Question Tag: Profitability

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  • 20 Marks

CR – May 2015 – L3 – Q3 – Emerging Trends in Corporate Reporting

Analyze financial statements of two companies and discuss limitations of ratio analysis.

Real Expansion Plc is a large group that seeks to grow by acquisition. The directors have identified two potential entities and obtained copies of their financial statements. The accountant of the company computed key ratios to evaluate the performance of these companies relating to:

  • Profitability and returns;
  • Efficiency in the use of assets;
  • Corporate leverage; and
  • Investor-based decisions.

The computation generated hot arguments among the directors, and they decided to engage a Consultant to provide expert advice on which company to acquire.

Extracts from these financial statements are given below:

Required:

(a) As the Consultant to the company, carry out a financial analysis on the financial statements and advise the company appropriately. (15 Marks)

(b) State the major limitations of ratio analysis for performance evaluation. (5 Marks)

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  • 20 Marks

CR – May 2016 – L3 – Q2 – Introduction to Corporate Reporting

Analyze Ehis Marvel Plc's financial performance and assess clothing and food sales divisions' contributions.

Ehis Marvel, a public company, is a high street retailer that sells clothing and food. The managing director is very disappointed with the current year’s result. The company expanded its operations and commissioned a famous designer to restyle its clothing products. This has led to increased sales in both retail lines, yet overall profits are down.

Extract from the Income Statement for the two years to March 31, 2016, are shown:

Ehis Marvel Plc – Statement of cash flow for the year to March 31, 2016

(ii) The share price of Ehis Marvel Plc averaged N6.00 during the year to March 31, 2015, but was only N3.00 at March 31, 2016.

Required:
Write a report analysing the financials of Ehis Marvel Plc, utilising the above ratios and the information in the statement of cash flows for the two years ended March 31, 2016. Your report should refer to the relative performance of the clothing and food sales and be supported by any further ratios you consider appropriate.

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  • 20 Marks

CR – May 2019 – L3 – Q2 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Assess the accounting treatment of a policy change and analyze the profitability, liquidity, and efficiency ratios of the company based on the financial statements.

Below is the draft financial statement of Lanwani Plc., a manufacturer of fast-moving consumer goods.

Statement of financial position as at

Statement of profit or loss

Additional Information:

  1. The company changed its accounting policy from the cost model to the revaluation model for its property. The revaluation reserve represents the revaluation surplus recognized in 2017. No adjustment was made for 2016.
  2. Development costs of ₦45 billion were capitalized during 2017. The related asset is not expected to generate economic benefits until 2020.

Required:
a. Assess the accounting treatment of the change in accounting policy and state the impact on the return on capital employed (ROCE). (3 Marks)
b. Analyze the profitability, liquidity, and efficiency of Lanwani Plc. (15 Marks)
c. Briefly discuss TWO limitations of the analysis done in (b) above. (2 Marks)

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  • 9 Marks

CR – Nov 2014 – L3 – SC – Q6b – Introduction to Corporate Reporting

Evaluate Luck & Co's financial position and recommend restructuring options to address going concern threats.

Scenario:
Luck & Co. has been making losses over the last few years. Its statement of financial position at 31 December, 2013, showed the following:

Statement of Financial Position as at 31 December, 2013

Assets N
Property, plant, and equipment 80,000
Inventory 20,000
Receivables 40,000
Total Assets 140,000
Equity and Liabilities N
Ordinary Capital 100,000
Retained Earnings (140,000)
Secured Loan Stock 100,000
Payables 80,000
Total Equity & Liabilities 140,000

On liquidation, the assets would realise the following:

Assets N
Property, plant, and equipment 30,000
Inventory 12,000
Receivables 36,000
Total Realisable Value 78,000

If the company continues to trade for the next four years, profit after charging N20,000 per annum as depreciation on the property, plant and equipment would be as follows:

Year Profit (N)
2014 4,000
2015 20,000
2016 26,000
2017 28,000
Total 78,000

Assume that there would be no surplus cash to settle the payables and loan stock holders until after four years when inventory and receivables could be realised at their book values.

Required:

Evaluate the financials and advise the management of Luck & Co on the options available to them and redraft the statement of financial position of Luck & Co after the exercise. (9 Marks)

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  • 15 Marks

FM – Nov 2016 – L3 – Q6 – Strategic Performance Measurement

Evaluate Osamco Limited's financial performance and discuss reasons for its potential stock exchange listing.

Osamco Limited, a manufacturer of wire and cables, was bought from its conglomerate parent company in a management buyout deal in August 2010. Six years later, the managers are considering the possibility of listing the company’s shares on the Nigerian Stock Exchange.

The following financial information is made available:

OSAMCO LIMITED
Income Statement for the Year Ended June 30, 2016

Item Amount (N’million)
Turnover 91.25
Cost of sales (79.00)
Profit before interest and taxation 12.25
Interest (3.25)
Profit before taxation 9.00
Taxation (1.25)
Profit attributable to ordinary shareholders 7.75
Dividend (0.75)
Retained profit 7.00

Statement of Financial Position as at June 30, 2016

Average performance ratios for the industry sector in which Osamco Limited operates are as stated below:

Industry Sector Ratios

Ratio Industry Average
Return before interest and tax on long-term capital employed 24%
Return after tax on equity 16%
Operating profit as a percentage of sales 11%
Current ratio 1.6:1
Quick (acid test) ratio 1.0:1
Total debt: equity (gearing) 24%
Dividend cover 4.0
Interest cover 4.5

Required:

  1. (a) Evaluate the financial state and performance of Osamco Limited by comparing it with that of its industry sector. (10 Marks)
  2. (b) Discuss four probable reasons why the management of Osamco Limited is considering Stock Exchange listing. (5 Marks)

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  • 6 Marks

CR – May 2018 – L3 – SB – Q4a – Presentation of Financial Statements (IAS 1)

Explain how off-statement financing can mislead financial statement users, with examples for three user groups.

a. Recording the substance of transactions, rather than their legal form, is an important principle in financial reporting. The use of off-statement of financial position financing arrangement enables companies to obtain financing without showing debts in their books.

Required:

Describe how the use of off-statement of financial position financing can mislead users of financial statements, making specific reference to THREE user groups and giving examples where recording the legal form of transactions may mislead them. (6 Marks)

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  • 15 Marks

PM – May 2015 – L2 – SB – Q6 – Costing Systems and Techniques-

Determine the most profitable product mix for Markus Limited, and prepare a profitability statement for the optimal product mix.

Markus Limited manufactures three products and operates a marginal costing system.

The following information has been extracted from the company’s records:

Products X Y Z
Units budgeted to be produced and sold 3,600 6,000 3,400
Selling Price (₦) 120 110 100
Requirement per Unit:
Direct Material (kg) 5 3 4
Direct Labour (Hours) 4 3 2
Direct Labour Hour rate (₦) 4 4 4
Direct Material Cost per Kg (₦) 8 8 8
Variable Overheads (₦) 14 26 16
Fixed Overheads (₦) 20 20 20
Maximum possible sales (units) 8,000 10,000 3,000

All the three products are produced from the same direct material using the same types of machine and labour. Direct labour, which is the key factor, is limited to 37,200 hours.

Required: a. Determine the most profitable product mix. (6 Marks)
b. Prepare a statement of profitability for the product mix. (9 Marks)

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  • 20 Marks

CR – Nov 2017 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Analyze Odua Plc’s financial performance using ratios under profitability, efficiency, liquidity, solvency, and market performance.

The summarized comparative financial statements of Odua Plc. for the years ended December 31, 2016, and 2015 are as follows:

Statement of Profit or Loss and Other Comprehensive Income for the Year Ended December 31

2016 (N’m) 2015 (N’m)
Revenue 550 400
Cost of Sales (400) (200)
Gross Profit 150 200
Operating Costs (72) (60)
Operating Profit 78 140
Investment Income – –
(Loss)/Gain on Revaluation of Investments (10) 20
Finance Costs (10) (6)
Profit Before Taxation 58 154
Income Tax Expense (8) (30)
Profit for the Year 50 124
Other Comprehensive Income
Revaluation Losses on PPE (90) –
Total Comprehensive Income for the Year (40) 124

Statement of Financial Position as of December 31

2016 (N’m) 2015 (N’m)
Assets
Non-Current Assets
Property, Plant, and Equipment 430 490
Investments (Fair Value) 70 80
Total Non-Current Assets 500 570
Current Assets
Inventory 80 38
Trade Receivables 104 56
Bank – 20
Total Current Assets 184 114
Total Assets 684 684
Equity and Liabilities
Equity
Equity Shares of N0.50 Each 240 240
Revaluation Reserve 20 110
Retained Earnings 180 130
Total Equity 440 480
Non-Current Liabilities
Bank Loan 100 100
Current Liabilities
Trade Payables 100 78
Bank Overdraft 40 –
Current Tax Payable 4 26
Total Current Liabilities 144 104
Total Equity and Liabilities 684 684

Additional Information:

  1. The Managing Director asserts that Odua Plc has retained book value and has not deteriorated, appraising the company’s new strategy.
  2. In recent years, Odua Plc has faced difficulties maintaining sales due to a shift to online shopping. In response, Odua launched a price-cutting strategy on January 1, 2016.
  3. Odua installed a new product movement and control system on January 1, 2016, costing N40 million and depreciated over five years, replacing an older system disposed of at zero consideration.
  4. The share price declined from N2.80 per share on December 31, 2015, to N1.60 per share on December 31, 2016.

Required:
Evaluate and interpret the following ratios under the headings of profitability, efficiency, short-term liquidity, long-term solvency and stability, and stock market performance for each financial year:

  • Profitability Ratios: Gross Margin, Net Margin, ROCE, ROE
  • Efficiency Ratios: Inventory Days, Receivables Days, Payables Days
  • Liquidity Ratios: Current Ratio, Acid Test Ratio
  • Solvency Ratios: Interest Cover, Gearing
  • Market Ratios: Earnings Per Share, Price Earnings Ratio

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  • 20 Marks

FR – May 2016 – L2 – Q4 – Business Combinations (IFRS 3)

Calculate and assess Quintet Plc's performance against industry averages using ratio analysis.

Quintet Plc sells provisions through its stores located in various retail shopping centers in the major cities in Nigeria. It has recently been experiencing declining profitability, and the board is concerned whether this issue is specific to the company or related to the sector as a whole. Additionally, concerns regarding the company’s solvency have been raised. To address these, the company has engaged a consulting firm specializing in corporate report analysis to provide average ratios across the business sector to rate performance.

Below are the ratios provided by the consulting firm for Quintet Plc’s business sector based on the year ending June 30, 2015:

  • Debt to equity: 38%
  • Gross profit margin: 35%
  • Operating profit margin: 12%
  • Return on year-end capital employed (ROCE): 16.8%
  • Net asset turnover: 1.4 times
  • Current ratio: 1.25:1
  • Average inventory turnover: 3 times
  • Trade payables’ payment period: 64 days

The financial statements of Quintet Plc for the year ending September 30, 2015, are as follows:

Income Statement

Item Amount (N’000)
Revenue 224,000
Opening Inventory 33,200
Purchases 175,600
Closing Inventory (40,800)
Gross Profit 56,000
Operating Costs (39,200)
Finance Costs (3,200)
Profit Before Tax 13,600
Income Tax Expense (4,000)
Profit for the Year 9,000

Statement of Financial Position

Item Amount (N’000)
Assets
Non-current assets
Property and shop fittings 102,400
Deferred development expenditure 20,000
Total Non-current assets 122,400
Current Assets
Inventory 40,800
Bank 4,000
Total Current Assets 44,800
Total Assets 167,200
Equity and Liabilities
Equity
Equity shares of N1 each 60,000
Property revaluation reserve 12,000
Retained earnings 34,400
Total Equity 106,400
Non-current Liabilities
10% loan notes 32,000
Current Liabilities
Trade payables 21,600
Current tax payable 7,200
Total Current Liabilities 28,800
Total Equity and Liabilities 167,200

Note:

  1. Net asset is defined by the consulting firm as total assets less current liabilities.
  2. The deferred development expenditure relates to a one-off payment for a franchise as a sole distributor of a particular product under negotiation but not concluded as of September 30, 2015, although payment has been made.

Required:

a) Compute the equivalent ratios for Quintet Plc provided by the consulting firm for the business sector.
(9 Marks)

b) Write a report to the board assessing the profitability and solvency performance of Quintet Plc compared to its business sector averages. For clarity, solvency measures both liquidity and gearing.
(11 Marks)

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  • 20 Marks

FR – May 2021 – L2 – Q5 – Performance Analysis

Analyze profitability, liquidity, and financial stability of Pepeyoyo Limited based on provided ratios.

You are the Chief Accountant of Jolmarg Nigeria Limited. Pepeyoyo Limited is a competitor in the same industry as Jolmarg and has been operating for the past 20 years.

The following is the result of Pepeyoyo Limited for the last three years ended December 31:

Ratios 2016 2017 2018
Gross profit margin (%) 34 34.4 35.4
ROCE (%) 21.1 21.5 17.8
Net profit margin (%) 11.9 12.4 11.4
Asset turnover (times) 1.78 1.73 1.56
Gearing ratio (%) 15.6 24.3 23.6
Debt ratio (%) 18.5 32.0 30.9
Interest cover (times) 16.7 8.1 5.5
Current ratio 3:1 2.8:1 2.7:1
Quick ratio 1.2:1 1.1:1 1.1:1
Receivable collection period (days) 46 52 64
Inventory turnover period (days) 158 171 182
Payable payment period (days) 35 42 46

Required:

a. Write a report to the finance director of Jolmarg Nigeria Limited analyzing the performance (profitability, liquidity, and long-term financial stability) of Pepeyoyo Limited based on the information available.
(10 Marks)

b. Identify FIVE areas which require further investigation, including references to other pieces of information which would complement your analysis of the performance of Pepeyoyo Limited.
(10 Marks)

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  • 20 Marks

CR – May 2015 – L3 – Q3 – Emerging Trends in Corporate Reporting

Analyze financial statements of two companies and discuss limitations of ratio analysis.

Real Expansion Plc is a large group that seeks to grow by acquisition. The directors have identified two potential entities and obtained copies of their financial statements. The accountant of the company computed key ratios to evaluate the performance of these companies relating to:

  • Profitability and returns;
  • Efficiency in the use of assets;
  • Corporate leverage; and
  • Investor-based decisions.

The computation generated hot arguments among the directors, and they decided to engage a Consultant to provide expert advice on which company to acquire.

Extracts from these financial statements are given below:

Required:

(a) As the Consultant to the company, carry out a financial analysis on the financial statements and advise the company appropriately. (15 Marks)

(b) State the major limitations of ratio analysis for performance evaluation. (5 Marks)

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  • 20 Marks

CR – May 2016 – L3 – Q2 – Introduction to Corporate Reporting

Analyze Ehis Marvel Plc's financial performance and assess clothing and food sales divisions' contributions.

Ehis Marvel, a public company, is a high street retailer that sells clothing and food. The managing director is very disappointed with the current year’s result. The company expanded its operations and commissioned a famous designer to restyle its clothing products. This has led to increased sales in both retail lines, yet overall profits are down.

Extract from the Income Statement for the two years to March 31, 2016, are shown:

Ehis Marvel Plc – Statement of cash flow for the year to March 31, 2016

(ii) The share price of Ehis Marvel Plc averaged N6.00 during the year to March 31, 2015, but was only N3.00 at March 31, 2016.

Required:
Write a report analysing the financials of Ehis Marvel Plc, utilising the above ratios and the information in the statement of cash flows for the two years ended March 31, 2016. Your report should refer to the relative performance of the clothing and food sales and be supported by any further ratios you consider appropriate.

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  • 20 Marks

CR – May 2019 – L3 – Q2 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Assess the accounting treatment of a policy change and analyze the profitability, liquidity, and efficiency ratios of the company based on the financial statements.

Below is the draft financial statement of Lanwani Plc., a manufacturer of fast-moving consumer goods.

Statement of financial position as at

Statement of profit or loss

Additional Information:

  1. The company changed its accounting policy from the cost model to the revaluation model for its property. The revaluation reserve represents the revaluation surplus recognized in 2017. No adjustment was made for 2016.
  2. Development costs of ₦45 billion were capitalized during 2017. The related asset is not expected to generate economic benefits until 2020.

Required:
a. Assess the accounting treatment of the change in accounting policy and state the impact on the return on capital employed (ROCE). (3 Marks)
b. Analyze the profitability, liquidity, and efficiency of Lanwani Plc. (15 Marks)
c. Briefly discuss TWO limitations of the analysis done in (b) above. (2 Marks)

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  • 9 Marks

CR – Nov 2014 – L3 – SC – Q6b – Introduction to Corporate Reporting

Evaluate Luck & Co's financial position and recommend restructuring options to address going concern threats.

Scenario:
Luck & Co. has been making losses over the last few years. Its statement of financial position at 31 December, 2013, showed the following:

Statement of Financial Position as at 31 December, 2013

Assets N
Property, plant, and equipment 80,000
Inventory 20,000
Receivables 40,000
Total Assets 140,000
Equity and Liabilities N
Ordinary Capital 100,000
Retained Earnings (140,000)
Secured Loan Stock 100,000
Payables 80,000
Total Equity & Liabilities 140,000

On liquidation, the assets would realise the following:

Assets N
Property, plant, and equipment 30,000
Inventory 12,000
Receivables 36,000
Total Realisable Value 78,000

If the company continues to trade for the next four years, profit after charging N20,000 per annum as depreciation on the property, plant and equipment would be as follows:

Year Profit (N)
2014 4,000
2015 20,000
2016 26,000
2017 28,000
Total 78,000

Assume that there would be no surplus cash to settle the payables and loan stock holders until after four years when inventory and receivables could be realised at their book values.

Required:

Evaluate the financials and advise the management of Luck & Co on the options available to them and redraft the statement of financial position of Luck & Co after the exercise. (9 Marks)

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  • 15 Marks

FM – Nov 2016 – L3 – Q6 – Strategic Performance Measurement

Evaluate Osamco Limited's financial performance and discuss reasons for its potential stock exchange listing.

Osamco Limited, a manufacturer of wire and cables, was bought from its conglomerate parent company in a management buyout deal in August 2010. Six years later, the managers are considering the possibility of listing the company’s shares on the Nigerian Stock Exchange.

The following financial information is made available:

OSAMCO LIMITED
Income Statement for the Year Ended June 30, 2016

Item Amount (N’million)
Turnover 91.25
Cost of sales (79.00)
Profit before interest and taxation 12.25
Interest (3.25)
Profit before taxation 9.00
Taxation (1.25)
Profit attributable to ordinary shareholders 7.75
Dividend (0.75)
Retained profit 7.00

Statement of Financial Position as at June 30, 2016

Average performance ratios for the industry sector in which Osamco Limited operates are as stated below:

Industry Sector Ratios

Ratio Industry Average
Return before interest and tax on long-term capital employed 24%
Return after tax on equity 16%
Operating profit as a percentage of sales 11%
Current ratio 1.6:1
Quick (acid test) ratio 1.0:1
Total debt: equity (gearing) 24%
Dividend cover 4.0
Interest cover 4.5

Required:

  1. (a) Evaluate the financial state and performance of Osamco Limited by comparing it with that of its industry sector. (10 Marks)
  2. (b) Discuss four probable reasons why the management of Osamco Limited is considering Stock Exchange listing. (5 Marks)

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  • 6 Marks

CR – May 2018 – L3 – SB – Q4a – Presentation of Financial Statements (IAS 1)

Explain how off-statement financing can mislead financial statement users, with examples for three user groups.

a. Recording the substance of transactions, rather than their legal form, is an important principle in financial reporting. The use of off-statement of financial position financing arrangement enables companies to obtain financing without showing debts in their books.

Required:

Describe how the use of off-statement of financial position financing can mislead users of financial statements, making specific reference to THREE user groups and giving examples where recording the legal form of transactions may mislead them. (6 Marks)

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  • 15 Marks

PM – May 2015 – L2 – SB – Q6 – Costing Systems and Techniques-

Determine the most profitable product mix for Markus Limited, and prepare a profitability statement for the optimal product mix.

Markus Limited manufactures three products and operates a marginal costing system.

The following information has been extracted from the company’s records:

Products X Y Z
Units budgeted to be produced and sold 3,600 6,000 3,400
Selling Price (₦) 120 110 100
Requirement per Unit:
Direct Material (kg) 5 3 4
Direct Labour (Hours) 4 3 2
Direct Labour Hour rate (₦) 4 4 4
Direct Material Cost per Kg (₦) 8 8 8
Variable Overheads (₦) 14 26 16
Fixed Overheads (₦) 20 20 20
Maximum possible sales (units) 8,000 10,000 3,000

All the three products are produced from the same direct material using the same types of machine and labour. Direct labour, which is the key factor, is limited to 37,200 hours.

Required: a. Determine the most profitable product mix. (6 Marks)
b. Prepare a statement of profitability for the product mix. (9 Marks)

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  • 20 Marks

CR – Nov 2017 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Analyze Odua Plc’s financial performance using ratios under profitability, efficiency, liquidity, solvency, and market performance.

The summarized comparative financial statements of Odua Plc. for the years ended December 31, 2016, and 2015 are as follows:

Statement of Profit or Loss and Other Comprehensive Income for the Year Ended December 31

2016 (N’m) 2015 (N’m)
Revenue 550 400
Cost of Sales (400) (200)
Gross Profit 150 200
Operating Costs (72) (60)
Operating Profit 78 140
Investment Income – –
(Loss)/Gain on Revaluation of Investments (10) 20
Finance Costs (10) (6)
Profit Before Taxation 58 154
Income Tax Expense (8) (30)
Profit for the Year 50 124
Other Comprehensive Income
Revaluation Losses on PPE (90) –
Total Comprehensive Income for the Year (40) 124

Statement of Financial Position as of December 31

2016 (N’m) 2015 (N’m)
Assets
Non-Current Assets
Property, Plant, and Equipment 430 490
Investments (Fair Value) 70 80
Total Non-Current Assets 500 570
Current Assets
Inventory 80 38
Trade Receivables 104 56
Bank – 20
Total Current Assets 184 114
Total Assets 684 684
Equity and Liabilities
Equity
Equity Shares of N0.50 Each 240 240
Revaluation Reserve 20 110
Retained Earnings 180 130
Total Equity 440 480
Non-Current Liabilities
Bank Loan 100 100
Current Liabilities
Trade Payables 100 78
Bank Overdraft 40 –
Current Tax Payable 4 26
Total Current Liabilities 144 104
Total Equity and Liabilities 684 684

Additional Information:

  1. The Managing Director asserts that Odua Plc has retained book value and has not deteriorated, appraising the company’s new strategy.
  2. In recent years, Odua Plc has faced difficulties maintaining sales due to a shift to online shopping. In response, Odua launched a price-cutting strategy on January 1, 2016.
  3. Odua installed a new product movement and control system on January 1, 2016, costing N40 million and depreciated over five years, replacing an older system disposed of at zero consideration.
  4. The share price declined from N2.80 per share on December 31, 2015, to N1.60 per share on December 31, 2016.

Required:
Evaluate and interpret the following ratios under the headings of profitability, efficiency, short-term liquidity, long-term solvency and stability, and stock market performance for each financial year:

  • Profitability Ratios: Gross Margin, Net Margin, ROCE, ROE
  • Efficiency Ratios: Inventory Days, Receivables Days, Payables Days
  • Liquidity Ratios: Current Ratio, Acid Test Ratio
  • Solvency Ratios: Interest Cover, Gearing
  • Market Ratios: Earnings Per Share, Price Earnings Ratio

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  • 20 Marks

FR – May 2016 – L2 – Q4 – Business Combinations (IFRS 3)

Calculate and assess Quintet Plc's performance against industry averages using ratio analysis.

Quintet Plc sells provisions through its stores located in various retail shopping centers in the major cities in Nigeria. It has recently been experiencing declining profitability, and the board is concerned whether this issue is specific to the company or related to the sector as a whole. Additionally, concerns regarding the company’s solvency have been raised. To address these, the company has engaged a consulting firm specializing in corporate report analysis to provide average ratios across the business sector to rate performance.

Below are the ratios provided by the consulting firm for Quintet Plc’s business sector based on the year ending June 30, 2015:

  • Debt to equity: 38%
  • Gross profit margin: 35%
  • Operating profit margin: 12%
  • Return on year-end capital employed (ROCE): 16.8%
  • Net asset turnover: 1.4 times
  • Current ratio: 1.25:1
  • Average inventory turnover: 3 times
  • Trade payables’ payment period: 64 days

The financial statements of Quintet Plc for the year ending September 30, 2015, are as follows:

Income Statement

Item Amount (N’000)
Revenue 224,000
Opening Inventory 33,200
Purchases 175,600
Closing Inventory (40,800)
Gross Profit 56,000
Operating Costs (39,200)
Finance Costs (3,200)
Profit Before Tax 13,600
Income Tax Expense (4,000)
Profit for the Year 9,000

Statement of Financial Position

Item Amount (N’000)
Assets
Non-current assets
Property and shop fittings 102,400
Deferred development expenditure 20,000
Total Non-current assets 122,400
Current Assets
Inventory 40,800
Bank 4,000
Total Current Assets 44,800
Total Assets 167,200
Equity and Liabilities
Equity
Equity shares of N1 each 60,000
Property revaluation reserve 12,000
Retained earnings 34,400
Total Equity 106,400
Non-current Liabilities
10% loan notes 32,000
Current Liabilities
Trade payables 21,600
Current tax payable 7,200
Total Current Liabilities 28,800
Total Equity and Liabilities 167,200

Note:

  1. Net asset is defined by the consulting firm as total assets less current liabilities.
  2. The deferred development expenditure relates to a one-off payment for a franchise as a sole distributor of a particular product under negotiation but not concluded as of September 30, 2015, although payment has been made.

Required:

a) Compute the equivalent ratios for Quintet Plc provided by the consulting firm for the business sector.
(9 Marks)

b) Write a report to the board assessing the profitability and solvency performance of Quintet Plc compared to its business sector averages. For clarity, solvency measures both liquidity and gearing.
(11 Marks)

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  • 20 Marks

FR – May 2021 – L2 – Q5 – Performance Analysis

Analyze profitability, liquidity, and financial stability of Pepeyoyo Limited based on provided ratios.

You are the Chief Accountant of Jolmarg Nigeria Limited. Pepeyoyo Limited is a competitor in the same industry as Jolmarg and has been operating for the past 20 years.

The following is the result of Pepeyoyo Limited for the last three years ended December 31:

Ratios 2016 2017 2018
Gross profit margin (%) 34 34.4 35.4
ROCE (%) 21.1 21.5 17.8
Net profit margin (%) 11.9 12.4 11.4
Asset turnover (times) 1.78 1.73 1.56
Gearing ratio (%) 15.6 24.3 23.6
Debt ratio (%) 18.5 32.0 30.9
Interest cover (times) 16.7 8.1 5.5
Current ratio 3:1 2.8:1 2.7:1
Quick ratio 1.2:1 1.1:1 1.1:1
Receivable collection period (days) 46 52 64
Inventory turnover period (days) 158 171 182
Payable payment period (days) 35 42 46

Required:

a. Write a report to the finance director of Jolmarg Nigeria Limited analyzing the performance (profitability, liquidity, and long-term financial stability) of Pepeyoyo Limited based on the information available.
(10 Marks)

b. Identify FIVE areas which require further investigation, including references to other pieces of information which would complement your analysis of the performance of Pepeyoyo Limited.
(10 Marks)

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