Examination Answer Booklet

To be filled by Student before completing the Examination

STUDENT ID NUMBER………………………..043-306
DEGREE/DIPLOMA/CERTIFICATE FOR WHICH THE CANDIDATE IS REGISTERED
e.g. BBA,BPH,BIRDS,LLB,BIT:………………………………….BBA-AF
YEAR OF STUDY…………………………………………………TWO
MODULE CODE…………………………………………………..BBF211
MODULE NAME…………………………………………………. FIANACIAL REPORTING AND
ANALYSIS
SEMESTER………………………………………………………...THREE
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 CUU Answer booklet

Question one
Explain any four approaches of analyzing financial statements (4marks)

The four approaches of analyzing financial statement are.

Trend analysis.
This analysis is used to find out if the balances of the company is increasing or decreasing.

Beach marking analysis.

This analysis is used to compare the actual income with the target set by the company’s management

Ratio analysis.
This analysis is used to analysis the financial performance in relation to efficiency, liquidity, profitability,
and solvency.

Break Even Point analysis.

This analysis is used to reveals the point at which the company will have sold enough units to cover all
the costs.

Mention any four components of financial statements (4marks)

The components of financial statements are:
 Statement of comprehensive income
 Statement of financial position.
 Cash flow statement
 Statement of charge in equity

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A statement of financial position as at 30.06.03 (7marks)

Workings
Advances to employees....500
Bank................................................500
 Salaries expense................2,900
Salesman commission.....2,000
Auditor's remuneration....5,200
Salaries payable............................10,100
( Insurance expense (1,600-6,400)....4,800)
Insurance................................................................4,800
 Bad debts expense....5,000
Debtors........................................5,000
 Bad debts expense [(190,000-5,000)x2%]....3,700
Allowance for doubtful debts............................................3,700
Depreciation expense....8,260
Accumulated depreciation-Furniture and fittings (10%x61,600)...........6,160
= 6,160 x 12 =
Accumulated depreciation-motor vehicle [(28,800-20,400)x25%]....2,100
 
(Income tax expense (30%x75,740) = 22,722 )
Income tax payable....................................................22,722
 Retained profits....15,000
Bonds redemption reserve....15,000

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Statement of financial position as of 30/06/2003.

Particulars UGX (000) UGX (000)
Noncurrent Assets

Motor vehicle 28,800

Furniture 61,600
Accum. Depreciation on Furniture and fittings (39,360)
Accum. Depreciation Motor vehicles (22,500)

Total noncurrent Assets

28,540
Current Assets
Debtors 185,000
Allowance for doubtful debts. (3,700)
Stock 125,600
Advances to employees 500
Goodwill at cost 128,00

Total current Assets

435,400

Total Assets
463,940
Liabilities
Creditors
70,000
Bank
17,300
Salaries
22,722
Income tax payable 10,100
Total liabilities
120,022
Equity
13% Bonds2002/2003
Shares capital shs. 1,000Ordinary shares 80,000
Share premium 120,000
Retained benefits 60,000
68,818
Bonds redemption reserve
15,000
Total Equity

Total liabilities and Equity 343,818

463,940

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Statement of comprehensive income for the year ending 30.06.03 (10 marks

UGX (000) UGX (000)

Sales 704,000
Sales discounts (9,200)
Net sales 694,800

Less: cost of goods sold

Beginning stock 114,000
purchases 412,800
Transports on purchase 7,600
Purchases discounts (27,200)
Stock ending (125,600)
Cost of goods sold (381,600)
Gross profits 313,200

Less expanses
Wages and salaries 41,300
Advertising 13,600
Insurance 6,400
Depreciation expanses 8,260
Bad debts expanses 8,700
Transport on sales 31,200
Interest on 13% Bonds 5,200
Salesmen commission 18,400
Rent and rates 36,000
Electricity 18,800
Directors remuneration 40,000
Auditors remuneration 5,200
Repairs and maintenance 4,400
(237,460)
Profit before tax 75,740
Income tax expanses (22,722)

Net income 53,018

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Question two
General ledger entries to record the above transactions.

Solution summary

Total application received = 90000

Rejected application =15000

Allotted fully = 45000

Balance application =90000 - (45000+15000). = 30000 shares

Allotted on pro rata basis =50000 - 45000 =5000shares

Cr Cash A/C Dr

Share application = 18,000,000 Share application = 3,000,000

Balance b/d = 15,000,000

18,000,000 18,000,000

Cr. Share application A/C

Dr

Share Capital (50,000 x 200) = 10,000,000 Cash = 18,000,000

Cash Refund (15,000 x 200) = 3,000,000

Share Allotment (5,000 x 500) = 2,500,000

Share Call 2,500,00

18,000,000 18,000,000

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Cr Share Allotment A/C Dr

Share Capital – Allotment money due Share Capital (Excess application

50,000 x 300. = 15,000,000 money adjusted) = 2,500,000

Balance b/d = 12,500,000

15,000,000 15,000,000

Cr Share Call A/C Dr

Share Capital (Excess application
Share Capital (50,000 x 500) = 25,000,000 money adjusted) = 25,000,000

25,000,000 25,000,000

Cr Share Premium A/C Dr

Balance b/d = 10,000,000 Share Allotment 50,000 x 200. = 10,000,000

10,000,000 10,000,000

Cr Share Capital A/C Dr

Share application (50,000 x 200) = 10,000,000

Balance b/d. = 50,000,000 Share Allotment 50,000 x 300. = 15,000,000

Share Call (50,000 x 500). = 25,000,000

50,000,000 50,000,000

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b) Explain with calculations how the amounts originally received in the pro rata allotment were
utilized.
Applications Shares application application Excess adjusted to adjusted to Refund
allotted money money application allotment calls in advance
received money
Transferred
to share
capital

15000 nil 3000000   3000000     300000

0
(15000*200)

45000 45000 9000000 9000000        

(45000*200)

30000 5000 6000000 1000000 5000000 2500000 2500000  

(30000*200) (5000*200) (6000000- (5000*500) (5000*500)

1000000)

C. Explain any four ways of issuing shares to the public (9marks)

Share are made available or issued in a number of ways by the issuing company.
A placing.
This is where the issuing merchant bank or a firm of brokers makes arrangement for its customers or a
number of financial institutions to subscribe for the shares.

An offer for sale.

This is where the issuing house itself subscribes for the shares and subsequently offers them to the public.

A public issue.
This where shares are issued to the general public and the issuing company normally advertised in the
newspapers and anybody can apply to buy shares. This will normally be relevant only for companies
wishing to raise large amounts of money..

A rights issue.
This is when a company wants to raise substantial additional funds by issuing shares, they often make a
rights issue to existing shareholders. This usually means that they offer new shares at a price lower than

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the current market price. A rights issue is the normal way in which established companies raise additional
funds, and it is intended to be attractive

Question three
LIFO METHOD (8 marks)
Under LIFO Method
Units acquired Units Sold Ending balance
Date Activities Units Cost Total Unit Cost per Total Units on Per Total
acquire per cost sold unit cost hand unit
d unit
Jan 1 Beginning 1,000 1.00 1,000
inventory
Jan 1 1,000 1.00 1,000

Received 1,000
units 1,000 1.00 1,000 1,000 1.00 1,000

1,000 1.00 1,000

1,000 1.00 1,000

Jan 10
Received 260 260 1.05 273 260 1.05 270
units
Jan 20 Issued 700 units 260 1.05 270 1,000 1.00 1,000
410 1.00 440 560 1.00 560
1,000 1.00 1,000

560 1.00 560

Received 400
Feb 4 units 400 1.15 460 400 1.15 460
1,000 1.00 1,000
Feb 21 Received 300
units 300 1.25 375 560 1.00 560

300 1.25 375

March Issued 620 units 300 1.25 375 1,000 1.00 1,000-
16 320 1.15 368 560 1.00 560
80 1.15 92

April Issued 240 units 80 1.15 92 1,000 1.00 1,000

12
160 1.00 160 400 1.00 400

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May 1,000 1.00 1,000

10 Received 500 400 1.00 400
units 500 1.10 550 500 1.10 550
Total 2,658 1,708 1,950

Cost of goods sold (LIFO) = 1,708

Cost of ending inventory = 1,950
II. Weighted average method (8 marks)
Under Weight average cost method

Units acquired Cost of goods sold Ending balance

Date Activities Units Cost Total Unit Cost per Total Units on Cost per Total
acquired per cost sold unit cost hand unit cost
Units
Jan 1 Beginning 1,000 1.00 1,000.00
inventory
Jan 1 Received 1,000 1.00 1,000 2,000 1.00 2,000.00
1000 units
Average weight cost = Total cost of inventory/Total units of inventory
Weight average = 1,000 + 1,000 / 1,000 + 1,000 = 1.00
Jan 10 Issued 260 1.05 273 2,260 1.01 2,282.60
received
160 units
Average weight cost = Total cost of inventory/Total units of inventory
Weight average = 2000 + 273 / 2000 + 260 = Shs 1.01
Jan 20 Issued 700 700 1.01 707 1,560 1.01 1,575.60
units
Feb 4 Received 400 1.15 460 1,960 1.04 2,038.40
400 units
Average weight cost = Total cost of inventory/Total units of inventory
Weight average = 1575.6 + 460 / 1560 + 400 = Shs 1.04
Feb 21 Received 300 1.25 375 2,260 1.07 2,418.20
300 units
Average weight cost = Total cost of inventory/Total units of inventory
Weight average = 2038.40 + 375 / 1960 + 300 = Shs 1.07
March Issued 620 620 1.07 663.40 1,640 1.07 1,754.80
16 units
April Issued 240 240 1.07 256.80 1,400 1.07 1,498.00
12 units
May Received 500 1.10 550 1,900 1.08 2,052.00
10 500 units
Average weight cost = Total cost of inventory/Total units of inventory
Weight average = 1498 +550 / 1400 + 500 = 108.

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Total 2,658.00 1,627.20 2,052.00

Cost goods sold (weight average = 1,627.20

Cost of ending inventory (weight average) = 2,052.00

Analyze the closing stock in each case? (9 marks)

Analysis.
Closing inventory as per LIFO method is Shs = 1,950 whereas according to Weighted average method it
is Shs = 2,052
 Under LIFO method, the units last received will be issued first. So, the issues are made at higher prices in
case of raising prices scenario.
 Hence, the closing inventory will be valued at lower prices (starting prices)
Under Weighted average method, the price are made average and issues are valued at that average price. 
Hence, the closing inventory will be higher than that of LIFO method

Question Five
a) Explain the term ratio analysis (3marks)
Ratio analysis pertains to insights/useful information about a company's profitability, operational
efficiency, liquidity, and solvency that are revealed by comparing line-item data from a business
entity's financial statements.
 
b) Explain any five types of ratios, giving two examples under each(12 marks )
The five types of ratios.
1. Profitability ratios - These ratios measure a company's usage of its assets to generate income
and control its expenses to generate a rate of return that is acceptable to the company's
management. 
Examples.
Operating margin = This ratio tells how much a company earns for every dollar of revenue after
deducting operating expenses (that is, depreciation, taxes, and interest expenses are not included). 
Gross Profit margin = This ratio tells us how much a company earns for every dollar of revenue after
deducting costs of sales. Simply multiply by 100 to get the percentile.
Liquidity ratios - these types of ratios measure the company's availability of cash to pay its obligations. 
Examples.

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Current ratio - this type of ratio measures the company's ability to cover/pay its obligations for the next
12 months (short-term obligations). It's calculated by dividing current assets by current liabilities.
Quick Ratio (Acid-Test Ratio) = It's the same as the Current Ratio, only, instead of the entire current
assets, it only accounts for the most liquid assets or those that are readily convertible to cash such as Cash
and Cash equivalent, marketable securities and accounts receivable. Notice that the inventories are not
that liquid or may take time to be sold and be "cash" in nature. If the quick ratio results in a low one, then
this could be probably due to the assets of the company being heavily tied up to its inventories and/or the
non-current assets such as fixed assets (property, plant, and equipment).

2. Activity ratios - these types of ratios measure how effective a company is in the use of its
resources or assets, hence, it is called "efficiency ratios.
Examples
Accounts Receivable Turnover ratio = tells how well or efficient a business is in managing its
receivables from customers, the way the company extends credit to its customers through evaluation of
how long it will take in collecting outstanding customer debts throughout the period (accounting period).
Total Asset Turnover Ratio = This ratio measures how efficiently a company is using its assets in
generating sales revenue by comparing its net sales revenue to its average total assets. It's calculated by
dividing net sales revenue by the average total assets. 

3. Leverage ratio - these types of ratios measure how the firm is able to pay or repay its long-term
obligations. 
Examples
Debt ratio = Total Liabilities / Total assets -- which means a higher ratio, the greater risk there is with the
company's operations. 
Times-Interest-Earned ratio = this measures the firm's ability to pay/repay its obligations. It is
calculated by dividing EBITDA (earnings before interest, tax, depreciation, and amortization) by the
company's total interest payable. 

4. Equity ratios - these types of ratios measure the relationship between return and the value of an
investment in a company's shares and they also measure the cost of issuing stocks.
Examples  
Debt-equity = Total Liabilities/book value of shareholders' equity. This ratio needs to be compared
across other companies' ratios within the same industry. 
Return on Equity = (Net earnings after taxes - preferred dividends) / common equity dollars. The higher
the return on equity the better for the company because that would mean the company is generating more
profits. 
5. Shareholders' ratios, these measure the strength of the company, its share price and its
dividends.

Price Earnings (P/E) ratio. This measures the market price of the share as proportion of the
earnings per share calculated

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Earnings per share. This measures the company potential dividends that it could pay to
shareholders

Explain why it is necessary to know the form business you intend to start. (7 marks)

It is necessary to know the form of a business an individual is intending to start because of the following

To understand the risk involve.

In business there are always risk involves. Assessing your business risks before moving with the plan is
very important. Calculating, understanding and planning for the risk, for example, considering liabilities
and insurance in case of anything.

To understand the tax burden.

To find out the business taxes such as city council URA and how is your payroll going to be in order
make your tax payments timely

To determine your audience.

Understanding who needs your products or services can help in each decision you make. It is important to
make sure you are delivering what your customer’s needs, because you cant earn profits without your
customers, understand who they are and make them the priority

To map the finance

Starting a business requires money. Make a plan for how you will fund startup cost, whether that is your
own funds or getting a loan from a financial institution

To look for a mentor or advisor

Before Starting a business, no matter how tempting that sounds, finding those who have already gone
through that process before can help you set up for success. learn from someone ales who has gone
through the process to help you set up your new business for growth.

To put together the business plan

Take time To outline the plan main components of the business
The mission statement
A description of your business
A list of your products or services
An analysis of the current market and opportunity
A list of decision-makers in the company, along with their bios
Your financial plan so those who review can understand the opportunity

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(c) Required; Calculate any ten ratios from the above information (10 marks)

Calculations of 10 ratios from the above information:  

PROFITABILITY RATIOS
1. Operating margin = (Revenue - Operating expenses excluding depreciation, taxes and interests) /
Revenue.
2. Gross Profit margin = Gross profit / Revenue
LIQUIDITY RATIOS
Current ratio = Current assets / current liabilities
                         = 53,300 / $26,000
                         = 2.05
2. Quick ratio = Quick assets/ current liabilities
    = (Cash + Trade Debtors)/ 26,000
  = 1.05
ACTIVITY RATIOS 
1. Accounts Receivable turnover ratio = Revenue / Average Accounts Receivable
    = 312,000 / 13,000
     = 24
2. Total Asset Turnover Ratio = Revenue / Average Total Asset
= 312,000 / 157,300
= 1.98
DEBT RATIO 
1. Debt ratio = Total liabilities / Total assets
= 26,000 / 157,300
= 0.17
2. Times-interest-earned ratio = EBITDA / Total Interest Payable
  = (Net Profit before tax + Interest on Debenture) / 3,120
  = ( 31,200 + 120)/ 3,120
  = 11
MARKET RATIOS
1. Debt-to-equity = Total liabilities/ book value of shareholders' equity
= 26,000 / 131,300
= 0.20

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2. Return on Equity = (Net earnings after taxes - preferred dividends)/ common equity dollars
   = 23,400 / 131,300
    = 0.18

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