Centre name

your college name

Learner’s name
First Name Last Name
ABE membership number
your ABE membership number – i.e. 123456

By ticking this box,

I Insert your full name
am confirming that the work I am submitting is my own and I have acknowledged
ALL
the sources of reference I have used in constructing my assignment.
Date:
Day Month Year
COMPANY CONTEXT: SAFARICOM
Safaricom Limited is a mobile telecommunication company in Kenya whose head office is at Safaricom
House, Nairobi. It is the leading telecommunication company in Kenya with a market share of 64.5% and
the most profitable company in East and Central Africa. Safaricom is a large company with over 10,000
employees working across various locations inside and outside Kenya. The company’s products and
services include mobile telephony, mobile money transfer, consumer electronics, ecommerce, cloud
computing, data, music streaming, and fibre optic services. The company operations are in Kenya,
Uganda, Tanzania, Ethiopia, South Africa and the United Kingdom. Apart from Kenya and Ethiopia, the
company’s operations in other countries are through joint ventures and agents. The key competitors of
Safaricom are the other telcos in the Kenyan market such as Airtel and Telkom. The company’s flagship
mobile money transfer system MPESA also faces competition from leading banks such as Equity Bank
that has also developed a mobile money transfer system called Equitel. The company classifies its
customers into two main categories: consumer and enterprise. Consumer customers are individual
purchasers of goods and services, while enterprise clientele includes business of all sizes, ranging from
small-to-medium enterprises (SMEs) to large corporate firms.
Question 1 25 Marks

(750 words)

Accounting concepts guides on how to record transactions and how to maintain the books of accounts.
These are the assumptions on which accounting records are made.

This includes:

1.Accruals/Matching concept. This state that revenues earned must be matched against the expenses
incurred to earn the said revenues in an accounting period.

REVENUES EARNED-EXPENSES INCURED=PROFIT

REVENUES EARNED: Revenues relating to the financial year, which includes revenues for the year
received and revenues for the year accrued. Revenues accrued balance at the end of the year represents those
revenues that have earned but have not been received. Safaricom Plc includes revenues on calls on credit for
the year in the total revenues. Revenues received in advance don’t reflect in the total revenue earned by
Safaricom Plc e.g. revenue in advance for internet as at the end of the year.

EXPENSES INCURED: Expenses relating to the financial year, which includes expenses for the paid in
advance in the previous year and expenses paid paid during the year relating to the same year. Included in
the expenses for Safaricom Plc for the 2023 31st March are salaries for the year as well as salaries advance
during the year ended 2022 31st March.

2.Cost concept. Assets of Safaricom Plc are recorded at the historical cost. This is more objective than the
application of other values that would largely be subjective.

3.Going on concern: Safaricom Plc Has prepared the financial statements in the view that the company will
be existing for a foreseeable future.

4.Money measurement concept: Included in the financials of Safaricom plc are only items that can be valued
monetarily. Items such as, managerial capabilities, brands, technological skills and internally generated
goodwill have been omitted because they cannot be measured monetarily.

5.Prudence concept: While Safaricom plc prepared the financials, caution was taken not to overstate the
assets and profits while caution was taken not understate the liabilities and losses. This the essence of
providing for bad debts and contingent liabilities.

IMPLICATIONS

1.By the use of the accounting principles and concepts Safaricom Plc is able to identify the income
statement items i.e. income and expenses as well as balance sheet items assets and liabilities.

2.The statements made by Safaricom Plc have complied to the accounting principles thereby making them
consistent and complete.

3.Consistently prepared statements by Safaricom Plc make the statements comparable with other companies’
statements and thereby useful to users e.g. potential investors
4.Safaricom Plc has ensured transparency in the operations of the the company by full disclosure e.g. by
accompanying the financial statements with the directors’ remuneration report.

5.By following the accounting standards, Safaricom plc easily determines the management accountability.
For example, it will be possible to evaluate the ability of the management to increase profitability.

6.By following the accounting standards, Safaricom Plc makes the work of auditors easy. If the auditors find
that policies, concepts and standards have been followed, they can then conclude that the statements reflect
the true and fair position of the company.

7. Prevents Frauds and Accounting Manipulations. Safaricom Plc follows the accounting standards as laid
down for all entities, this makes it difficult for the management to manipulate financial information to the
company’s advantage. Misrepresentation and frauds would thereby be difficult.

8.By following the concept of regular reporting, Safaricom Plc has made it possible to prepare the
financial statements by the end of every 31st march of the year.

9.The dual aspect accounting ie every transaction has dual effect in the financial statements has given
Safaricom plc a self check system for both the income statement as well as the balance sheet.

10.By following the consistency of the policies applied in preparing financial statements, Safaricom Plc has
ensured information is reliable for use by relevant stakeholders.

11.Safaricom Plc financial statements are prepared on the assumption of going on concern. This implies
that:

a) The company has to classify assets as either current asset or noncurrent asset.

b) The cost of the fixed assets would have to be allocated over the useful period of the asset.

c) The fixed assets are for use and not for sale.

d) Fixed assets are not reflected at their realisation value but at cost in financial statements.

e) A distinction has been made between capital expenditure and revenue expenditure.

12.All the recorded transactions are on the basis of Safaricom Plc as a separate entity from the members.
Payments to members can only be from the profits made and not from capital. This implies that during loss
making periods, Safaricom plc can not pay dividends.
Question 2 25 Marks

(750 words)

Financial ratios are quantitative means of evaluating the performance of a company from the financial
statements. The accuracy of these ratios will there fore rely on the quality of the financial statements.

The ratios can be used to compare between companies of same industry or compare inter period
performance of the same company.

Safaricom plc could be interested in the inter period performance of the company. That is Year2022 and
Year 2023.

PROFITABILITY RATIOS
These ratios evaluate how well the company used the resources at its disposal to generate profits.
Safaricom plc profitability ratios:
1.MARK UP. This compares profits to the cost of sales by percentage. For Safaricom plc, we will use the
direct costs as the cost of sales.
Operating profit * 100
Total Cost

2023 2022
119070.7 *100 113386.4 *100
89363.4 90613.6
=133.24% = 125.13%

A high mark up is an indication of high prices or the cost of sales has been significantly reduced. The
Safaricom plc products are highly priced, more than double the cost. This an indication that its operating in
near a monopoly market. However, the company has competitors who there must have agreed with the
pricing and therefore can say it could be an oligopoly market. The pricing increased in the year 2023.

2.GROSS MARGIN. This ratio compares the profit to sales as a percentage. For Safaricom Plc, the ratio
will be;
2023 2022
Operating profit * 100
Total Revenue

119070.7*100 113386.4*100
310479.8 292556.2
=38.35% =38.76%
The operating expenses for Safaricom Plc in both years appears to take a very big portion of the revenues.
This ratio has remained almost the same.
3.Operating ratio. This ratio compares total costs to the net revenue from operations as a percentage.

For Safaricom plc, the ratio will be;

2023 2022
147407.4 *100 142761.8*100
302579.4 292556.2
=48.7% =44.8%
For both years, the ratio of the costs to revenue from operations has remained at 48.8%

4.ROCE, return on capital employed.

This is the EBIT expressed as a percentage of the capital employed.

EBIT (Earnings before interest and tax)

Capital employed=Total Assets-Current liabilities
For Safaricom Plc, the ratio will be;
2023 2022
119070.7*100 113836.4*100
328053.7-100362 303308.3-94620.2
=52.3% 54.5%
The return on capital employed for both years are good, however the return decreased by 2%

5.Return on net worth. This is the profit after tax expressed as a percentage of the shareholders’ funds.
For Safaricom Plc, the ratio will be;
2023 2022
74939.6*100 71789.3 *100
166109.1 144456.4
=45% = 49.6%
For both years Safaricom plc returns on equity was good. However there has been a decrease in the year
2023 by almost 5%.Despite the increase in shareholders funds, the return never increased.

LIDUIDITY RATIOS:

These ratios evaluate the ability of the firm to pay its short-term liabilities.

These ratios are in two:

Current Ratio: These ratios measures the ability of the ability of the firm to pay its short-term liabilities
given reasonable time. This means the payment need to come from current assets. Current ratio is the current
assets divided by current liabilities.

2022 2023

48391.7 55948
100362 94620.2
=0.48:1 =0.59:1
Acid test Ratio: These ratios measures the ability of the ability of the firm to pay its short-term liabilities
within a short notice. This means that we will consider only those assets that can be converted to cash in the
shortest time possible, This excludes inventory.
2022 2023
48391.7-2,231.5 55948-4,147.4
100362 94620.2
=0.46:1 =0.55:1
EFFICIENCY RATIOS

These ratios evaluate how well the company is using its resources to generate income. These includes,

Asset Turnover: This evaluates how much a unit in sales can be generated by a unit of in assets.

Asset turnover = Net sales

Average total assets

2023 2022

310,479.8 295,845.9

315681.0 283664.15

= 0.98:1 =1.04:1

There was a better return of sales on assets in year 2022 as compared to year 2023.

GEARING RATIOS

These ratios measure the extent to which a company is internally financed and to what extent its externally
financed. This includes:

Debt to equity ratio: This measures the extent of the company is financed by debt and what proportion is
financed by equity.

Debt *100

Equity

61582.6 *100 64231.7*100

166109.1 144456.4

=37.1% =44.5%

A higher financial leverage indicates more financing from external sources. The financial leverage for
Safaricom therefore reduced. On average Safaricom plc is more financed from internal sources.

Debt to total capital: This ratio expresses the debt as a percentage of the total capital.

61582.6 64231.7

227691.7 208668.1

=27% =30.7%

In 2022, debt comprised 30.7% of the financing for Safaricom plc while in 2023 this decreased to 27% of
the financing.
Question 3 25 Marks

(750 words)
Cashflow forecasts and financial budgets shows the expected cash inflows and the expected cash outflows in
a given period. By the use of Cashflow forecasts and financial budgets, Safaricom plc can be able know its
financial standing and therefore make the right decisions on matters finance.

From Cashflow forecasts and financial budgets, there are three situations Safaricom plc can find itself in:

a) Anticipate and plan for cash shortages. Safaricom plc will be able forecast how much cash would
be required. Once the shortage has been identified, the company has to identify how much need to be
raised either: i) Internally or
ii)Externally

Of importance also will be the period for which the finance will be required and the payment period should
the financing be external.

INTERNAL SOURCES FOR FINANCING A CASH SHORTAGE. This source has no time limit and
attracts no interest. However, there can be an opportunity cost of using this source. Safaricom can sample
the following internal sources:

Retained profits. These are the earnings that remained undistributed to the members of the company.
Safaricom plc has enjoyed high profitability over time and therefore reinvesting profits would not be
a hill to climb.

Sale of assets. Safaricom plc can dispose off the non current assets at its disposal to fiancé any
cashflow shortfalls.

Sale and lease back. Safaricom can dispose off some non current assets for immediate large cash
inflow and the lease the same assets at reasonably lower regular lease payments.

external.

EXTERNAL SOURCES FOR FINANCING A CASH SHORTAGE.

Issue of shares: Safaricom plc can issue more shares in the stock market and raise more funds.

Issue of debentures. The company can issue debt stock to raise funds. This has the effect of reducing the
profitability by the interest expense.

Loans. The company can opt for either short term or long-term loans depending on the period of time the
finances are likely to be required.

Government grants. Safaricom plc is a major communication infrastructure in Kenya for both information
and money transfer. This make it qualify for government grants should it hit a financial snag after
exhausting all other avenues of assessing finances.

Bank overdraft. For short term financing Safaricom can assess bank overdrafts to finance its operations.
b) Anticipate and plan for a surplus.
When the company anticipate surplus of cash, the directors can decide on the best investment
destinations for the best interest of the company. The decision has to be based on the best returns for
the company considering the risks therein.
c) Hit a balance of no shortage nor reasonable surplus. In this scenario Safaricom plc may not
require to plan for any cash reorganisation but still use the Cashflow forecasts and financial budgets
to place itself at a competitive advantage position. This includes;
Tracking spending to monitor all spending to avoid wastages and therefore making their products
cheaper.

Scenario planning and management; Using hypothetical scenarios Safaricom plc can come up
with strategic business decisions can prove to be more rewarding for the company.

Sense red signals. Safaricom plc can always be able read for danger signs eg from perpetual un
intentional depletion of surpluses. This will call for proper scrutiny of what could be the major cause.

Monitor late payments. From the cashflow forecasts, Safaricom can identify and monitor the late
payments and thereby make decisions to counter this. The company would be able to identify the
stakeholders who are making the cash management not to go as planned.

Foreign currency risk, the finance team can use the cashflow forecast information to mitigate
against foreign currency risk.
Question 4 25 Marks

(750 words)
Break-even analysis, is the systematic examination of the interrelationships between selling prices, sales and
production volume, costs and profits. It is commonly used tool for decision making. The CVP analysis may
be used in setting selling prices, to predict the required production levels,choosing among alternative
marketing strategies and analysing the effects of cost increases or decreases on profitability of an enterprise.
(Powers, 1987; Harper, 1995; Storey, 1995).

BEP=FIXED COST/CONTRIBUTION PER UNIT.

Fixed cost represent those cost that remain constant irrespective of the level of activity attained while the
variable costs are the costs change with the level of activity attained.

For example if the variable cost of an internet router is KES 1000 and the selling price KES 2500 and the
fixed cost incurred is KES 675M, BEP=675M/1500= 450000 ROUTERS

Break-even can be helpful when a business wants to make decisions. It is particularly useful for
making decisions about:

In a potentially very competitive market coupled globalisation it becomes apparent that its very important
for organisations to seek competitive advantage. Safaricom would therefore seek for diversification as
means of staying as the market leader in the mobile connectivity industry. Safaricom definitely would
require to introduce new products. The company can use break even to predict how many units it needs to
produce and sell for the new product to be feasible.

Different pricing strategies can be applied to respond to changing market situations. During price wars it
will be very important to price in such a way that variable costs are covered. Safaricom in using break even
analysis can identify the price that will produce enough contribution to cover the fixed costs and therefore
suffer no losses. Its upon this price that a premium can be added while keeping the price of the competitors
at check so as to give the investors some returns on their investment.

Still in pricing, the safaricom can use break even analysis to determine the margin of safety. This measures
the extent to which sales can fall before reaching the breaking point.

Margin of safety= (current activity-BEP)* 100

Current activity

Safaricom can use the margin of safety to evaluate the extent they can cede business but still not run into
losses. This is very essential in strategic decision making when faced with a tense market competition and
therefore loosing part of its market share.

Through break even analysis safaricom can identify the impact the changes in costs(fixed or variable or
both) This will inform on the decisions of whether to change the supplier or invest in new infrastructure so
as to reduce the breakeven point.
Break even analysis can be used by Safaricom to predict the required production levels, levels that can give
the required profit. This forecast will assist in planning for the required equipment,staff,purchase orders for
products like handsets, internet routers sim cards etc.

Suppose Safaricom intend to inject more capital for expansion, the use of breakeven analysis can be handy
to determine the sales level to meet proposed expenditure.

Additional sales level= Proposed expenditure/contribution per unit

For example if the variable cost of an internet router is KES 1000 and the selling price KES 2500.Supposing
the company intends to inject KES150M, the additional sales level will be 150000/1.5=100000 additional
routers.

For Breakeven analysis to be applied the are some underlying assumptions that applies all other variables are
assumed to remain constant other than the volume of operation. However other factors like operational
efficiency, price, production methods, competition change, changes in legislation etc are likely to change.

The BEP analysis assumes that costs can be split into fixed and variable costs. In reality there are likely to
be semi variable costs like connectivity cost payable to Telecom by Safaricom. This cost can however be
split using methods like the high low method, regression method, engineering method etc.

However, break-even analysis is a useful tool for short term planning and decision making and is more
relevant where the proposed changes in activity are relatively small so that established cost patterns and
relationships are likely to hold good. The amount of fixed costs and the marginal cost per unit are likely to
change, hence Break even analysis is unlikely to produce useful guidance. Some examples of typical short
run decisions where Break even analysis may be useful include: choice of sales mix, pricing policies, multi
shift working, special order acceptance etc. (Terry, 2000) and lastly that profits are determined using
marginal costing approach.

In conclusion, break even analysis is a very important tool in in decision making but can be misleading if the
factors to be held constant changes.
Reference list

1. https://www.toppr.com/guides/principles-and-practice-of-accounting/accounting-standards/
accounting-standards-objectives-benefits-limitations/
2. European Journal of Business and Management www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-
2839 (Online) Vol.12, No.21, 2020
3. https://www.iiste.org/Journals/index.php/EJBM/article/viewFile/53566/55352
4. Terence Lucey, Terry Lucey. South-Western Cengage Learning, 2009