Question Tag: Gearing

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  • 10 Marks

FR – Nov 2024 – L2 – Q4b – Financial Performance Assessment of Acquisition Targets

Assessment of financial performance and position of Suah LTD and Nagbe LTD to assist Dukuly LTD in an acquisition decision.

Dukuly LTD, a public entity, has been expanding through acquisitions. It is assessing two potential acquisition targets, Suah LTD and Nagbe LTD, both operating in the same industry.

The financial statements of Suah LTD and Nagbe LTD for the year ended 30 September 2024 have been provided, along with a set of financial ratios calculated for Suah LTD.

Required:
Using the calculated ratios for Nagbe LTD from Question 4a, assess the relative financial performance and financial position of Suah LTD and Nagbe LTD, to assist the directors of Dukuly LTD in making an acquisition decision.

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  • 10 Marks

FR – Nov 2024 – L2 – Q4a – Financial Ratios and Performance Evaluation

Calculation of key financial ratios for Nagbe LTD to compare with Suah LTD and evaluate financial performance.

Dukuly LTD, a public entity, has been expanding through acquisitions. It is assessing two potential acquisition targets, Suah LTD and Nagbe LTD, which operate in the same industry. The indicative price for acquiring either entity is GH¢12 million.

The financial statements for Suah LTD and Nagbe LTD are provided as follows:

Statement of Profit or Loss for the year ended 30 September 2024

Item Suah LTD (GH¢’000) Nagbe LTD (GH¢’000)
Revenue 25,000 40,000
Cost of Sales (19,000) (32,800)
Gross Profit 6,000 7,200
Distribution & Admin Expenses (1,250) (2,300)
Finance Costs (250) (900)
Profit Before Tax 4,500 4,000
Income Tax Expense (900) (1,000)
Profit for the Year 3,600 3,000

Statement of Financial Position as at 30 September 2024

Item Suah LTD (GH¢’000) Nagbe LTD (GH¢’000)
Non-Current Assets 4,800 10,300
Current Assets 4,800 8,700
Total Assets 9,600 19,000
Equity 2,600 5,600
Non-Current Liabilities 5,000 9,200
Current Liabilities 2,000 4,200
Total Equity & Liabilities 9,600 19,000

Additional Information:

  1. Carrying Amount of Plant Assets:

    • Suah LTD: GH¢4,800,000
    • Nagbe LTD: GH¢2,000,000

  2. The following ratios for Suah LTD are provided:

    Ratio Suah LTD
    Return on Capital Employed (ROCE) 62.5%
    Net Asset Turnover 3.3 times
    Gross Profit Margin 24.0%
    Profit Margin (Before Interest & Tax) 19.0%
    Current Ratio 2.4:1
    Inventory Holding Period 31 days
    Trade Receivables Collection Period 31 days
    Trade Payables Payment Period 24 days
    Gearing Ratio 65.80%
    Acid Test Ratio 1.6:1

Required:
Using the financial statements provided, calculate the corresponding ratios for Nagbe LTD to compare with Suah LTD.

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  • 20 Marks

CR – May 2016 – L3 – Q2 – Introduction to Corporate Reporting

Analyze Ehis Marvel Plc's financial performance and assess clothing and food sales divisions' contributions.

Ehis Marvel, a public company, is a high street retailer that sells clothing and food. The managing director is very disappointed with the current year’s result. The company expanded its operations and commissioned a famous designer to restyle its clothing products. This has led to increased sales in both retail lines, yet overall profits are down.

Extract from the Income Statement for the two years to March 31, 2016, are shown:

Ehis Marvel Plc – Statement of cash flow for the year to March 31, 2016

(ii) The share price of Ehis Marvel Plc averaged N6.00 during the year to March 31, 2015, but was only N3.00 at March 31, 2016.

Required:
Write a report analysing the financials of Ehis Marvel Plc, utilising the above ratios and the information in the statement of cash flows for the two years ended March 31, 2016. Your report should refer to the relative performance of the clothing and food sales and be supported by any further ratios you consider appropriate.

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  • 20 Marks

CR – May 2017 – L3 – Q2 – Emerging Trends in Corporate Reporting

Analyze and compare the performance of Lanke Plc and its group for 2014 and 2015 using selected financial ratios.

The following figures have been extracted from the financial statements of Lanke Plc and its subsidiaries for the years ended December 31, 2014, and December 31, 2015:

The directors of Lanke Plc would like to know how the individual performance of the company and that of the group compares with each other and over the two years. In particular, they are interested in performance measures around profitability, long-term solvency, and asset utilization using only the ratios indicated below. They would also want a brief explanation of why the analysis of the performance of a single company may differ from that of a group company.

Required:

Prepare a performance report that addresses the needs of the directors of Lanke Plc for the two-year period 2014 and 2015.

Note: Limit your ratio computation to the following:

  • Return on Capital Employed (ROCE)
  • Profit Margin
  • Asset Turnover
  • Gearing
  • Interest Cover
    (Show all workings)

(Total: 20 Marks)

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  • 14 Marks

CR – May 2023 – L3 – Q2a – Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)

Analyze Octopus Petroleum’s performance and ability to finance future oil spill costs

Octopus Petroleum PLC is a multinational oil and gas group operating in the Niger Delta areas of Nigeria. The company has been highly profitable over the years. The group explores and extracts natural resources, holds reserves, and has recently become involved in the downstream sector by opening various commercial retail outlets for the sale of petrol to motorists.

In June 2020, the company was involved in an ecological disaster in the Ogoni area of Niger Delta as a result of massive oil spillage due to some technical faults, thereby resulting in spilling oil into the surrounding ocean and damaging wildlife and local communities.

Investors are concerned about the future prospects of Octopus Petroleum PLC and whether it represents a safe investment since the company normally operates in the lucrative oil and gas sector.

Octopus Petroleum Group annual report for the year 2020 and its comparative figures are shown below:

Octopus Petroleum Group Consolidated Statement of Profit or Loss for the Year Ended December 31

Octopus Petroleum Group Consolidated Statement of Financial Position as at December 31

Additional Information:

  1. The N3,700 million provision for the Ogoni oil spill is an estimated cost net of relevant tax.
  2. Calculating the financial cost of the oil spill in Ogoni land has been slightly problematic. However, N530 million had been expended by year-end, while the future costs of clean-up and compensation are undetermined.
  3. One uncertain cost is fines payable to the Federal Government of Nigeria. Past fines have exceeded N2,500 million.
  4. Octopus Petroleum Group vertically integrated in 2020 by acquiring and rebranding petrol stations.
  5. Oil reserves were at record-high levels in 2020.
  6. Oil prices increased by approximately 5% during 2020.
  7. The company values inventory on a last-in-first-out (LIFO) basis, which contravenes IAS 2.
  8. Dividend payments remained at N625 million for both 2020 and 2019.
  9. Investors typically evaluate companies using these ratios:
    • Profitability Ratios:
      • Return on Capital Employed (ROCE)
      • Return on Equity (ROE)
      • Gross Profit Percentage
      • Operating Profit Percentage
    • Liquidity Ratios:
      • Current Ratio
      • Acid Test Ratio
    • Resource Utilization and Financial Position Ratios:
      • Inventory Turnover
      • Asset Turnover
      • Interest Cover
      • Gearing Ratio

Required:

(a) Analyze the performance of Octopus Petroleum Group over the two-year period. Your analysis should also consider the group’s ability to finance the cost of the oil spill in Ogoni land in the coming years. (14 Marks)

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  • 15 Marks

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

Evaluate Osamco Limited's financial performance and discuss reasons for its potential stock exchange listing.

Osamco Limited, a 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 financial information is made available:

OSAMCO LIMITED
Income Statement for the Year Ended June 30, 2016

Item Amount (N’million)
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

Average performance ratios for the industry sector in which Osamco Limited operates are as stated below:

Industry Sector Ratios

Ratio Industry Average
Return before interest and tax on long-term capital employed 24%
Return after tax on equity 16%
Operating profit as a 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:

  1. (a) Evaluate the financial state and performance of Osamco Limited by comparing it with that of its industry sector. (10 Marks)
  2. (b) Discuss four probable reasons why the management of Osamco Limited is considering Stock Exchange listing. (5 Marks)

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  • 6 Marks

CR – May 2018 – L3 – SB – Q4a – Presentation of Financial Statements (IAS 1)

Explain how off-statement financing can mislead financial statement users, with examples for three user groups.

a. Recording the substance of transactions, rather than their legal form, is an important principle in financial reporting. The use of off-statement of financial position financing arrangement enables companies to obtain financing without showing debts in their books.

Required:

Describe how the use of off-statement of financial position financing can mislead users of financial statements, making specific reference to THREE user groups and giving examples where recording the legal form of transactions may mislead them. (6 Marks)

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  • 20 Marks

FM – May 2015 – L2 – SB – Q2 – Introduction to Performance Management

Prepare profitability and cash flow statements, and compute liquidity and gearing ratios for Ozoigbondu Nigeria Limited.

Ozoigbondu Nigeria Limited is a company that is into buying and selling of plastic containers. The company is financed by a capital of ₦15 million inclusive of reserves in a mix of 30% and 70% of debt and equity respectively.

The Company has been in trading business for the past six years and has consistently adhered to its corporate policy on sales, purchases, and inventory management.

The company’s policy on sales is to ensure that sales are collected as follows: (i) Cash sales is 40% of the monthly sales. (ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on purchases is in agreement with the supplier’s policy which is to pay for all supplies in the month following. The company’s stock policy is to reserve 30% of the month’s purchases as closing inventory.

The following information is available for the five years 2010 to 2014:

2010 2011 2012 2013 2014
Monthly Sales 3,400,000 3,600,000 4,200,000 4,800,000 7,200,000
Monthly Purchases 2,000,000 2,400,000 2,800,000 3,200,000 4,800,000
Monthly Salaries 350,000 350,000 430,000 430,000 480,000
Monthly Rent 100,000 100,000 100,000 100,000 100,000
Monthly Cash Expenses 200,000 220,000 240,000 280,000 360,000

Additional Information: (i) The company purchased a motor vehicle in July 2013 which was paid for in September 2013. The cost of the motor vehicle was ₦5,000,000.
(ii) Annual depreciation for the motor vehicle is 20%.
(iii) The Cash Balance as at 31st December 2011 was ₦4,000,000.
(iv) The company’s salaries, rent, and expenses were paid in the month they were due.

Required: a. Prepare a Profitability Statement for 2012, 2013, and 2014. (10 Marks)
b. Prepare a Cash Flow Statement for 2012, 2013, and 2014. (7 Marks)
c. Determine and comment on the liquidity ratio (current ratio) for 2014. (2 Marks)
d. Compute the gearing ratio. (1 Mark)

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  • 30 Marks

FR – May 2024 – L2 – SB – Q1 – Statement of Cash Flows

Prepare a statement of cash flows for Badary Plc using the direct method and discuss profitability, gearing, and investor's stake in Badary Plc.

Additional Information:

(i) During the year ended March 31, 2021, plant and equipment with a carrying amount of N40,000,000 were sold for N55,000,000. The profit or loss on disposal was charged to distribution expenses.
(ii) Dividend of 2 kobo per share was paid in the year ended March 31, 2021, and there were also bonus issues.
(iii) Depreciation charged for the year was N10,000,000 on furniture and N30,000,000 on plant and equipment.
(iv) During the year, an investment that cost N12,500,000 some years ago was disposed of for N20,000,000. The profit or loss on disposal was charged to administrative expenses.
(v) Dividends received were from investments in shares and the immediate disposal of rights issues from the investment in a blue-chip company.

You are required to:
a. Prepare the statement of cash flows of Badary Plc for the year ended March 31, 2021, using the direct method in accordance with IAS 7. (20 Marks)
b. Discuss the profitability, gearing, and investor’s stake in Badary Plc and recommend strategies for improving or sustaining them. (10 Marks)

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  • 15 Marks

FR – May 2022 – L2 – SB – Q7 – Consolidated Financial Statements (IFRS 10)

Evaluate the acquisition of Warri Health PLC by computing financial ratios and drafting a technical report to the Chief Accountant of Owerri PLC.

The Board of Directors of Owerri PLC is planning to acquire a controlling interest in Warri Health PLC, a vaccine-producing company, to expand the profitability of the group. Both companies are quoted on the Nigerian Stock Exchange (NSE). The Chief Accountant of Owerri PLC has been given the industrial average and the financial statements of Owerri PLC and Warri Health PLC for the year ended December 31, 2020. This was done to enable the Chief Accountant compute the relevant ratios and evaluate the inherent potentials of the acquisition.

The following comparative ratios of Warri Health PLC and Owerri PLC with the industrial average are provided:

You are required to:
a. Compute the cost of sales ratio and earnings yield (EY) for both companies for the year ended December 31, 2020. (2 Marks)

b. Draft a technical report to the Chief Accountant of Owerri PLC, evaluating and advising on the desirability of acquiring a controlling interest in Warri Health PLC. (13 Marks)

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  • 4 Marks

CR – Nov 2020 – L3 – Q5c – Ratios for Lenders

Calculate two ratios of interest to a potential long-term lender for two years.

Calculate, for both years, TWO (2) ratios of interest to a potential long-term lender.

 

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  • 20 Marks

CR – May 2021 – L3 – Q5 – Financial performance of Shop First Ltd

Analyze the financial performance of Shop First Ltd for 2020 and discuss the effects of discontinued operations and contingencies.

Shop First Ltd operates supermarket chains across the sixteen (16) regions of Ghana. The firm has been in commercial operation for more than two decades, growing its operations through an effective supply chain and financial management. However, in the last few years, keen competition and worsening general economic performance have steadied the consistent growths experienced over the years, resulting in the entity disposing off part of its operations. Below are the financial statements of Shop First Ltd:

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FR – May 2020 – L2 – Q4a – Financial Ratios Calculation

Calculate the financial ratios of Adenta Ltd for the year ended 31 December 2018 based on its financial statements.

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  • 10 Marks

FR – May 2020 – L2 – Q4b – Financial Performance Analysis

Write a report analyzing Adenta Ltd's financial performance in comparison to industry averages for 2018.

As the Financial Controller of Adenta Ltd, write a report to the Board of Directors analyzing the financial performance of Adenta Ltd based on a comparison with the industry averages. (10 marks)

 

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  • 20 Marks

FR – March 2023 – L2 – Q4 – Financial Statement Analysis

Analyze and compare the financial performance of Boomu Ltd and Sintim Ltd using profitability, liquidity, efficiency, and gearing ratios.

Boomu Ltd is an agro-processing company with strong competition from Sintim Ltd. The Board of Directors of Boomu Ltd wants to measure the performance of the company against its competitor. Below are the statement of comprehensive income of the two companies for the year ended 31 December 2021, and the statement of financial positions as at that date.

Statement of Comprehensive Income:

Boomu Ltd (GH¢000) Sintim Ltd (GH¢000)
Revenue 619,085 956,200
Cost of Sales (424,700) (762,400)
Gross Profit 194,385 193,800
Administrative Expenses (58,635) (84,940)
Other Income 6,335 9,270
Operating Profit 142,085 118,130
Finance Cost – (3,000)
Profit Before Income Tax 142,085 115,130
Income Tax Expense (23,460) (34,220)
Profit for the Year 118,625 80,910

Statement of Financial Position:

Boomu Ltd (GH¢000) Sintim Ltd (GH¢000)
Non-Current Assets
Property, Plant & Equipment 231,636 197,884
Intangible Assets 105,320 111,928
Total Non-Current Assets 336,956 309,812
Current Assets
Inventories 33,960 37,480
Trade Receivables 26,216 3,836
Cash and Cash Equivalents 91,328 42,472
Total Current Assets 151,504 83,788
Total Assets 488,460 393,600

Equity & Liabilities:

Boomu Ltd (GH¢000) Sintim Ltd (GH¢000)
Equity
Share Capital 20,000 30,000
Retained Earnings 390,536 283,820
Total Equity 410,536 313,820
Non-Current Liabilities
Deferred Taxation 18,120 13,948
20% Loan Notes – 30,000
Total Non-Current Liabilities 18,120 43,948
Current Liabilities
Trade and Other Payables 42,904 28,040
Current Tax 16,900 7,792
Total Current Liabilities 59,804 35,832
Total Equity & Liabilities 488,460 393,600

Required: As the Finance Manager of the company, write a report to the Board of Directors, assessing the comparative performance of the company for the year ended 31 December 2021 using THREE (3) profitability ratios, TWO (2) liquidity ratios, THREE (3) efficiency ratios, and TWO (2) gearing ratios.

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  • 9 Marks

FR – Nov 2023 – L2 – Q4b – Financial Statement Analysis

Write a report analyzing the performance of two companies, Addin Petroleum and Gyan Petroleum, using key financial ratios.

Write a report to the Chairperson of the board based on a comparative analysis of the performance of both companies using the ratios computed in (a) above.

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  • 20 Marks

FR – July 2023 – L2 – Q4 – Performance Analysis

Assess the financial performance of Besease Ltd using financial ratios and prepare a report for the board of directors.

Besease Ltd won two prestigious awards in 2020 despite the negative impact of the COVID-19 pandemic. The Board of Directors seeks to assess the company’s performance for the year ended 31 December 2021 in comparison to 2020.

Below are the financial statements for the year ended 31 December 2021:

Statement of comprehensive income for the year ended 31 December

2021 (GH¢) 2020 (GH¢)
Revenue 7,315,927 6,184,754
Cost of sales (4,322,986) (3,441,339)
Gross profit 2,992,941 2,743,415
Other income 330,812 280,832
Administrative expenses (2,511,179) (2,648,987)
Operating profit 812,574 375,260
Finance cost (496,913) (174,872)
Profit before tax 315,661 200,388
Taxation (188,621) (30,700)
Profit for the year 127,040 169,688

Statement of financial position as at 31 December

2021 (GH¢) 2020 (GH¢)
Non-current assets
Property, Plant & Equipment 9,224,988 5,102,799
Intangible assets 35,824 33,350
Investments 36,629 36,629
Total non-current assets 9,297,441 5,172,778
Current assets
Inventories 2,878,337 1,329,279
Trade receivables 1,875,594 2,246,747
Cash and bank balances 527,412 372,081
Total current assets 5,281,343 3,948,107
Total assets 14,578,784 9,120,885
Equity & Liabilities
Equity
Share capital 217,467 217,467
Retained earnings 1,289,140 1,162,100
Credit reserve 826,528 1,102,037
Total equity 2,333,135 2,481,604
Non-current liabilities
Interest-bearing loans 6,708,598 2,800,223
Deferred taxation 187,624 186,304
Total non-current liabilities 6,896,222 2,986,527
Current liabilities
Trade payables 1,257,693 1,550,466
Taxation 118,337 101,391
Other payables 2,993,667 1,021,167
Accrued expenses 979,730 979,730
Total current liabilities 5,349,427 3,652,754
Total equity & liabilities 14,578,784 9,120,885

The Finance Manager has selected the following performance ratios:
i) Return on capital employed (capital employed = interest-bearing debt + shareholders’ equity) (%)
ii) Return on equity (%)
iii) Acid test ratio (times)
iv) Debt-to-equity ratio
v) Interest cover ratio (times)

Required:
Write a report to the Board of Directors assessing the comparative performance of Besease Ltd for the year ended 31 December 2021 using the given ratios.

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  • 9 Marks

FR – May 2017 – L2 – Q4b – Financial Statement Analysis

Write a report analyzing the performance of Shine Ltd compared to Diamond Ltd and the industry averages based on profitability, liquidity, gearing, and efficiency.

As the Financial Controller of Shine Ltd, write a report to the Managing Director analyzing the performance of your company, comparing the results against that of Diamond Ltd (a key competitor) and against the industry average using the following measures:

  • Profitability
  • Liquidity
  • Gearing
  • Efficiency

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  • 6 Marks

FR – May 2017 – L2 – Q4a – Financial Statement Analysis

Calculate comparable financial ratios for Diamond Ltd and Shine Ltd based on profitability, liquidity, gearing, and efficiency.

The following information has been extracted from the recently published accounts of Diamond Ltd and Shine Ltd.

Statement of Profit or Loss for the year ended 31 December 2016
The following are the latest industry average ratios:
Required:
Calculate comparable ratios (to two decimal places where appropriate) for the two companies. All calculations must be clearly shown.

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  • 15 Marks

FR – May 2016 – L2 – Q4 – Financial Statement Analysis

Prepare a report for the managing director of ANN Co. on IB Co's financial position, focusing on gearing and liquidity ratios.

ANN Co is considering acquiring an interest in its competitor IB Co Ltd. The managing director of ANN Co has obtained the three most recent statements of financial position of IB Co Ltd as shown below:

IB Co Ltd – Statement of Financial Position as at 31st December:

2013 2014 2015
Non-current assets
Land and buildings 11,460 12,121 11,081
Plant and equipment 8,896 9,020 9,130
Total non-current assets 20,356 21,141 20,211
Current assets
Inventories 1,775 2,663 3,995
Trade receivables 1,440 2,260 3,164
Cash 50 53 55
Total current assets 3,265 4,976 7,214
Total assets 23,621 26,117 27,425
Equity
Share capital 8,000 8,000 8,000
Retained earnings 6,434 7,313 7,584
Total equity 14,434 15,313 15,584
Non-current liabilities
12% debentures (2015-2018) 5,000 5,000 5,000
Current liabilities
Trade payables 390 388 446
Bank 1,300 2,300 3,400
Income taxes payable 897 1,420 1,195
Dividend payable 1,600 1,696 1,800
Total current liabilities 4,187 5,804 6,841
Total equity and liabilities 23,621 26,117 27,425

Required:
Prepare a report for the managing director of ANN Co, commenting on the financial position of IB Co Ltd and highlighting any areas that require further investigation (using gearing and liquidity ratios only).

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