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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  • 20 Marks

FR – March 2024 – L2 – Q4a – Financial Statement Analysis

Calculate financial ratios for Mantemante Ltd and compare them with industry averages.

The following information has been extracted from the Financial Statements of Mantemante Ltd.

Statement of Financial Position as at 31 December 2023

Additional information, including ratios such as Return on Capital Employed, Net Profit Margin, Asset Turnover, Gearing, etc., is also provided.

Required:
a) Compute the comparable ratios for Mantemante Ltd for the years 2022 and 2023.
(10 marks)
b) Write a report for the Board of Directors analyzing the performance of Mantemante Ltd with references to the ratios for the two years and industry averages.
(10 marks)

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  • 20 Marks

FR – May 2018 – L2 – Q4 – Financial Statement Analysis

Calculate financial ratios for Obiya Ltd based on its financial statements for the year ended 30 September 2017.

Obiya Ltd assembles computer equipment from bought-in components and distributes them to various wholesalers and retailers. It has recently subscribed to an inter-firm comparison service. Members submit accounting ratios as specified by the operator of the service, and in return, members receive the average figures for each of the specified ratios taken from all of the companies in the same sector that subscribe to the service. The specified ratios and the average figures for Obiya’s sector are shown below:

Ratios of sector companies for the period to 30 September 2017

Ratio Sector Average
Return on capital employed 22.1%
Net asset turnover 1.8 times
Gross profit margin 30%
Net profit (before tax) margin 12.50%
Current ratio 1.6:1
Quick ratio 0.9:1
Inventory holding period 46 days
Accounts receivable collection period 45 days
Accounts payable payment period 55 days
Debt to equity 40%
Dividend yield 6%
Dividend cover 3 times

Obiya Ltd’s financial statements for the year to 30 September 2017 are set out below:

Statement of profit or loss for the year ended 30 September 2017

Description GH¢’000
Revenue 2,425
Cost of sales (1,870)
Gross profit 555
Other operating expenses (215)
Operating profit 340
Finance costs (34)
Exceptional item (note ii) (120)
Profit before tax 186
Income tax (90)
Profit for the period 96

Statement of changes in equity (extract)
For the year ended 30 September 2017

Description GH¢’000
Retained earnings – 1 October 2016 179
Net profit for the period 96
Dividends paid (Interim GH¢60,000; final GH¢30,000) (90)
Retained earnings – 30 September 2017 185

Statement of financial position as at 30 September 2017

Description GH¢’000
Non-current assets
Property, plant, equipment 540
Current assets
Inventory 275
Accounts receivable 320
Bank –
Total current assets 595
Total assets 1,135
Equity
Ordinary shares (25 pesewas each) 150
Retained earnings 185
Total equity 335
Non-current liabilities
8% loan notes 300
Current liabilities
Bank overdraft 65
Trade accounts payable 350
Taxation 85
Total current liabilities 500
Total equity and liabilities 1,135

Notes:

i) The details of the non-current assets are:

Description Cost (GH¢’000) Accumulated depreciation (GH¢’000) Net book value (GH¢’000)
At 30 September 2017 3,600 3,060 540

ii) The exceptional item relates to losses on the sale of a batch of computers that had become worthless due to improvements in microchip design.

iii) The market price of Obiya’s shares throughout the year averaged GH¢6.00 each.

Required:
a) Calculate the ratios for Obiya equivalent to those provided by the inter-firm comparison service.

(5 marks)

b) Write a report analyzing the operational performance, gearing, investment, and liquidity of Obiya Ltd based on a comparison with the sector averages. (10 marks)

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  • 15 Marks

FR – Nov 2018 – L2 – Q4 – Financial Statement Analysis

Assess the financial performance and position of Light Ltd and Favour Ltd for acquisition purposes based on profitability, liquidity, and gearing ratios.

Salt Ltd is a Government Business Entity that would like to acquire 100% of a viable private company. It has obtained the following draft financial statements for two companies, Light Ltd and Favour Ltd. They operate in the same industry, and their managements have indicated they would be receptive to a takeover.

Statement of Profit or Loss for the year ended 31 December 2017:

Description Light Ltd (GH¢’000) Favour Ltd (GH¢’000)
Revenue 12,000 20,500
Cost of sales (10,500) (18,000)
Gross profit 1,500 2,500
Operating expenses (240) (500)
Finance costs (210) (600)
Profit before tax 1,050 1,400
Income tax expense (150) (400)
Profit for the year 900 1,000
Dividends paid 250 700

Statements of Financial Position as at 31 December 2017:

Description Light Ltd (GH¢’000) Favour Ltd (GH¢’000)
Assets
Non-current assets:
Freehold factory 4,400 –
Owned plant 5,000 2,200
Leased plant – 5,300
Total non-current assets 9,400 7,500
Current assets:
Inventory 2,000 3,600
Trade receivables 2,400 3,700
Bank 600 –
Total current assets 5,000 7,300
Total assets 14,400 14,800
Equity and Liabilities
Equity shares of GH¢1 each 2,000 2,000
Property revaluation reserve 900 –
Retained earnings 2,600 800
Total equity 5,500 2,800
Non-current liabilities
Finance lease obligations – 3,200
7% loan notes 3,000 –
10% loan notes – 3,000
Deferred tax 600 100
Government grants 1,200 –
Total non-current liabilities 4,800 6,300
Current liabilities
Bank overdraft – 1,200
Trade payables 3,100 3,800
Government grants 400 –
Finance lease obligations – 500
Taxation 600 200
Total current liabilities 4,100 5,700
Total equity and liabilities 14,400 14,800

Notes:

i. Both companies operate from the same premises.
ii. Additional details of the two companies’ plant are:

Description Light Ltd (GH¢’000) Favour Ltd (GH¢’000)
Owned plant – Historical cost 8,000 10,000
Leased plant – Original fair value – 7,500

There were no disposals of plant during the year by either company.

iii. The interest rate implicit within Favour Ltd’s finance leases is 7.5% per annum. For the purpose of calculating ROCE and gearing, all finance lease obligations are treated as long-term interest-bearing borrowings.

Required:
Assess the relative financial performance and financial position of Light Ltd and Favour Ltd for the year ended 31 December 2017 to inform the directors of Salt Ltd in their acquisition decision. Your analysis should focus on profitability, liquidity, and gearing.
(15 marks)

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  • 8 Marks

AFM – Nov 2016 – L3 – Q3a – Sources of finance and cost of capital

Calculate the cost of equity for Sunland Co using the Capital Asset Pricing Model (CAPM) with a focus on deriving beta from industry data.

a) The directors of Sunland Company, a company which has 75% of its operations in the retail
sector and 25% in manufacturing, are trying to derive the firm’s cost of equity. However, since
the company is not listed, it has been difficult to determine an appropriate beta factor. The
following information was researched:

  •  Retail industry – quoted retailers have an average equity beta of 1.20, and an average
    gearing ratio of 20:80 (debt: equity).
  • Manufacturing industry – quoted manufacturers have an average equity beta of 1.45 and
    an average gearing ratio of 45:55 (debt: equity).
  • The risk free rate is 3% and the equity risk premium is 6%.
  • Tax on corporate profits is 30%.
  •  Sunland Co has gearing ratio of 50% debt and 50% equity by market values. Assume that
    the risk on corporate debt is negligible.

Required:
Calculate the cost of equity of Sunland Company using the Capital Asset Pricing Model.

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  • 8 Marks

CR – May 2018 – L3 – Q4c – Analysis and Interpretation of Financial Statements

Analyze and compare the financial performance of two companies in terms of operating performance, liquidity, gearing, and investment ratios.

Fordland Ltd and Fiatland Ltd are two companies in the garment industry. The following are financial ratios computed by the Research Department of ICAG as part of analyzing companies’ performance industry by industry:

Ratios Fordland Ltd Fiatland Ltd
Return on Capital Employed (ROCE) 24.10% 30%
Net Assets Turnover 1.9 times 2.5 times
Gross Profit Margin 35% 20%
Net Profit Margin 10.50% 38%
Current Ratio 1.0:1 2.0:1
Quick Ratio 0.8:1 1.0:1
Inventory Holding Period 60 days 90 days
Receivables Collection Period 58 days 60 days
Payables Payment Period 50 days 50 days
Debt to Equity Ratio 50% 30%
Dividend Yield 3% 2%
Dividend Cover 2 times 1.5 times

Required:
Write a report analyzing and comparing the financial performance of Fordland Ltd and Fiatland Ltd. The report should cover operating performance, liquidity, gearing, and investment ratios. (8 marks)

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  • 20 Marks

CR – April 2022 – L3 – Q5 – Analysis and interpretation of financial statements

Write a report analyzing the financial performance and financial position of Azure Plc using financial ratios and sector averages.

Azure Plc is a company that trades its ordinary shares on the Ghana Stock Exchange. Below are the statements of profit or loss for the year ended 31 December 2020 and for the first three quarters in 2020 published in line with the Ghana Stock Exchange regulations:

Statements of profit or loss of Azure Plc:

Description Year Ended 31 Dec 2020 (Audited) Quarter 3 (Unaudited) Quarter 2 (U

naudited)

 Quarter 1 (Unaudited)
Revenue GH¢ 2,829 million GH¢ 544 million GH¢ 810 million GH¢ 624 million
Cost of sales (GH¢ 1,754 million) (GH¢ 346 million) (GH¢ 489 million) (GH¢ 412 million)
Gross profit GH¢ 1,075 million GH¢ 198 million GH¢ 321 million GH¢ 212 million
Other operating income GH¢ 72 million GH¢ 32 million GH¢ 21 million GH¢ 23 million
Administrative expenses (GH¢ 572 million) (GH¢ 94 million) (GH¢ 183 million) (GH¢ 146 million)
Distribution costs (GH¢ 265 million) (GH¢ 73 million) (GH¢ 62 million) (GH¢ 65 million)
Finance costs (GH¢ 15 million) (GH¢ 11 million) (GH¢ 2 million) (GH¢ 2 million)
Profit before tax GH¢ 295 million GH¢ 52 million GH¢ 95 million GH¢ 22 million
Tax (GH¢ 101 million) (GH¢ 17 million) (GH¢ 31 million) (GH¢ 11 million)
Profit for the year GH¢ 194 million GH¢ 35 million GH¢ 64 million GH¢ 11 million

Additional information:
The following ratios have been calculated for the relevant sector for the year ended 31 December 2020:

  • Return on year-end capital employed: 18.30%
  • Return on year-end equity: 16.05%
  • Profit (before interest and tax) margin: 12.1%
  • Gross profit margin: 43.22%
  • Current ratio: 2.60
  • Quick ratio: 1.25
  • Assets turnover: 1.02
  • Debt-to-equity ratio: 30.50%

Required:
Write a report to the Board of Directors of Azure Plc, analyzing the financial performance and financial position of the company using the above information to assist the Board in determining whether strategic adjustments are required and where, if any.
(20 marks)

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  • 20 Marks

CR – Nov 2023 – L3 – Q5 – Analysis and interpretation of financial statements

Analyze and compare the financial performance and position of two companies, Abodam Plc and Bossu Plc, using various financial ratios and metrics.

You are a financial consultant of Synel Investments (SI). The Directors of SI have tasked you to evaluate the financial health of two wholesaling companies – Abodam Plc (Abodam) and Bossu Plc (Bossu) – to help them decide which entity to invest in. Assume that all other factors of the two companies have been considered except their current period’s relative financial performance and position. The financial statements of Abodam and Bossu for the year ended 31 December 2022 are provided below:

Additional information:

  1. The Directors of Bossu announced at the beginning of the current period to repurchase 20% of the company’s issued shares in equal proportion over a three-year period. The purchase of the first tranche is expected to occur around February 2023. At the start of second quarter this year, the major commercial lender of Abodam triggered its covenant modification right to include stricter profit-based clauses in the loan agreement.

  1. During the year, Abodam and Bossu paid ordinary dividends of GH¢450,000 and GH¢315,000 respectively.
  2. Average borrowing rate for the two companies has remained 11% during the period.

Required:

a) Compute the following additional ratios for the two companies:

i) Return on year-end equity

ii) Return on year-end capital employed (where capital employed equals total assets less current liabilities)

iii) Trade receivables days

iv) Debt-to-equity

(8 marks)

b) Write a report to the board of SI to evaluate the relative financial performance and position of Abodam and Bossu, based on the following headings:

i) Profitability

ii) Working capital management

iii) Gearing

iv) Earnings per share

v) Bossu’s repurchase plan vi) Abodam’s loan covenant

(12 marks)

(Total: 20 marks)

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  • 20 Marks

CR – Aug 2022 – L3 – Q5 – Analysis and interpretation of financial statements

This question requires writing a report that assesses the comparative performance of a company using various financial ratios (profitability, liquidity, efficiency, and gearing).

Wadie Ltd has been in operation for the past ten years. The company started operations in Kumasi with just three employees, but currently operates in all regions of Ghana, with over five hundred employees.

The final meeting for the year of the Board of Directors of the company is to be convened, and as a tradition, the Finance Manager presented an analysis of the financial performance of the company for the financial year ended 31 December 2021. Below are the financial statements for the year ended 31 December 2021:

Statement of Comprehensive Income for the year 31 December

Additional Information:

i) Finance income relates to interest earned on the company’s investment in Government of Ghana loan notes.

ii) Dividend payable represents the dividend declared or approved by shareholders at the last Annual General Meeting.

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. Your report should use THREE (3) profitability ratios, TWO (2) liquidity ratios, THREE (3) efficiency ratios, and TWO (2) gearing ratios.

 

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  • 20 Marks

CR – Mar 2023 – L3 – Q5 – Analysis and interpretation of financial statements Series

Compute financial ratios including operating profit margin, ROCE, inventory turnover, current ratio, capital gearing, and dividend yield for Atiku Ltd and Obi Ltd.

Atiku Ltd operates in the same business sector as Obi Ltd. The directors of Atiku Ltd would like to understand the firm’s strengths and weaknesses relative to Obi Ltd from the latest financial statements of the two entities as set out below:

Summarised Statements of Profit or Loss for the year ended 30 June 2022:

 

Net profit figures were arrived at after considering the following items:

  • Depreciation and amortisation: Atiku Ltd (GH¢3,110), Obi Ltd (GH¢2,850)
  • Employee benefits: Atiku Ltd (GH¢7,200), Obi Ltd (GH¢6,050)
  • Finance cost: Atiku Ltd (GH¢1,050), Obi Ltd (GH¢880)
  • Provision for current tax: Atiku Ltd (GH¢1,004), Obi Ltd (GH¢925)
  • Deferred tax decrease in provision: Atiku Ltd (GH¢116), Obi Ltd (GH¢55)
  • Current tax under-provision (2021): Atiku Ltd (nil), Obi Ltd (GH¢32)

Additional information: The following ratios have been extracted from the Directors’ Report accompanying the financial statements:

  • Gross profit margin: Atiku Ltd (22%), Obi Ltd (25%)
  • Dividend coverage: Atiku Ltd (4), Obi Ltd (5)
  • Current share price: Atiku Ltd (GH¢2.10), Obi Ltd (GH¢1.55)

Required:
a) Compute the following ratios for both entities for the year ended 30 June 2022: i) Operating profit margin (1.5 marks)
ii) Return on capital employed (capital employed defined as all interest-bearing liabilities and equity) (1.5 marks)
iii) Inventory turnover period (1.5 marks)
iv) Current ratio (1.5 marks)
v) Capital (long-term) gearing (1.5 marks)
vi) Dividend yield (2.5 marks)

b) Write a report to the Chief Executive Officer analyzing Atiku Ltd’s financial performance and position relative to Obi Ltd, for the year ended 30 June 2022. For the report writing, use only the following ratios: operating profit margin, return on capital employed, capital gearing and dividend yield. (10 marks)

 

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  • 20 Marks

CR – Dec 2022 – L3 – Q5 – Analysis and Interpretation of Financial Statements

Evaluate Partey Ltd's performance using key financial ratios for profitability, liquidity, efficiency, and gearing.

Partey Ltd is a company engaged in continuous casting and cold rolling of aluminum products in Ghana. The company has been in operation for several decades, and its operations did not change in the year ended 31 December 2021.

Below are financial statements for the years 2021 and 2020:

Statement of Profit or Loss and Other Comprehensive Income

2021 (GH¢000) 2020 (GH¢000)
Revenue 389,507 445,963
Cost of sales (240,731) (237,345)
Gross profit 148,776 208,618
Other income 19,315 10,983
Distribution costs (76,366) (108,137)
Administrative expenses (74,520) (46,216)
Operating profit 17,205 65,248
Finance cost (21,287) (21,537)
Profit before tax (4,082) 43,711
Tax expense – (16,521)
Profit for the year (4,082) 27,190

Statement of Financial Position

2021 (GH¢000) 2020 (GH¢000)
Non-current assets:
Property, plant and equipment 196,784 183,190
Investment securities 137 348
Total non-current assets 196,921 183,538
Current assets:
Inventories 50,400 66,351
Trade receivables 23,769 27,688
Other receivables 9,343 1,833
Cash and cash equivalents 45,969 20,699
Total current assets 129,481 116,571
Total assets 326,402 300,109
Equity and Liabilities:
Stated capital 10,000 10,000
Retained earnings 124,575 111,676
Total equity 134,575 121,676
Non-current liabilities:
15% Loan notes 8,580 10,247
20% Loan notes (NGIC Pension Fund) 100,000 100,000
Total non-current liabilities 108,580 110,247
Current liabilities:
Trade payables 80,182 65,082
Current tax – 3,104
Accrued expenses 3,065 –
Total current liabilities 83,247 68,186
Total equity and liabilities 326,402 300,109

Required:

a) As the Finance Manager of Partey Ltd, you have been tasked by the Board of Directors to produce a report. Assess the performance of the company over time based on profitability, liquidity, efficiency, and gearing.
(Note: Your report should include TWO (2) ratios each of profitability, liquidity, efficiency, and gearing).
(16 marks)

b) Management of the company wants to achieve improvement in technology and production processes to stimulate growth. However, this will require further injection of funds and less strain on operating cash flows. To achieve this, the Board of Directors of the company has resolved to convince the company’s largest debtholder, NGIC Pension Fund, to exercise the conversion right attached to the debt. The total value of the debt included in the financial statements for both financial years is GH¢100 million. The debt was issued at a coupon rate of 20% per annum. The annual coupon payments are also included in the financial statements above for both financial years. NGIC Pension Fund is also the second-largest shareholder of the company.

The estimated tax expense on the company’s profit for the year ended 31 December 2021, if the debt owed to NGIC Pension Fund is converted, is GH¢3.172 million. Current tax liability at 31 December 2021 is expected to increase by the same amount.

Required:
Assess the performance of the company for the year ended 31 December 2021 upon conversion of the debt owed to NGIC Pension Fund on 1 January 2021 at its carrying amount.
(4 marks)

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