FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING AND FINANCE

Financial Statement Analysis (BBF2103)
January- June 2020 SEMESTER
INSTRUCTIONS TO CANDIDATES:
1. The assessment criteria are: a) Substance b) Originality
c) Presentation
d) Use of illustration/examples where appropriate

2. Independent research on the relevant topics is encouraged.

3. Special consideration would be given to students who demonstrate an in-depth
analysis of the questions.
4. Candidates who simply regurgitate their answers from the course manual may risk
failing the assignment.
5. Any similarities between individual assignments will result in a fail grade.
6. Pages should be clearly numbered.
7. The format of the assignment should be as follows:
a) Front cover (i.e. title page) stating the:
 Module name and code.
 Students full name and candidate number
 Class code – e.g. Group A/B/C
 Name of Lecturer
 Submission date
b) Contents page
c) Main body of the assignment
8. Retain photocopy of your course assignment.
9. Complete your assignment and hand it in by, or, earlier if possible:

Assignment 1 & 2
Date Issued: 14/09/2021
Due Date: 30/09/2021

Total Marks : 50

Question 1 [30 Marks] (Preparation of Financial Statements)

Financial Statement Analysis BBF2103 Assignment 1 @ L. Thusabantu 2021 Page 1

The following Trial Balance was extracted from the books of L2SA Limited
on 31 March 2021:

Details P P
1 760 000 Ordinary Shares of 25thebe each 440 000
fully paid
200 000 10% Preference Shares of P1 each, 150 000
75thebe called 51 000
Delivery Vehicle at cost 21 000
Provision for depreciation of delivery vehicles 60 000
Bank Loan 1 321 000
Sales 1 025 005
Cost of Sales 43 100
Fixtures and Fittings at cost 19 040
Provision for Deprecaition of fixtures and fittings 278 122
Stock at 31 March 2021 390 000
Freehold premises, at cost 200 000
13% Loan Stock 2027, unsecured 62 550
Profit and Loss Account Balance 322 160
Trade Receivables 181 200
Trade Payables 50 000
Genera Reserve 63 100
Management Expenses 13 000
Interest on Loan Stock 3 000
Insurances 33 300
Directors’ Fees 4 100
Interest on Loan 52 703
Cash at bank and in hand 101 100
Salaries and Wages 2 442 240 2 442 240

The following matters have to be taken into consideration in preparing the

final accounts:

1. A half year’s interest is due on the 13% loan stock.

2. Depreciation is to be provided as follows:
 Fixtures and fittings at the rate of 10% per annum on cost.
 Delivery vehicles at the rate of 20% per annum on cost. They
include a new delivery vehicle which was purchased at a cost
of P8 000 on 1 October 2020.
3. Authorised capital is as follows:
 Ordinary shares of 25thebe each
P500 000
 Preference shares of P1 each P200 000
4. The following apportionments are made between administration
expenses and distribution expenses:

Selling and

Financial Statement Analysis BBF2103 Assignment 1 @ L. Thusabantu 2021 Page 2

 Details Administrati Distribution
on
Salaries and Wages 75% 25%
Directors’ Fees 100% -0-
Insurance Two-thirds One-third
Management 80% 20%

5. Salaries and Wages owing amount to P900 and insurance prepaid

amounts to P300.
6. One year’s dividend is to be provided for on the nominal value of
the preference shares.
7. One quarter of the bank loan is repayable during the year ended 31
March, 2022 and the remainder after that date.

Required:

You are required, in accordance with International Accounting Standard

(IAS) 1:

a. Profit or Loss Account for the year ended 31 March 2021;

b. The Statement of Financial Position for as at that date; and
c. The Statement of Changes in Equity (SOCIE) for publication in so far
as possible from the information provided.
d. Identify any two (2) functions and any two (2) functions and
limitations of Statement of Financial Position respectively.

Question 2 [20 marks] (Issue of Bonus and Rights Shares)

Kaone Limited’s statement of financial position at 31 January 2013 was as

follows:

Details P
Fixed assets 852 000
Current assets:
Sundry current assets 377 000
1 229 000

EQUITY AND LIABILITIES

Equity
1 000 000 Ordinary Shares of 20thebe each fully paid 200 000
Share Premium Account 53 000
General Reserves 600 000
Retained Earnings 185 000
1 038 000
Current Liabilities
Sundry Current Liabilities
Total liabilities 191 000

Financial Statement Analysis BBF2103 Assignment 1 @ L. Thusabantu 2021 Page 3

 191 000

Total equity and Liabilities 1 229 000

On 1 February 2013, the following events took place in the order shown:

1. A bonus issue of 3 500 000 ordinary shares was made so as to leave

the remaining reserves in the most flexible form.
2. The ordinary shares were then consolidated into shares of P1 each.
3. A rights issue, at a premium of 10thebe per share, as offered and
fully taken up on the basis of one share for every three already held.

Required:

You are required to:

a. Journalize the above transactions with appropriate narrations.

b. Prepare the statement of financial position immediately after the
transactions have been completed.

[TOTAL: 50 MARKS]

END OF ASSIGNMENT 1

ASSIGNMENT 2

Question 1 [25 marks] (Ratio Analysis)

Financial Statements are given below for Easy Loan Limited, a non-bank
financial institution:

Easy Loan Limited

Profit or Loss Statement for the year ended 31 December 2020

Details P
Net sales 5 800 000

Cost of goods/services sold 4 640 000

Operating expenses 540 000
Interest expense 128 500
Income tax 245 750
5 554 250
Net profit
245 750

Financial Statement Analysis BBF2103 Assignment 1 @ L. Thusabantu 2021 Page 4

 Statement of Financial Position as at 31 December 2020

Details P
ASSETS:
Non-current assets
Plant and equipment, net of accumulated depreciation 2 820 000

Current Assets:
Inventories: 1 025 000
Finished goods 775 000
Materials 250 000
Accounts Receivables 550 000
Cash 185 000
1 760 000
Total assets 4 580 000
EQUITY & LIABILITIES
Equity
Ordinary share capital of P1 each fully paid
200 000
Share Premium
400 000
Retained earnings
765 000
1 365 000
Non-current liabilities
Long-term debt
1 450 000
Current liabilities
Accounts payable
1 765 000
Total liabilities 3 215 000

Total equity and liabilities 4 580 000

The president of the company is concerned about the low rate of return
and the increasing difficulty of meeting obligations as they become due.
Customarily, the company has been paying dividends each year of P1 per
share of stock; and this practice has been continued even though cash is
badly needed to support business operations.

Plans have already been made to introduce new product lines that will
yield higher profit margins. In the meantime, plans for next year indicate
that net sales revenue can be increased by 5% as a result of a slight
increase in sales volume. Furthermore, operating economies are
expected to result in a decrease of P480 000 in the cost of goods/services
sold. The other costs are expected to remain the same with income tax
being equal to 50% of income before income tax.

Financial Statement Analysis BBF2103 Assignment 1 @ L. Thusabantu 2021 Page 5

Depreciation of P250 000 is included in cost of goods/services sold and
operating expenses and is expected to be the same in the next year.
Dividends of P1 per share are to be paid next year, and current liabilities
are to be reduced by P200 000 if possible. Accounts receivable will
remain at the same level, materials inventory is to be P760 000, and
finished goods inventory is to be P700 000 at the end of next year. No
additions or retirements of plant and equipment are to be made during
the next year.

Required:

a. Identify any five (5) significant objectives of financial statement

analysis.
b. Prepare the projected financial statements for the ended 31
December 2022.
c. Determine the following relationships from the financial statements
given for 2021:
i. Rate of return on sales.
ii. Asset turnover.
iii. Rate of return on assets.
iv. Rate of return on shareholders’ equity.
v. Percentage of shareholders’ equity to total equity.
vi. Current ratio.
vii. Number of times that interest is earned.
d. Determine the relationships required in (b) above from the
estimated financial statements for the next year. (Do not average
data).
e. Does it appear that some improvement can be made in earning
power and safety as a result of the relatively small increase in sales
volume coupled with cost savings? Discuss.
f. With reference to Easy Loan Limited, how would you explain an
entity’s high gross profit margin and low net profit margin? To what
can this phenomenon be attributed?

Question 2 [25 marks]

(Students to come up with set of Financial Statements of a company of

their choice and analyse the financial distress of the company.

[TOTAL: 50 MARKS]

END OF ASSIGNMENT 2

Financial Statement Analysis BBF2103 Assignment 1 @ L. Thusabantu 2021 Page 6