BAF 4101: FINANCIAL STATEMENT ANALYSIS

INSTRUCTIONS
Attempt all questions

Question one
a) What are the Purpose of Analyzing financial statements in a company?
(8 marks)
1) To provide adequate information about the source of finance and
obligations of the finance firm.
2) To provide reliable information about the financial performance and
financial soundness of the concern.
3) To provide sufficient information about results of operations of business
over a period of time.
4) To provide useful information about the financial conditions of the
business and movement of resources in and out of business.
5) To provide necessary information to enable the users to evaluate the
earning performance of resources or managerial performance in
forecasting the earning potentials of business
b) Procedure of analyzing Financial Statement include

1. Establish objectives :the analyst should establish objective of

financial analysis by defining the purpose and context of financial
statements analysis

2. Collection data; the next stage is collecting data necessary for

financial analysis from different sources

3. data processing: this ranges from simple sorting and adjustments to

preparing common-size financial statements and graphical
representation of ratios and trends

4. data analysis: this involve Conducting analysis on processed data

and interpret the results

5. Making recommendation: Develop recommendations in the light of

inferences drawn from analysis conducted and report/communicate
them to relevant personnel. This phase is the most critical of all from
different perspectives. As it involves many responsibilities on part of
 the analysts that he is required to fulfill regarding the
recommendations and communication of those recommendations.

6. Follow up (Review), if necessary, the information gathered,

conclusions reached on the basis of analysis and recommendations
made on periodic basis by repeating the steps above to check
whether conclusions reached and recommendations given need any
revisions or not on the basis of updated information.

Question two

Using a company of your choice perform a business analysis based on the

following
a) The effect of the trend in the economy

Economic factors have a significant impact on how an organization

Does business and also how profitable they are. A company like Kenya
airways has considered factors such as economic growth, interest
rates, exchange rates, inflation, disposable income of consumers and
businesses and so on to survive in the economy

The management of the organization

b) Competition level and its effect
In order for Kenya power to survive competition it must check on the
numbers of similar competitive companys number of company in the
industry, their size and market capitalizations. Its important that you
Kenya airways monitor their activities, and then design effective
strategies using their controllable variables to fight
competitions .Competitors are the rivals, which compete with the firm
in the market and resources as well.
c) The management effect
The capability of the management team and the leadership styles
employed by managers will also have a major impact on the morale of
employees and organization culture. the Kenya airways management
involve workers in decision making processes and trusting that
although managers and worker have different views they largely
 benefit by working together to achieve the business objectives; the
company should maintain a good relationship between management,
pilots and all other crew members.
.

Question three

Vasco millers Ltd. is in the process of forecasting its financial needs for the
coming year ending 31 October 2003. The company attained a turnover
ofSh.300 million for the current year ended 31 October 2002. The following
are the summarized financial statements of the company for the year ended
31 October 2001:
Profit and Loss Account Sh.million
Turnover 300
Profit before tax 54
Taxation 18
Profit after tax 36
Dividend 9
Retained profit 27

Balance Sheet
Sh.million Sh.million
Net Assets:
Fixed assets (net) 190
Current assets 146
Current liabilities 103 43
233
Financed by:
Issued ordinary shares 50

Reserves 90
140
Medium and long-term
Debt 93 233
From past experience, it has been disclosed that each additional Sh.1 of
sales made by the
company requires, on average, a total investment in fixed assets, stocks and
debtors of Sh.1.50. The Sh.1 additional sales also results in the generation of
automatic financing of 40 cents as various creditors spontaneously arise with
the increase in sales.
The net profit margin after tax and the dividends payout ratio which apply for
the year ended 31 October 2002 will also be relevant into the foreseeable
future.
Required:
(a) The amount of external finance that will be needed during the year
ending 31 October 2003 if sales are expected to increase by 15% in the year.
(4 marks)
(b) The maximum expected sales growth that can be achieved in the year
ending 31 October 2003 if only internally generated funds are used. (6marks)
(c) The maximum growth in sales that can be achieved in the year ending 31
October 2003 if the company wishes to maintain its current level of financial
gearing. (6 marks)
(d) Briefly comment upon the weaknesses of the method of forecasting used
above. (4 marks)
Limitation of forecasting method
The net profit margin may vary from the current 12%
Companies normally try to maintain a constant or slightly increasing
dividend per share rather than the constant dividend payout ratio which is
assumed in the question.
Fixed assets, stocks and debtors are unlikely to increase in direct
proportion to sales similarly, creditors.
Internally generated cash is taken to be retained profits this ignores non-
cash items (dep n)
(Total: 20
marks)