Tag (SQ): Financial Statement Analysis

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  • 15 Marks

FR – L2 – Q61 – Financial Statement Analysis

Calculate EPS for Year 5 and adjusted EPS for Year 4 for Unity Vaccines Plc after share transactions.

On 1 January Year 5, Unity Vaccines Plc had 5 million ordinary shares in issue. The following transactions in shares took place during the next year.

1 February A 1 for 5 bonus issue

1 April A 1 for 2 rights issue at GH¢1 per share. The market price of the shares prior to the rights issue was GH¢4.

1 June An issue at full market price of 800,000 shares.

In Year 5 Unity Vaccines Plc made a profit before tax of GH¢3,362,000. It paid ordinary dividends of GH¢1,200,000 and preference dividends of GH¢800,000. Tax was GH¢600,500. The reported EPS for Year 4 was GH¢0.32.

Required

Calculate the EPS for Year 5, and the adjusted EPS for Year 4 for comparative purposes.

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  • 10 Marks

FA – L1 – Q103 – Interpretation of Financial Statements

Calculate five financial ratios for KK Enterprises based on its 20X8 financial statements.

KK is the owner of a business supplying goods to other traders. He has just received the financial accounts for his business for the year ended 31st December 20X8 from his accountant. These are reproduced below.

Statement of profit or loss for the year ended 31st December 20X8

GH¢ GH¢
Sales
Cost of sales
Gross profit
Expenses
Net profit

Statement of financial position as at 31st December 20X8

GH¢ GH¢
Non-current assets (net)
Current assets
Inventory 52,000
Receivables 15,000
Cash 100
Total assets
Current liabilities
Payables 6,000
Bank 2,500
Capital
Balance b/d 200,000
Net profit 30,000
Drawings (21,400)
Total capital and liabilities

Note: Inventory on 1st January 20X8 was valued at GH¢ 48,000.

Required:
Calculate for KK Enterprises each of the following ratios for the year ended 31st December 20X8 (where appropriate, calculations should be approximated to two decimal places):
(i) Net profit margin.
(ii) Return on capital employed (using the closing year-end value for capital employed).
(iii) Current ratio.
(iv) Liquid (acid test) ratio.
(v) Rate of inventory turnover.

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  • 10 Marks

AAA – L3 – Q31 – Planning

Analyze draft financial statements of Meal Haven Ltd using analytical procedures to assess audit impact on accounts receivable.

Your audit and assurance firm has just accepted a financial statement audit engagement from Meal Haven Ltd, a restaurant that prepares lunch for the general public and on special orders. The company operates at a number of sales points in the city.
The company uses a computerised system that has networked all the sales points to its head office. Your firm is planning the new audit and has received the draft financial statements for the year. As the audit senior to lead the engagement team, you are examining the financial statements, an extract of which is shown below:

Statement of Profit or Loss (Extract)

Draft 2015 Audited 2014
GH¢’000 GH¢’000
Revenue 16,346 11,300
Cost of Sales 12,912 8,596
Gross Profit 3,434 2,704
Net Profit 1,962 1,130

Statement of Financial Position (Extract)

Draft 2015 Audited 2014
Non-current Assets 5,598 5,232
Other Current Assets 3,492 2,254
Accounts Receivable 3,964 2,872
Inventories 1,291 860
Accounts Payable 1,028 920

Required:
(a) Using analytical procedures at the planning stage, state your observations drawn from the extracts from the draft financial statements and how they may impact on your audit of accounts receivable.

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  • 20 Marks

AA – L2 – Q38 – Audit Evidence

Explain why the audit manager selected PPE, trade receivables, and inventory for further investigation at Mellow Manufacturing. List further information needed from Mellow Manufacturing's financial controller to clarify PPE, receivables, and inventory issues.

Mellow Manufacturing is a long-established manufacturing company. The audit manager has been provided with the following extracts from the draft financial statements for £20X8 prior to the final audit planning meeting with the financial controller.

Draft statement of financial position (extracts)

Draft 20X8 £’000 Actual 20X7 £’000
Property, plant and equipment 32,560 31,850
Receivables
Trade 7,250 4,340
Other 1,230 1,150
Inventory
Raw materials 2,900 2,100
Work-in-progress 1,450 1,860
Finished goods 2,340 2,020
Current liabilities
Trade 4,320 4,180
Other 2,450 2,340

Draft statement of comprehensive income (extracts)

Draft 20X8 £’000 Actual 20X7 £’000
Revenue 43,150 40,680
Cost of sales (29,180) (28,890)
Gross profit 13,970 11,790
Distribution costs (3,450) (3,120)
Administrative expenses (2,340) (2,120)
Depreciation/loss on sale of PPE (2,280) (1,320)
Profit before tax 5,900 5,230

The manager has reviewed these extracts and has identified three financial statement headings which he believes require further investigation. These are property, plant and equipment, trade receivables, and inventory. He has also calculated the following accounting ratios:

Draft 20X8 Actual 20X7
Trade receivables collection period 30 days 19 days
Inventory turnover 8.6 times 9.9 times
Gross profit percentage 32% 29%

Required
(a) Explain why the manager has selected these three headings for further investigation.

(b) Set out the further information that the manager should request from the financial controller at the final audit planning meeting in order to clarify the situation with regards to these financial statement headings.

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  • 30 Marks

AA – L2 – Q23 – Analytical Procedures

Explain when and how analytical procedures are applied per ISA 520. Comment on Zenith Technologies' financial performance for two years using provided data. Identify audit risks from Zenith Technologies' performance and describe audit procedures to address them.

You have been presented with the following draft financial information about Fresca Solutions, a very successful company that develops and licenses specialist computer software and hardware. Its non-current assets mainly consist of property, computer hardware and investments, and there have been additions to these during the year. The company is experiencing increasing competition from rival companies, most of which specialise in hardware or software, but not both. There is pressure to advertise and cut prices.
You are the audit manager. You are planning the audit and are conducting a preliminary analytical review and associated risk analysis for this client for the year ended 31 May 20X8. You have been provided with a summarised draft statement of comprehensive income which has been produced very quickly and certain accounting ratios and percentages. You have been informed that the company accounts for research and development costs in accordance with IAS 38 Intangible Assets.

Statement of comprehensive income

Year ended 31 May
20X7 20X8
€’000 €’000
Revenue 15,206 13,524
Cost of sales 3,009 3,007
Gross profit 12,197 10,517
Distribution costs 3,006 1,996
Administration expenses 994 1,768
Selling expenses 3,002 274
Profit from operations 5,195 6,479
Net interest receivable 995 395
Profit before tax 6,190 6,874
Income tax expense 3,104 1,452
Net profit 3,086 5,422
Retained profits 1,617 3,983
Dividends paid €1,469,000 €1,439,000

Accounting ratios and percentages

Year ended 31 May
20X7 20X8
Earnings per share 0.43 1.04
Performance ratios include the following:
Gross margin 0.80 0.78
Expenses as a percentage of revenue:
Distribution costs 0.20 0.15
Administrative expenses 0.07 0.13
Selling expenses 0.20 0.02
Operating profit 0.34 0.48

Required

(a)  In accordance with ISA 520 Analytical Procedures explain when analytical procedures shall or may be carried out and the nature of such procedures.

(b) Using the information above, comment briefly on the performance of the company for the two years.

(c) Use your answer for part (b) to identify the areas that are subject to increased audit risk and describe the further audit work you would perform in response to those risks.

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