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  • 5 Marks

FA – Nov 2024 – L1 – Q5c – Profitability vs Liquidity Ratios

Explain the difference between profitability and liquidity ratios and provide two examples of each.

Accounting ratios cover a wide array of ratios that are used by accountants and act as different indicators that measure profitability, liquidity, and potential financial distress in a company’s financials.

Required:

Differentiate between profitability ratios and liquidity ratios and give TWO examples each.

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q3 – Review of Subsequent Events and Going Concern Assumptions

Identify going concern risks for Woes Limited and outline post-reporting date audit matters to assess its ability to continue as a going concern.

You are responsible for the audit of Woes Limited for the year-ended 31 December 2013. The principal activity of Woes Ltd is the provision of high-quality packaging services for manufacturing companies. The company was established three years ago and has significantly exceeded its growth targets in each of those years.

Historically, the packaging process was labour-intensive, but in September 2013, in an effort to reduce labour costs and increase efficiency, the company invested in an enhanced automated packing system. The investment was funded by a loan repayable in monthly instalments over four years. The loan covenant agreement includes a term specifying that the company’s debt: equity ratio should not exceed 1:1.

A comparison of the draft accounts for the year ended 31 December 2013 with the previous year indicates a significant increase in revenue with a small increase in profit. The company is currently trading in excess of its overdraft limit and is negotiating an increase in its facility with the bank. Management has prepared, in support of its negotiations, profit and cash flow forecasts based on the assumptions that the anticipated increase in efficiency, including a reduction in labour costs, will be achieved.

The company struggles to meet the weekly wage bill and has fallen behind in its payments to the tax authorities. It has also failed to comply with the terms of the lease in respect of the factory premises and has not paid the last three months’ instalments.

Required:

a. Identify and explain, from the information provided above, factors which indicate that Woes Ltd may not be a going concern. (10 Marks)
b. Outline the matters to which you would direct your attention in the period after the reporting date to determine whether Woes Ltd can continue as a going concern for the foreseeable future. (10 Marks)

(Total: 20 Marks)

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  • 20 Marks

CR – July 2024 – L3 – Q5 – Analysis and Interpretation of Financial Statements

Analyze Towobo Ltd’s financial health and provide advice on whether ABC Mutual Funds should invest.

Presented below are the common-sized financial statements of Towobo Ltd over the last five years:

Vertical Common-Sized Statements of Profit or Loss for the Years Ended 31 December

% 2022 2021 2020 2019 2018
Revenue 100.00 100.00 100.00 100.00 100.00
Cost of sales (88.58) (85.45) (84.92) (87.36) (92.70)
Gross profit 11.42 14.55 15.08 12.64 7.30
Distribution & marketing costs (1.00) (0.86) (0.83) (1.15) (0.87)
Administrative expenses (0.74) (0.79) (0.88) (0.85) (0.73)
Other operating income 2.06 1.78 0.77 0.58 0.69
Other operating expenses (1.36) (0.86) (1.21) (1.20) (0.94)
Profit from operations 10.38 13.82 12.93 10.02 5.45
Finance cost (0.02) (0.04) (0.02) (0.05) (0.10)
Profit before tax 10.36 13.78 12.92 9.97 5.35
Tax (3.25) (3.98) (4.05) (3.25) (2.61)
Profit after tax 7.11 9.80 8.86 6.72 2.74

Vertical Common-Sized Statements of Financial Position as at 31 December

% 2022 2021 2020 2019 2018
Non-current assets
Property, plant & equipment 8.49 8.55 15.50 20.27 23.33
Intangible assets 0.52 0.72 0.44 0.51 0.70
Capital work-in-progress 0.13 0.39 7.39 0.28 0.66
Long-term loans & advances 0.33 0.22 0.52 3.20 3.65
Total non-current assets 9.47 9.88 23.85 24.26 28.31
Current assets
Inventories 14.20 13.19 25.51 40.61 32.25
Receivables 0.16 0.09 0.53 0.32 –
Prepayments, advances, & other receivables 22.33 17.65 6.21 10.69 20.33
Short-term investments 35.15 40.67 7.10 – –
Cash and bank balances 18.69 18.52 36.80 24.12 19.11
Total current assets 90.53 90.12 76.15 75.74 71.69
Total assets 100.00 100.00 100.00 100.00 100.00
Equity
Issued, subscribed & paid-up capital 2.43 2.77 8.81 10.25 11.59
Retained earnings 16.50 10.69 18.24 3.78 0.62
Other reserves 10.10 11.91 21.95 22.74 7.20
Total equity 29.03 25.37 49.00 36.77 19.41
Non-current liabilities
Pensions liabilities 0.16 0.12 0.51 0.38 0.36
Deferred tax 0.74 0.71 0.83 – –
Deferred revenue 0.02 0.02 0.06 0.08 0.10
Total non-current liabilities 0.92 0.85 1.40 0.46 0.46
Current liabilities
Trade, dividend & other payables 70.04 73.15 49.60 62.73 80.02
Current portion of deferred revenue 0.01 0.01 0.04 0.03 –
Income tax – 0.62 – 0.01 0.11
Total current liabilities 70.05 73.78 49.60 62.77 80.13
Total equity & liabilities 100.00 100.00 100.00 100.00 100.00

Required:
As the Financial Advisor to ABC Mutual Funds, report on the financial health or otherwise of Towobo Ltd based on the vertically analysed financial statements and advise ABC Mutual Funds on whether to invest in Towobo Ltd. Your report should focus on the profitability and cost control analysis, asset structure, capital structure, and working capital structure.

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  • 6 Marks

FM – MAY 2019 – L2 – Q4b – Working Capital Management

Explain the advantages a company may derive from proper working capital management.

The need for working capital management varies from industry to industry, and they can even vary among similar companies. This is due to several factors, including differences in collection and payment policies, the timing of asset purchases, the likelihood of a company writing off some of its past-due accounts receivable, and in some instances, capital-raising efforts a company is undertaking. Proper management of working capital is essential to a company’s fundamental financial health and operational success as a business.

 

Required:
Explain FOUR (4) advantages a company may derive from proper working capital management. (6 marks)

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  • 5 Marks

FA – Nov 2024 – L1 – Q5c – Profitability vs Liquidity Ratios

Explain the difference between profitability and liquidity ratios and provide two examples of each.

Accounting ratios cover a wide array of ratios that are used by accountants and act as different indicators that measure profitability, liquidity, and potential financial distress in a company’s financials.

Required:

Differentiate between profitability ratios and liquidity ratios and give TWO examples each.

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q3 – Review of Subsequent Events and Going Concern Assumptions

Identify going concern risks for Woes Limited and outline post-reporting date audit matters to assess its ability to continue as a going concern.

You are responsible for the audit of Woes Limited for the year-ended 31 December 2013. The principal activity of Woes Ltd is the provision of high-quality packaging services for manufacturing companies. The company was established three years ago and has significantly exceeded its growth targets in each of those years.

Historically, the packaging process was labour-intensive, but in September 2013, in an effort to reduce labour costs and increase efficiency, the company invested in an enhanced automated packing system. The investment was funded by a loan repayable in monthly instalments over four years. The loan covenant agreement includes a term specifying that the company’s debt: equity ratio should not exceed 1:1.

A comparison of the draft accounts for the year ended 31 December 2013 with the previous year indicates a significant increase in revenue with a small increase in profit. The company is currently trading in excess of its overdraft limit and is negotiating an increase in its facility with the bank. Management has prepared, in support of its negotiations, profit and cash flow forecasts based on the assumptions that the anticipated increase in efficiency, including a reduction in labour costs, will be achieved.

The company struggles to meet the weekly wage bill and has fallen behind in its payments to the tax authorities. It has also failed to comply with the terms of the lease in respect of the factory premises and has not paid the last three months’ instalments.

Required:

a. Identify and explain, from the information provided above, factors which indicate that Woes Ltd may not be a going concern. (10 Marks)
b. Outline the matters to which you would direct your attention in the period after the reporting date to determine whether Woes Ltd can continue as a going concern for the foreseeable future. (10 Marks)

(Total: 20 Marks)

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  • 20 Marks

CR – July 2024 – L3 – Q5 – Analysis and Interpretation of Financial Statements

Analyze Towobo Ltd’s financial health and provide advice on whether ABC Mutual Funds should invest.

Presented below are the common-sized financial statements of Towobo Ltd over the last five years:

Vertical Common-Sized Statements of Profit or Loss for the Years Ended 31 December

% 2022 2021 2020 2019 2018
Revenue 100.00 100.00 100.00 100.00 100.00
Cost of sales (88.58) (85.45) (84.92) (87.36) (92.70)
Gross profit 11.42 14.55 15.08 12.64 7.30
Distribution & marketing costs (1.00) (0.86) (0.83) (1.15) (0.87)
Administrative expenses (0.74) (0.79) (0.88) (0.85) (0.73)
Other operating income 2.06 1.78 0.77 0.58 0.69
Other operating expenses (1.36) (0.86) (1.21) (1.20) (0.94)
Profit from operations 10.38 13.82 12.93 10.02 5.45
Finance cost (0.02) (0.04) (0.02) (0.05) (0.10)
Profit before tax 10.36 13.78 12.92 9.97 5.35
Tax (3.25) (3.98) (4.05) (3.25) (2.61)
Profit after tax 7.11 9.80 8.86 6.72 2.74

Vertical Common-Sized Statements of Financial Position as at 31 December

% 2022 2021 2020 2019 2018
Non-current assets
Property, plant & equipment 8.49 8.55 15.50 20.27 23.33
Intangible assets 0.52 0.72 0.44 0.51 0.70
Capital work-in-progress 0.13 0.39 7.39 0.28 0.66
Long-term loans & advances 0.33 0.22 0.52 3.20 3.65
Total non-current assets 9.47 9.88 23.85 24.26 28.31
Current assets
Inventories 14.20 13.19 25.51 40.61 32.25
Receivables 0.16 0.09 0.53 0.32 –
Prepayments, advances, & other receivables 22.33 17.65 6.21 10.69 20.33
Short-term investments 35.15 40.67 7.10 – –
Cash and bank balances 18.69 18.52 36.80 24.12 19.11
Total current assets 90.53 90.12 76.15 75.74 71.69
Total assets 100.00 100.00 100.00 100.00 100.00
Equity
Issued, subscribed & paid-up capital 2.43 2.77 8.81 10.25 11.59
Retained earnings 16.50 10.69 18.24 3.78 0.62
Other reserves 10.10 11.91 21.95 22.74 7.20
Total equity 29.03 25.37 49.00 36.77 19.41
Non-current liabilities
Pensions liabilities 0.16 0.12 0.51 0.38 0.36
Deferred tax 0.74 0.71 0.83 – –
Deferred revenue 0.02 0.02 0.06 0.08 0.10
Total non-current liabilities 0.92 0.85 1.40 0.46 0.46
Current liabilities
Trade, dividend & other payables 70.04 73.15 49.60 62.73 80.02
Current portion of deferred revenue 0.01 0.01 0.04 0.03 –
Income tax – 0.62 – 0.01 0.11
Total current liabilities 70.05 73.78 49.60 62.77 80.13
Total equity & liabilities 100.00 100.00 100.00 100.00 100.00

Required:
As the Financial Advisor to ABC Mutual Funds, report on the financial health or otherwise of Towobo Ltd based on the vertically analysed financial statements and advise ABC Mutual Funds on whether to invest in Towobo Ltd. Your report should focus on the profitability and cost control analysis, asset structure, capital structure, and working capital structure.

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  • 6 Marks

FM – MAY 2019 – L2 – Q4b – Working Capital Management

Explain the advantages a company may derive from proper working capital management.

The need for working capital management varies from industry to industry, and they can even vary among similar companies. This is due to several factors, including differences in collection and payment policies, the timing of asset purchases, the likelihood of a company writing off some of its past-due accounts receivable, and in some instances, capital-raising efforts a company is undertaking. Proper management of working capital is essential to a company’s fundamental financial health and operational success as a business.

 

Required:
Explain FOUR (4) advantages a company may derive from proper working capital management. (6 marks)

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