Question Tag: Liquidity Ratios

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  • 20 Marks

CR – Dec 2020 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Assess the performance of two companies using financial ratios and draft a report for investment decisions.

Heritage Limited and Legacy Limited are two competitors in the merchandising and retailing sector of the economy. At a time when the sector is faced with escalating fuel prices and economic recession, both companies have shown resilience and adaptability. The financial statements of the companies for the year ended December 31, 2020, are as follows:

Statements of Profit or Loss for the Year Ended December 31, 2020:

Item Heritage Limited (N’000) Legacy Limited (N’000)
Revenue 150,000 700,000
Cost of Sales (60,000) (210,000)
Gross Profit 90,000 490,000
Interest 500 12,000
Distribution Costs 13,000 72,000
Administrative Expenses 15,000 35,000
Total Expenses 28,500 119,000
Profit Before Tax 61,500 371,000
Income Tax Expense (16,605) (100,170)
Profit for the Year 44,895 270,830

Statements of Financial Position as at December 31, 2020:

Item Heritage Limited (N’000) Legacy Limited (N’000)
Assets:
Non-Current Assets:
Property – 500,000
Plant and Equipment 190,000 280,000
Total Non-Current Assets 190,000 780,000
Current Assets:
Inventories 12,000 26,250
Trade Receivables 37,500 105,000
Bank 500 22,000
Total Current Assets 50,000 153,250
Total Assets 240,000 933,250
Equity & Liabilities:
Equity:
Share Capital 156,000 174,750
Retained Earnings 51,395 390,830
Total Equity 207,395 565,580
Non-Current Liabilities:
Long-Term Debt 10,000 250,000
Current Liabilities:
Trade Payables 22,605 117,670
Total Liabilities 32,605 367,670
Total Equity & Liabilities 240,000 933,250

The Board of Directors of Patrimony Investments PLC is considering a proposal to buy into one of the companies to enhance the reported profit and stability of the company after the investment.

Required:

a. Assess the relative performance of the two companies for the year ended December 31, 2020, with three suitable ratios each for:

  • Profitability and efficiency
  • Liquidity and solvency
    (8 Marks)

b. Draft a report on the computed ratios for the consideration of the Board of Directors of Patrimony Investments PLC to appropriately guide the Board in deciding on the proposal to buy into any one of the companies.
(12 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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  • 16 Marks

PM – Nov 2024 – L2 – Q6 – Divisional Performance Measurement

Comparative analysis of Owerri and Isiekenesi event centers based on financial performance metrics

Omegboje and company is a medium-scale outfit that specializes in the rental business in Owerri and Isiekenesi towns. The company operates a large event center in each city, supplying chairs, tables, and canopies for both outdoor and some indoor events.

Each event center manager has some independence in operations and earns a performance bonus of 10% of sales if they achieve more than the standard return on capital employed (ROCE) of 50%.

The following financial data is available for the two centers for the years ending December 31, 2020, and 2019:

Additional Information:

  1. Revenue is derived from rentals and ancillary services.
  2. Both centers have a cost of capital of 15%.
  3. Ignore taxation and inflation.

Required:

a. Discuss the relative performance of the two centers based on: i. Return on Capital Employed (ROCE) ii. Residual Income iii. Profit Margin iv. Current Ratio v. Quick Ratio vi. Gearing Ratio vii. Interest Cover
(7 Marks)

b. Compute the performance bonus for the centers (if any), showing your workings.
(4 Marks)

c. Briefly outline the role of a Management Accountant in project management.
(4 Marks)

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  • 15 Marks

FR – Nov 2020 – L2 – Q1b – Ethical Issues in Financial Reporting.

Analyze signs, causes, and solutions to overtrading at Ikoko Plc based on its financial statements.

Ikoko Plc started business 3 years ago following a research breakthrough that motivated large-scale customers to order the company’s new product.

The extract from the financial statements recently published is as follows:

Statement of Profit or Loss for the Year Ended December 31, 2014

 

Statement of Financial Position as at December 31, 2014

Required:
i. Discuss THREE signs that show Ikoko Plc is suffering from overtrading during the year ended December 31, 2014, from the published financial statements. (5 marks)
ii. Identify any FIVE possible causes of the problem from the published financial statements. (5 marks)
iii. Recommend any FIVE possible solutions to the problem. (5 marks)

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  • 20 Marks

FR – May 2019 – L2 – Q3 – Statement of Cash Flows (IAS 7)

Calculation of cash operating cycle and comparative ratios for Kobape Limited, and analysis of company performance through a report.

Shown below are the financial statements of Kobape Limited for its most recent two years.

Extract from the statement of profit or loss for the year ended 30 April:

2019 (N’000) 2018 (N’000)
Revenue 224,000 195,000
Cost of sales (169,200) (136,500)
Gross profit 54,800 58,500
Administrative costs (32,700) (38,040)
Distribution costs (10,900) (12,680)
Finance cost (1,900) (1,380)
Profit before tax 9,300 6,400

Statement of financial position as at 30 April:

Assets (N’000) 2019 2018
Non-current assets 37,000 28,600
Current assets:
– Inventory 12,800 9,800
– Trade receivables 24,600 21,600
– Cash balance 1,600 2,400
Total assets 76,000 62,400

Equity and liabilities:

2019 2018
Ordinary share capital 16,000 16,000
Retained earnings 26,200 18,600
Non-current liabilities:
– 10% loan notes 16,000 12,000
Current liabilities:
– Bank overdraft 2,200 1,600
– Trade payables 15,000 13,800
– Taxation 600 400
Total equity and liabilities 76,000 62,400

The following are the ratios calculated for Kobape Limited based on the financial statements of the previous year and also the latest industry average ratios:

Ratio Kobape Ltd (30 April 2018) Industry Average
Net profit margin 3.99% 4.73%
ROCE (Capital employed = equity + loan notes) 16.69% 18.50%
Asset turnover 4.19 times 3.91 times
Current ratio 2.14:1 1.90:1
Quick ratio 1.52:1 1.27:1
Gross profit margin 30.0% 35.23%
Account receivables collection period 40 days 52 days
Account payables payment period 37 days 49 days
Inventory turnover (times) 13.9 times 18.3 times
Gearing ratio 25.75% 32.71%

Required:
a. Calculate the cash operating cycle of Kobape Limited for the year ended 30 April, 2018 and 2019. (5 Marks)

b. Calculate the comparative ratio(s) (to two decimal places where appropriate) for Kobape Limited for the year ended 30 April, 2019. (5 Marks)

c. Draft a report addressed to the board of directors of Kobape Limited, analyzing the performance of the company for the year 2019 based on the result of the previous year and the industry average. (10 Marks)

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  • 20 Marks

FR – May 2018 – L2 – Q4 – Consolidated Financial Statements (IFRS 10)

Assess the financial performance and position of two companies using specified ratios and explain the limitations of ratio analysis.

Ibadan Nigeria Limited is considering acquiring a suitable private limited liability company. The board of directors engaged a financial consultant to analyze the financial position of two companies, Abuja Limited and Rivers Limited, which are both receptive to the acquisition. The draft financial statements of the two companies are as follows:

Statements of Profit or Loss

a. Draft a report to the chairman of the board of directors of Ibadan Limited to assess the financial performance and position of the two companies using the following specific ratios: (12 Marks) i. Profitability ratios: Gross profit percentage and net profit margin. ii. Liquidity ratios: Acid test ratio, current ratio, trade receivable period. iii. Long-term financial stability ratios: Gearing ratio and proprietary ratio. iv. Efficiency ratios: Total asset turnover and non-current asset turnover.

b. Explain the limitations of ratio analysis and further information that may be useful to the board of directors when making the acquisition decision. (8 Marks)

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  • 9 Marks

FR – Nov 2023 – L2 – Q4a – Financial Statement Analysis

Calculate key financial ratios for Addin Petroleum and Gyan Petroleum to assess their performance for acquisition purposes.

You are the Chief Finance Officer of LizOil Co. Ltd, a holding company with subsidiaries that have diversified interests. The company’s Board of Directors are interested in acquiring a new subsidiary in the Downstream Petroleum Sector. Two companies have been identified as potentials for the acquisitions: Addin Petroleum and Gyan Petroleum. The following are the summaries of their respective financial statements:

Statement of Profit or Loss for the year ended 30 September 2022

Statement of Financial Position as at 30 September 2022

Required:
a) Calculate the following ratios for each of the two companies: i) Net profit margin ii) Return on year-end capital employed iii) Quick ratio iv) Trade receivables’ collection period (in days) v) Gearing (debt over debt plus equity) vi) Interest cover (9 marks)

b) Write a report to the Chairperson of the board based on a comparable analysis of performance of both companies using the ratios computed in (a) above. (9 marks)
c) State TWO (2) limitations of ratios. (2 marks)

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  • 15 Marks

FR – May 2016 – L2 – Q4 – Financial Statement Analysis

Prepare a report for the managing director of ANN Co. on IB Co's financial position, focusing on gearing and liquidity ratios.

ANN Co is considering acquiring an interest in its competitor IB Co Ltd. The managing director of ANN Co has obtained the three most recent statements of financial position of IB Co Ltd as shown below:

IB Co Ltd – Statement of Financial Position as at 31st December:

2013 2014 2015
Non-current assets
Land and buildings 11,460 12,121 11,081
Plant and equipment 8,896 9,020 9,130
Total non-current assets 20,356 21,141 20,211
Current assets
Inventories 1,775 2,663 3,995
Trade receivables 1,440 2,260 3,164
Cash 50 53 55
Total current assets 3,265 4,976 7,214
Total assets 23,621 26,117 27,425
Equity
Share capital 8,000 8,000 8,000
Retained earnings 6,434 7,313 7,584
Total equity 14,434 15,313 15,584
Non-current liabilities
12% debentures (2015-2018) 5,000 5,000 5,000
Current liabilities
Trade payables 390 388 446
Bank 1,300 2,300 3,400
Income taxes payable 897 1,420 1,195
Dividend payable 1,600 1,696 1,800
Total current liabilities 4,187 5,804 6,841
Total equity and liabilities 23,621 26,117 27,425

Required:
Prepare a report for the managing director of ANN Co, commenting on the financial position of IB Co Ltd and highlighting any areas that require further investigation (using gearing and liquidity ratios only).

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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 – Aug 2022 – L2 – Q4 – Financial Statement Analysis

Calculate various financial ratios for Pat Plc and compare them to industry averages and Write a report to assess the financial performance and position of Pat Plc relative to industry standards based on the calculated ratios.

Pat Plc is a listed Ghanaian company that produces textile prints for local and African markets. During the year ended 31 March 2022, the following financial information was available:

Gross profit: GH¢12,150
Cost of sales: GH¢77,850
Operating profit before interest and tax: GH¢7,130
Finance cost: GH¢920
Tax charged to profit or loss: GH¢1,400
Inventory turnover: 3.6 times
Dividend per share: GH¢0.36
Dividend yield: 6%

Extracts from the Statement of Financial Position as at 31 March 2022:

Required:
a. Based on the information provided, compute the following ratios for Pat Plc:
i) Profit (after tax) margin
ii) Current ratio
iii) Return on Capital Employed (ROCE)
iv) Receivables period
v) Price/Earnings ratio
vi) Debt/Equity ratio

b. Using the ratios computed in Question 4a, write a report to the Board of Directors of Pat Plc assessing the financial performance and financial position of the entity, relative to its industry.

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  • 20 Marks

FR – May 2019 – L2 – Q4a – Financial Statement Analysis

Calculation of various financial ratios based on the financial statements of Zangi Ltd for 2017 and 2018.

Zangi Ltd is a private company in Ghana, and extracts from its most recent financial statements are provided below:

Statement of profit or loss for the year ended 31 March:

Required:

a) Calculate the following ratios using the information in the financial statements above:

  • i) Operating profit margin
  • ii) Gross profit margin
  • iii) Return on assets employed
  • iv) Debt to equity
  • v) Interest cover
  • vi) Current ratio
  • vii) Quick ratio

b) Comment on the profitability, liquidity, and gearing of the company for the two-year periods based on the ratios computed above and advice management where appropriate.

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  • 20 Marks

FA – July 2023 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculate financial ratios and discuss ways to improve liquidity for a company using its financial statements.

The following is a summary of the final accounts of Beposo Ltd for the year ended 31 December 2022.


Required:

a) Calculate each of the following ratios (where appropriate, calculations should be to two decimal places).
i) Sales to capital employed (2 marks)
ii) Current ratio (2 marks)
iii) Liquid (acid test) ratio (2 marks)
iv) Interest cover (2 marks)
v) Gearing ratio (2 marks)

b) Explain FOUR (4) ways in which Beposo Ltd could improve its liquidity. (10 marks)

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  • 20 Marks

FA – April 2022 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculation and interpretation of key financial ratios for two companies to assess profitability and liquidity.`

The Statement of Profit or Loss and Statements of Financial Position of two manufacturing companies in the same sector are set out below:

Required:
a) Define and calculate the following ratios for each company:
i) Net profit percentage
ii) Return on capital employed
iii) Average receivables collection period
iv) Average payables period
v) Inventory turnover
(15 marks)

b) A not-for-profit organisation issues a different set of financial statements than the statements produced by a business organisation (profit making). When it comes to bookkeeping for a not-for-profit organisation, many processes remain the same as that of a business organisation. However, differences in terminology apply when managing the books of a not-for-profit organisation.

Required:
What terminology will be used for the following:
i) Profit for the period
ii) Loss for the period
iii) Equity reserve
(5 marks)

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  • 20 Marks

FA – Nov 2020 – L1 – Q5 – IAS 7: Statement of cash flows | Interpretation of financial statements (Financial Ratios)

Analysis of financial performance using ratios and calculation of additional liquidity ratios and explanation of the importance of the statement of cash flows.

The following financial information relates to Mawoekpor Ltd. for the year ended 31 December 2019 (with comparative figures for the year ended 31 December 2018):

Statement of Financial Position as at 31 December 2019

Required:
a) Select THREE (3) of the ratios listed above and briefly outline what information each ratio provides to users of financial information, commenting specifically on the financial results of Mawoekpor Ltd.
(9 marks)

b) Calculate TWO (2) additional ratios for both 2018 and 2019 that would provide further evidence of the liquidity of the company.
(5 marks)

c) Explain THREE (3) importance of preparing a statement of cash flows.
(6 marks)

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  • 20 Marks

FA – Nov 2019 – L1 – Q5 – Preparation of limited liability company financial statements

Calculate profitability, liquidity, and efficiency ratios, discuss the advantages and disadvantages of ratio analysis, and explain the responsibilities of directors and auditors.

The following Profit or Loss Account and Statement of Financial Position relate to Dombo Ltd for the year ended 31 December 2018 (with comparative figures for the year ended 31 December 2017 where relevant).

Summarised Profit or Loss Account for the Year Ended 31 December 2018

Required:

a) Calculate TWO (2) ratios each for the year ended 31 December 2018 and 2017 respectively in the following categories:

i) Profitability

ii) Liquidity

iii) Efficiency

(9 marks)

b) State FOUR (4) advantages and TWO (2) disadvantages of ratio analysis. (6 marks)

c) Explain the responsibilities of the directors and the external auditors towards the financial statements of a company. (5 marks)

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  • 20 Marks

FA – Nov 2018 – L1 – Q6 – Interpretation of financial statements (Financial Ratios)

Evaluate two companies using financial ratios to advise on the better investment option.

Oware Ltd is considering possible investment in only one of the following companies: Achiaa Ltd or Apire Ltd. Extracts from the financial statements of both companies are below:

Required:
a) Calculate the following ratios for both Achiaa Ltd and Apire Ltd:
i) The Net Profit %
ii) The Debt to Equity Ratio
iii) Trade Receivable Days
iv) Interest Cover
(12 marks)

b) Prepare a memorandum on the overall assessment, making recommendations on which company Oware Ltd should invest in.
(8 marks)

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  • 20 Marks

FA – May 2017 – L1 – Q6 – Interpretation of financial statements (Financial Ratios)

Calculate and interpret various financial ratios for Father Ltd and Son Ltd, focusing on liquidity, profitability, and efficiency.

The following is a summary of the Financial Statements of two companies in the retailing business.

Required:

a) Compute the following ratios for both companies:

i) Current Ratio (2 marks)
ii) Acid Test Ratio (2 marks)
iii) Gross Profit Margin (2 marks)
iv) Return on Capital Employed (2 marks)
v) Trade Payable Period (2 marks)
vi) Receivable Collection Period (2 marks)

b) Using the ratios calculated in (a) above, interpret the results under the following categories:

i) Profitability (3 marks)
ii) Liquidity (3 marks)
iii) Efficiency (3 marks)

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  • 20 Marks

FA – Nov 2015 – L1 – Q3 -Interpretation of financial statements (Financial Ratios) | IAS 7: Statement of cash flows

Define key terms related to cash flow and calculate liquidity ratios using given financial data.

(a) Explain what is meant by the following terms as per IAS 7:
i. Statement of Cash flow (3 marks)
ii. Cash (1 mark)
iii. Cash equivalents (1½ marks)
iv. Operating activities (1½ marks)
v. Investing activities (1½ marks)
vi. Financing activities (1½ marks)

(b)
(i) Yaa Baby Company Ltd. has the following items in its Statement of Financial Position as at 31st December, 2014:

Item GH¢
Inventories 130,000
Trade Receivables 60,500
Cash in hand 3,453
Trade Payables 96,750

The company belongs to a Trade Association that has recently published industry averages for key financial ratios based upon a survey of its members. The industry averages for current and quick ratios applicable to the business of Yaa Baby Co. Ltd are:

  • Current ratio = 1.55: 1
  • Quick ratio = 0.95: 1

Required:
Calculate Current and Quick ratios of Yaa Baby Co. Ltd. and briefly comment on the result with reference to the industry averages. (5 marks)

(ii) Financial Ratios can be grouped under three (3) broad categories i.e. Profitability, Liquidity/Working capital, and Debt and Gearing/Leverage ratios. List all the ratios under Liquidity or Working capital ratios. (5 marks)

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