

2. State FOUR warnings signs of an insolvent company. (4 marks)

3. Examine THREE cash flow drivers in a business. (6 marks)

4. The following is the statement of profit or loss of Xylem Ltd. for the years ended 30 June 2022 and 30 June 2023.

Required:
Prepare a common size statement of income for the years 30 June 2023 and 30 June 2022. (8 marks)

(Total: 20 marks)

 

QUESTION FIVE

1. For financial reports to be useful and reliable to both internal and external shareholders, they must be accurate in preparation and presentation.

Required:
In view of the above statement, explain TWO impacts of inaccurate financial reporting. (4 marks)

2. The following are the summarised financial statements of Masomo Limited:

Required:
For years 2022 and 2023, calculate:

Return on capital employed (ROCE). (2 marks)

Current ratio. (2 marks)

Quick ratio. (2 marks)

Gearing ratio. (2 marks)

Non-current assets turnover. (2 marks)

Working capital turnover. (2 marks)

In reference to the above ratios (i) to (vi), comment on profitability, liquidity, gearing and working capital of Masomo Ltd. (4 marks)

(Total: 20 marks)

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