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UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

YEARLY/SECOND SEMESTER
EXAMINATIONS

DATE

BSc (HONS) FINANCE LEVEL I

FRIDAY
19 MAY 2006

BSc (HONS) FINANCE WITH LAW LEVEL I

SERIES

MODULE

TIME

MAY 2006

ACCOUNTING AND
FINANCIAL ANALYSIS
[DFA 1020Y(1)]

9.30 12.30 P.M.

INSTRUCTIONS TO CANDIDATES
TIME ALLOWED: 3 HOURS
NO. OF QUESTIONS SET:

FIVE (5)

NO. OF QUESTIONS TO BE ATTEMPTED: THREE (3)


SECTION A QUESTION ONE (1) IS COMPULSORY AND CARRIES 40
MARKS.
SECTION B ANSWER ONLY ONE (1) QUESTION. EACH QUESTION
CARRIES 30 MARKS.
SECTION C ANSWER ONLY ONE (1) QUESTION. EACH QUESTION
CARRIES 20 MARKS.

ACCOUNTING AND FINANCIAL ANALYSIS


[DFA 1020Y(1)]
SECTION A
QUESTION ONE (1) IS COMPULSORY AND CARRIES 40 MARKS.
Question 1
The following information has been extracted from the annual report of
Smith Limited:
BALANCE SHEET AS AT 30TH JUNE
Notes
ASSETS
Non-Current Assets
Tangible assets
Intangible assets

Current Assets
Inventories
Accounts receivables
Cash and bank balances

EQUITY AND LIABILITIES


Equity
Share capital
Share Premium
Retained earnings
Non-Current Liabilities
Loan
Current Liabilities
Taxation
Accounts payable
Bank overdrafts
Proposed dividend

2005
Rs

2004
Rs

3
4

835,165
108,400
943,565

636,376
108,400
744,776

5
6

396,973
5,195,285
398,776
5,991,034

627,373
4,326,063
20,475
4,973,911

6,934,599

5,718,687

40,000
5,000
284,608
329,608

30,000
50,374
80,374

1,165,611

1,000,000

9
10

124,880
4,419,133
795,367
100,000
5,439,380
6,934,599

10,558
3,173,580
1,354,175
100,000
4,638,313
5,718,687

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30TH JUNE
Notes
Turnover
Cost of sales
Gross Profit
Distribution Costs
Administrative Expenses
Depreciation
Profit from operations
Net interest Costs
Profit before Taxation
Taxation
Profit before Dividends
Dividends
Profit for the year

11

12

2005
Rs
10,794,915
(7,120,410)
3,674,505
(1,378,509)
(1,268,792)
(274,445)
752,759
(143,645)
609,114
(149,880)
459,234
(225,000)
234,234

2004
Rs
5,286,615
(3,152,687)
2,133,928
(795,861)
(761,177)
(195,552)
381,338
(109,789)
271,549
(10,558)
260,991
(100,000)
160,991

Additional Information:
Inventory at 30th June 2003 was Rs 476,875.
STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 30TH
JUNE 2005

Balance at 1st July 2004


Equity Shares issued
Profit for the year

Share
Capital
Rs
30,000
10,000
40,000

Share
Premium
Rs
5,000
5,000

Retained
Earnings
Rs
50,374
234,234
284,608

Total
Rs
80,374
15,000
234,234
329,608

NOTES TO THE FINANCIAL STATEMENTS-30TH JUNE 2005


1.

INCORPORATION AND ACTIVITIES


Smith Limited is a private company incorporated in Mauritius. Its
main business activity is the distribution of goods to hotels.

2.

ACCOUNTING POLICIES
The principal accounting policies adopted by the company are as
follows:
(a)

Basis of Accounting
The financial statements are prepared under the historical cost
convention and in accordance with International Accounting
Standards.

(b)

Revenue Recognition
Turnover is based on the invoiced value of goods sold less
trade discounts, allowances and Value Added Tax. Sale of
goods are recognized upon delivery of products and
customers acceptance.

(c)

Fixed Assets and Depreciation


Depreciation is calculated on the straight-line basis so as to
write off the cost of tangible assets less their estimated
residual values over their expected useful lives. The annual
rates used are:
Furniture
Office Equipment
Computer
Motor Vehicles

10%
20%
20%
20%

(d)

Stocks
Stocks are valued at the lower of cost and net realizable value.
In general cost is determined on a weighted average basis. Net
realizable value is estimated selling price in the ordinary
course of business less selling expenses.

ACCOUNTING POLICIES
(e)

Financial Instruments
Financial assets and financial liabilities are recognized in the
Balance Sheet when the company has become a party to the
contractual provisions of the instrument.
Trade receivables
Trade receivables are stated at their nominal value as
reduced by appropriate allowances for estimated
irrecoverable amounts.
Cash and cash equivalents
Cash comprises cash balances on hand and cash deposited
with banks. Cash equivalents are short-term highly liquid
investments that are readily convertible to known amounts of
cash and which are subject to an insignificant risk of change
in value.
Trade payables
Trade payables are stated at their nominal value.
Borrowings
Interest-bearing bank loans and overdrafts are recorded at
amortised cost.

3.

TANGIBLE ASSETS
Furniture

Office
Equipment

Computer

Motor
Vehicles

Rs

Rs

Rs

Rs

67,826
67,826

61,708
89,768
151,476

26,087
67,585
93,672

856,060
434,036
(196,925)
1,093,171

1,011,681
591,389
(196,925)
1,406,145

13,564
6,782
-

15,987
30,295
-

10,434
18,734
-

335,320
218,634
(78,770)

375,305
274,445
(78,770)

20,346

46,282

29,168

475,184

570,980

Net Book Values


At 30 June 2005

47,480

105,194

64,504

617,987

835,165

At 30 June 2005

54,262

45,721

15,653

520,740

636,376

Cost
At 1 July 2004
Additions
Disposal
At 30 June 2005
Depreciation
At 1 July 2004
Charge for the year
Disposal
Adjustment
At 30 June 2005

Total

Note: One of the motor vehicles was sold during the current year for Rs140,000.
4.

INTANGIBLE ASSETS
Formation Costs

5.

STOCKS
Goods for resale

6.

ACCOUNTS RECEIVABLE

Trade receivables
Other receivables

2005
Rs

2004
Rs

108,400

108,400

2005
Rs

2004
Rs

396,973

627,373

2005
Rs

2004
Rs

4,166,598
1,028,687
5,195,285

3,875,070
450,993
4,326,063

7.

8.

SHARE CAPITAL

2005
Rs

2004
Rs

Authorised: 50,000 ordinary shares of Rs1 each

50,000

50,000

Issued and fully paid capital

40,000

30,000

LOAN
Additional loan was raised during the year ended 30th June 2005.

9.

TAXATION
Income tax provision is calculated at the rate of 25% on
the adjusted profit for the year.

10.

ACCOUNTS PAYABLE

2004
Rs

124,880

10,558

2005
Rs

Trade payables
Other payables

11.

2005
Rs

PROFIT BEFORE TAXATION

2004
Rs

4,015,640
403,493
4,419,133

2,776,954
396,626
3,173,580

2005
Rs

2004
Rs

The profit before taxation is arrived at after charging:


274,445
50,000
12,000
25,492

Depreciation
Directors Emoluments
Auditors remuneration
Staff Costs

195,552
40,000
10,000
38,475

12.

DIVIDENDS
Dividends proposed
Dividend paid

2005
Rs

2004
Rs

100,000
125,000
225,000

100,000
100,000

Required:
(a) Compute the following ratios for the years ended 30th June 2004 and
2005:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)

Gross profit margin


Net profit margin
Return on capital employed
Current ratio
Quick ratio
Debtors collection period (in days)
Stock turnover
Creditors payment period (in days)
Capital gearing
Interest cover

[1 mark]
[1 mark]
[1 mark]
[1 mark]
[1 mark]
[1 mark]
[1 mark]
[1 mark]
[1 mark]
[1 mark]

(b) Based on the above ratios, write a report to management,


commenting on the profitability, liquidity, efficiency and gearing of
[15 marks]
Smith Limited for the year ended 30th June 2005.
(c) Prepare a cash flow statement for the year ended 30th June 2005 in
accordance with IAS 7, using the indirect method.
[15 marks]
[Total: 40 Marks]

SECTION B
ANSWER ONLY ONE (1) QUESTION FROM THIS SECTION. EACH
QUESTION CARRIES 30 MARKS.
Question 2
The Directors of M&S Ltd have prepared functional budgets for the four
months ending 30 April 2005. To discover the effect that the budgets will
have on the company at the end of the four months, they require the
accountant to prepare master budgets. The accountant is provided with
the following data.
M & S Ltd Balance sheet at 31 December 2004
Fixed assets

Cost
Rs

Freehold premises
Plant and Machinery

50,000
37,500
87,500

Current assets
Stock
Trade Debtors
Balance at Bank

Depreciation
Rs
10,000
22,500
32,500

Net
Rs
40,000
15,000
55,000

30,000
42,500
20,750
93,250

Current liabilities

22,500

Long term liability


12% debentures 2009/10

70,750
125,750
25,000
100,750

Capital and Reserves


Ordinary shares of Rs 1 each
General Reserve
Retained profit

65,000
30,000
5,750
100,750

Further information:
1. Sales and purchases for the four months from January to April 2005 are
budgeted as follows:

Sales (Rs)
Purchases (Rs)

January

February

March

April

62,500
25,000

70,000
20,000

75,000
30,000

82,500
37,500

2. 40% of sales are to cash customers; one months credit is allowed on the
remainder.
3. The company pays for its purchases in the month following purchase.
4. Selling and distribution expenses amount to 10% of sales and are paid
in the month in which they are incurred.
5. Administration expenses amount to Rs 20,000 per month and are paid
in the month in which they are incurred
6. Stock at the end of April 2005 is estimated to be valued at Rs 22,500.
7. Additional plant and machinery costing Rs 60,000 will be purchased on
1 March 2005.
8. Plant and machinery which cost Rs 20,000 and has a written down
value of Rs 8,000 at 31 December 2004 will be sold for Rs 6,000 on 1
March 2005.
9. Annual depreciation of fixed assets is based on cost as follows: Freehold
premises 3%; plant and machinery 20%. 50% of all depreciation is to be
charged to selling and distribution expenses and the balance to
administration expenses.
10. A subscription fee of Rs 15,000 for 6 months to 30 June 2006 will be paid
on 1 January 2005.
11. Debenture interest is payable half-yearly on 30 June and 31 December.
12. A dividend of Rs 0.10 per share will be paid on the ordinary shares on
30 April 2005
Required:
(a) (i)

Prepare a Cash budget for the four months from January 2005 to
April 2005.
[10 marks]

(ii)

Prepare a budgeted Profit and Loss account for the four months
ending 30 April 2005.
[8 marks]

(iii) Prepare a budgeted Balance sheet as at 30 April 2005.


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[8 marks]

(b)

What are principal budget factors and how do they affect the
preparation of budgets?
[4 marks]
[Total: 30 marks]

Question 3
(a)

Mauri Telecom had a fixed factory overhead budget for 2003 of


Rs1.5 million. The company planned to make and sell 200,000 units
of a particular communications device. All variable manufacturing
costs per unit were Rs7. The budgeted income statement contained
the following (in thousands):
Rs000
Sales
Manufacturing cost of goods sold

2,500
1,400

Gross margin
Deduct selling and administrative expenses

1,100
400

Operating income

700

For simplicity, assume that the actual variable costs per unit and the
total fixed costs were exactly as budgeted.
Required:
(a)

Compute the budgeted fixed factory overhead per unit. [1 mark]

(b)

Near the end of 2003, a large computer manufacturer offered to


buy 10,000 units for Rs120,000 on a one-time special order. The
president of Mauri Telecom stated: "The offer is a bad deal. It's
foolish to sell below full manufacturing costs per unit. I realize that this
order will have only a modest effect on selling and administrative costs.
They will increase by a Rs30,000 fee paid to our sales agent."
(i) Prepare supporting calculations to evaluate the acceptability
of the offer.
[4 marks]
(ii) What qualitative factors should the president of Mauri
Telecom consider before finally deciding whether to accept
the offer?
[5 marks]
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(b)

The details below relate to the level of activity (number of building


permits) at the Municipality of Port - Louis for the quarter ended 31
March 2003 for a retail business.
Building Permits

Total costs
Rs

January

1,400

112,000

February

1,500

119,980

March

1,700

129,100

The fees charged for each building permit average Rs150.


Required:
(i)

Calculate the:
Variable cost per unit;
Total fixed costs for the period;
Contribution to Sales ratio;
Breakeven point in units and value
[8 marks]

(ii)

List four main limitations of the break-even analysis.


[4 marks]

(c)

Daylight Ltd makes one kind of sanitary fitment, and has provided
you with the following data:
Rs
Rs
Sales
Direct materials
Direct labour
Other variable costs

300,000
60,000
40,000
50,000
150,000
150,000
120,000

Contribution
Fixed costs
Net profit

30,000

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Required:
Prepare a Profit/Volume chart from the above data, and determine
the breakeven point and margin of safety. Explain your results
briefly.
[8 marks]
[Total: 30 marks]

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SECTION C
ANSWER ONLY ONE (1) QUESTION FROM THIS SECTION. EACH
QUESTION CARRIES 20 MARKS.
Question 4
Predicting corporate failure: how useful are multi-discriminant analysis
models? Discuss.
S R Letza, Leeds Metropolitan University, L Kalupa & T Kowalski, Poznan University of Economics

[20 marks]
Question 5
Discuss the extent to which earnings management can be detected and
prevented.
[20 marks]

- END OF QUESTION PAPER -

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