- 20 Marks
PSAF – L2 – Q13.3- Financial Statements Discussion and Analysis
Question
Nation A and Nation B are West African Nations that attained independence around the same period. Presented below are the financial statements of the two countries.
Statement of financial position as at 31 December 2023
| Nation A (GH¢ million) | Nation B (GH¢ million) | |
|---|---|---|
| Current liabilities | ||
| Payables | 9,300 | 6,150 |
| Trust monies | 2,100 | 1,350 |
| Domestic debt | 24,000 | 6,750 |
| 35,400 | 14,250 | |
| Non-current liabilities | ||
| Domestic debt | 54,000 | 27,000 |
| External debt | 63,675 | 33,000 |
| 117,675 | 60,000 | |
| Total fund and liabilities | 153,075 | 74,250 |
Required:
(a) From the information provided, compute for the two countries respectively:
- Grant to Total Revenue ratio;
- Wage Bill to Tax Revenue ratio;
- Interest to Revenue ratio;
- Debt to GDP ratio;
- Capital expenditure per Capita; and
- Wages bill to Total Expenditure ratio. (b) Based on the result in question (a), write a report discussing and analyzing the financial performance and financial position of the two countries. Include in your report the limitations of the analysis of the two countries.
Answer
(a)
Computation of ratios for Nation A and Nation B
| Ratio | Nation A | Nation B |
|---|---|---|
| Grant to Total Revenues (%) | 3.56 | 2.11 |
| (Total grant/Total Revenue *100) | ||
| Wage bill to Total Tax Revenue (%) | 84.54 | 39.70 |
| (Compensation/Total Tax*100) | ||
| Interest to Revenue (%) | 53.79 | 20.03 |
| (Interest expense/Total revenue*100) | ||
| Debt to Gross Domestic Product (%) | 54.10 | 27.65 |
| (total debt/GDP*100) | ||
| Capital expense per Capita (GHC) | 534.50 | 1,878.67 |
| (Capital expenditure/Population) | ||
| Wage bill to Total Expenditure (%) | 47.23 | 43.02 |
| (Compensation/Total Expenditure*100) |
(b)
Report: Analysis and discussion of financial performance of Nation A and Nation B
Introduction
This report analyses and discusses the financial performance and position of Nation A and Nation B. It also indicates the limitations of the analysis.
Financial performance
The financial performance of the two countries is measured by the following ratios:
- Grant to Total Revenue
- Wage Bill to Tax Revenue
- Interest to Revenue
- Wage Bill to Total Expenditure
The grant to total revenue ratio measures the extent to which a country relies on external sources (grants and donations) to finance its operations. The higher the ratio, the more dependent the country is on external grants and donations. Both countries have low dependency on grants; however, Nation A is more dependent on grants than Nation B, given the ratios of 3.56% and 2.11%, respectively.
In respect of the wage bill to total tax revenue, which measures the efficiency in the management of the wage bill of the country, Nation B spends a lower portion of its taxes to pay employees in the public sector than Nation A. This implies that Nation A is overemploying staff in the public sector, which results in a bloated payroll.
The interest to revenue ratio measures the extent to which a country relies on debt to finance its operations and the ability of the country to honor its interest obligations. Nation A uses a higher portion of its revenue (53.79%) to pay interest than Nation B, which is 20.03%. Similarly, Nation A applies 47.5% of its total expenditure to interest, which is higher than that of Nation B. This indicates that Nation B manages its interest costs better than Nation A.
Financial position
The financial condition of the countries was examined based on the debt to GDP ratio and capital expenditure per capita. These measures show the financial sustainability of the countries. Given the debt to GDP ratio of 54% and 27.65%, the debt of Nation B is at a more sustainable level than Nation A. However, Nation A’s debt is within acceptable levels. Capital Expenditure (CAPEX) per capita indicates the amount of capital investment per citizen. The higher the per capita, the more investment by the government in capital projects and infrastructure. Nation B has a better CAPEX per capita (GH¢1,878.67) than Nation A (GH¢534.50).
Conclusions
In all, the financial performance of the two countries is reasonably good, but Nation B shows a stronger performance than Nation A. The financial condition of both countries is acceptable; however, Nation B shows more sustainable financial conditions. Nonetheless, there are some limitations to the analysis, and these include:
- Even though the two countries are West African, there may be some political, structural, and cultural differences that may not be reflected in the analysis.
- Differences in accounting policies and choices may affect the results of the countries, which may not be reflected in the analysis.
- The effect of exchange rates on the figures may impact the analysis but was not considered in the analysis.
- The accounting periods of the two countries may differ, thereby affecting the financial statements and the analysis carried out.
- Uploader: Salamat Hamid