TEAM UNIVERSITY

DEPARTMENT OF HIGHER DEGREE

MASTER OF BUSINESS ADMINISTRATION (MBA)

CODE –,, : FINANCIAL STATEMENTS ANALYSIS

ACADEMIC YEAR 2021/2022

END OF SEMESTER EXAMINATION

INSTRUCTIONS:
1. Attempt Four questions
2. Question one is Compulsory
3. Attempt any three questions section B
4. Time allowed: 3Hrs

SECTION A: (40 Marks)- Compulsory

Question One:
a) Today is 15 April 2019. You are a Financial Analyst at JADO, a top-notch investment
management firm. Your supervisor has asked you to analyze ABC, Inc. and DEF, Inc.
based on their earnings per share (EPS) and P/E ratios.

Both the companies are listed on USE, the country top securities market. Stock prices of
ABC, Inc. and DEF, Inc. as at 31 March 2019 were UGX 4000 and UGX7000
respectively. ABC, Inc. financial statements for the year ended 31 March 2019 are
available which report an EPS of UGS 2,500 per share for the year ended 31 March 2019.
While complete financial statements for DEF, Inc. are not yet available, the company has
reported its net income for the year ended 31 March 2019, which is UGX 9.5 million.

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 Following additional public information is available from the company’s investor
relations website:

 The company had 2,000,000 shares of common stock as at 1 April 2018

 On 30 June 2015, the company issued 500,000 additional shares
 On 31 December 2018, the company bought back 250,000 shares
 The company had a preferred stock of UGX 5 million throughout the year which
carries dividend at 8%.

Calculate EPS for DEF and calculate P/E ratios for both companies. (10 marks)

b) Differentiate between on balance sheet and off-balance sheet? (10 marks)

c) Explain the usefulness of each of the following ratios in reviewing the performance of a
business:
i. Current Ratio (02 marks)
ii. Acid Test Ratio (02 marks)
iii. Receivables Collection Period (02 marks)
iv. Payables Settlement Period (02 marks)
v. Inventory Turnover Rate (02 marks)
d) A financial analysis report is, basically, a document that attracts high interest of investors as
it contains a detailed appraisal of a company’s financial health. The results of financial
techniques provide important inputs into security valuation.
Required:
Explain the problems that can be encountered when financial analysts rely on financial ratios
prepared under the historical cost convention for their information? (10 marks)

SECTION B: (60 Marks)

Question Two:
You have been hired as an analyst for Twed Bank and your team is working on an independent
assessment of Daka Duck Food ltd. (DDF Ltd). DDF Ltd. is a firm that specializes in the production of
freshly imported farm products from Egypt. Your assistant has provided you with the following data for
Flipper ltd. and their industry.

2019-

Ratio 2019 2018 2017 Industry

Average

Long-term debt 0.45 0.40 0.35 0.35

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 Inventory Turnover 62.65 42.42 32.25 53.25

Depreciation/Total Assets 0.25 0.014 0.018 0.015

Days’ sales in receivables 113 98 94 130.25

Debt to Equity 0.75 0.85 0.90 0.88

Profit Margin 0.082 0.07 0.06 0.075

Total Asset Turnover 0.54 0.65 0.70 0.40

Quick Ratio 1.028 1.03 1.029 1.031

Current Ratio 1.33 1.21 1.15 1.25

Times Interest Earned 0.9 4.375 4.45 4.65

Equity Multiplier 1.75 1.85 1.90 1.88

a. In the annual report to the shareholders, the CEO of Flipper ltd., wrote, “2017 was a good
year for the firm with respect to our ability to meet our short-term obligations. We had
higher liquidity largely due to an increase in highly liquid current assets (cash, account
receivables and short-term marketable securities).” Is the CEO correct? Explain and use
only relevant information in your analysis. (10 Marks)

b. What can you say about the firm's asset management? Be as complete as possible given the
above information, but do not use any irrelevant information. (05 Marks)
c. Write a report to the shareholders analyzing the firm's solvency and leverage, given the
above information. (05 Marks)

Question Three
a) Today many analyst have commented on growing disillusion with the usefulness and
reliability of the information contained in some comprehensive income.
Required:
Explain the extent to which a company’s statement of cash flows may be more useful and
reliable than its statement of comprehensive income. . (05 marks)
b) During a workshop to empower business community of Kwelikweli District on Financial
sustainability, it was realized that “The analysis and evaluation of cash flows is essential if
the Controller or CFO is to appraise an entity’s cash flows from operating, investing, and
financing activities.

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 After the workshop, Mr, Weasel provided you with the following information relating to
Weasel, a limited liability company, at 31 August 2018 and 2019 as below:

Balance sheet as at 31 August

2018 2019
ASSETS Shs,000 Shs,000 Shs,000 Shs.000
Non-current assets 6,400 8,500
Current assets
Inventory 1,200 1,400
Accounts receivable 1,500 1,400
Cash at bank 200 2,900 300 3,100
9,300 11,600
EQUITY AND LIABILITIES
Capital and reserves
Issued share capital 2,000 2,200
Share premium account 2,340 2,540
Revaluation reserve - 1,000
Accumulated profits 2,400 2,960
6,740 8,700
Non-current liabilities
10% loan notes 2005 1,000 1,500
Current liabilities
Trade payables 800 700
Taxation 400 500
Bank overdraft 360 200
1560 1,400
9,300 11,600
Notes

(1) Movements in non-current assets:

Plant and

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 Land Buildings Equipment Total

Shs. 000 Shs.000 Shs.000 Shs.000

Cost or valuation

At 1 September 2018 2,000 3,000 3,400 8,400

Additions 2,500 2,500

Disposals (1,000) (1,000)

Revaluation 1,000 1,000

At 31 August 2019 3,000 3,000 4,900 10,900

Accumulated depreciation

At 1 September 2018 400 1,600 2,000

Provision for year 60 1,140 1,200

Disposals (800) (800)

At 31 August 2019 460 1,940 2,400

Net book amounts

At 31 August 1999 3,000 2,540 2,960 8,500

At 1 September 1998 2,000 2,600 1,800 6,400

(2) Issue of loan notes – A further Shs. 500,000 of 10% loan notes was issued at par on 1
September 2018. Interest on all loan notes is paid on 28 February and 31 August each year.
(3) The company paid a dividend of Shs.500, 000 during the year.
(4) Plant sold during the year realised Shs.250, 000.
(5) The tax charge for the year in the income statement was Shs.500, 000.

Required:

Prepare a cash flow statement for Weasel limited for the year ended 31 August 2019, using the
indirect method. (15 marks)

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 Question Four
Much of the momentum for creative accounting comes from the perceived need on the part of
various stakeholders (particularly management and shareholders) to ensure an ever-increasing
level of earnings, which, it is expected, will positively impact share price. In an environment in
which companies are expected to achieve or exceed previously signalled earnings levels, this is
particularly insidious. The fact that creative accounting practices are intended to support share
price does not excuse the practice, it merely explains some cases.

Pressure for change must come, therefore, from external sources, in particular regulators. This
explains, in part, why governments, IASB, etc., have been so proactive in this area.

You have been hired to deal with this vice in one of the organization in the country;

a) Explain why the vice has persisted in the organizations. (08 marks)
b) Describe the most widely used techniques of creative accounting in the country. (08 marks)
c) Suggest major ways of curbing the vice. (04 marks)
Question Five:
An Article in a newspaper reads “Financial distress is a global phenomenon of paramount
importance to small enterprises in small open economies such as those of Uganda. However, the
debate on the causes of financial distress has not reached a consensus as the literature presents
conflicting perspectives on the sources of this adversity.”
As a student of Finance, you are required to:
a) Distinguish between voluntary and involuntary liquidation as approaches to financial distress
management. ( 10 Marks)
b) Explain possible schemes that may be used to address business failure in the country.
(10 Marks)
Question Six:
You are a consultant, providing business advice to small and medium size clients. One client,
who is considering how to achieve improved performance, has enquired about financial
statement analysis.

Required:
Prepare notes for a meeting with the client which explain:

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 i. With relevant examples, what is generally meant by the term “Financial Statement
Analysis” (06 Marks)
ii. What challenges might be encountered if a Financial Statement Analysis exercise
is undertaken; (04 Marks)
iii. The similarities and differences between the creative accounting and Window
dressing. ( 10 Marks)

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