FIN621 - FINANCIAL STATEMENT ANALYSIS FINAL TERM PAPER

Question No: 63 (Marks: 3)

What is a difference between Profit and profitability?



Profit is one of financial performances of a company and an evidence of its success, which is achieved if the income exceeds the expenses. Profit growth determines the potential growth of the company, increases its business activity.



The term “profitability” has its origin from the rent, which literally means income. Thus, the term “profitability” in broad sense refers to yield, revenue performance and efficiency. Profitability indicators are used for comparative assessment of individual businesses performance and industries that produce different amounts and types of products.



Question No: 64 (Marks: 3)

What are the ratios you suggest for following?
Short term loan
Long term loan
Common Share holder


Short term loan--------------LIQUIDITY RATIO (Short term Solvency)
Long term loan------------- LEVERAGE/DEBT RATIOS (Long term Solvency)
Common Share holder-----PROFITABILITY RATIOS





Question No: 65 (Marks: 3)

What will be the effect on the book value per share of the common stock of a company, if the corporation obtains a loan?



When a corporation obtains a bank loan there is no effect upon book value per share of common stock. Assets and liabilities both increase by its amount. Therefore, net assets will remain unchanged.





Question No: 66 (Marks: 5)

Following data is given:

Company A
Company B

Cost of Goods Sold
300, 000
450, 000

Beginning inventory
120, 000
130, 000

Ending inventory
160, 000
140, 000




Requirement:

Calculate the Inventory Turnover Ratio?





For Company A:



Inventory Turnover Ratio = Cost of goods sold/average inventory

Inventory Turnover Ratio = 300, 000/ [(120,000+160,000)2]



Inventory Turnover Ratio = 300, 000/140, 000=2.14



For Company B:



Inventory Turnover Ratio = Cost of goods sold/average inventory

Inventory Turnover Ratio = 450, 000/ [(130,000+140,000)2]



Inventory Turnover Ratio = 450, 000/135, 000=3.33





Question No: 67 (Marks: 5)

Assume that you are a commercial loan officer at a large bank. One of your clients recently submitted an application for Rs.300, 000 five year loans. You have worked with this business before on numerous occasions and have periodically been forced to deal with late and missed payments attributed to cash flow problems. Thus you are surprised to see in the business plan accompanying the application that the management expects to reduce the company’s operating cycle from 190 days to 90 days. A footnote to the business plan indicates that the reduction in the operating cycle will result from a tighter credit policy and the implementation of a just-in-time inventory system.



As the company has reduced its operating cycle from 190 days to 90 days which has tightened the credit policy, as a result of which sales of the company will be reduced which will decrease the revenue of the company and profit of the company will also be decreased. Implementations of just in time inventory system will also tight the liquid position of the company. Keeping in view this situation, application for loan of Rs. 300,000 will not be exceed to by the bank.





Question No: 68 (Marks: 5)

Following data is given:

2010
2009

Net sales
300, 000
400, 000

Cost of Goods Sold
60, 000
90, 000

Operating expense
150, 000
200, 000




Requirement:

Compare the two companies by using vertical analysis?



For 2010:



Net sales 300, 000 100%

Less: COGS 60, 000 20%

Gross profit 240, 000 80%

Less: Operating expense 150, 000 50%

Net income 90, 000 30%





Explanation just for understanding:



100% is assigned to net sales with all revenue and expense accounts related to it.



Net sales=300,000= 100%



COGS=60, 000= 60, 000/300,000*100=20%



Gross profit=240, 000/300,000*100=80%



Operating expense=150, 000/300, 000*100=50%



Net income=90, 000/300, 000*100=30%





For 2009:



Net sales 400, 000 100%

Less: COGS 90, 000 22.5%

Gross profit 310, 000 77.5%

Less: Operating expense 200, 000 50%

Net income 110, 000 27.5%





Explanation just for understanding:



100% is assigned to net sales with all revenue and expense accounts related to it.



Net sales=400,000= 100%



COGS=90, 000= 90, 000/400,000*100=22.5%



Gross profit=310, 000=310, 000/400,000*100=77.5%



Operating expense=200, 000=200, 000/400, 000*100=50%



Net income=110, 000=110, 000/400, 000*100=27.5%







Question No: 69 (Marks: 5)

Use the following information to make all the September 30 Closing Entries required by ABC Company to prepare for the next accounting cycle.


Revenue
900, 000

Utilities expense
2500

Salaries Expense
4000

Insurance Expense
5000

Materials Expense
456

Miscellaneous expenses
9876

Office Rent expenses
1200

Dividends
56, 000

Depreciation expense
86, 000

Fin621 current paper 2011
Mr. Touqeer Riaz Paper
62 mcqs
Q no 63.
Is it necessary for a company having machinery & a building to pass adjusting
entries? (3)
Q no 64.
Co A has a current ratio 3:1
Co B has a current ratio 2:1
Has Co A more higher operating cycle than Co B? If it is then why? (3)
Q no 65
What do creditors of the firm can derive out of Balance Sheet of the firm…….? (3)
Q no 66
Some data was given and then I was asked to calculate ROE of a firm…………(5)
Q no 67
Suppose I am the Finance Manager of a firm and my 2 customers are interested in
doing investment then
1st customer is interested in that firm who’s market value of the share is higher and
2nd customer is interested in investing in that firm who’s profit of that year is
higher…………..
Being a professional, what advise can I give to both the customers and why?..........
(5)
Q no 68
Following are some ratios
Cash Ratio
Current Ratio
Quick Ratio
Which ratio has the lower value among all & why…………(5)
Q no 69
Some uncorrected transactions were given and I was supposed to correct them with
figures and I was also asked to write the adjusting rule by the accounting
standard………….(5)