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  • 20 Marks

CML – OCT 2022 – L3 – Q1 – Lending to Iron Rod Manufacturing Company

Evaluate a request for GHC 3.0 million working capital finance from a long-term customer manufacturing iron rods, aiming to supply government projects, considering eroded profits and provided financials.

Joojo Metals Ltd… has been your customer for the past twenty years. The company manufactures iron rods used in the construction of roads and houses and supplies wholesalers in Accera, Akim Oda, Nkawkaw, Nsawam and its environs.

The company sources its raw materials of iron scraps and ingons both locally and abroad, withThe company hasThe company has has been its profits eroded in 20221 due to the rapidly depreciating exchange rate of the cedi against foreigni currencies. The company has also faced increasing competition from other producers in Accera and Takorardi as well as cheaper imports from China China.

Joojo Banful owns $60%$ of the shares of the the company, whilst the remaining $ 40%$ is held by his childhood friend Fifii Awotwe who takes no active part in the management of the company.

Joojo serves as the CEO and General Manager of the company, whilst his wife, Mama Nelson, a chartered accountant serves as the Finance Director of the company. His factory Manager is Jonas Dadzzie, aged 62, a vastly experienced factory manager he recruited only a year ago. In addition, he has a pool of twenty skilled workers many of whom were poached from other companies.

The principal shareholder of the company, Joojo Banful is a noted supporter of the ruling government though he persistently denies that he has provided funding for the government.

The company’s factory is located at Tema in the Greater Accera Region of the country on a wide expanse of land. It is fitted with three huge warehouses, which are well stocked at all times. The company also has three articulator trucks which it uses for its supplies.

Jonas comes to you with a business proposition involving the provision of working capital finance for the supply of of iron rods to major government building construction projects running across the country. He tells you that this could give the business a major breakthrough and bring gains also to your bank. He is asking for working capital finance of GHC 3.0 million for this major expansion in scope of operations.

How would you respond to this proposition with respect to the provided financial statements and ratios on pages 3.4 & 5?

Profit and Loss Extracts for the year ending 30 Dec

Ratios

2019

2020

2021

[30 Marks]

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  • 20 Marks

FRPA – APRIL 2023 – L3 – Q4 – Ratio Analysis and Performance Report for Loan Assessment

Compute five specified ratios for 2021 and 2020 using provided financial statements and write a report analyzing the company's performance comparing the two years.

As the Credit Officer for TCB Bank, Alpha Technology Solutions Limited has submitted its financial statements as part of the process to secure a loan of GHS 5million. You are required to:
i. Compute the following ratios for 2021 and 2020.
• Gross Profit Margin
• Return on Capital Employed
• Acid Test Ratio
• Payable period
• Debt to equity

ii. Write a report to the Head of Credit analyzing the performance of the company for the 2020 and 2021. Your report should explain the ratios and analyze them in relation to the previous year.

ALPHA TECHNOLOGY SOLUTIONS LIMITED STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 2021

2021 (GHS) 2020 (GHS)
NON-CURRENT ASSETS
Property, Plant and Equipment 438,631 428,210
Fixed Deposit – 400,000
Total Non-Current Assets 438,631 828,210
CURRENT ASSETS
Inventories 2,284,401 2,409,650
Accounts Receivable 2,712,529 1,368,010
Cash on Hand and Bank 642,951 2,177,519
Total Current Assets 5,639,881 5,955,179
TOTAL ASSETS 6,078,512 6,783,389
2021 (GHS) 2020 (GHS)
LIABILITIES AND SHAREHOLDERS’ EQUITY
NON-CURRENT LIABILITIES
Loans 115,484 115,484
Deferred Tax 18,127 22,110
Total Non-Current Liabilities 133,611 137,594
CURRENT LIABILITIES
Accounts Payable 1,843,574 2,869,489
Current Tax 30,512 129,464
Total Current Liabilities 1,874,086 2,998,953
Total Liabilities 2,007,697 3,136,547
SHAREHOLDERS’ EQUITY
Stated Capital 1,240,000 1,240,000
Retained Earnings 2,830,815 2,406,842
Total Shareholders’ Equity 4,070,815 3,646,842
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 6,078,512 6,783,389

ALPHA TECHNOLOGY SOLUTIONS LIMITED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31ST DECEMBER 2021

2021 (GHS) 2020 (GHS)
Revenue 11,180,208 12,957,649
Direct Cost (7,446,676) (9,703,650)
Gross Profit 3,733,532 3,253,999
Other Income – 23,436
Administrative Expenses (3,168,234) (2,483,480)
Operating Profit 565,298 793,955
Income Tax Expense (141,325) (198,489)
Profit/(Loss) After Taxation 423,973 595,466

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  • 20 Marks

CML – APRIL 2023 – L3 – Q3 – Critical Examination of Agro-Processing Equipment Finance

Critically examine a USD 540,000 equipment purchase request from Pistashio Cashew Nuts Ltd, using background and financials (exchange rate GHC13/USD).

Pistashio Cashew Nuts Ltd. is a producer of roasted cashew nuts for sale in the local and international markets. The company was established fifteen years ago by Professor Joel Amo, a professor in Agriculture at the University of Ghana with some support from his expatriate friend Mr. Peter Deitrich, a German national. Mr. Deitrich aged 75 is an experienced industrialist with vast experience in many agro-based outfits. He serves as the Board Director of the Company. Mr. Joel aged 70 also serves as the CEO and COO for the business.

Mrs. Amo aged 65 a seasoned chartered accountant serves as the CFO and Head of HR for the company. She joined the company five years ago when she retired as Head of Internal Audit for Bank of Ghana.

Mr. Kweku Dadzie aged 68 has served as the factory manager for the company since his retirement from Gold Coast Aluminum Works as factory supervisor eight years ago.

The company is embarking on an expansion project in order to meet the burgeoning demand for its product which is selling very fast on the international market as well as the local market. The company supplies roasted cashew to a number of hotels and supermarkets in the country (about 40% of its output and exports the rest to UK, France, Greenland USA and South America.

The company has a state of the art factory located at Ada a few miles drive from Tema. Your visit to the premises show that the machinery in use are rather aged which Joel explains as the reason for the fast deterioration in account performance over the past year.

The customer tells you he has received an increase in orders from overseas which makes it imperative to procure a larger set of cashew roasting and packaging equipment. He shows you an invoice for a set costing in total USD 540,000 including equipment cost, transportation costs and installation costs. (USD exchange rate is GHC13.00/USD)

Critically examine this proposition using the information above and the related financial statements provided below.

Pisticashio Cashew Nuts Ltd Profit and Loss Extracts for the year ending 31 Dec

2020 GHC 2021 GHC 2022 GHC
Sales 1,850,000 2,571,500 3,985,825
Opening Inventory 245,000 289,000 442,800
Purchases & Production 1,239,500 1,748,620 2,790,078
1,484,500 2,037,620 3,232,878
Closing Inventory 289,000 442,800 770,500
Cost of Sales 1,195,500 1,594,820 2,462,378
Gross Profit 654,500 976,680 1,523,447
Overheads 175,000 298,000 476,800
Depreciation 259,000 312,400 372,400
Operating Profit 220,500 366,280 674,247
Interest Paid 125,000 145,000 158,000
Profit Before Tax 95,500 221,280 516,247
Tax 23,875 55,320 129,062
Profit After Tax 71,625 165,960 387,185
Noncurrent Assets 2020 2021 2022
Building 684,000 831,600 929,200
Plant & Machinery 360,000 240,000 390,000
Motor Vehicles 270,000 380,000 360,000
Furniture and Fixtures 110,000 160,000 110,000
Total 1,424,000 1,611,600 1,789,200
Current Assets
Inventory 289,000 442,800 770,500
Receivables 258,000 254,700 574,000
Prepayments 25,600 36,800 47,800
Bank 125,000 85,400 75,800
697,600 819,700 1,468,100
Current Liabilities
Trade Creditors 148,000 184,700 435,200
Overdraft 854,900 1,544,920 1,426,827
Total Current Liabilities 1,002,900 1,729,620 1,862,027
Net Current Assets -305,300 -909,920 -393,927
Net Assets 1,118,700 701,680 1,395,273
Capital
Share Capital 1,000,000 500,000 1,000,000
Income Surplus 118,700 201,680 395,273
1,118,700 701,680 1,395,273

Ratios

2020 2021 2022
Sales Growth 39.00% 55.00%
Receivable Days 51 36 53
Payable Days 44 39 57
Inventory Turnover Days 88 101 114
Gross Margin 35% 38% 38%
Overhead % 9% 12% 12%
Net Margin 5% 9% 13%
Interest Cover 1.76 2.53 4.27
Current Ratio 0.70 0.47 0.79
Quick Ratio 0.41 0.22 0.37
Tax Rate 25% 25% 25%
Dividend Payout RATIO 50% 50% 50%
Inventory to Sales 16% 17% 19%
Receivables to Sales 14% 10% 14%
Payables to Sales 8% 7% 11%

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  • 20 Marks

CML – APRIL 2023 – L3 – Q2 – Critical Examination of Restaurant Property Acquisition Loan

Critically examine a loan request from Aduane Restaurants and Mobile Food Ltd for 80% financing (GHC 640,000) of a new premises purchase, using company background and financials.

Aduane Restaurants and Mobile Food Ltd. has operated an account with us for the past ten years since the inception of the company. The company has ten restaurants located at strategic parts of Accra, two at Takoradi and two in Kumasi.

The CEO of the company Mr. Sampson Arthur has come to see you for a discussion about the future of the company. Due to road construction, his key head office restaurant branch located at East Legon is no longer viable. He has identified another premises located close to the center of Accra which he wishes to acquire. According to him the vendors, who are siblings who inherited the property from their deceased parents, wish to dispose of the property in order to avoid unnecessary disputes among themselves. The property is also a bit dilapidated and would need to be overhauled. The company has been given a favourable price of GHC 800,000.00 to facilitate a quick sale. The company is able to provide 20% of the purchase and is asking the bank to finance the difference.

The company provides services primarily to workers within their vicinity. The company has become a household name due to the quality of their food and services. The company has a fleet of vans which assist in the delivery, one van for each branch. The ambience of their premises is also attractive and their restaurants are always milling with clientele mostly bank staff, civil servants and staff of private companies, at lunch time. They are also a favorite choice for wedding and other social occasions.

Their bank account operations however declined due to the onset of Covid and its impact on workers having to work from home. You have nonetheless discerned a slight improvement in their operations from the current bank account operations.

Management team comprises, Mr. Samson Arthur, aged 46, Chairman and CEO of the Company, Mrs. Mary Arthur, aged 45, COO and Chief Matron of the company and Mr. Kweku Johnson, aged 32 CFO of the company. Mr., Samson Arthur is a graduate in Economics from University of Ghana Legon and an MBA in Marketing. He worked in one of the top banks in the country for ten years prior to his resigning to take over his aged mother’s restaurant. Mrs. Mary Arthur, his wife has a degree in Food Science and Nutrition from the Ho University. She served as a matron at Wesley Grammar High School prior to joining the company at its inception. Kweku Johnson is a close family friend of the CEO and holds a Diploma in Accounting from the University of Professional Studies, Accra. Prior to joining the company Kweku worked at the Labone Polyclinic as an accounts staff.

Each branch has a manager and a chief cook, supported by two matrons. In addition, they hire waiters and waitresses on temporary basis and put them through some rigorous training before deploying them.

Critically examine this proposition as per information above and the related financial statements below.

Aduane Restaurant and Mobile Food Ltd Profit and Loss Extracts for the year ending 31st Dec

2020 GHC 2021 GHC 2022 GHC
Sales 1,899,500 2,796,460 3,215,929
Opening Inventory 204,570 321,215 503,363
Production cost 968,945 1,482,124 1,768,761
1,173,515 1,803,339 2,272,124
Closing Inventory 321,215 503,363 643,186
Cost of Sales 852,300 1,299,976 1,628,938
Gross Profit 1,047,200 1,496,484 1,586,991
Overheads 44,880 235,386 268,292
Depreciation 131,000 162,500 256,500
Operating Profit 871,320 1,098,598 1,062,199
Interest Paid 38,000 54,000 102,000
Profit Before Tax 833,320 1,044,598 960,199
Tax 208,330 261,150 240,050
Profit After Tax 624,990 783,449 720,149
Noncurrent Assets 2020 2021 2022
Building 615,000 600,000 585,000
Equipment 75,000 118,500 232,000
Motor Vehicles 210,000 200,000 395,000
Furniture and Fixtures 114,000 123,000 118,000
Total 1,014,000 1,041,500 1,330,000
Current Assets
Inventory 321,215 503,363 643,186
Receivables 445,880 701,150 1,010,560
Prepayment 19,250 45,210 55,610
Bank 15,000 14,800 25,600
801,345 1,264,523 1,734,956
Current Liabilities
Trade Payables 322,915 531,327 675,345
Overdraft 125,000 15,542 270,382
Total Current Liabilities 447,915 546,869 945,727
Net Current Assets 353,430 717,654 789,229
Net Assets 1,367,430 1,759,154 2,119,229
Financed by
Capital
Share Capital 800,000 800,000 800,000
Income Surplus 567,430 959,154 1,319,229
1,367,430 1,759,154 2,119,229

Ratios

2020 2021 2022
Sales Growth 47.22% 15.00%
Receivable Days 86 92 115
Payable Days 122 131 139
Inventory Turnover Days 138 141 144
Gross Margin 55% 54% 49%
Overhead % 2% 8% 8%
Net Margin 43.87% 37.35% 29.86%
Interest Cover 22.93 20.34 10.41
Current Ratio 1.79 2.31 1.83
Quick Ratio 1.07 1.39 1.15
Tax Rate 25% 25% 25%
Inventory to Sales 17% 18% 20%
Receivables to Sales 23% 25% 31%
Payables to Sales 17% 19% 21%
Gearing 9.14% 0.88% 12.76%
Dividend Payout Ratio 50% 50% 50%

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  • 20 Marks

CML – APRIL 2023 – L3 – Q1 – Gold Coast Shipping Company Ltd Financing Proposition

Critically examine the financing proposition from Gold Coast Shipping Company Ltd for a USD 2.0 million down payment on a new ship, using provided company background, operations, and financial statements for 2020-2022.

Mr. Bampoh Humphrey is the Board Chairman and CEO of Gold Coast Shipping Company Ltd. He owns 80 percent of the shares of the company with his foreign Partner Jones Smith, a retired Chairman of Elder Dempster Shipping Company owning the remaining 20%.

The two shareholders acquired the company from the Divestiture Implementation Committee in 1995 when the government divested its shareholding in the national shipping line the Black Star Line. Mr. Bampoh is known to be highly connected with the government in power at the time of AFC.

The company is engaged in transportation of primary products such as bauxite, gold and manganese ore from the country abroad and the transportation of consumer goods in container ships throughout the world.

The company has a fleet of ten cargo ships and ten container ships. It has three main offices located in Tema, Takoradi and London in the UK.

The company has operated an impressive account with you since the acquisition of the national shipping line, until in recent times when you noticed a sharp deterioration in its account operations. Following your painstaking investigation you established that the company incurred a huge loss when a cargo of bauxite was diverted on the high seas and the goods stolen. The ship was later discovered to have been sunken in the high seas to hide the evidence. Another problem you observed was that their fleet was becoming aged and one of them needs immediate replacement.

Each office of the company has an Office Manager all of whom are experienced expatriate shipping managers poached from international shipping companies.

The cost of purchase and delivery of one ship is estimated at USD 5.0 million, and the company is requesting for financial support from the bank to make a down payment of USD 2.0 million for the ship. The company proposes to pay the bank over a period of five years whilst the remainder of the cost of the ship is to be paid over the next period of ten years.

Critically examine this proposition using the information above and the related financial statements provided below.

Gold Star Shipping Ltd Statement of Comprehensive Income as at 31 Dec 2020 GHC

Total Revenue Cost of Revenue Gross Profit Overheads Depreciation Operating Profit Interest Paid Profit Before Tax Tax Profit After Tax 2021 GHC 13,700,000 6,165,000 7,535,000 1,575,500 1,337,000 4,622,500 480,000 4,142,500 1,035,625 3,106,875 2021 GHC 14,400,000 6,912,000 7,488,000 1,843,200 1,514,000 4,130,800 352,000 3,778,800 944,700 2,834,100 2022 GHC 14,920,000 7,758,400 7,161,600 2,333,488 1,564,000 3,264,112 312,500 2,951,612 737,903 2,213,709

Gold Star Shipping Ltd Balance Sheet as at 31st Dec

Noncurrent Assets 2020 2021 2022
Building 147,000 238,000 327,000
Equipment 9,000,000 11,325,000 10,150,000
Motor Vehicles 720,000 480,000 432,000
Furniture and Fixtures 350,000 260,000 170,000
Total 10,217,000 12,303,000 11,079,000
Current Assets
Inventory 135,000 185,000 197,000
Receivables 245,000 254,000 1,998,000
Prepayments 146,200 158,400 268,700
Bank 950,800 241,250 746,805
1,477,000 838,650 3,210,505
Current Liabilities
Trade Payables 125,000 135,600 156,400
Overdraft 45,000 65,000 85,200
Total Current 170,000 200,600 241,600
Liabilities
Net Current Assets 1,307,000 638,050 2,968,905
Net Assets 11,524,000 12,941,050 14,047,905
Capital
Share Capital 10,000,000 10,000,000 10,000,000
Income Surplus 1,524,000 2,941,050 4,047,905
11,524,000 12,941,050 14,047,905

RATIOS 2020 2021 2022

Sales Growth 5.11% 3.61%

Receivable Days 7 6 49

Payable Days 7 7 7

Inventory Turnover Days 8 10 9

Gross Margin 55% 52% 48%

Overhead % 12% 13% 16%

Net Margin 30.24% 26.24% 19.78%

Interest Cover 9.63 11.74 10.45

Current Ratio 8.69 4.18 13.29

Quick Ratio 7.89 3.26 12.47

Tax Rate 25% 25% 25%

Dividend Payout RATIO 50% 50% 50%

Inventory to Sales 0.01 0.01 0.01

Receivables to Sales 0.01 0.01 0.13

Payables to Sales 0.01 0.01 0.01

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  • 30 Marks

CML – APRIL 2024 – LEVEL 3 – Q1 – BA Brazil Nuts Ltd Lending Proposition

Critically examine a request from BA Brazil Nuts Ltd for an overdraft increase to GHC10 million and a USD 500,000 term loan for new equipment, considering their financials, operations, and recent challenges like a fire outbreak.

Your valued customers of twenty years, BA Brazil Nuts Ltd was established twenty-six years ago by Herbert Obeng, aged 62 and his wife Martha Obeng, aged 58, both graduates in Agricultural Engineering from the University of Science, Industry and Technology. They also have MBA certificates in Marketing. Prior to this, they both worked with the Gold Coast Food Production and Distribution Service, a State Corporation engaged in the cultivation, purchase and distribution of food supplies. Herbert serves as both Board Chairman and CEO of the company. He is also in charge of Farming Operations. The Farm Managers at the company’s farms report directly to Herbert. Martha serves as the CFO and Executive in charge of Marketing. She is supported by an Accounts Clerk, Jones Pino, aged 25 who has just completed his professional examination in Accounting. ICA (Ghana). The company also has a pool of skilled workers poached from other reputable industrial establishments.

The company is located at Ekumfi Swedru in the Central Region of the country and boasts of a state of the art Brazil nut production plant and a five storey office building. The company has two articulator trucks which are used in the carting of the Brazil nuts to the ports for export. The company is engaged in the production, roasting, packing and export of processed Brazil nuts primarily to the EU and Great Britain which take 60% of its products. The rest is sold locally (20%) and to other parts of the world (20%) including Australia and the US.

The company has operated an impressive account over the years until a year ago when you saw a sharp dip in the company’s turnover. In your interaction with Herbert, you learnt that there had been a fire outbreak which affected a significant part of the company’s farm holdings in the Bono Region of the country. He had to replenish his stock of Brazil nuts at a higher cost from his colleagues who also have farms in this part of the country. Your latest investigations show that the company has replanted the burnt area with Brazil nut seedlings.

In one of your visits, it came to your attention that Herbert was building a new factory at Winneba about eighty (80) kilometers away. When you queried him, he told you he was anticipating expanding his market in US and Australia.

The company’s Overdraft Facility of GHC 5,000,000.00 is showing a hard core at around GHC 3,000,000.00. The company is requesting for:

  1. An increase in the Overdraft Facility to GHC10 million in support of Working Capital.
  2. A Term Loan of USD 500,000 for the purchase of new Brazil Nut Roasting and Packaging Plant for the new factory. GHS/USD = GHS 13.5/USD1

Critically examine this proposition. [30 MARKS] BA Brazil Nuts Ltd. Profit and Loss Extracts for the year ending 31 Dec

2021 2022 2023
GHC GHC GHC
5,750,000 6,900,000 7,690,000
472,610 534,100 758,420
3,150,000 4,142,000 4,605,800
3,622,610 4,676,100 5,364,220
534,100 758,420 985,400
3,088,510 3,917,680 4,378,820
2,661,490 2,982,320 3,311,180
690,000 779,700 991,580
405,000 417,400 777,400
1,566,490 1,785,220 1,542,200
439,600 574,000 684,500
1,126,890 1,211,220 857,700
281,723 302,805 214,425
845,167 908,415 643,275

BA Brazil Nuts Ltd. Balance Sheet as at 31 Dec

Ratios 2021 2022 2023 Sales Growth

20.00%

11.45%

Receivable Days

98

112

141

Payable Days

90

75

78

Inventory Turnover Days

63

71

82

Gross Margin

46%

43%

43%

Overhead %

12%

11%

13%

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  • 20 Marks

TAI – Aug 2020 – L1 – Q4 – Audit Review and Reporting

Recommend examination procedures for reviewing God’s Time Ltd.’s profit forecast for COVID-19 financial assistance.

In order to assist businesses during the COVID-19 period, the Government of Ghana has announced various packages including financial assistance to various companies and other Small and Medium Enterprises. Your firm, Prosper & Co has been approached to perform an assurance engagement for God’s Time Ltd; the engagement will be a review of prospective financial information which is needed to support the company’s application for financial assistance provided under COVID-19 facilities. God’s Time Ltd had its financial year ended 31st December each year.

The operating profit forecast for the two years to 31st December 2020 prepared by a member of the accounting team of God’s Time Ltd is shown below, along with some accompanying notes.

Six months to 30th June 2019 Six months to 31st Dec. 2019 Six months to 30 June. 2020 Six months to 31st Dec. 2020
GH¢ GH¢ GH¢ GH¢
Earnings 2,801,597 3,088,680 4,210,265 4,429,728
Direct costs 2,135,938 2,315,746 3,413,711 3,618,584
Gross Profit 665,659 772,934 796,554 811,144
Operating Exp.
Wages & Salaries 168,452 184,864 209,546 218,762
Advertising 13,840 20,542 28,548 31,540
Design costs 21,580 32,456 50,452 43,546
Marketing 10,896 12,458 16,520 34,450
Interest on Loan 45,543 48,620 51,654 60,542
Other Operating Exp 266,264 309,173 318,622 324,458
Net Profit 139,084 164,821 121,212 97,846

Additional Notes: i. God’s Time Ltd is a producer of greetings cards and giftware; the demand for which is seasonal in nature.

ii. Design costs are mostly payroll costs of the staff working in the company’s design team, and the costs relate to the design and development of new product ranges.

iii. The total ‘Other expenses’ is calculated based on 40% of the projected revenue for the six-month period.

iv. In 2019, the company was granted a loan facility to complete the ongoing factory project.

Required:

Recommend the examination procedures which should be used in the review of the profit forecast.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      (B)

You are the supervisor in-charge of the audit of Titi bidi Construction Company Limited. The audit of the company is near completion, and you are finalizing the audit report. As part of your final review, you want a confirmation that, the tax liability as reported is accurate and as such there is no liability that has not been captured.

Required:

Outline the audit steps to verify that, all tax payments and tax credits has been captured and the liability as reported is accurate.

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  • 20 Marks

TAI – Aug 2020 – L1 – Q3 – Audit Review and Reporting

Comment on matters and audit evidence for bad debt provisions and VAT claims of Mina Macarthy Limited for 2019.

(a) You are a tax audit team leader responsible for the audit of Mina Macarthy Limited.

Mina Macarthy Limited owns a block of flats and earns its income through rentals and general dealing. On 1st January 2019, the ledger accounts of the company included the following balances.

Debtors’ account GH¢475,000

Provision for doubtful debts account GH¢ 42,235

The balance on the provision account consisted of the following: GH¢

Specific provision of 100% against the debt of Charles Sulemana, a tenant 31,500

General provision of 1% against remaining debts
12,235

During the year ended 31st December 2019, the following events occurred.

i. Charles Sulemana paid Mina Macarthy GH¢11,150 and then vanished without trace to new world, leaving no assets.

ii. Another tenant, Antonio Banderas, who owed GH¢3,900 fell into a river and was also found to have died penniless.

iii. Azuma Nickson returned from total obscurity and paid an amount of GH¢6,450 which Mina Macarthy Ltd had written off in 2017.

iv. Credit sales for the year amounted to GH¢8,167,400 and cash received from debtors (other than Sulemana and Azuma) totaled GH¢3,150,000

v. On 31st December 2019, Mina Macarthy Ltd decided to provide in full against a disputed debt of GH¢51,200 owed by Kwesi Otoo Pratt, and to maintain the 1% general provision on other debtors.

Additional notes

The company has submitted its returns for 2019 which showed a profit before tax of GH¢375,650.

Required: Comment on the matters to be considered. In addition to your comments, explain the audit evidence expected to be obtained during your review of Mina Macarthy Limited’s audit working papers prepared by the audit team member in respect of each of the issues described above.                                                                                                                                                                                                                                                                                                                                                                                                                             (bi)

In order to claim a VAT bad debt, a business must show proof of the bad debt.

Required:

i. Explain how a bad debt may arise for VAT.

(bii) In order to claim a VAT bad debt, a business must show proof of the bad debt.

Required:

ii. Explain the circumstances under which a bad debt relief can be claimed.

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  • 14 Marks

CR – Nov 2024 – L3 – Q5b – Financial Performance & Digital Technology Integration

Evaluating the financial performance of Nsawkaw PLC and addressing challenges of digital technology integration in accounting.

(a) Compute the following ratios for the years ended 2024 & 2023:
i) Operating profit margin
ii) Return on parent’s equity
iii) Earnings per share
iv) Current ratio
v) Trade receivables days
vi) Total liabilities to total assets %

(b) Write a report to the directors of DPEF evaluating the inter-period financial performance and position of NK using the above six (6) ratios. The report should draw attention to how the non-financial metrics combine with the financial counterparts to showcase the prospects and viability of NK.                                                                      c) The concept of double materiality is relevant to sustainability impacts and dependencies. It
incorporates financial materiality and impact materiality. 

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  • 6 Marks

CR – Nov 2024 – L3 – Q5a – Financial Analysis and Investment Evaluation

Compute financial ratios for Nsawkaw PLC to evaluate its financial performance for investment recommendation.

Nsawkaw PLC (NK), a gold processing and trading company, has been identified by Djaraye Private Equity Fund (DPEF) as a target for long-term equity investment. As a financial consultant of DPEF, you have been tasked to evaluate the integrated financial condition of NK and make an investment recommendation.

Below are the summarised versions of NK’s Consolidated Financial Statements for the year ended June 30, 2024 (together with its comparative period):

Summarised Consolidated Statement of Profit or Loss for the year ended 30 June 2024

2024 (GH¢000) 2023 (GH¢000)
Revenue 2,538,000 2,125,000
Operational expenses (1,909,100) (1,592,900)
Interest costs (186,700) (157,250)
Taxation (234,000) (198,500)
Profit after tax 208,200 176,350
Other comprehensive income 17,900 10,550
Total comprehensive income 226,100 186,900

Summarised Consolidated Statement of Changes in Equity for the year ended 30 June 2024

Equity Holders of the Parent (GH¢000) Non-controlling Interests’ Equity (GH¢000) Total Equity (GH¢000)
2024
Balances b/d 457,200 65,600 522,800
Total comprehensive income 190,800 35,300 226,100
Dividends (110,000) (8,700) (118,700)
Balances c/d 538,000 92,200 630,200
2023
Balances b/d 355,000 46,650 401,650
Total comprehensive income 160,500 26,400 186,900
Dividends (58,300) (7,450) (65,750)
Balances c/d 457,200 65,600 522,800

Summarised Statement of Financial Position as at 30 June 2024

2024 (GH¢000) 2023 (GH¢000)
Non-current assets
Property, plant, and equipment 718,000 657,000
Others 156,000 99,000
Total Non-current assets 874,000 756,000
Current assets
Trade receivables 140,000 121,000
Others 236,500 123,050
Total Current assets 376,500 244,050
Total Assets 1,250,500 1,000,050
Total Equity and Liability 1,250,500 1,000,050

Additional information:

  1. The total number of equity shares outstanding was 1.2 million and 1.4 million at 30 June 2023 and 30 June 2024 respectively.
  2. Other comprehensive income attributable to non-controlling interests for the years ended 30 June 2023 and 2024 amounted to GH¢8.05 million and GH¢9.6 million respectively.
  3. Non-current liabilities at 30 June 2023 and 30 June 2024 amounted to GH¢250,800 and GH¢308,510 respectively.
  4. The following metrics have been gleaned from NK’s published sustainability reports across the two years:
Metric 2024 2023
Scope 1 & 2 carbon emissions (tonnes of CO2) 650 780
Scope 3 carbon emissions (tonnes of CO2) 2,400 2,380
Women in senior management (%) 21 16
Total recordable injury frequency rate (TRIFR) per 100 full-time workers 3.3 4.1

The scope and definitions of the above sustainability measures have remained materially unchanged across the two years.

Required:

Compute the following ratios for the years ended 2024 & 2023:

  1. Operating profit margin
  2. Return on parent’s equity
  3. Earnings per share
  4. Current ratio
  5. Trade receivables days
  6. Total liabilities to total assets %

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  • 15 Marks

FM – Nov 2016 – L3 – SC – Q6 – Strategic Performance Measurement

Evaluate Osamco Limited’s financial performance compared to industry benchmarks and discuss reasons for considering stock exchange listing.

Osamco Limited, manufacturer of wire and cables, was bought from its conglomerate parent company in a management buyout deal in August 2010. Six years later, the managers are considering the possibility of listing the company’s shares on the Nigerian Stock Exchange.

The following information is made available:

OSAMCO LIMITED
INCOME STATEMENT FOR THE YEAR ENDED JUNE 30, 2016

N’million Amount
Turnover 91.25
Cost of sales (79.00)
Profit before interest and taxation 12.25
Interest (3.25)
Profit before taxation 9.00
Taxation (1.25)
Profit attributable to ordinary shareholders 7.75
Dividend (0.75)
Retained profit 7.00

STATEMENT OF FINANCIAL POSITION AS AT JUNE 30, 2016

N’million Amount
Non-current assets (at cost less accumulated depreciation)
Land and buildings 9.00
Plant and machinery 24.75
Total non-current assets 33.75
Current assets
Inventories 11.00
Accounts receivable 11.75
Cash at bank 2.50
Total current assets 25.25
Total assets 59.00
Equity
Ordinary shares of N1 each 6.75
Reserves 24.25
Total equity 31.00
Non-current liabilities
Accounts payable due after more than one year: 12% Debenture 2018 5.50
Current liabilities
Trade accounts payable 17.50
Bank overdraft 5.00
Total current liabilities 22.50
Total equity and liabilities 59.00

Industry sector ratios:

Metric Industry Average
Return before interest and tax on long-term capital employed 24%
Return after tax on equity 16%
Operating profit as percentage of sales 11%
Current ratio 1.6:1
Quick (acid test) ratio 1.0:1
Total debt: equity (gearing) 24%
Dividend cover 4.0
Interest cover 4.5

Required:
a. Evaluate the financial state and performance of Osamco Limited by comparing it with that of its industry sector. (10 Marks)

b. Discuss FOUR probable reasons why the management of Osamco Limited is considering Stock Exchange listing. (5 Marks)

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  • 20 Marks

FM – May 2019 – L3 – Q7 – Working Capital Management

Evaluate the financial viability of accepting a new customer order and provide considerations for granting credit.

V Plc. manufactures engineering equipment. The company has received an order from a new customer for five machines at N5,000,000 each. V Plc.’s terms of sale are 10 percent of the sales value payable with the order. The deposit has been received from the new customer. The balance is payable 12 months after acceptance of the order by V Plc.

V Plc.’s past experience has been that only 60 percent of similar customers pay within 12 months. Customers who do not pay within 12 months are referred to a debt collection agency to pursue the debt. The agency has in the past had a 50 percent success rate of obtaining immediate payment once they became involved. When they are unsuccessful, the debt is written off by V Plc. The agency’s fee is N500,000 per order, payable by V Plc. with the request for service. This fee is not refundable if the debt is not recovered.

As an accountant in V Plc.’s credit control department, and based on the company’s past experience and on discussions with the sales and credit managers, you do not expect the pattern of payment and collection to change.

Incremental costs associated with the new customer’s order are expected to be N3,600,000 per machine, 70 percent of these costs are for materials and are incurred shortly after the order has been accepted. The remaining 30 percent is for all other costs, which you can assume are paid shortly before delivery, i.e., in 12 months’ time. The company is not at present operating at full production capacity.

A credit bureau has offered to provide error-free credit information about the new customer if the price is right.

V Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.

Required:

a. Evaluate, from a purely financial point of view, if V Plc. should accept the order from the new customer based on the above information. (12 Marks)

b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 Marks)

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  • 20 Marks

FM – May 2019 – L3 – Q2 – Strategic Performance Measurement

Calculate and analyze PH Plc.’s financial performance using EPS, dividend yield, dividend cover, and P/E ratio metrics.

The following financial information is available for PH Plc:

Year 2014 2015 2016 2017
Earnings attributed to ordinary shareholders (₦m) 200 225 205 230
Number of ordinary shares (millions) 2,000 2,100 2,100 1,900
Price per share (kobo) 220 305 290 260
Dividend per share (kobo) 5 7 8 8

Assume that share prices are as at the last day of each year.

Required:

a. Calculate PH Plc.’s earnings per share, dividend yield, dividend cover, and price/earnings ratio. Explain the meaning of each term and state their limitations. (14 Marks)
b. Explain why the changes that occurred in the figures calculated in (a) above over the past four years might have happened. (6 Marks)

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  • 20 Marks

FM – Nov 2014 – L3 – SB – Q2 – Corporate Restructuring

Analyze divestment strategies for Chelsy Plc’s divisions, compute finance needs, and assess buyout and sale implications.

Chelsy Plc has two manufacturing divisions, Bolts and Nuts. The Bolts division is profitable whereas the Nuts division is not. The company’s share price has consequently declined to 50 kobo per share from a price of N2.83 per share three years ago.

The board of directors is considering two proposals:
i. To cease trading and close down the company.
ii. To close the Nuts division and continue the Bolts division through a leveraged management buyout. The new company will continue to manufacture bolts only but will require an additional investment of N275 million to grow the Bolts division’s after-tax cash flows by 3.5 percent in perpetuity. The proceeds from the sale of the Nuts division will be applied to pay the division’s outstanding liabilities. The finance raised from the management buyout will be applied in paying any remaining liabilities, fund additional investment, and purchase the current equity shares at a premium of 20 percent.

The Nuts division is twice the size of the Bolts division in terms of the assets attributable to it.

Extracts from the most recent financial statements of Chelsy Plc are as follows:

Statement of Financial Position as at 31 December 2013

N’000
Non-current assets 605,000
Current assets 1,210,000
Share capital (40 kobo per share) 220,000
Reserves 55,000
Liabilities (non-current and current) 1,540,000

Comprehensive Income Statement for the year ended 31 December 2013

Division Revenue Costs (prior to depreciation, interest, and tax)
Bolts division 935,000 (660,000)
Nuts division 1,870,000 (2,035,000)
Depreciation, interest, and tax (combined): (187,000)
Loss: (77,000)

If the company’s assets are sold, the estimated realizable values are as follows:

N’000
Non-current assets 550,000
Current assets 605,000

Additional Information:

  1. Redundancy and other costs will be approximately N297 million if the whole company is closed and pro rata for individual divisions that are closed. These costs have priority for payment before any other liabilities in case of closure. The taxation effects relating to this may be ignored.
  2. Company income tax on profits is 30%, and it can be assumed that tax is payable in the year it is liable.
  3. Annual depreciation on non-current assets is 10%, and this is the amount of investment needed to maintain the current level of activity.
  4. The new company’s cost of capital is expected to be 11%.

Required:

(a) Discuss, briefly, the possible benefits of divesting Bolts division through a management buyout. (4 Marks)
(b) Estimate the return the creditors and the shareholders will receive in the event that Chelsy Plc is closed and all its assets sold. (3 Marks)
(c) Estimate the additional amount of finance needed and the value of the new company if only the assets of Nuts division are sold and the Bolts division is divested through a management buyout. (8 Marks)
(d) Discuss the issues that should be taken into consideration in relation to:
i. Seeking potential buyers and negotiating the price
ii. Due diligence
(Assume that the Nuts division is to be sold as a going concern). (5 Marks)

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  • 14 Marks

CR – May 2021 – L3 – Q3a – Presentation of Financial Statements (IAS 1)

Analyze Somolu Limited's financial performance and recommend whether Agege Plc should invest; discuss reporting quality improvements.

The Chief Executive Officer (CEO) of Agege Plc. has forwarded the draft financial statements of Somolu Limited through an e-mail to you as the company’s financial consultants.

In the e-mail, the CEO informed you that Agege Plc. is planning to acquire Somolu Limited. Somolu Limited is a private limited company that has recently applied for additional funds which was rejected from its current bankers on the basis that the company has insufficient assets to offer as security.

The draft financial statements of Somolu Limited as at December 31, 2019, are as follows:

Somolu Limited
Statement of profit or loss and other comprehensive income for the year ended December 31, 2019

Somolu Limited
Statement of financial position as at December 31, 2019

Required:

a. Carry out a critical analysis of the financial performance and position of Somolu
Limited together with recommendations as to whether Agege Limited should
consider the investment in Somolu Limited. (14 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

Investigation under investment decision will NOT include:
A. Loan facility decision
B. Purchase of shares
C. Purchase of business
D. Reporting on profit forecast
E. Partnership participation

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  • 20 Marks

FM – Nov 2018 – L3 – Q4 – Strategic Performance Measurement

Evaluate Yemi John Plc’s financial performance and analyze financing options for expansion in line with shareholder wealth and earnings growth.

Yemi John Plc. (YJ) is planning to raise N30 million in new finance for a major expansion of its existing business and is considering a rights issue, a placing, or an issue of bonds. The corporate objectives of YJ, as stated in its annual report, are to maximize the wealth of its shareholders and to achieve continuous growth in earnings per share. Recent financial information on YJ is as follows:

Year 2017 2016 2015 2014
Turnover (Nm) 28.0 24.0 19.1 16.8
Earnings before interest and tax (EBIT) (Nm) 9.8 8.5 7.5 6.8
Profit after tax (PAT) (Nm) 5.5 4.7 4.1 3.6
Dividends (Nm) 2.2 1.9 1.6 1.6
Ordinary shares (Nm) 5.5 5.5 5.5 5.5
Reserves (Nm) 13.7 10.4 7.6 5.1
8% Bonds, redeemable 2024 (Nm) 20 20 20 20
Share price (N) 8.64 5.74 3.35 2.67

The par value of the shares of YJ is N1.00 per share. The general level of inflation has averaged 4% per year in the period under consideration. The bonds of YJ are currently trading at their par value of N100. The values for the business sector of YJ are as follows:

  • Average return on capital employed: 25%
  • Average return on shareholders’ fund: 20%
  • Average interest coverage: 20 times
  • Average debt/equity ratio (market value basis): 50%
  • Return predicted by the capital asset pricing model: 14%

EBIT/closing total capital employed

Required:

a. Evaluate the financial performance of YJ, analyzing and discussing the extent to which the company has achieved its stated objectives of:
i. maximizing the wealth of its shareholders; and
ii. achieving continuous growth in earnings per share. (13 Marks)

Note: Up to 8 marks are available for financial analysis.

b. Analyze and discuss the relative merits of a rights issue, a placing, and an issue of bonds as ways of raising finance for the expansion. (7 Marks)

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  • 15 Marks

FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

a. In the context of the selection and holding of investments, discuss each of the following scenarios:

i. An investor holding only one security needs to be concerned with the unsystematic risk of that security. (3 Marks)

ii. However, an investor who holds a number of securities should take account of total risk. (3 Marks)

iii. An investor should never add to a portfolio an investment that yields a return less than the market rate of return. (3 Marks)

b. The equity beta of KT Plc. is 1.2 and the equity alpha is 1.4. Explain the meaning and significance of these values to the company. (6 Marks)

(Total 15 Marks)

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  • 30 Marks

FR – May 2024 – L2 – SA – Q1 – Statement of Cash Flows (IAS 7)

Preparation of financial statements for Adama PLC, including profit or loss, changes in equity, and memo on EPS and ROCE.

a. The following trial balance was extracted from the books of Adama Plc as at June 30, 2022:

Additional information:

  1. The value of the freehold land and buildings includes a land element of N266,800,000, and the estimated remaining life of the buildings at July 1, 2021, was 25 years. Depreciation on buildings is charged 65% to cost of sales and 35% to administrative expenses.
  2. The revenue includes N69,250,000 for an item of office equipment disposed of on November 30, 2021. The equipment had a carrying value of N46,060,000 at the date of sale. The equipment cost N75,000,000 when acquired three years ago.
  3. Included in the cost of sales is N82,600,000 incurred in the manufacture of new office equipment, which was put to use by Adama PLC on February 1, 2022.
  4. All office equipment is depreciated at 15% per annum using the reducing balance method, charged to cost of sales. Depreciation on all motor vehicles is at 20% per annum on a straight-line basis and charged to distribution costs. Depreciation is charged in full in the year of acquisition and no charge in the year of disposal.
  5. Following the conclusion of winding-up proceedings for one of Adama PLC’s customers, it was resolved to write off the sum of N26,450,000 due from the customer and to make an allowance for doubtful receivables of 2½% on the continuing trade receivables.
  6. The financial assets are equity instruments held at fair value through profit or loss, and they suffered an impairment loss of N12,700,000 at the year-end.
  7. The 3% redeemable loan notes were issued on October 1, 2021, under terms that provided for a large premium on redemption in 2025. These terms were interpreted by the finance director to mean an effective interest rate of 6½% per annum.
  8. The income tax expense for the year ended June 30, 2022, is estimated at N143,552,000, while the deferred tax payable for the same period is N12,520,000. There was an over-provision of N25,664,000 in respect of income tax for the previous trading year.
  9. The suspense account balance represents the corresponding credit entry for shares issued at a premium of 15 kobo per share, arising from the issue of 400,000 ordinary shares made during the year.
  10. The directors recommended a 20 kobo final dividend per ordinary share for the year and a transfer of N38,900,000 to the general reserve.

Required: Prepare for Adama PLC the following financial statements:

  1. Statement of profit or loss and other comprehensive income for the year ended June 30, 2022. (10 Marks)
  2. Statement of changes in equity for the same period. (4 Marks)
  3. Statement of financial position as of June 30, 2022. (10 Marks)

b. Some new trainee accountants in your organization discussed Earnings Per Share (EPS) and Return on Capital Employed (ROCE) as the best ratios for analyzing an entity’s financial performance. The finance director has requested a memo explaining these ratios and highlighting their limitations.

Required:
Prepare a memo to the finance director explaining the EPS and ROCE ratios and their limitations. (6 Marks)

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  • 20 Marks

PM – NOV 2016 – L2 – Q4 – Decision-Making Techniques

Question requires analysis of airline operations to determine profitability of different pricing and charter decisions through contribution analysis.

Aghobe Air owns a single aircraft which operates between Lagos and Kano. The normal flight schedule is that flights leave Lagos on Mondays and Thursdays and depart from Kano on Wednesdays and Saturdays. Aghobe Air cannot offer any more flights between Lagos and Kano. The only seat available on the aircraft is economy class.

The following information is available: Seating capacity of the aircraft is 360 passengers. Weekly average number of passengers per flight is as follows:

Additional information:

(i) Food and beverages service cost N1,000 per passenger but at no charge to the passengers;

(ii) Commission to travel agents paid by Aghobe Air (All tickets are booked by travel agents) is 8% of fare;

(iii) Fixed annual leased costs allocated to each flight is N2,650,000 per flight;

(iv) Fixed ground services (maintenance, check in baggage handling, etc.) cost allocated to each flight N350,000 per flight;

(v) Fixed flight crew salaries allocated to each flight is N200,000 per flight; and

(vi) Fuel cost is unaffected by the actual number of passengers on the flight.

Required:

a. Determine the net operating income made by Aghobe Air on each one way flight between Lagos and Kano. (5 Marks)

b. The market research unit of Aghobe Air indicates that lowering the average one way fare to N24,000 will increase the average number of passengers per flight to 212. Should Aghobe Air lower its fare? (5 Marks)

c. A tourist group known as Sea Bird Tour Operator approaches Aghobe Air on the possibility of chartering the aircraft twice each month from Lagos to Kano and back from Kano to Lagos. If Aghobe Air accepts the offer, it will only offer 184 flights in each year. Other terms of the offer include:

  • For each one way flight, Sea Bird Tour Operator will pay Aghobe Air N3,750,000 which covers cost of charter for one way, use of flight crew and ground service staff. Sea Bird Tour operator will pay for fuel costs, food and beverages.

Should Aghobe Air accept the offer from Sea Bird Tour Operator? (5 Marks)

d. What factors should be taken into consideration in taking the decision in (c) above? (5 Marks)

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