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ARTT BUSINESS SCHOOL - RATIO ANALYSIS – ICAP PAST PAPERS

Taha Popatia ARTT Business School

March 2016

Q.3 Ali and Bashir are chartered accountants and have been working as Managing Director (MD)

and Chief Financial Officer (CFO) in a listed company. In a recent meeting of the Board, the

directors have decided to expand the business within six months by opening 20 retail outlets. This expansion would require financing of Rs. 300 million which may be arranged through

bank loan.

The following information has been extracted from latest draft financial statements of the

company:

Following additional information is also available:

80% of the sales are on credit.

Opening inventory was Rs. 100 million.

40% of current liabilities comprise of trade payables.

MD has advised the CFO to arrange the loan from MN Bank. He has also informed that the President

of the bank is his good friend and the loan can be arranged on a fast track basis at a mark-up of 15% per annum, subject to the following conditions:

current ratio and quick ratio should be at least 2:1 and 1:1 respectively;

gearing ratio should not exceed 40%; and

interest cover should be at least 3.

CFO is not comfortable with this deal as the mark-up offered by the bank is much higher than the rate on the existing loan and it is difficult for the company to meet the gearing requirements of the bank.

However, MD has asked him to make certain changes in the draft financial statements before

submission to the bank; which according to the CFO are not in accordance with the IFRSs.

Required:

(a) Compute liquidity, working capital and debt ratios of the company. (06)



September 2015 Q.5 An investor wants to analyze the performance of Zee Limited for which he has collected the

following information for the year ended 30 June 2015 and 2014:

The break-up of shareholders’ equity as at 1 July 2013 was as under:

Required:

Compute Return on Capital Employed and Return on Shareholders’ Equity for the year

ended 30 June 2015. (07)

September 2013 Q.4 The directors of Arabic Industries Limited (AIL) has set a sales target of Rs. 600 million for the

year ending 31 August 2014 and has asked the chief financial officer to prepare AIL’s forecasted

financial statements for the year 2014.

Based on prior years’ experience, the financial ratios for the year 2014 are estimated as

follows:

Other related estimates are as follows:

(i) Average collection period for trade debtors would be 45 days.



(ii) Closing value of inventory is estimated to increase by 25% as compared to opening

inventory. (iii) Working capital and bank overdraft would be maintained at Rs. 100 million and Rs. 15

million respectively.

Shareholders’ equity as on 1 September 2013 is as follows:

AIL does not intend to issue any further shares, during the year ending 31 August 2014.

Required:

Prepare the forecasted income statement for the year ending 31 August 2014 and a summarized

balance sheet as at 31 August 2014. (Assume a 360 days year) (11)

September 2011 Q.6 The following information pertains to Shale Distributors Limited (SDL):

All the purchases and sales are on credit.

Required:

(a) Calculate the cash operating cycle of SDL and explain briefly its significance. (04 marks) (Assume a 360-day year)

a. Describe any two limitations of accounting ratios. (02 marks)

September 2009 Q.5 Torkham Limited is presently experiencing short term cash flow problems. The chief executive

officer has approached you for advice on how to improve the present cash flow situation. The

following amounts were extracted from the records of the company:



All sales are made on credit.

Required: (a) Calculate the ratios that would be needed to analyse the working capital of the company.

(Assume a 360 day year)

(b) Comment on the company’s working capital management in the light of these ratios. (10)

March 2008 Q.6 According to the sales budget prepared by the marketing department of Mohsin Limited, the

sales for the year 2008 has been estimated at Rs. 210 million. Before finalizing the sales target,

the chief executive has asked the chief financial officer to prepare the projected financial statements of the company, for the year 2008.

Based on the experienced gained in prior years, the financial ratios for the year 2008 has

been projected as follows:

The shareholders’ equity as at December 31, 2007 is as follows:



Required: Being the CFO of the company, prepare the projected balance sheet and income statement for the year

2008. Assume a 360 day year. (15)

March 2007 Q.3 Following data is available with Pink Limited in respect of two of its regular customers who are

engaged in the same kind of business:

Credit committee of Pink Limited has decided to allow credit limit of Rs. 18 million to both customers. However, Mr. Alam, a member of the committee, had some reservations on extending credit facility to

customer ‘A’.

Required: Compute and interpret the relevant ratios of each customer and submit your comments on the opinion

of Mr. Alam. (10)

September 2006 Q.3 The Chief Accountant of Shaheed & Company (Pvt.) Limited has resigned. Management has

hired you to prepare the balance sheet as at June 30, 2006 and the profit and loss account for the year then ended. The records of the company have not been maintained properly. While going

through some of the files you found a report in which the following ratios and information have

been shown.



The management has informed you that the above ratios are mostly accurate. You have also

ascertained that the sale during the year was Rs. 216 million and selling & administrative expenses

amounted to Rs. 14.057 million. Tax rate applicable to the company is 30% of net profit and 90% of the tax has been paid during the year.

Required: Develop a summarized balance sheet as at June 30, 2006 and profit and loss account for the year then

ended. (11)

June 2016 Q.6 Following are the extracts from the latest annual reports of Farhad Limited (FL) and Sajjad

Limited (SL) which are engaged in similar type of manufacturing business:

Both companies record their fixed assets at cost less accumulated depreciation and

impairment losses. However, FL has revalued its freehold land during the year and

incorporated the result thereof in its latest financial statements.

Required:

(a) Comment on the relative operating and financial performance of Farhad Limited and Sajjad Limited from the above information. (08)

(b) Identify with reasons what further information you would find useful for the purpose of your

comments in (a) above. (05)



December 2015 Q.4 You have significant investment in XYZ Limited. Your brokerage house has provided you with

a report which is based on the financial statements of XYZ Limited for the year ended 30 June

2015. You have reviewed the report and the financial statements and obtained the following information:

(i) Deferred tax assets The company has recognized substantial amount of deferred tax asset in respect of carried

forward losses, which will expire in next three years. The losses were incurred during the last

five years and in current year it made a small profit before tax due to non-operating gains.

(ii) Convertible preference shares

Convertible preference shares have been disclosed as a liability.

(iii) Unrealised gains and losses

The company uses fair value method for investments held as “Available for sale” and “Held for trading” and unrealised gains and losses on such investments are recorded in other

comprehensive income.

You have also received information that the company has revised its pension scheme significantly,

subsequent to the issuance of the above financial statements. However there is no information as regards the actuarial valuation subsequent to the revision.

Required:

Assume that the report has been prepared without considering the possible impact of the adjustments required because of the above information, if any. Discuss how this could affect the evaluation carried

out by the brokerage house in terms of liquidity, solvency and profitability ratios and business

valuation of XYZ Limited. (15)

December 2013 Q.6 New Horizon (Private) Limited (NHPL) is engaged in the distribution and supply of

pharmaceutical products. The following information has been extracted from NHPL’s draft financial statements for the year ended 30 September 2013:



Following further information is available:

(i) On June 2012, NHPL acquired exclusive distribution rights of a range of life saving drugs from a Malaysian company for 12 years at a cost of Rs. 18 million. NHPL has capitalized

the cost of rights and it is to be amortized over the period of distribution rights.

(ii) In October 2012, NHPL launched a country-wide sales promotion campaign to introduce the Malaysian drugs. The cost of the advertisement campaign was Rs. 25million. As the

benefits of the campaign are long term, NHPL has decided to amortize the costs over a

period of 5 years.

(iii) The prices offered by the Malaysian company are quite low as compared to prices of similar

quality drugs in Pakistan. Since this matter was publicized vigorously in the advertisement

campaign, the Malaysian drugs were able to capture the market.

(iv) In 2013, the sales of drugs imported from Malaysia accounted for 70% of the company's

revenue. The level of credit sales has remained constant at 40% of total sales.

(v) NHPL is also negotiating the acquisition of distribution rights of the products of another

foreign company.

Required:

Comment on the financial and operating performance of NHPL for the year ended 30 September 2013,

supported by relevant accounting ratios. (14)

December 2012 Q.4 Primate Mart Limited (PML) operates a network of several retail stores throughout the country.

In order to retain its market share and achieve growth in revenue, PML has extended

substantial credit facilities to its major customers. Consequently, PML’s bank borrowings have increased substantially over the past few years. PML has recently requested its bank for further

increase in its borrowing facilities.



The bank is concerned about the increase in the quantum of loans extended to PML and has appointed

you to analyse the financial performance of PML for the last three years. The information available in respect of the company is as follows:

(iii) The present borrowing limit sanctioned to PML is Rs. 750 million.

Required:

Prepare a report for the bank containing an analysis of the financial performance of the company for

the period covered by the financial statements. Your report should focus on the particular concern of



the bank regarding the rapidly increasing level of lending exposure to PML and suggest matters which the bank may discuss with the PML’s management. (Assume your name is Bashir Ahmed) (15)

December 2010 Q.5 Following are the extracts from the latest annual published accounts of the two companies

which are engaged in similar types of businesses.

Required:

(a) Comment on the strategic outlook of the management of the above companies based on their

debt equity ratio and liquidity position.

(b) Based on the price earnings ratio comment on the attractiveness of the two companies, from the investors point of view. (10 marks)

December 2009 Q.4 Sachal Limited (SL) is planning to acquire 100% shareholdings in Waris Limited (WL). Before

submission of financial proposal, SL is carrying out an analysis of WL’s financial and operating performance. The CFO of SL has gathered the following information which is based on the

financial statements for the year ended December 31, 2008:



Required: (a) Draft a report to the board of directors, on behalf of the CFO, analyzing the financial

performance of Waris Limited by evaluating each category of ratios in comparison with the

industry. (Do not write your name or any identification in the report) (12)

(b) List any four types of additional information which would have helped you in a better analysis.

(04)

December 2008 Q.6 You are working as a Financial Analyst in Brown Venture Capital Limited. Your company has

received an offer for equity investment in a large group of companies. While reviewing the

consolidated financial statements of the group and detailed offer documents, you have noted the

following significant judgments, estimates and assumptions used in preparation of the consolidated financial statements, which may have an impact on the independent evaluation of

the affairs and operations of the group.

Operating Lease Commitments The Group has entered into commercial property leases as a Lessee. The Group has

determined, based on an evaluation of the terms and conditions of the arrangements, that it does not acquire all the significant risks and rewards of ownership of these properties and

so accounts for the contracts as operating leases.

Convertible Preference Shares The Group has determined, based on an evaluation of the significant terms and conditions of the issue,

that these securities fall under the category of liability rather than equity, and have been disclosed and accounted for accordingly.

Pension and Other Post-Employment Benefits



The cost of defined benefit pension plans and other post-employment benefits is determined using

actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases.

Due to the long term nature of these plans, such estimates are subject to significant uncertainty.

Impairment of Non-Financial Assets All non-financial assets including goodwill and other intangibles are assessed for impairment at each

reporting date and at any other time when there are indications of impairment. When value in use calculations are undertaken, management has to estimate the expected future cash flows from the asset

or cash-generating unit and choose a suitable discount rate in order to calculate the present value of

such cash flows.

Useful Lives of Property, Plant And Equipment The Group has invested significant amounts in acquisition of items of property, plant and equipment (PPE). Generally, the Group follows a prudent practice and estimates the useful economic lives of such

assets to the enterprise on a minimum side.

Provision for Decommissioning The activities of the Group normally give rise to obligations for site restoration. In determining the

amount of the provision, assumptions and estimates are required in respect of discount rates and the expected cost of dismantling and removing the plants from the site.

Required: You have assessed that the managements judgments, estimates and assumptions may turn out to be

incorrect. What will be the impact of any error in management’s estimates and assumptions, on the

following: � Liquidity, profitability and gearing ratios of the group;

� Business valuation of the group.

Give brief explanations to justify your conclusions. (20)

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