INSTITUTE OF BANKERS IN MALAWI

DIPLOMA IN BANKING EXAMINATION

SUBJECT: CREDIT RISK ASSESSMENT 1 (IOBM –D204)

Date: Sunday, 6th November 2016

Time Allocated: 3 hours (13:30 – 16:30 Hours)

INSTRUCTIONS TO CANDIDATES

1 This paper consists of TWO Sections, A and B.

2 Section A consists of 4 questions, each question carries 15 marks.

Answer ALL questions.

3 Section B consists of 4 questions, each question carries 20 marks. Answer

ANY TWO questions.

4 You will be allowed 10 minutes to go through the paper before the start of the
examination, you may write on this paper but not in the answer book.

5 Begin each answer on a new page.

6 Please write your examination number on each answer book used.

Answer books without examination numbers will not be marked.

7 All persons writing examinations without payment will risk expulsion from the
Institute.

8 If you are caught cheating, you will be automatically disqualified in all subjects
seated this semester.

9 DO NOT open this question paper until instructed to do so.

SECTION A (60 MARKS)

Answer ALL questions from this section.

QUESTION 1

Discuss the following limitations of financial statements analysis:

a) Comparative ratio analysis. (5 marks)

b) Quantitative and qualitative analysis. (5 marks)
c) Inflation. (5 marks)

(Total 15 marks)

QUESTION 2
a) Your company offers a customer the following credit terms: “payment 60 days
after the invoice date, or an early payment discount of 2% for payment within 10
days.” What is the return on capital for the customer from taking the discount?
(5
marks)
b) With a well labelled diagram explain the Aggressive Approach in financing
working capital. (10
marks)

(Total 15 marks)

QUESTION 3
Explain the relevance of any of the following to an analyst of audited financial
statements:

a) The directors report. (3 marks)

b) The cash flow statement. (3 marks)
c) The auditor’s report. (3 marks)
d) Notes to the annual financial statements. (3 marks)
e) The value added statement. (3 marks)

(Total 15 marks)

A qualification examined by the Institute of Bankers in Malawi

QUESTION 4

a) The Liquidity Ratios are not always a good indicator of a healthy cash flow.
Explain why this is so. (6 marks)

b) Discuss any two of the following and give examples where applicable:
i) Credit risk. (3 marks)
ii) Industry risk. (3 marks)
iii) Operational risk. (3 marks)

(Total 15 marks)

SECTION B (40 MARKS)

Answer ANY TWO questions from this section

QUESTION 5

When analyzing an organization’s financial statement:

a) Briefly outline five signs that one would depict from the business’s bank
account that would show that the business is overtrading. (10
marks)

b) In your opinion, what challenges would overtrading have on the organization’s

actual cash flows? (10 marks)

(Total 20 marks)

QUESTION 6

a) With the aid of a well labelled diagram, explain the concept of breakeven point.
(10 marks)
b) In calculating breakeven, it is necessary to make a number of assumptions.
Briefly discuss five of these underlying assumptions. (10 marks)
3

A qualification examined by the Institute of Bankers in Malawi

 (Total 20 marks)

QUESTION 7

The Accountant of Mtendere (Pvt) Ltd has prepared the following estimates of sales
and purchases for the period covering June to October of the current financial year.

Sales (MWK) Purchases(MWK)

June 75, 000 56, 000

July 87, 000 58,000

August 50,000 63,000

September 75, 000 104,000

October 100, 000 75,000

The accounting records reveal that 30% of the sales are for cash. The balances are
credit s ales, of which 75% are collected one month after the sales, and the
remaining 25% are collected two months after the sale. The company wishes to
maintain a minimum cash balance of MK2,000. Any surplus over and above this
amount will be invested, whilst any shortfall will be funded by means of a bank
overdraft, The company currently has an overdraft facility of MK15,000.

Additional information:

i) Purchases are paid for one month after they are purchases
ii) Salaries and wages are MK15,000 per month.
iii) Rent, electricity and water bills amount to MK6,000 per month.
iv) Other cash expenses are MK4,000 per month.

Required:

Prepare a Cash Flow Budget for August, September and October and show the
month-end cash balances for each of these months.

A qualification examined by the Institute of Bankers in Malawi

 (Total 20 marks)

QUESTION 8

a) Explain with examples for each on how a business can have either a negative
cash cycle or a positive cash cycle? (10
marks)

b) How will you as a Bank Manager respond to a business client who says to you:
‘I never prepare a Cash Flow Budget because everything changes in any case
and they never work out as you plan them’? (10 marks)

END OF THE EXAMINATION PAPER

A qualification examined by the Institute of Bankers in Malawi