UNIVERSITY OF GHANA BUSINESS SCHOOL

DEPARTMENT OF ACCOUNTING

UGBS 208: INTRODUCTION TO FINANCIAL ACCOUNTING

2ND SEMESTER 2019/2020 ACADEMIC YEAR
TUTORIAL SET 6 – FINANCIAL STATEMENT ANALYSIS AND INTERPRETATION

Question 1
The information below relates to Kwan-Pa Company Limited.

Statement of Financial Position

2017 2016
NON-CURRENT ASSETS GH¢ ‘000 GH¢ ‘000
Property, Plant and Equipment 305,206 302,478
Intangible Assets 4,204 4,204
Available for sale financial assets 5,618 5,648
Total Non-Current Assets 315,028 312,330
CURRENT ASSETS
Inventory 47,940 29,594
Accounts Receivables 374,074 313,983
Held to maturity Investments 56,836 56,836
Current Tax 5,293 6,046
Cash and Bank Balances 69,251 39,554
Total Current Assets 553,394 446,013
Total Assets 868,422 758,343
EQUITY
Stated Capital 185,589 185,589
Building Fund 9,575 7,788
Income Surplus 108,621 74,654
Capital Surplus 5,770 5,770
Total Equity 309,555 273,801
NON-CURRENT LIABILITIES
Long-Term Loan 11,740 11,615
CURRENT LIABILITIES
Bank Overdraft 41,383 41,383
Accounts Payables 494,651 420,451
Current Portion of Loan 11,093 11,093

Theodora, Belinda, Priscilla, Graham, & Fred 1

 Total Current Liabilities 547,127 472,927
Total Liabilities 558,867 484,542
Total Equity and Liabilities 868,422 758,343

Income Statement
2017 2016
GH¢ ‘000 GH¢ ‘000
Revenue 3,494,391 2,028,369
Cost of sales (3,316,562) (1,882,756)
Gross Profit 177,829 145,613
Sundry Income 15,087 15,087
General & Admin Expenses (40,850) (40,091)
Selling and Distribution Expenses (84,028) (77,679)
Operating Profit 68,038 42,930
Finance Income 11,137 11,137
Finance Expenses (4,105) (4,069)
Profit before Tax 75,070 49,998
Income Tax Expense (21,422) (14,742)
Profit after Tax 53,648 35,256

Additional information:
i. The issued shares by the company were 391,863,128 at the of both years
ii. The proposed dividend at the end of 2017 and 2016 were GH¢ 10,972,168 and GH¢
9,796,578 respectively.
iii. The market price per share 2.54 at the end 2017 and 2.20 at the end of 2016
You are required to:
a. Prepare a common size and a common base financial statement for the company
b. Compute all the relevant ratios for the company at the of 2016 and 2017 financial years
c. Write a report to management, commenting on the performance, liquidity, solvency and
investment viability of the company.

Theodora, Belinda, Priscilla, Graham, & Fred 2

Question 2
Below are the financial statements of Galamsey Gold Company Limited, a mining
company that has been operating in the country for over a decade.

Statement of Financial Position as at 31st December….

2017 2016
Non-current assets GH¢ ‘000 GH¢ ‘000
Property, plant and equipment 511,984 492,694
Deferred mine development expenditure 293,704 279,373
Asset retirement costs 29,644 21,367
Deferred tax asset - 4,691
Other non-current assets 60,027 25,625
895,359 823,750
Current assets
Inventory 71,753 48,411
Accounts receivable 13,205 17,016
Amounts due from related companies 827
Cash and bank 38,032 40,466
122,990 106,720
Current liabilities
Third party debt 8,824 -
Accounts payable 51,882 55,315
Reclamation liability 326 92
Amounts due to related companies 23,331 111,008
Deferred tax liability 1,985 1,015
86,348 167,430
Net current assets/(liabilities) 36,642 (60,710)

Non-current liabilities
Third party debt (66,176) -
Loans due to related companies (511,382) (509,113)
Reclamation liability (33,578) (22,719)
Deferred tax liability (19,722)
Other non-current liabilities (5,530) (4,033)
(636,388) (535,865)
Net assets 295,613 227,175

Financed by:
Stated capital (@ GH¢ 3.00 per share) 158,406 158,406
Advance towards stated capital 117,207 116,193
Income surplus account - surplus/(deficit) 20,000 (47,424)
295,613 227,175

Theodora, Belinda, Priscilla, Graham, & Fred 3

 Income Statement for the year ended 31st December….
2017 2016
Turnover 434,911 305,620
Cost of sales (220,496) (178,271)
Gross profit 214,415 127,349
General and administrative expenses (135,208) (112,051)
Operating profit 79,207 15,298
Other income 14,614 4,361
Net profit before tax 93,821 19,659
Income tax (25,383) (7,857)
Profit after tax transferred to income surplus account 68,438 11,802

Income Surplus Account

Balance b/d (47,424) (59,226)
Profit after tax transferred from profit and loss account 68,438 11,802
21,014 (47,424)
Dividend paid 1,014 0
Surplus/(deficit) at 31 December 20,000 (47,424)

The following additional information is also relevant:

(i) The market price per share is at GH¢ 12.00
Required: compute all the relevant accounting ratios for the 2016 and 2017 accounting periods
and comment on the company’s performance for the same period.

Theodora, Belinda, Priscilla, Graham, & Fred 4

Question 3
Below are the financial statements of Kejetia Company Limited and Makola Company
Limited for the year ended 31st December, 2018
Statement of financial Position as 31 December, 2018
KEJETIA MAKOLA
ASSETS GH¢ ‘000 GH¢ ‘000
Non-Current Assets 54,950 39,750

Current Assets
Inventory 10,870 7,700
Trade and Other Receivables 7,400 5,600
Cash and Bank 5,850 1,250
Total Current Assets 24,120 14,550
Total Assets 79,070 54,300

EQUITY
Share Capital (@ 50p per share) 26,500 25,000
Retained Earnings (11,200) (8,570)
Other Reserves 15,400 1,840
Total Equity 30,700 18,270
LIABILITIES
Non-Current Assets
Bank Loans 25,470 10,250
Debenture 3,000 2,500
Total Non-Current Liabilities 28,470 12,750
Current Liabilities
Trade and Other Payables 13,450 15,080
Short Term Loans 6,450 8,200
Total Current Liabilities 19,900 23,280
Total Liabilities 48,370 36,030
Total Equity and Liabilities 79,070 54,300

Theodora, Belinda, Priscilla, Graham, & Fred 5

 Income Statement for the year ended 31st December, 2018
KEJETIA MAKOLA
GH¢ ‘000 GH¢ ‘000
Revenue 49,681 45,900
Cost of Sale 42,689 42,925
Trading Profit 6,992 2,975
General and Administrative Expenses 5,250 1,550
Profit Before Interest and Tax 1,742 1,425
Finance Cost 545 453
Profit before Tax 1,197 972
Income Tax Expense 257 127
Profit after Tax 940 845
The following additional information are also relevant:
(i) The current share price for Kejetia and Makola Companies wereؓ GH¢ 2.50 and GH¢
1.50 respectively.
(ii) At the end of the 2012 accounting year, Kejetia Co. Ltd paid GH¢ 0.60 on each
ordinary share. On the other hand, Makola Co. Ltd paid its shareholders, a dividend
of GH¢ 0.2 per share.
(iii) For Kejetia Co. Ltd, 80% of its sales are and purchases are made on credit,
whereas Makola Co. Ltd. makes all sales and purchases on credit
You are required to compute all relevant ratios and assess the performance of these two
companies.

Question 4
Microchip Ltd assembles telecommunication equipment form bought-in components and sells to
wholesalers and retailers. It has recently subscribed to an Inter-firm comparison service. The
specific ratios and the average figures for Microchip Ltd.’s industry for the year ended 31st
December 2008 are shown below:
Return on capital employed 20.1%
Gross Profit Margin 32%
Net Profit (before Tax) margin 12.5%
Current Ratio 1.6:1
Acid Test Ratio 0.9:1
Stock holding period 46 days
Trade debtors collection period 45 days
Debt equity ratio 40%
Dividend Yield 6%
Dividend Cover 3 times

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Microchip’s financial statements for the year to 31st December 2008 are set out below:
Statement of Comprehensive Income for the Year ended 31st Dec. 2008
GH¢ ‘000
Turnover 4850
Cost of Sales (3,740)
Gross Profit 1,110
Other operating cost (688)
Operating profit 422
Finance cost (50)
Profit before taxation 372
Income Tax (180)
Profit after taxation 192

Extracts of statement of changes in equity for the year ended 31st December 2008
GH¢
‘000
Income Surplus at 1st January 2008 358
Net Profit after Tax 192
Dividend paid – Interim (120)
Final (60)
Income Surplus at 31st December 2008 370

Statement of Financial Position as at 31st December, 2008

GH¢’000
Non-Current 1,080
Assets Current
Assets Stock 550
Trade Debtors 640
1,190
Total Assets 2,270
Equity: Stated
Capital Income 300
Surplus 370
670
Non-Current Liabilities:
8% Debenture 600
Current Liabilities:
Bank Overdraft 130
Trade creditors 700
Taxation 170
1,000
Total Equity and Liabilities 2,270

Theodora, Belinda, Priscilla, Graham, & Fred 7

Note: The market price of Microchip Ltd’s shares throughout the year average GH¢6.00 each.
(a) Calculate the ratios for Microchip Ltd equivalent to those provided by the Inter-firm
comparison service.
(b) As the Financial Controller, write a report to be Board analyzing the financial performance
of Microchip Ltd based on a comparison with the industry averages.

Question 5
The management of Abayie Ltd is considering expanding the scale of operation of the company.
At the last Board meeting, it was decided that investing in an existing company would be
advantageous. A search team, of which your boss is the chairman, was set up to look for
potential companies.
Two companies, Tomah Ltd and Yagao Ltd have been identified by the search team. Tomah Ltd
and Yagao Ltd produce similar products but they are located in Accra Metropolitan Area and
Kumasi Metropolitan Area. In view of the bulky nature of their products and attendant
transportation cost, each company has spatial monopoly.
The financial statements of the two companies are as follows:
Statement of financial position as at 31/12/2011

Graham, Priscilla, Foster & Gabriel (0544277872/0271672064/0544630733/0242849511) 8

Payables are made up as
follows:

Yagao
Tomah Ltd
Ltd
GH¢ GH¢
Trade Payables 10,605 67,670
Overdraft 10,000 -
Taxation 2,000 50,000
22,605 117,670

Required: Calculate the following ratios for each company and comment on the results.
(i) Profitability ratios – gross profit margin, net operating profit margin and the return on
capital employed
(ii) Liquidity ratios – current ratio, quick ratio, stock turnover, debtors’ collection
period and creditors payment period.
(iii) Leverage ratios – gearing ratio and interest cover.

Theodora, Belinda, Priscilla, Graham, & Fred 9

Question 6
Bobole-Bobo Oil and Gas Company Limited has provided you with the following
financial information.

Statement of Financial Position

2018 2017
ASSETS GH¢ ‘000 GH¢ ‘000
Property, Plant and Equipment 241,565 189,892
Intangible Assets and Goodwill 13,116 13,254
Investment in Subsidiary and Associates 6,286 6,286
Leasehold Prepayments and Leases 45,525 28,942
Total Non-Current Assets 306,492 238,374
CURRENT ASSETS
Inventories 82,026 69,236
Current Tax Assets 15,530 9,462
Trade and Other Receivables 216,652 162,868
Amounts due from related parties 11,171 7,853
Cash and Cash Equivalents 28,933 11,739
Total Current Assets 354,312 261,158
Total Assets 660,804 499,532
EQUITY
Stated Capital 51,222 51,222
Income Surplus 119,310 103,017
Total Equity 170,532 154,239
NON-CURRENT LIABILITIES
Loans and Borrowings 7,571 4,253
CURRENT LIABILITIES
Bank Overdraft 79,520 44,880
Trade and other Payables 326,968 259,297
Amounts due to related parties 76,213 36,863
Total Current Liabilities 482,701 341,040
Total Liabilities 490,272 345,293
Total Equity and Liabilities 660,804 499,532

Theodora, Belinda, Priscilla, Graham, & Fred 10

 Income Statement
2018 2017
GH¢ ‘000 GH¢ ‘000
Revenue 1,848,493 1,652,250
Cost of Sales (1,672,113) (1,491,717)
Gross Profit 176,380 160,533
Other Income 16,371 12,111
General, Admin and Selling expense (131,999) (107,544)
Profit before Interest and Tax 60,752 65,100
Finance Income 382 114
Finance cost (12,024) (13,056)
Profit before Tax 49,110 52,158
Income Tax Expense (12,915) (13,881)
Profit for the Year 36,195 38,277

The following additional information is also relevant:

i. Stated capital included 8% Preference share capital of GH¢ 6,122,000 for both years.
ii. The market price per share for the 2018 and 2017 financial years were GH¢ 5.00 and
GH¢ 4.2 respectively.
iii. The number of ordinary shares issued by the company as at the end of the
applicable years was 90,000,000shares
iv. The company proposed a dividend of 19,902,000 and 23,520,000 for the 2017
and 2018 financial year ends.
You are required to:
a. Prepare a common size and a common base financial statement for the company
b. Compute all the relevant ratios for the company at the of 2016 and 2017 financial years
c. Write a report to management, commenting on the performance of the company.

Theodora, Belinda, Priscilla, Graham, & Fred 11

Question 7
As a newly employed Accountant of Peace Limited, you have been presented with the
financial statements as follows:

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(i) Analyze the performance of the company using horizontal and vertical analysis.
(ii) Compute for the two years the all relevant ratios
(iii) Write a report to the Finance Director commenting on the financial performance and
position of the company.

Theodora, Belinda, Priscilla, Graham, & Fred 13