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PRACTICE EXERCISES: FINANCIAL STATEMENT ANALYSIS

QUESTION 1

You are given an assignment to evaluate the financial performance of two competing growth
companies. Both companies are in technology-related industries that provide consultation
services for provision of computer hardware, network services, and other applications. The
following are summaries from the statement of comprehensive income of Shine Tech Sdn Bhd
(STSB) and Excel Tech Sdn Bhd (ETSB) for the year ended 31 December 2010:

Shine Tech Sdn Bhd Excel Tech Sdn Bhd


(RM ‘000) (RM ‘000)

Sales RM10,431 RM134


Cost of sales (6,313) (87)
Gross profit 4,118 47
Operating expenses (3,478) ( 37)
Operating income 640 10
Interest expense (42) (2)
Net other revenues 79 1
Income before tax 677 9
Income taxes (203) (3)
Net income RM 474 RM 6

The following are summaries from the comparative statement of financial position for Shine
Tech Sdn Bhd and Excel Tech Sdn Bhd as at 31 December 2010:

Shine Tech Sdn Bhd Excel Tech Sdn Bhd


(RM ‘000) (RM ‘000)
Year 2010 Year 2009 Year 2010 Year 2009
Non-current assets:
Property, plant, and equipment, 1,620 1,614 5.7 7.0
(net)
Other non-current assets 413 670 1.1 1.5
Total non-current assets 2033 2284 6.8 8.5

Current assets:
Cash and cash equivalents 636 578 34.5 22.2
Accounts receivable (net) 2,101 1,804 15.5 14.7
Inventories 1,514 1,373 27.2 28.4
Other current assets 429 401 3.5 4.2
Total current assets 4,680 4,156 80.7 69.5
Total assets 6,713 6,440 87.5 78.0

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Liabilities and Stockholders’
Equity

Stockholders’ equity:
Ordinary share (RM1, par 300 300 2.3 2.3
value
Premium Share 238 238 17.8 17.8
Retained earnings 3,454 2,980 55.9 50.9
Total stockholders’ equity 3,992 3,518 76.0 71.0

Long term liabilities 707 890 2.5 1.6

Current liabilities:
Current portion of long-term 205 255 - -
liabilities
Notes payable 75 425 - -
Accounts payable 573 504 6.0 4.0
Accrued liabilities 1,054 765 2.0 1.0
Income taxes payable 107 83 1.0 0.4
Total current liabilities 2,014 2,032 9.0 5.4

Total liabilities 2,721 2,922 11.5 7.0

Total liabilities and


stockholders’ equity 6,713 6,440 87.5 78.0
Additional information:

i. Net credit sales for the year 2010 are RM8,400,000 and RM RM120,000 for Shine
Technology Sdn Bhd and Excel Technology Sdn Bhd, respectively.

ii. The selling prices for Shine Tech Sdn Bhd and Excel Tech Sdn Bhd on 28 December
2010 are RM 12 and RM10 per share, respectively.

iii. No dividends were declared and paid out during 2010.

REQUIRED:

Note: Round all figures to two (2) decimal places.

(a) Compute and compare the following ratios for Shine Technology Sdn Bhd and Excel
Technology Sdn Bhd for the year 2010.

i) Current ratio
ii) Acid-test ratio

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iii) Account receivables turnover

Based on the above ratios; discuss the liquidity position of both companies.

(b) Compute debt ratio to compare the solvency position of Shine Technology Sdn Bhd and
Excel Technology Sdn Bhd for the year 2010. Explain your answer.

(c) Compute the following ratios for Shine Technology Sdn Bhd and Excel Technology Sdn
Bhd for the year 2010:

i) Return on Assets
ii) Earnings per share (EPS)

QUESTION 2

The following selected data were taken from the financial statements of Bakti Berhad for 31 st
December, 2013, 2012, and 2011:

2013 2012 2011


Total assets RM3,000,000 RM2,700,000 RM2,400,000
Notes payable (10% interest) 1,000,000 1,000,000 1,000,000
Common shares 400,000 400,000 400,000
6% Preference shares, RM100 200,000 200,000 200,000
each (no change during year)
Retained earnings 1,126,000 896,000 600,000

The net income were RM242,000 and RM308,000 for 2013 and 2012, respectively. No
dividends on common shares were declared between 2011 and 2013.

REQUIRED:

(a) Calculate the return on total assets, the return on shareholders’ equity, and the return on
common shareholders’ equity for the years 2013 and 2012. Round to one decimal place.
Use the formulas given below.

(b) Explain the conclusion that can be drawn from your answer in (a) above as to the
company’s profitability.

Formula:
Return on Total Assets = (Net Income + Interest Expense ) / Average Total Assets
Return on Sharesholders’ Equity = Net Income / Average Sharesholders’ Equity

3
Return on Common Sharesholders’ Equity = (Net Income - Preferred Dividends) /
Average Common Sharesholders’ Equity

QUESTION 3

Hasfiq Sdn. Bhd. and Al-Qayyum Sdn. Bhd. are two competing companies selling bicycle
equipment. The comparative statements of financial position as at 31 March 2012 are as follow:

Comparative Statements of Financial Position


as at 31 March 2012

Hasfiq Al-Qayyum
(RM) (RM)
Current Assets:
Cash 9,000 7,000
Accounts Receivable 43,000 31,000
Note Receivable 3,000 2,500
Inventories 39,500 27,500
Prepaid Expenses 1,000 1,500
95,500 69,500
Non-current Asset:
Equipment (net) 164,000 138,500
Total Assets 259,500 208,000

Liabilities:
Current Liabilities 41,500 27,000
Non-current Liabilities 54,000 49,000

Shareholders’ Equity:
Share Capital 100,000 100,000
Retained Earnings 64,000 32,000
Total Liabilities and Shareholders’ Equity 259,500 208,000

Additional information:

1. The balance of certain accounts as at 1 April 2011 were:

Hasfiq Sdn. Bhd. Al-Qayyum Sdn. Bhd.

Accounts Receivable RM39,000 RM29,000

4
Note Receivable 4,000 2,000
Inventories 36,500 24,500
Retained earnings 58,000 26,000
Total Assets 254,000 206,000

2. The extracted information of comparative statements of profit or loss and other


comprehensive income from both companies for the year ended 31 March 2012 are as follow:

Hasfiq Sdn. Bhd. Al-Qayyum Sdn. Bhd.

Sales Revenue (Net) RM379,000 RM287,000


Cost of Goods Sold 253,600 190,700
Net Income 28,000 16,000

REQUIRED:

(a) Calculate the following ratios for both firms:


(i) current ratio

(ii) acid test ratio (quick ratio)

(iii) inventory turnover

(iv) account receivables turnover

Which firm is better in terms of short-term credit risk? Give your reasons.

(b) Calculate the following ratios for both firms

(i) rate of return on total assets.


(ii) rate of return on shareholders’ equity

Which firm has the better investment? Justify your answer.

(b) State any TWO (2) other analyses may be carried out to assist you in making the above
decisions?

QUESTION 4

5
Mr. Amir is considering investing his excess fund in a company. He is considering two
companies in the same industry. Those companies are Bravo Sdn Berhad (BSB) and Gogo Sdn
Bhd (GSB). The summarised final accounts of the companies are as follows:

Statement of Financial Position


As at 31 January 2012
Bravo Sdn Bhd (BSB) Gogo Sdn Bhd (GSB)
RM RM RM RM
Non-current Asset 80,000 180,000

Current Assets
Inventory 30,000 50,000
Debtors 6,000 20,000
Cash 4,000 10,000
40,000 80,000
Less: Current Liability
Trade creditors (10,000) (20,000)
Net Current Asset 30,000 60,000
110,000 240,000
Represented by:
Ordinary Share capital 60,000 160,000
Retained earnings 20,000 75,000
80,000 235,000
Non-Current Liability
10% Debentures 30,000 5,000
110,000 240,000

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Statement of Comprehensive Income
For Year Ended 31 January 2012
Bravo Sdn Bhd (BSB) Gogo Sdn Bhd (GSB)
RM RM RM RM
Sales 160,000 240,000
Cost of sales:
Opening inventory 10,000 70,000
Purchases 140,000 160,000
150,000 230,000
Less: Ending Inventory (30,000) (50,000)
120,000 180,000
Gross profit 40,000 60,000
Less:
Establishment expenses 10,000 14,000
Administrative expenses 12,000 18,000
Sales expenses 6,000 9,500
Financial expenses 3,000 500
31,000 42,000
Net profit 9,000 18,000
REQUIRED:

(a) For each of the company above, calculate the following ratios:

(i) Return on equity


(ii) Expense to sales ratio
(iii) Net profit to sales
(iv) Return on asset
(v) Inventory turnover
(vi) Debtor turnover period
(vii) Creditor turnover period

(b) Compare and explain the ratios of the two companies in terms of:

(i) Profitability
(ii) Efficiency

QUESTION 5

7
Below is summary information from the financial statements of two companies competing in the
glassware industry;

Data from the Statements of Financial Position at 31 Dec 2012

Kota Berhad Kiara Berhad


ASSETS RM(in million) RM(in million)
Non-current assets
Fixed assets, net 178,900 254,300
Total non-current assets 178,900 254,300
Current assets
Cash 22,000 12,100
Account receivable, net 79,100 254,300
Trade receivable (notes) 13,600 472,400
Merchandise inventory 88,800 84,000
Prepaid expenses 11,700 12,100
Total current assets 215,200 218,100
Total assets 394,100 472,400
ETUITY & LIABILITIES
Equity
Common share, RM5 par value 135,000 143,000
Retained earnings 71,600 135,100
Total equity 206,600 278,100
Non-current liabilities
Long-term notes payable 95,000 95,300
Total non-current liabilities 95,000 95,300
Current liabilities 92,500 99,000
Total liabilities 187,500 194,300
Total equity & Liabilities 394,100 472,400

Data from Statement of Profit & Loss and Other Comprehensive Income for years ended 31 Dec
2012

Kota Berhad Kiara Berhad


RM (in million) RM (in million)
Sales 395,600 669,500
Cost of sales 292,600 482,000
Interest expense 7,900 12,400
Income tax expense 7,700 14,300
Profit for the period 35,850 63,700
Basic Earnings Per Share (EPS) 1.33 2.23

Additional information from last year data ended 31 Dec 2011:

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Kota Berhad Kiara Berhad
RM (in million) RM (in million)
Account receivable, net 74,200 75,300
Trade receivables (notes) 0 0
Merchandise inventory 107,100 82,500
Total assets 385,400 445,000
Common share, RM5 par value 135,000 143,000
Retained earnings 51,100 111,700

REQUIRED:

1. For both companies, compute the


a. Current ratio
b. Acid-test ratio
c. Account (and notes) receivable turnover
d. Inventory turnover
e. Days’ sales in inventory

From the ratio calculate above, which company are better to be consider on short-term
risk and why?

2. For both companies, compute the


a. Profit margin ratio
b. Return on total assets
c. Returns on common shareholders’ equity

Identify which company’s share you would recommend as the better investment and
why?

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