Course Code: ACCT 4202 (Financial Statement Analysis)

12th Batch-2020
Question No. 1.
a) Explain why financial statements are important to the decision-making process in financial analysis.
Financial accounting and financial statements are a vital part of a company's operations. It provides insight into how much
and how a business generates revenues, what the cost of doing business is, how efficiently it manages its cash, and what
its assets and liabilities are. Financial statements provide all the detail on how well or poorly a company manages itself.
Financial statements can be helpful in decision-making on the basis o f making good decisions on accurate data. Properly
kept and presented financial records allow companies and outside parties to get a complete picture of the organization's
financial health.

b) Identify and describe at least four categories of financial analysis tools.

The following are the various techniques can be adopted for the analysis and interpretations of financial statements.
(1) Comparative Financial Statements.
(2) Common Size Statements.
(3) Trend Analysis.
(4) Ratio Analysis.
(5) Fund Flow Analysis.
(6) Cash Flow Analysis.
Now, here is the description of at least four categories of financial analysis tools-
1. Comparative Financial Statements
comparative statements are prepared not only to the comparison of the various figures of two or more periods but
also the relationship between various elements embodied in profit and loss account and balance sheet. It enables to
measure operational efficiency and financial soundness of the concern for analysis and interpretations. The following
information may be shown in the comparative statements:
a. Figures are presented in the comparative statements side by side for two or more years.
b. Absolute data in money value.
c. Increase or Decrease between the absolute figures in money value.
d. Changes or trend in various figures in terms of percentage.
2. Common Size Statements
In order to avoid the limitations of Comparative Statement, this type of analysis is designed. while preparing the
Common Size Profit and Loss Account, total sales is taken as common base and other items are expressed as a
percentage of sales. Like this, in order to prepare the Common Size Balance Sheet, the total assets or total liabilities
are taken as common base and all other items are expressed as a percentage of total assets and liabilities.
3. Trend Analysis
Trend Analysis is one of the important techniques which is used for analysis and interpretations of financial statements.
While applying this method, it is necessary to select a period for a number of years in order to ascertain the
percentage relationship of various items in the financial statements comparing with the items in base year. When a
trend is to be determined by applying this method, earliest year or first year is taken as the base year. The related
items in the base year are taken as 100 and based on this trend percentage of corresponding figures of financial
statements in the other years are concluded. This analysis is useful in framing suitable policies and forecasting in future
also.
4. Ratio Analysis
Ratio Analysis is one of the important techniques which is used to measure the establishment of relationship between
the two interrelated accounting figures in financial statements. This analysis helps to Management for decision making.
Ratio Analysis is an effective tool which is used to ascertain the solvency, the liquidity and operational efficiency of the
concern.

c) Compare the "absolute amount of change" with the percent change as an indicator of change. Which is better for
analysis?
Both indicators complement each other, one should not be used without the other because they could easily be misleading.

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Change analyses in both amounts and percentages are relevant because different dollar bases in computing percentage changes
can yield large changes inconsistent with their actual importance. For example, a 50% change from a base amount of $1,000 is
usually less significant than the same percentage change from a base of $100,000. Reference to dollar amounts is necessary to
retain a proper perspective and to make valid inferences on the relative importance of changes.
Computation of year-to-year changes is straightforward. Still, a few rules should be noted.
1. When a negative amount appears in the base and a positive amount in the next period (or vice versa), we cannot
compute a meaningful percentage change. Also, when there is no amount for the base period, no percentage change is
computable. Similarly,
2. when the base period amount is small, a percentage change can be computed but the number must be interpreted with
caution. This is because it can signal a large change merely because of the small base amount used in computing the
change. Also, when an item has a value in the base period and none in the next period, the decrease is 100%.

c) Common-size analysis is an important tool in financial analysis. Describe a common-size financial statement. Explain
how one is prepared.
A common size financial statement displays items as a percentage of a common base figure. Creating common size
financial statements makes it easier to analyze a company over time and compare it with its peers.
Ways or rules for preparing the Common Size Statements-
1. For Common Size Profit and Loss Account, "Total(net) sales" is taken as common base and other items are
expressed as a percentage of sales.
2. For the Common Size Statement of Financial Position, the "Total Assets" or "Total liabilities and Shareholders'
equity" are taken as common base and all other items are expressed as a percentage of "Total Assets" or "Total
liabilities and Shareholders' equity".

d) Describe the content and purpose of at least four financial reports that must be filed with the SEC.
1. a statement of financial position (balance sheet) at the end of the period
a statement of financial position of any economic unit disclosing as at a given moment of time its assets, at cost,
depreciated cost, or other indicated value, its liabilities and its ownership equities." It indicates soundness of a
business concern at a specific period of time.
The accounting equation is the basis of the balance sheet:
Assets = Liabilities + Equity.
The left-hand side of this equation relates to the economic resources controlled by the firm, called assets. These
resources are valuable in the sense that they represent potential sources of future revenues. The company uses
these resources to carry out its operating activities. In order to engage in its operating activities, the company must
obtain funds to fund its investing activities. The right-hand side of the accounting equation details the sources of these
funds.
Liabilities represent funds obtained from creditors. These amounts represent obligations or, alternatively, the claims of
creditors on assets.
Equity, also referred to as shareholders' equity, encompasses two different financing sources:
(1) funds invested or contributed by owners, called "contributed capital", and
(2) accumulated earnings since inception and in excess of distributions to owners (dividends), called "retained
earnings". From the owners' viewpoint, these amounts represent their claim on assets. It often is helpful for students to
rewrite the accounting equation in terms of the underlying business activities:
Investing Activities = Financing Activities.
Recognizing the two basic sources of financing, this can be rewritten as:
Investments = Creditor Financing + Owner Financing.

2. a statement of profit or loss and other comprehensive income for the period
The purpose of preparing Trading, Profit and Loss Accounts to ascertain the Net Profit or Net Loss of a
business concern during the accounting period.
The income statement is designed to measure a company's financial performance between balance sheet
dates—hence, it refers to a period of time. An income statement lists revenues, expenses, gains, and losses of a

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 company over a period. The "bottom line" of an income statement, net income, measures the increase (or decrease)
in the net assets of a company (i.e., assets less liabilities), before consideration of any distributions to owners. Most
contemporary accounting systems, the U.S. included, determine net income using the accrual basis of accounting.
Under this method, revenues are recognized when earned, independent of the receipt of cash. Expenses, in turn, are
recognized when incurred (or matched with its related revenue), independent of the payment of cash.
3. a statement of changes in equity for the period
The statement of shareholders' equity reports changes in the component accounts comprising equity. The statement is
useful in identifying the reasons for changes in owners' claims on the assets of the company. In addition, accepted
practice excludes certain gains and losses from net income which, instead, are directly reported in the statement of
shareholders' equity.

4. a statement of cash flows for the period

Statement of Cash Flows. Under the accrual basis of accounting, net income equals net cash flow only over the life of
the firm. For periodic reporting purposes, accrual performance numbers nearly always differ from cash flow numbers.
This creates a demand for periodic reporting on both income and cash flows. The statement of cash flows details the
cash inflows and outflows related to a company's operating, investing, and financing activities over a period of time.
Question No.2.
The common size statement of financial position as on June 30, 2020 and the Income statement for the year ended June
30, 2020 of Pearson publications are given below. Cash balance as on June 30, 2020 was Tk. 60,000 and interest paid
during the year 2019-20 was Tk.1, 60,000.
Pearson Publications
Statement of Financial Position
At the end of the year
Assets: Amount (in %) Amount (in %)
Current assets:
Cash and Cash Equivalents 20
Marketable Securities 16
Accounts Receivable 12
Inventory 10
Total current assets 58
Net non-current assets 42
Total assets 100
Liabilities and Shareholders' equity:
Current liabilities:
Accounts payable 18
Notes payable 10
Wages payable 6
Total current liabilities 44
Long-term debts 30
Total liabilities 74
Shareholders' equity:
Ordinary shares 20
Retained earning 6
Shareholders' equity 26
Total liabilities and Shareholders' equity 100

Pearson Publications
Statement of Financial Performance
For the year ended of the year

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 Particulars Amount (in %)
Sales Tk.100.00
Cost of goods sold 55.00
Gross profit 45.00
General, selling and administrative expenses Operating 21.00
profit 24.00
Interest expenses 6.00
Taxes 2.00
8.00
Net Income/(loss) 16.00

Required:
a) Prepare the statement of financial position and an Income statement in Taka as of June 30, 2020 for Pearson
Publications.
Pearson Publications
Statement of Financial Position
At the end of the year 2019-20
Assets: Amount Amount
Current assets:
Cash and Cash Equivalents 60,000
Marketable Securities 48,000
Accounts Receivable 36,000
Inventory 30,000
Total current assets 1,74,000
Net non-current assets 1,26,000
Total assets 3,00,000
Liabilities and Shareholders' equity:
Current liabilities:
Accounts payable 54,000
Notes payable 30,000
Wages payable 18,000
Total current liabilities 1,32,000
Long-term debts 90,000
Total liabilities 2,22,000
Shareholders' equity:
Ordinary shares 60,000
Retained earning 18,000
Shareholders' equity 78,000
Total liabilities and Shareholders' equity 3,00,000

Statement of Financial Performance

Particulars Amount Amount
Sales 26,66,667
Cost of goods sold (14,66,667)
Gross profit 12,00,000
General, selling and administrative expenses (5,60,000)
Operating profit 6,40,000
Interest expenses 1,60,000
Taxes 53,333
(2,13,333)
Net Income/(loss) 4,26,667

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b) Calculate the following ratios for Pearson publications as of June 30, 2020:
Current ratio:
Quick ratio;
Debt-equity ratio
Times interest earned;
Average collection period;
Inventory turnover
Non-current assets turnover
Operating profit margin
Net profit margin
Return on assets.
Return on equity.

i. Current ratio: Current Assets 174,000 1.32:1

Current Liabilities 132000
ii.Quick ratio; Current Assets-Inventory-Prepaid exp. 174,000-30,000 1.091:1
Current Liabilities 132000
iii.Debt-equity ratio Long term Debts 90000 1.15:1
Shareholders Fund 60000

iv. Times interest EBIT 640000 4 times

earned; Total Interest Exp. 160000
v. Average collection A/R+Bills Receiveable 36000 49.28days
Credit Sales ×365 2666667
period;

vi. Inventory turnover Cost of Goods Sold 1466667 48.89

Average Inventory 30000 times
vii. non-current assets Total Sales 2666667 21.16 times
turnover Non current Asses 126000
viii. Operating profit Operating Profit 640000 23.97%
margin Net Sales ×100 2666667
ix. Net profit margin Net Profit (after tax) 426667 16%
Net Sales ×100 2666667
x. Return on assets. Net Profit 4,26,667 142.23%
Total Asses ×100 3,00,000
xi. Return on equity. Net Profit 426667 547%
×100 78000
Shareholders' Equity

c) What does each of the following ratios indicate? Mention in one or two sentences only. [ Methods of classification are
not required]
i.Current ratio:
ii.Debt-equity ratio
iii.Times interest earned;
iv.Average collection period;
v.Inventory turnover
vi.Non-current assets turnover
vii.Operating profit margin
viii.Price earnings ratio.
sl
1 Current ratio: It tests the credit strength and solvency of an organization. It shows
strength of working capital, it indicates ability to discharge short

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 term liabilities
2 Debt-equity ratio A high debt-to-equity ratio indicates that a company is borrowing more
capital from the market to fund its operations, while a low debt-to-
equity ratio means that the company is utilizing its assets and
borrowing less money from the market.
3 Times interest earned; the times interest earned ratio depicts a company's ability to cover the
interest owed on debt obligations, expressed as income before interest
and taxes divided by interest expense. The lower the interest coverage
ratio, the greater the company's debt and the possibility of
bankruptcy.
4 Average collection period The average collection period is the average number of days it takes a
business to collect and convert its accounts receivable into cash. The
average collection period refers to the length of time a business needs
to collect its accounts receivables. Companies calculate the average
collection period to ensure they have enough cash on hand to meet
their financial obligations. This period indicates the effectiveness of a
company's AR management practices.
5 Inventory turnover A high inventory turnover generally means that goods are sold faster
and a low turnover rate indicates weak sales and excess inventories.
Again, it refers to the amount of time that passes from the day an item
is purchased by a company until it is sold.
6 Non-current assets turnover This refers to level of contribution made by pure non-current assets
towards sales or turnover generation. It helps to determine the
managerial efficiency with which a company utilises all its non-current
assets.
7 Operating profit margin It is used to test operational efficiency of business
This ratio is the yardstick which measures the efficiency of all
operational activities of business i.e. production, management,
administration, sales, etc. The operating margin measures how much
profit a company makes on a dollar of sales after paying for variable
costs of production, such as wages and raw materials, but before
paying interest or tax.
8 Price earnings ratio. The P/E ratio helps investors determine the market value of a stock as
compared to the company's earnings. a low P/E Ratio indicates that the
share price is low compared to company earnings and is undervalued
and vice versa.

Question No. 3.
a) "Accounting income has elements of both permanent income and economic income". Explain this statement.
Accounting income is the profit a company retains after paying off all relevant expenses from sales revenue earned.
Accounting income or loss recognizes realized gains and losses, and does not recognize unrealized gains and losses.
Economic income or loss recognizes all gains and losses, whether realized or unrealized. When the related transaction
is settled or completed, gains and losses are realized.

As the permanent income involves earning profit for the long term and the accounting income does the same for
business as it focuses on a constant flow of income for several years. Also, the element of economic income has its
presence in accounting income, which focuses on increasing the net worth of the company and even the improvement in
stakeholder's value. Economic income indicates the performance of the organization. Hence, the above statement is
correct.
Economic income or loss recognizes all gains and losses, whether realized or unrealized. When the related transaction
is settled or completed, gains and losses are realized.

b) From the following information of Albert Company as on 31st December 2020:

Noncurrent asset Tk. 40,00,000

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 Working capital 10,00,000
Current ratio 3:1
Non-current assets turnover ratio 10 times
Gross profit 25% on sales
Trade receivable turnover ratio 15 times
Loss on sale of plant assets Tk.10,000
Trade payable turnover ratio 15 times
Interest expenses Tk.50,000
Income tax 20%
Inventory turnover ratio 10 times
Net income 10% of turn over
General Reserve 15% of the net income
Capital gearing ratio 1:1
Depreciation expenses Tk.10,000
Amortization on patent Tk.8,000
Doubtful expenses Tk.5,000
Derecognizing expenses Tk.15,000

Required:
i. Prepare an Income Statement for the year ended 31st December 2020
Workings
Non-current assets turnover ratio = Net sales/ non-current assets
10 = Net sales/40,00,000
Net Salse = 400,00,000
Gross Profit = 25% x Total sales
= 25% x 4,00,00,000 =100,00,000
COGS = 400,00,000-100,00,000 =300,00,000
Inventory Turnover Ratio = COGS/Avg. Inventory
10 = 300,00,000/ Avg. Inventory
Avg. Inventory= 3000,000
Purchase = 30,000,000+3000,000-0=33,000,000

Tax= (4000,000/80%) *20%=1000,000

Albert Company
Income Statement
for the year ended 31st December 2020
Particulars Amount Amount
Sales 40,000,000
Cost of goods sold
Beginning Inventory -
Purchase (balancing) 33,000,000
-Inventory (3,000,000)
COGS (30,000,000)
Gross profit 10,000,000
Operating Expenses
Depreciation 10,000
Amortization on patent 8,000
Doubtful Expense 5,000
Loss on sale of plant assets 10,000
Others (balancing) 4,902,000
Total Operating Expenses (4,935,000)
Operating profit 5,065,000
Others expenses

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 Derecognizing expanse (15,000)
EBIT 5,050,000
Interest expenses
(50,000)
EBT
5,000,000
Taxes (1,000,000)
Net Income (After Tax) 4,000,000

st
ii. Prepare a Statement of Financial Position as at 31 December 2020.
Workings
1.Working capital = Current Asset - Current Liabilities
1,000,000 + Current Liabilities = Current Asset

2.Current Ratio = Current Asset/ Current Liabilities

3/1 =(1000,000 + Current Liabilities)/ Current Liabilities
3 X Current Liabilities= 1000,000 + Current Liabilities
2 X Current Liabilities = 10,00,000
Current Liabilities= 500,000
Current Asset = 1500,000

3. Trade Receivable turnover Ratio= Sales/ Accounts Receivable

Account receivable= 26,66,667
4. Trade Payable turnover Ratio= Purchase / Accounts Payable
Accounts Payable = 3,30,00,000/15 =2200000
5. General Reserve= 15% of Net Income
General Reserve = 15% x 4000,000
= 6,00,000

6. Capital Gearing Ratio = Equity / Fixed Interest-bearing Debt

1/1 = Equity / Fixed Interest-bearing Debt
Equity= Fixed Interest-bearing Debt

Albert Company
Financial Position
31st December 2020
Assets: Amount Amount
Current assets:
Inventory 3,000,000
A/R 2,666,667
Others (Cash) (4,166,667)
Total current assets 1,500,000
Net non-current assets 4,000,000
Total assets 5,500,000
Liabilities and Shareholders' equity:
Current liabilities:
A/P 2,200,000
Others (1,700,000)
Total current liabilities 500,000
Long-term debts 2,500,000
Total liabilities 3,000,000
Shareholders' equity:
Retained earning

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 Net Income 40,000,000
General Reserve 6,000,000
46,000,000
Shareholders' equity (43,500,000)
Total Equity 2,500,000
Total liabilities and Shareholders' equity 5,500,000

Question No.4.
a) Briefly discuss the process of fundamental analysis of financial statements for used in valuation.
Fundamental analysis is the process of determining the value of a company by analyzing and interpreting key factors for economy,
industry, and company attributes. A major part of fundamental analysis is evaluation of a company's financial position and
performance. The objective of fundamental analysis is to determine the intrinsic value of an entity. Determination of fundamental
value can be used to support stock decisions and to price acquisitions.
It is a method of determining a stock's real or "fair market" value. Fundamental analysts search for stocks currently trading at
prices higher or lower than their real value. If the fair market value is higher than the market price, the stock is deemed
undervalued, and a buy recommendation is given.

The process of fundamental Analysis is as follows:

b) What do you mean by technical screens? Mention some common technical screens methods which relate to trading
and investment strategies.
TECHNICAL SCREENS: Technical screens is a technique that searches for patterns in the price or volume history of
a stock to predict future price movements. It identifies investment strategies from indicators that relate to trading.

Some common technical screens methods which relate to trading and investment strategies are:
a)Price screens: Buy stocks whose prices have dropped a lot relative to the market (sometimes called losers) and sell
stocks whose prices have increased a lot (sometimes called winners). The rationale: large price movements can be
deviations from fundamentals that will reverse.
b)Small-stocks screens: Buy Stocks with a low market value (price per share time's shares outstanding). The rationale:
History has shown that small stocks typically earn higher returns.
c)Neglected-stock screens: Buy stocks that are not followed by many analysts. The rationale: These stocks are
underpriced because the investor "herd that follows fashions has deemed them uninteresting.
d)Seasonal screens: Buy stocks at a certain time of year, for example, in early January. The rationale: History shows
that stock returns tend to be higher at these times.

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 e)Momentum screens: Buy stocks that have had increases in stock prices. The rationale: The price increase has
momentum and will continue.
f) Insider trading screens: Mimic (follow) the trading of insiders (who must file details of their trades with the Securities
and Exchange Commission). The rationale: Insiders have inside Information that they use in trading.

c) Here are some accounting numbers and market values (in millions) for HP and Gateway for 2020. These two computer
manufacturers are considered to be comparable Dell Inc.
Sales (tk) Earning (TK) Book Value (TK) Market Value (Tk)
HP 90,452 1,248 27,906 65,926
Gateway 12,160 (2,580) 3,130 3,888
Instructions:
Calculate the following ratios for HP and Gateway
1. Price-to-sales (P/S);
2. Price to - earnings (P/E)
3. Price to book (P/B)
Dell reported the following number for fiscal year 2020:
Sales Tk. 62336 million
Earnings 2492
Book Value 9388
Apply multiples for HP and Gateway to price Dell's 5,204 million outstanding shares.

HP
Now apply the multiples to Dell:
Price to sale 65,926/90452 0.73
Price to earning 65,926/1248 52.78
Price to book 65,926/27906 2.36

Gate way
Price to sale 3,888/12,160 0.32
not applicable negative
Price to earning 3,888/-2,580 earnings
Price to book 3,888/3,130 1.24
Dells
Average number value

Sales (0.73+0.32)/2= 0.35 62336 21817.6

Earnings 52.78= 52.78 2492 131527.76
Book Value (2.36+1.24)/2= 1.2 9388 11265.6
Total 164610.96
Average 54870.32
With 5,204 million shares outstanding, the estimated value per share = 54870.32/5,204 = 10.54
Question No. 5.
a) What do you mean by Free Cash Flow? Why it is calculated?
Free cash flow (FCF) is the cash flow available for the company to repay creditors or pay dividends and interest to
investors. Free cash flow describes the cash remaining from operations after adjustment for capital expenditures and
dividends.
It is calculated to show how efficient a company is at generating cash. Free cash flow measures how much cash a
company has at its disposal, after covering the costs associated with remaining in business. Investors use free cash
flow to measure whether a company might have enough cash for dividends or share buybacks.
b) Ideal products a greeting card company, had the following statements as of December
Ideal Inc.
Comparative Balance Sheet
As at December 31, 2020 and 2019

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 Particulars 31.12.2020 31.12.2019
Taka Taka
Cash 6,000 7,000
Accounts Receivable 62,000 51,000
Short-term Investment (Available for sale) 35,000 18,000
Inventories 40,000 60,000
Prepaid rent 5,000 4,000
Printing equipment 1,54,000 1,30,000
Accumulated Depreciation-Equipment (35,000) (25,000)
Copyrights 46,000 50,000
Total Assets 3,13,000 2,25,000
Accounts payable 46,000 40,000
Income taxes payable 4,000 6,000
Wages payable 8,000 4,000
Short-term loans payable 38,000 40;000
Long-term loans payable 60,000 69,000
Common stock, Tk. 10 par 1,00,000 1,00,000
Retained earnings 57,000 36,000
Total Liabilities and Stockholder's Equity: 313000 295000

Ideal Inc.
Income Statement
For the year ended December 31, 2020
Particulars Amount Amount
Sales 3,38,150
Cost of goods sold 1,75000
Gross margin 1,63,150
Operating expenses 120 000
Operating Income 43,150
Interest expenses 11,400
Gain on sale of equipment 2,000 (9,400)
Income before tax 33,750
Income tax expenses 6,750
Net Income 27000

Additional Information:
1. Dividends in the amount of Tk. 6,000 were declared and paid during 2020.
2.Depreciation expenses and amortization expenses are included in operating expenses.
3.No unrealized gains or losses have occurred on the investments during the year.
4.Equipment that had a cost of Tk. 20,000 and was 70% depreciated was sold during the year 2020.
Instructions:
i. Prepare a Statement of Cash Flows for 2020, under the indirect method;
ii. Compute the Free cash flows;
iii. Compute the following ratios and comment on the position of the company's based on the results of the ratios.
1. Current Debt coverage ratio;
2. Cash return on sales ratio;
3. Cash debt coverage ratio.
IDEAL PRODUCTS
Statement of Cash Flows (Indirect Method)
For the year ended December-31, 2020
Particulars Amount Amount
Cash flows from operation activities:

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 Net Income 27,000
Adjustment to reconcile net income to net cash provided by operating activities:

Depreciation expense 24,000

Amortization of copyright 4,000
Gain on sale of equipment (2,000)
Increase in Accounts receivable (11,000)
Decrease in inventory 20,000
Increase in accounts payable 6,000
Increase prepaid rent (1,000)
Decrease in income tax payable (2,000)
Increase in wages payable 4,000 42,000
Net cash provided by operating activities 69,000
Cash flows from investing activities:
Sale of equipment [(20,000 x 30%) + 2,000] 8,000
Purchase of equipment (44,000)
Purchase available- for sale Investments (17,000)
Net cash used by investing activities (53,000)
Cash flows from financing activities:
Payments of Short-term loans (2,000)
Payments of Long-term loans (9,000)
Payments of cash dividends (6,000)
Net cash used by financing activities (17,000)
Net decrease in cash during the period (1,000)
Add: Cash at the beginning of the period 7,000
Cash at the end of period 6,000

Workings:
1.Calculation of depreciation:
Cost price of sold equipment Tk. 20,000
Less: Book value of sold equipment 6,000
Accumulated depreciation 14,000
Add: Accumulated depreciation (Closing) 35,000
Total accumulated depreciation 49,000
Less: Accumulated depreciation (Beginning) 25,000
Depreciation expense for the year 24,000

Tk Tk
Cash provided by Operating Activities 69,000
-Capital Expenditure
-Purchase of equipment (44,000)
-Cash Dividend (6,000)
(50,000)
Free Cash Flow 19,000

Net Cash provided by opearting activities 69,000

i. Current Debt coverage ratio: = 93,000 = 0.742
Average current liabilities
Comment: This means the company earned 74.2% cash from its primary operations to pay its current liabilities. This means
that the company will require non-operating cash flows or cash from previous periods to pay its current liabilities.
Net Cash provided by opearting activities 69,000
ii.Cash return on sales ratio: = 3,38,150 = 0.204
Net Sales
Comment: This means the company earned 20.4% cash from net sales.
Net Cash provided by opearting activities 69,000
iii.Cash debt coverage ratio: = = 0.438
Average total liabilities (Curent + Long term) 157,500
Comment: This means the company earned 43.8% cash from its primary operations to pay its total liabilities. This means

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 that the company will require non-operating cash flows or cash from previous periods to pay its total liabilities.

**Current Liability
Liabilities 2020 2019
Accounts Payable 46,000 40,000
Income tax Payable 4,000 6,000
Wages Payable 8,000 4,000
Short terms loans payable 38,000 40,000
Total Current Liability 96,000 90,000
Longe term loans payable 60,000 69,000
total liabilities 156,000 159,000
Average Current Liabilities= (96,000+90,000)/2=93,000
Average Total Liabilities= (156,000+159,000)/2=157,500
Question No. 6
a) What do you mean by growth firm and sustainable earnings?
A growth Firm
A growth firm is one that can increase its residual earning (EAT-Cost of Capital) by increasing ROCE (Return on capital
employed) from core operations or by growing investment. A growth firm have the following features:
1. Sustainable, growing sales (and with it, growing investment)
2. High or increasing profitability that is generated by core operations.
Sustainable Earning
Sustainable earnings are the earning that can be repeat in the future are called sustainable earnings. It is core earnings
that grow persistently. The sustainable growth rate is the maximum rate of growth that a company can sustain without
having to finance growth with additional equity or debt. Companies with high SGRs are usually effective in maximizing
their sales efforts, focusing on high-margin products, and managing inventory, accounts payable, and accounts receivable.
The SGR is used by businesses to plan long-term growth, capital acquisitions, cash flow projections, and borrowing
strategies.

b) Below are ratios for some of the firms that have appeared in this book, for their 2020 fiscal year:

Firms WC/TA RE/TA EBIT/TA MVE/BVTL SV/TA

Coca-Cola -0.12 1.05 0.29 15.4 0.98
Nike 0.34 0.58 0.15 9.0 1.67
Reebok 0.43 0.66 0.06 0.7 1.85
Hewlett-Packard 0.24 0.50 0.13 3.6 1.40
Dell, Inc. 0.38 0.09 0.31 27.9 2.65
Gateway Computer Microsoft 0.27 0.34 0.19 5.2 2.59
0.45 0.34 0.32 46.7 0.65

Page 13 of 13
Where, WC = Working Capital, TA = Total Assets, RE = Retained Earnings; EDIT=Earnings before Interest and Taxes; MVE
= Market Value of Equity; BVTL= Book Value of Total Liabilities; SV = Sales Value.
Required:
Compute the Altman Z-scores of each firm and interpret the Z score.

Solution:

We know,
WC RE EBIT MVE SV
Altman Z-Score =1.20× + 1.40× + 3.30× + 0.60× + 1.00×
TA TA TA BVTL TA

Altman Z-Score of
Coca-Cola = 1.20×-.12 + 1.40×1.05 + 3.30×0.29 + 0.60×15.4 + 1.00×.98 =12.503
Nike = 1.20×0.34 + 1.40×.58 + 3.30×0.15 + 0.60×9.0 + 1.00×1.67 =8.785
Reebok = 1.20×0.43 + 1.40×0.66 + 3.30×0.06 + 0.60×0.7 + 1.00×1.85 =3.908
Hewlett-Packard = 1.20×.24 + 1.40×0.50 + 3.30×0.13 + 0.60×3.6 + 1.00×1.40 =4.977
Dell, Inc. = 1.20×0.38 + 1.40×0.09 + 3.30×0.31 + 0.60×27.9 + 1.00×2.65 =20.995
Gateway Computer = 1.20×0.27 + 1.40×0.34 + 3.30×0.19 + 0.60×5.2 + 1.00×2.59 =7.137
Microsoft = 1.20×0.45 + 1.40×0.34 + 3.30×0.32 + 0.60×46.7 + 1.00×0.65 =30.742
Comments:
Firms Score Zone Result
Coca-Cola 12.503 Safe Zone Safe
Nike 8.785 Safe Zone Safe
Reebok 3.908 Safe Zone Safe
Hewlett-Packard 4.977 Safe Zone Safe
Dell, Inc. 20.995 Safe Zone Safe
Gateway Computer 7.137 Safe Zone Safe
Microsoft 30.742 Safe Zone Safe

Distress (likely to bankrupt) < 1.81< Gray Zone (Stable) < 2.99 < safe
c) An analyst summarizes the following information for ABC Company (Figures in million):
2017 2016 2015
Common shareholder's equity 10450 9788 9248
Net financial obligations 5386 5386 5386
Net operating assets 6064 5402 4862
Sales 15200 13396 12878
Analyze the growth of average common shareholders' equity in 2017.
Solution:
2017 2016 Changes
Sales 15,200 13,396 1,804
sales 15,200 13,396
Asset turnover = Avegae Assets (6064+5402)/2 = 2.65 (5402+4862)/2 = 2.61
Financial Leverage 5,386 5,386 0

Changes in common Shareholders (CSE)

1 1

1 1
t-1
1
(
=Δsalest,t-1× Assets turnover + salest ×Δ Assets turnover
)
t, t-1
- ΔNet Financial Leverage(t,t-1)

( )
= 1804× 2.61 + 15,200× 2.65 - 2.61 - 0
=691.19-87.906-0
=603.284

Page 14 of 14
 11th Batch-2019
Question No. 1.
a) What do you mean by Financial Statements? What are the components of modern financial statements as per IAS-1?
Financial statements refer to an organized collection of data on the basis of accounting principles and conventions to
disclose its financial information.

the components of modern financial statements as per IAS-1

A complete set of financial statements includes: [IAS 1.10]
1. a statement of financial position (balance sheet) at the end of the period
a statement of financial position of any economic unit disclosing as at a given moment of time its assets, at cost,
depreciated cost, or other indicated value, its liabilities and its ownership equities." It indicates soundness of a business
concern at a specific period of time.
2. a statement of profit or loss and other comprehensive income for the period
The purpose of preparing Trading, Profit and Loss Accounts to ascertain the Net Profit or Net Loss of a business
concern 2during the accounting period.
3. a statement of changes in equity for the period
4. a statement of cash flows for the period
5. notes, comprising a summary of significant accounting policies and other explanatory notes
6. comparative information prescribed by the standard.
b) Explain the claim: "financial statement analysis is an integral part of business analysis".
Financial statement analysis is an integral part of business analysis because financial statements provide us with an
overview of critical performance metrics.
It reduces the uncertainty of a business analysis; how a company obtains resources (financing), how those resources are
deployed (investing), and how effective the deployment (operating profitability). This is why financial statement analysis is
also referred to as fundamental analysis. Unlike technical analysis, which studies price trends, financial statement analysis
studies the income statement, the balance sheet and the cash flow statement. The income statement provides analysts
with an overview of revenues and expenses as well as a breakdown of earnings per share. The balance sheet provides
an overview of assets and liabilities. The cash flow statement provides an overview of the sources and uses of cash.
c) Following are given balance sheets as on 31st March, 2018 and 2019 of Dhaka Metal Works Company, you are
required to:
i. Prepare a Comparative Balance Sheet showing increase/decrease in amounts of each item and the percentage change
thereof, and
ii. give a brief report of the inferences you draw:
Dhaka Metal Works Company
Balance Sheet
(Amounts in Lakhs Tk.)
Particulars 2018 (Tk.) 2019 (Tk.)
Assets
Current Assets:
Cash 472 40
Account receivable 836 760
Inventory 640 520
Investments 1,080 680
Others 128 52
Non-Current Assets:
Furniture 36 72
Building 1,240 3,144
Land 80 120

Page 15 of 15
 Other Assets 224 296
Total Assets 4,73_6 5,6_84
Liabilities
Equity Share Capital 1,600 2,400
Capital Reserve 240 440
General Reserve 888 836
Sinking Fund 160 200
Debentures 800 1,300
Current liabilities:
Accounts Payable 1,020 468
Others 28 40
Total Liabilities 4.736 5,684
i. Prepare a Comparative Balance Sheet showing increase/decrease in amounts of each item and the percentage change
thereof, and
Dhaka Metal Works Company
Comparative Balance Sheet as31st March 2018 and 2019
(Amounts in Lakhs Tk.) Increase or decrease in 2019
Particulars 2018 (Tk.) 2019 (Tk.) Absolute change Percentage change
Assets
Current Assets:
Cash 472 40 (432) -91.53%
Account receivable 836 760 -9.09%
Inventory 640 520 (120) -18.75%
Investments 1,080 680 (400) -37.04%
Others 128 52 -59.38%
Non-Current Assets:
Furniture 36 72 100.00%
Building 1,240 3,144 1,904 153.55%
Land 80 120 50.00%
Other Assets 224 296 32.14%
Total Assets 4,736 5,684 20.02%
Liabilities
Equity Share Capital 1,600 2,400 50.00%
Capital Reserve 240 440 83.33%
General Reserve 888 836 -5.86%
Sinking Fund 160 200 25.00%
Debentures 800 1,300 62.50%
Current liabilities:
Accounts Payable 1,020 468 (552) -54.12%
Others 28 40 12 42.86%
Total Liabilities 4,736 5,684 20.02%
ii. give a brief report of the inferences you draw:

Question No. 2.
a) Explain business analysis and its relation to financial statement analysis.
Business analysis is the evaluation of a company's prospects and risks for business decisions. The objective of business analysis is
to aid with decision making by helping to structure the decision task, including an evaluation of a company's business environment,
its strategies, and its financial position and performance. As a result, the decision-maker will make a more informed decision.
Financial analysis is the use of financial statements to analyze a company's financial position and performance, and to assess future
financial performance. An important part of financial statement analysis is analyzing a company's business environment and strategy.
Most also agree that valuation, which requires forecasts, is part of financial statement analysis. Therefore, financial statement
analysis should be, and is, viewed as an important and integral part of business analysis and all of its component analyses.

The overall business analysis and relationship with others can be shown as

Page 16 of 16
b) Identify and discuss different types of business analysis. {Financial Analysis}

Financial Statement Analysis

!
!
On the Basis of Materials Used On the Basis of Modus Operandi
! !
1 1
External Internal Horizontal Vertical
Analysis Analysis Analysis Analysis

I. On the Basis of Materials Used: On the basis of materials used the analysis and interpretations of financial
statements may be classified into (a) External Analysis and (b) Internal Analysis.

a. External Analysis: This analysis meant for the outsiders of the business firm. Outsiders may be investors, creditors,
suppliers, government agencies, shareholders etc. These external people have to rely only on these published
financial statements for important decision making. This analysis serves only a limited purpose due to non-availability
of detailed information.
b. Internal Analysis: Internal analysis performed by the persons who are internal to the organization. These internal
people who have access to the books of accounts and other information related to the business. Such analysis can
be done for the purpose of assisting managerial personnel to take corrective action and appropriate decisions.

II. On the basis of Modus Operandi: On the basis of Modus operandi, the analysis and interpretation of financial
statements may be classified into: (a) Horizontal Analysis and (b) Vertical Analysis.

a. Horizontal Analysis: Horizontal analysis is also termed as Dynamic Analysis. Under this type of analysis, comparison
of the trend of each item in the financial statements over the number of years are reviewed or analyzed. This type
of comparison helps to identify the trend in various indicators of performance. In this type of analysis, current year
figures are compared with base year for figures are presented horizontally over a number of columns.

Page 17 of 17
b. Vertical Analysis: Vertical Analysis is also termed as Static Analysis. Under this type of analysis, a number of ratios
used for measuring the meaningful quantitative relationship between the items of financial statements during the
particular period. This type of analysis is useful in comparing the performance, efficiency and profitability of several
companies in the same group or divisions in the same company.
c) Given below are the summarized statement of financial performance and statement financial position of Pearson
Publication limited:
Amount (Tk.)
Net Sales 16,00,000
Less: Cost of goods sold 13,10,000
Gross Profit 2,90,000
Administrative Expenses 40,000
Income from operations 2,50,000
Other Expenses & losses- Interest paid (45,000)
Income before income taxes 2,05,000
Income tax expenses (82,000)
Net income 1,23,000

Particulars Amount (Tk.)

Assets:
Non-current assets 8,00,000
Current Assets:
Cash and cash equivalents 50,000
Accounts Receivable 1,75,000
Inventories 4,00,000
Marketable securities 75,000
Total Assets 15,00,000
Liabilities and owners' equity:
Current liabilities:
Accounts Payable 1,80,000
Bills payable 20,000
Others current liabilities 80,000
Total Current liabilities 2,80,000
Debentures 7,00,000
Paid up capital (40,000 @Tk.10) 4,00,000
Retained earnings 1,20,000
Total liabilities and owners' equity 15,00,000
Industry Average Ratios are:
Current Ratio 2.40:1
Quick Ratio 1.50:1
Sales to inventory 8 times
Average collection period 36 days
Price per share Tk.16
Debt to Assets 40
Time interest earned 6 times
Profit Margin 7%
Price Earnings ratio 15
Return on total assets 11%
Price per share Tk 15

Required:
i. Pearson Publication limited would like to borrow Tk.5, 00,000 from a bank for less than a year. Evaluate the firm's
current financial position by calculating ratios that you fell would be useful for the bank evaluation.
ii. Which problem areas are suggested by your ratio analysis? What are the possible reasons for them?
iii. Do you think the bank should grant the loan?
Solve:

Page 18 of 18
 Ratio Calculation Industry Comments
Current Ratio 7,00,000/2,80,000 = 2.50:1 2.40:1 The liquidity of the company
is strong. The company has
a current ratio that is strong
(2.50:1) and slightly above
industry average (2.40:.1).
Quick Ratio 3,00,000/2,80,000 =1.07:1 1.50:1 The near cash assets should
be increased. The company
is slice risky in paying short
term liabilities.
Sales to inventory 16,00,000/4,00,000 =4times 8 times Below satisfactory
Average collection period (1,75,000/16,00,000) *365 =39.92 days 36 days Collection period is above
Debt to Assets 9,80,000/15,00,000=0.65 40 Below satisfactory
Time interest earned 2,50,000/45,000=5.56 6 times Around satisfactory
Profit Margin 1,23,000/16,00,000=7.69% 7% satisfactory
Price Earnings ratio Market price per Equity 15 Below satisfactory
EPS =10/3.075=3.25
Return on total assets Net Profit 1,23,000 11% Below satisfactory
Total Assets ×100 = 15,00,000 = 8.2%
Price per share Tk. 10 Tk 15 below
Working:
Current Asset=50,000+175,000+4,00,000+75,000=7,00,000
Current Liabilities= 2,80,000
Quick Assets= CA-Inventory= 7,00,000-4,00,000=3,00,000
EBIT=2,50,000
Market price =10
Net Profit after Tax-Preference Dividend
EPS= Number of Equity Share =1,23,000/40,000=3.075
ii. The company should decrease inventory by increasing sales
iii. Bank should grant loan as the current ratio is above satisfactory level. But there is slightly
The Pearson publication
Question No. 3.
a) What do you mean by growth firm and sustainable earnings? See 2020
b) The common size statement of financial position as on June 30, 2018 and the statement of financial performance for
the year ended June 30, 2018 of Amazon publications are given below. Cash balance as on June 30, 2018 was Tk:70,000
and interest paid during the year 2017-18 was Tk.90,000.
Amazon Publications
Statement of Financial Position
At the end of the year
Assets: (Tk.) Amount (Tk.)
Current assets:
Cash and Cash Equivalents 15
Marketable Securities 10
Accounts Receivable 15
Inventory 20
Total current assets 60
Net non-current assets 40
Total assets 100
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable 15

Page 19 of 19
 Notes payable 20
Wages payable 5
Total current liabilities 40
Long-term debts 30
Total liabilities 70
Shareholders' equity:
Ordinary shares 20
Retained earnings 10
Shareholders' equity 40
Total liabilities and shareholders' equity 100

Amazon Publications
Statement of Comprehensive Income
For the year ended of the ear
Particulars Amount (Tk.)
Sales Tk.100.00
Cost of goods sold 45.00
Gross profit 55.00
General, selling and administrative expenses 31.00
Operating profit 24.00
Interest expenses 6.00
Taxes 2.00
8.00
Net income/loss 16.00
Required:
i. Prepare the Statement of Financial Position and Statement of Comprehensive Income in amount as of June 30,2018 for
Amazon Publications
ii. Calculate the following ratios for Amazon publications as of June 30, 2018:
(1) Current ratio:
(ii)Quick ratio;
(iii)Debt-equity ratio
(iv)Times interest earned;
(v)Average collection period;
(vi)Inventory turnover
(vii)Non-current assets turnover
(viii)Operating profit margin
(ix)Net profit margin
(x)Return on assets.
(xi)Return on equity.
i.
Assets: Tk Tk
Current assets:
Cash and Cash Equivalents 70,000
Marketable Securities 46,667
Accounts Receivable 70,000
Inventory 93,333
Total current assets 280,000
Net non-current assets 186,667
Total assets 466,667
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable 70,000

Page 20 of 20
 Notes payable 93,333

Wages payable 23,333

Total current liabilities - 186,667
Long-term debts - 140,000
Total liabilities - 326,667
Shareholders' equity: - -
Ordinary shares 93,333 -
Retained earnings 46,667 -
Shareholders' equity 186,667
Total liabilities and shareholders' equity 466,667

Particulars Amount (Tk.)

Sales 1,500,000
Cost of goods sold 675,000
Gross profit 825,000
General, selling and administrative expenses 465,000
Operating profit 360,000
Interest expenses 90,000
Taxes 30,000
120,000
Net income/loss 240,000

ii.
i. Current ratio: Current Assets 2,80,000 1.50:1
Current Liabilities 186667
ii.Quick ratio; Current Assets-Inventory-Prepaid exp. 280,000-93,333-0 1:1
Current Liabilities-OD-CC 186667

iii.Debt-equity ratio Long term Debts 140,000 0.75:1

Shareholders Fund 186667

iv. Times interest EBIT 360,000 4 times

earned; Total Interest Exp. 90,000

v. Average collection A/R+Bills Receiveable 70,000 17.03days

Credit Sales ×365 1,500,000 ×365
period;

vi. Inventory turnover Cost of Goods Sold 675,00 7.23 times

Average Inventory 93,333

vii. non-current assets Total Sales 1,500,000 8.04 times

turnover Non current Assets 186,667

viii. Operating profit Operating Profit 360,000 24%

margin Net Sales ×100 1,500,000

ix. Net profit margin Net Profit (after tax) 240,000 16%
Net Sales ×100 1,500,000

x. Return on assets. Net Profit 240,000 51.43%

Total Asses ×100 466,667

xi. Return on equity. Net Profit 240,000 128.7%

×100 186,667
Shareholders' Equity

Page 21 of 21
Question No. 4.
a) Briefly discuss the process of fundamental analysis of financial statements for used in valuation. See 2020
b) What do you mean by technical screens? Mention some common technical screens methods which relate to
trading and investment strategies. See 2020
c) Here are some accounting numbers and market values (in millions) for HP and Gateway for 2018. These two computer
manufacturers are considered to be comparable Dell Inc.

Sales (tk) Earning (TK) Book Value (TK) Market Value

HP 90,452 1,248 27,906 ( )65,926
Gateway 12,160 (2,580) 3,130 3,888
Instructions:
i. Calculate the following ratios for HP and Gateway
Price-to-sales (P/S);
Price to - earnings (P/E)
Price to book (P/B)

ii. Dell reported the following number for fiscal year 2018:
Sales Tk. 62336 million
Earnings 2492
Book Value 9388
Apply multiples for HP and Gateway to price Dell's 5,204 million outstanding shares.
Requiremet-1:
HP Now apply the multiples to Dell:
Price to sale 65,926/90452 0.73
Price to earning 65,926/1248 52.78
Price to book 65,926/27906 2.36

Gate way
Price to sale 3,888/12,160 0.32
not applicable negative
Price to earning 3,888/-2,580 earnings
Price to book 3,888/3,130 1.24
Dells
Average number value

Sales (0.73+0.32)/2= 0.35 62336 21817.6

Earnings 52.78= 52.78 2492 131527.76
Book Value (2.36+1.24)/2= 1.2 9388 11265.6
Total 164610.96
Average 54870.32
With 5,204 million shares outstanding, the estimated value per share = 54870.32/5,204 = 10.54

Question No. 5.
a) What do you mean by cash flow statement? What are the objectives of cash flow statement?
A Cash Flow Statement can be defined as a statement which summarize sources of cash inflows and uses of cash
outflows of a firm during a particular period of time . It is a statement that shows how much cash is generated and used
during a given time period. It is one of the main financial statement's analysts use in building a three-statement model. The
main categories found in a cash flow statement are
(1) operating activities,
(2) investing activities, and

Page 22 of 22
 (3) financing activities of a company and are organized respectively.
However, the main objectives of cash flow statement are:
(a) Measurement of Cash: Inflows of cash and outflows of cash can be measured annually which arise from operating
activities, investing activities and financial activities.
(b) Generating inflow of Cash: Timing and certainty of generating the inflow of cash can be known which directly helps
the management to take financing decisions in future.
(c) Classification of activities: All the activities are classified into operating activities, investing activities and financial
activities which help a firm to analyse and interpret its various inflows and outflows of cash.
(d) Prediction of future: A cash flow statement, no doubt, forecasts the future cash flows which helps the management to
take various financing decisions since synchronization of cash is possible.
(e) Assessing liquidity and solvency position: Both the inflows and outflows of cash and cash equivalent can be known,
and as such, liquidity and solvency position of a firm can also be maintained as timing and certainty of cash generation is
known i.e. it helps to assess the ability of a firm to generate cash.
(f) Evaluation of future cash flows: Whether the cash flow from operating activities are quite sufficient in future to meet
the various payments e.g. payment of expense/debts/dividends/taxes.
(g) Supply necessary information to the users: A cash flow statement supplies various information relating to inflows and
outflows of cash to the users of accounting information in the following ways:
(i) To assess the ability of a firm to pay its obligations as soon as it becomes due;
(ii) To analyse and interpret the various transactions for future courses of action;
(iii) To see the cash generation ability of a firm;
(iv) To ascertain the cash and cash equivalent at the end of the period.
(h) Helps the management to ascertain cash planning: No doubt, a cash flow statement helps the management to prepare
its cash planning for the future and thereby avoid any unnecessary trouble.

b) Lansbury Inc. had the following balance sheet at December 31, 2018.
LANSBURY INC.
BALANCE SHEET
DECEMI3ER 31, 2018
ASSETS
Cash 20,000
Accounts payable 30,000
Accounts receivable 21,200
Investments 32,000
Plant assets (net) 81,000
Land 40,000
Total Assets 194,200
Liabilities and Stockholders' Equity
Notes payable (long-term) 41,000
Common stock 100,000
Retained earnings 23,200
Total Liabilities and Stockholders' Equity 194,200

Page 23 of 23
During 2019, the following occurred.
1. Lansbury Inc. sold part of its investment portfolio for Tk.15,000. This transaction resulted in a gain of Tk.3,400 for the
firm. The company classifies its investments as available-for-sale.
2. A tract of land was purchased for Tk.18,000 cash.
3. Long-term notes payable in the amount of Tk.16,000 were retired before maturity by paying Tk.16,000 cash.
4. An additional Tk.20,000 in common stock was issued at par.
5. Dividends of Tk.8,200 were declared and paid to stockholders.
6. Net income for 2019 was Tk.32,000 after allowing for depreciation of Tk.11,000.
7. Land was purchased through the issuance of Tk.30,000 in bonds.
8. At December 31, 2019, Cash was Tk.32,000, Accounts Receivable was Tk.41,600, and Accounts Payable remained at
Tk.30,000.
Instructions:
a. Prepare a statement of cash flows for 2019.
b. How might the statement of cash flows help the user of the financial statements?
c. Compute two cash flow ratios.
a)
LANSBURY INC.
Statement of Cash Flows
For the Year Ended December 31, 2014

Cash flows from operating activities

Net income $32,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense $ 11,000
Gain on sale of investments (3,400)
Increase in account receivable
($41,600 – $21,200) (20,400) (12,800)
Net cash provided by operating activities 19,200
Cash flows from investing activities
Sale of investments 15,000
Purchase of land (18,000)
Net cash used by investing activities (3,000)
Cash flows from financing activities
Issuance of common stock 20,000
Retirement of notes payable (16,000)
Payment of cash dividends (8,200)
Net cash used by financing activities (4,200)
Net increase in cash 12,000
Cash at beginning of year 20,000
Cash at end of year $32,000
Noncash investing and financing activities
Land purchased through issuance of $30,000 of bonds
b) Cash flow information is useful for assessing the amount, timing, and uncertainty of future cash flows. For example, by showing the
specific inflows and outflows from operating activities, investing activities, and financing activities, the user has a better
understanding of the liquidity and financial flexibility of the enterprise. Similarly, these reports are useful in providing feedback about the
flow of enterprise resources. This information should help users make more accurate predictions of future cash flow. In addition,
some individuals have expressed concern about the quality of the earnings because the measurement of the income depends on a
number of accruals and estimates which may be somewhat subjective. As a result, the higher the ratio of cash provided by operating
activities to net income, the more comfort some users have in the reliability of the earnings. In this problem the ratio of cash

Page 24 of 24
provided by operating activities to net income is 60% ($19,200 ÷ $32,000).
c) An analysis of Lansbury's free cash flow indicates it is negative as shown below:
Free Cash Flow Analysis
Net cash provided by operating activities $19,200
Less: Purchase of land 18,000
Dividends 8,200
Free cash flow $ (7,000)
Net Cash provided by opearting activities 19200
Its current cash debt coverage= = (30,000+30,000)/2 = 0.64:1
Average current liabilities
Net Cash provided by opearting activities Net Cash provided by opearting activities 19200
cash debt coverage= = (Begining+Ending)/2 = (71,000+85,000)/2
Average total liabilities (Curent + Long term)
= 0.25 to 1 which are reasonable. Overall, it appears that its liquidity position is average and overall financial flexibility and solvency
should be improved.

Question No. 6.
a) What do you mean by industrial sickness?
As per Finance Bill 1977, An Industry becomes sick if it cannot pull on its normal activities, suffers from continuous loss. A
sick industry is one whose 50% or more of capital reserve were wiped out by the continuous loss.
Industrial sickness can be defined as a steady imbalance in the debt-equity ratio and distortion in the financial position of
the unit.
b) Discuss the causes of industrial sickness?

c) The followings are selected financial data of a manufacturing units at the end of 2018:
Particulars Taka
Earnings before interest and taxes 48,000
Total assets 7,00,500
Net sales 1,20,000
Market value of equity 1,17,000
Total liabilities 4,50,000
Current assets 2,85,000
Current liabilities 2,88,000
Retained earnings 70,500
Required:

Page 25 of 25
Compute the five financial ratios in the Altman Z-score and interpret the Z score result.

Solution:

We know,
WC RE EBIT MVE SV
Altman Z-Score =1.20× + 1.40× + 3.30× + 0.60× + 1.00×
TA TA TA BVTL TA

WC 2,85,000-2,88,00 -3000
TA = 7,00,500 = 7,00,500 =-4.28

RE 70,500
TA = 7,00,500 =0.1006

EBIT 48,000
TA = 7,00,500 = 0.068
MVE 1,17,000
BVTL = 4,50,000 =0.26

SV 1,20,000
TA = 7,00,500 =0.171

WC RE EBIT MVE SV
Altman Z-Score =1.20× + 1.40× + 3.30× + 0.60× + 1.00×
TA TA TA BVTL TA
Z-Score =1.20×-4.28 + 1.40×0.1006 + 3.30×0.068 + 0.60×0.26 + 1.00×0.171

=-4.44376
Decision Rule: Distress (likely to bankrupt) < 1.81< Gray Zone (Stable) < 2.99 < safe

Comment: The company is likely to bankrupt.

10th Batch-2018
Question No. 1.
a) What do you mean by financial Statements? What are the components of modern financial statements as per IAS
(International Accounting Standards)-1? See 2020

b) What are the objectives of financial statement analysis?

Objectives of Financial Statement Analysis
1. Assessing Earning capacity :Helps uses to decide on financial soundness. Ratios to ascertain are GP ratio, NP
ratio and ROE
2. Performing inter-firm comparison: Compare two or more companies' financially and operationally to decide
best one.
3. Effectiveness of management: Trend analysis or year on year comparison helps to ascertain management's
performance.
4. Changes in profitability patterns: Reveal true reasons for profit shortfall
5. Decision making and control and control : Take corrective decision if company is not moving in desired
direction.
6. Right direction and future orientation: Helps to evaluate results and plan to accomplish goals.

Page 26 of 26
 7. Information to stakeholders: Provide a basis decisions-making for government and statutory agencies.
c) The comparative condensed balance sheet of Morison Manufacturing organization is presented below:
Morison Manufacturing Organization
Comparative Condensed Balance Sheet
December, 31
Assets 2017 (Tk.) 2016 (Tk.)
Current assets:
Cash 1,00,000 2,00,000
Account receivable 7,50,000 4,00,000
Inventory 15,00,000 6,00,000
Prepaid expenses 50,000 50 000
Total current assets 24,00,000 12,50,000
Plant and equipment. 25 85.000 27.00,000
Total assets . 49,85,000 3950,120
Liabilities and Stockholders' Equity

Liabilities:
Current liabilities 12,50,000 5,00,000
Bonds payable 10 00 000 10,00,000
Total liabilities 22.50,000 15,00,000
Stockholders' equity:
Preferred stock 7,50,000 7,50,000
Common stock 5,00,000 5,00,000
Retained earnings 14,85,000 12,00,000
Total Stockholders' equity 27,35,000 24.50,000
Total Liabilities and Stockholders' Equity 4985000 3950000

Required:
(i) Make a Comparative analysis of the balance sheet data for Morison Manufacturing
organization using 2016 as base.
(ii) Prepare a Common Size Statement of balance sheet data for Morison Manufacturing
organization for 2017.
(iii)Comments on the financial performance of the company.
Current assets:
Cash 100,000 200,000 (100,000) -50.00% 2.01%
Account receivable 750,000 400,000 350,000 87.50% 15.05%
Inventory 1,500,000 600,000 900,000 150.00% 30.09%
Prepaid expenses 50,000 50,000 - 0.00% 1.00%
Total current assets 2,400,000 1,250,000 1,150,000 92.00% 48.14%
Plant and equipment. 2,585,000 2,700,000 (115,000) -4.26% 51.86%
Total assets . 4,985,000 3,950,000 1,035,000 26.20% 100.00% 1
Liabilities and Stockholders' Equity - 0.00%
Liabilities: - 0.00%
Current liabilities 1,250,000 500,000 750,000 150.00% 25.08%
Bonds payable 1,000,000 1,000,000 - 0.00% 20.06%
Total liabilities 2,250,000 1,500,000 750,000 50.00% 45.14%
Stockholders' equity: - 0.00%
Preferred stock 750,000 750,000 - 0.00% 15.05%
Common stock 500,000 500,000 - 0.00% 10.03%

Page 27 of 27
 Retained earnings 1,485,000 1,200,000 285,000 23.75% 29.79%
Total Stockholders' equity 2,735,000 2,450,000 285,000 11.63% 54.86%
Total Liabilities and Stockholders' Equity 4,985,000 3,950,000 1,035,000 26.20% 100.00% 1

Question No. 2.
a) Briefly discuss the process of fundamental analysis of financial statements for used in valuation. See 2020
b) What do you mean by technical screens? Mention some common technical screens methods which relate to trading
and investment strategies. -see 2020
c) Here are some accounting numbers and market values (in millions) for HP and Gateway for 2017. These two computer
manufacturers are considered to be comparable Dell Inc.
for 2018. These two computer manufacturers are considered to be comparable Dell Inc.

Sales (tk) Earning (TK) Book Value (TK) Market Value

HP 90,452 1,248 27,906 ( )65,926
Gateway 12,160 (2,580) 3,130 3,888
Instructions:
i. Calculate the following ratios for HP and Gateway
1. Price-to-sales (P/S);
2. Price to - earnings (P/E)
3. Price to book (P/B)
ii. Dell reported the following number for fiscal year 2017:
Sales Tk. 62336 million
Earnings 2492
Book Value 9388
Apply multiples for HP and Gateway to price Dell's 5,204 million outstanding shares.
Question No. 3.
Following is the abridged Balance Sheet of the Cosmopolitan Co. Ltd. As at: 31st March, 2017.
Balance Sheet
Particulars Taka Particulars Taka
Paid-up share capital Freehold property 400000
500000
Profit and loss account Plant and machinery: 2,50, 000
85,000 Less: Depreciation: 75,000
Current liabilities 2,00,000 1,75,000
Stock 1,05,000
Debtors 1,00,000
Bank 5,000
7,85,000 7,85,000

Page 28 of 28
From the following information you are required to prepare Statement of Comprehensive Income and Balance Sheet as at
31st March, 2018:
a) The composition of the total of liabilities side of the company's Balance sheet as at 31 March 2018 (the paid-up capital
remaining the same as at 31st March, 2017) was:
Share capital 55 percent
Profit and loss account 10 percent
10% Debentures 15 percent
Creditors 20 percent
st st
The debentures were issued on 1st April, 2017, interest being paid on 30 September 2014 and 31 March 2018;
51
b) During the year ended on 31 March 2018, additional Plant and Machinery had been bought and a further Tk. 25,000
depreciation written off. Freehold property remained unchanged. The total fixed assets then constituted 60 percent of
total fixed and current assets.
c) The current ratio was 1.6:1. The quick assets ratio was 1:1.
d) The debtors (four-fifths of the quick assets) to sales ratio revealed a credit period of two months.
st
e) Gross profit was at the rate of 15 percent of selling price and return on net worth as at 31 March 2018 was 10
percent.
f) Ignore taxation.
Solution
Working
a. Share capital 55 percent = 5,00,000
Profit and loss account 10 percent = 90,909
10%Debentures 15 percent= 1,36,363
Creditors 20 percent 1,81,818
Interest on debenture
136363*10%=13,636
b. Total Asset=Total Liabilities and Equity= (500,000/55%) = 909,090
Fixed Asset =545,454
Plant and Machinery= Fixed Asset- Free hold=545,454- 4,00,000=145,454
c.
CL=181,818
CA/CL=1.6:1
CA =1.6 *CA
=1.6*181818
=290,909
Quick Ratio= Quick Asset/Quick Liabilities=1:1
Quick Assets= Quick Liabilities=181818
Quick Asst= CA-Inventory-Prepaid Expenses
181818=290909-Inventory-0
Inventory= 290909-181818=109091
d.
Debtor= 4/5* 181818=145,454
Debtor/Sales=2 months=60 days
145454/Sales=60 days
Sales= 2424.23 /day
Total sales= 2424.23*365=8,84,845
e. Gross Profit= 8,84,845*15%=1,32,727
Net Worth=

Page 29 of 29
Share Capital= 5,00,000
P/L Account= 90909
Net worth 5,90,909
Balance Sheet
Particular Tk Tk
Freehold property 400,000
Plant and machinery: 2,45,454
Less: Depreciation: 100,000

Stock 1,45,454
Debtors 109,091
Bank (balancing) 145,454
109,091
Total Assets 909,090

Paid-up share capital 5,00,000

Profit and loss account 90,909
10%Debentures 1,36,363
Current liabilities 1,81,818
Total Equity and Liabilities 909,090
Income Statement
Particular TK Tk
Sales 8,84,845
COGS
Beginning Inventory 105,000
+ Purchase (Balancing) 792,572
-Ending Inventory (1,45,454)
Cost of Goods Sold (752,118)
Gross Profit 1,32,727
Operating Expenses
Depreciation 25,000
Others 16,818
Total operating Expenses (41,818)
Net Income 90,909
Question No.5
a) What do you mean by growth firm and sustainable earnings? See 2020
b) The following numbers were calculated from the financial statements for XYZ manufacturing company for 2017 and
2016:
2017 2016
Sales (millions) Tk. 34,508 Tk. 23.070
Return on common equity (ROCE) 14.2% 12.3%
Average common equity (millions) Tk 10,512 Tk. 9,346
Average net financial obligations (millions) Tk. 5,450 Tk. 582
Return on net operating assets (RNOA) 12.28% 13.75%
Average net operating assets (millions) Tk. 14,962 Tk. 9,828
Explain to what extent the change in common equity from 2016 to 2017 is due to sales growth, net assets required to
support sales, and borrowing.
Solution:
2017 2016 Changes
Page 30 of 30
 Sales 34,508 23,070 11,438
sales 34,508 23.070
Asset turnover = Avegae Assets 14,962 = 2.31 9,828 = 2.35
Financial Leverage 5,450 582 4,868

Changes in common Shareholders (CSE)

1 1

1 1
t-1
1
( )
=Δsalest,t-1× Assets turnover + salest ×Δ Assets turnover - ΔNet Financial Leverage(t,t-1)
t, t-1

( )
= 11,438× 2.35 + 34,508× 2.31 - 2.35 - 4,868
=4867.23+254.27-4868
=253.51
c) An analyst summarizes the following information for ABC Company (Figures in 05 million):
2017 2016 2015
Common shareholder's equity 10450 9788 9248
Net financial obligations 5386 5386 5386
Net operating assets 6064 5402 4862
Sales 15,200 13396 12878
Analyze the growth of average common shareholders' equity in 2017.
Solution:
2017 2016 Changes
Sales 15,200 13,396 1,804
sales 15,200 13,396
Asset turnover = Avegae Assets (6064+5402)/2 = 2.65 (5402+4862)/2 = 2.61
Financial Leverage 5,386 5,386 0
Changes in common Shareholders (CSE)
1 1

1 1
t-1
1
(
=Δsalest,t-1× Assets turnover + salest ×Δ Assets turnover
)
t, t-1
- ΔNet Financial Leverage(t,t-1)

( )
= 1804× 2.61 + 15,200× 2.65 - 2.61 - 0
=691.19-87.906-0
=603.284

Question No.6.
Standard manufacturing company was organized five years ago and manufactures toys. Its most recent three years
balance sheets and income statements are reproduced below:
Standard Manufacturing Company
Balance Sheet Statement
June 30, Year 5, Year 4 and Year 3
Particulars Year 5 Year 4 Year 3
Assets
Cash Tk.12,000 Tk.15,000 Tk.16,000 _
_ Accounts receivable, net 1,83,000 80,000 60,000
Inventory 1,42,000 97,000 52,000
Other current assets 5,000 6,000 4,000
Plant and equipment, net 1,60,000 1,10,000 70,000
Total assets Tk.5,02,000 Tk.3,08,000 Tk.2,02,000
Liabilities and Equity
Accounts Payable Tk.1,47,800 Tk.50,400 Tk.22,000
Income tax payable 30,000 14,400 28,000
Long term liabilities 1,20,000 73,000 22,400
Common stock, Tk.5 par value 1,10,000 1,10,000 80,000
Retained earnings 94,200 60,200 49,600

Page 31 of 31
 Total liabilities and equity Tk.5,02,000 Tk.3,08,000 Tk.2,02,000

Standard Manufacturing Company

Condensed Income Statement
June 30, Year 5, Year 4 and Year 3
Particulars Year 5 Year 4 Year 3
Sales Tk.16,50,000 Tk.12,50,000 Tk.10,50,000
Cost of goods sold (9,27,000) (8,10,000) (5,12,000)
Gross profit 7,57,000 4,40,000 5,38,000
Marketing and administrative expenses (6,70,000) (3,96,700) (4,67,400)
Operating income 87,000 43,300 70,240
Interest costs (12,000) (7,300) (2,240)
Income before taxes 75,000 36,000 68,000
Income taxes (30,000) (14,400) (28,000)
Net income Tk.45,000 TJ.21,600 (Tls.40,000)
A reconciliation of retained earnings for years ended June 30, Year 4, and Year 5, follows:
Standard Manufacturing Company
Condensed Income Statement
June 30, Year 5, Year 4 and Year 3
Particulars ' Year 5 Year 4
Balance, Beginning Tk.60,200 Tk.49,600
Add: Net income 45,000 21,600
Subtotal 1,05,200 71,200
Deduct: Dividend paid (11,000) (11,000)
Balance, ending Tk.94,200 Tk.60,200
Additional Information:
(a)All sales are on account.
(b)Long term liabilities are owed to company's bank.
(c)Terms of sales are net 30 days.
Required:
(a) Compute the following measures for both Years 4 and 5:
i. Current ratio
ii. Acid test ratio
iii. Accounts receivable turnover ratio
iv. Collection period of receivables
v. Inventory turnover
vi. Days to sell inventory
vii. Debt-to-equity ratio
viii. Time interest earned
(b) Using Year 3 as the base year, compute an index-number trend series for:
(i) Sales
(ii)Cost of goods sold
(iii)Gross profit
(iv)Marketing and administrative costs
(v)Net income
(c) Based on your analysis in (a) and (b), prepare a one-page report yielding a recommendation on whether to grant a
loan to Standard Manufacturing Company support your recommendation with relevant analysis.

Page 32 of 32
a)
Year 5 Year 4
Current ratio Current Assets 3,42,000 1,98,000
Current Liabilities 177,800 = 1.92:1 64800 =3.06:1
Acid test ratio 342000-142,000-0
Current Assets-Inventory-Prepaid exp. 177,800-0-0 =1.12:1 1,98,000-97000-0
Current Liabilities-OD-CC 64800-0-0 = 1.56:
1
Accounts Credit Sales 1650,000 1250,000
receivable A/R+Bills Receiveable 183,000 =9.0164 times 80,000 =15.625 times
turnover ratio

Collection period A/R+Bills Receiveable 183000 80,000

Credit Sales ×365 1650,000 ×365=40.48 1250,000 ×365=23.36
of receivables
days days
Inventory Cost of Goods Sold
turnover Average Inventory 927,000 810,000
(97,000+142,000)/2 = 7.76 (52,000+97,000)/2 = 10.
87
Days to sell Average Inventory (97,000+142,000)/2
inventory Cost of Goods Sold ×365 927,000 ×365=
(52,000+97,000)/2
47.05 days 810,000 ×365
= 33.58 days
Debt-to-equity Long term Debts 120,000 73000
ratio Shareholders Fund (110,000+94,200) =59% 110000+60200 =43%

Time interest EBIT 87000 43,300

earned Total Interest Exp. 12000 =7.25 times 7,300 = 5.93 times

b.
Particulars Year 5 Year 4 Year 3
Sales 157.14% 119.05% 100%
Cost of goods sold 181.05% 158.20% 100%
Gross profit 14.31% 81.78% 100%
Marketing and administrative expenses 143.35% 84.87% 100%
Net income 212.50% 154.00% 100%
c. The trend analysis shows continuous increase in sales which is 57.14% in year 5 and 19.05% in year 4. But it shows
reverse impact in year 5 by decreasing gross profit because of increasing cost of goods sold. Again, there is increase in
Marketing and administrative expenses in year 5.

9th Batch-2017
Question No.1

b) Explain the claim: "financial statement analysis is an integral part of business analysis". See 2019
d) Identify at least seven additional sources of financial reporting information.
Financial statements are not the sole output of the financial reporting system. Additional financial information is communicated by
companies through the following sources:

Management's Discussion and Analysis (MD&A). Companies with publicly traded debt and equity securities are required by the SEC
to provide a report of their financial condition and results of operations in a MD&A section of its financial reports.

Management Report. The management report sets out the responsibilities of management in preparing the company's financial
statements.

Page 33 of 33
Audit Report. The external auditor is an independent certified public accountant hired by management to assess whether the
company's financial statements are prepared in conformity with generally accepted accounting principles. Auditors provide an
important check on financial statements prior to their release to the public.

Explanatory Notes. Notes are an integral part of financial statements and are intended to communicate additional information
regarding items included in, and excluded from, the statements.

Supplementary Information. Certain supplemental schedules are required by accounting regulatory agencies. These schedules can
appear in notes to financial statements or, in the case of companies with publicly held securities, in exhibits to regulatory filings such
as the Form 10-K that is filed with the Securities and Exchange Commission.

Social Responsibility Reports. Companies increasingly recognize their need for social responsibility. While reports of socially
responsible activities are increasing, there is no standard format or accepted standard.
Proxy Statements. A proxy statement is a document containing information necessary to assist shareholders in voting on matters for
which the proxy is solicited.
e) Identify and discuss at least two areas of financial analysis.
15. Financial analysis includes analysis of the profitability of a company, the risk of the company, and the sources and uses of
funds for the company. Profitability analysis is the evaluation of a company's return on investment. It focuses on a company's
sources and levels of profits, and involves identifying and measuring the impact of various drivers of profitability. Profitability
analysis includes evaluation of two sources of profitability: margins and turnover. Risk analysis is the evaluation of a company's
riskiness and its ability to meet its commitments. Risk analysis involves assessing the solvency and liquidity of a company along with
its earnings variability. An analysis of sources and uses of funds is the evaluation of how a company is obtaining and deploying
funds. This analysis provides insights into a company's future financing implications.

The comparative financial statements of Wall-Mart Company are presented below:

Wall-Mart Company
Statement of Financial Performance
For the year ended December 31
Particulars 2016 2015
Net Sales revenue- 10,00,000 10,00,000
Investment income 1,40,000 20,000
Dividend revenue 60,000 20,000
Less: Cost & Expenses
Cost of goods sold 8 30 000 7,08,000
Selling & Administrative expenses. 1 50,000 1,50,000
Depreciation on PPE 30 600 19,600
Patent amortization . 17,000 13,000
Interest Expenses 10,600 9,000
Income Tax Expenses 22 000 18,000
Write off goodwill 7,000 5,000
Loss on sale of machine 4,000 3,000
Derecognizing expenses 8 000 2,000
Marketing Expenses 50,000 50,000
Total Expenses 11,28 200 9,87,600
Net income Tk.70,800 62,400

Wall-Mart Company
Statement of Financial Position
December 31
2016 2015
Current Assets:
Cash & Cash Equivalents Tk.32,000 Tk.30,000
Trade Receivable (Net) 50,000 40,000
Loan receivable held for sale 54,000 48,000
Loan receivable held for investment 35,000 30,000

Page 34 of 34
 Cash surrender value of life insurance 30,000 20,000
Advance to employees 5,000
Inventories 1,68,000 1,40,000
Short -term investments 12,000 16,000
Interest receivable 16,000 10,000
Accounts receivable 8,000 4,000
Prepaid insurance 10,000 6,000
Total Current assets 4,30,000 2,54,000
Non-current assets:
Store Equipment 1,00,000 66,000
Property, Plant & Equipment (Net) 4,00,000 4,00,000
Land held for speculation 1,50,000 1,00,000
Capitalize leases 1,46,000 50,000
Leasehold improvements 50,000 50,000
Leasehold property 1,00,000 1,00,000
Total assets Tk.13,76,000 Tk.13,76,000
Liabilities & Stockholder's Equity
Current Liabilities:
Trade Payable Tk.1,00,000 Tk.1,00,000
Interest payable 20,000 10,000
Income Taxes Payable 46,000 40,000
Bonds payable due in 1 years 1,00,000 1,00,000
Cash dividend payable 20,000 8,000
Salaries payable 4,000 2,000
Total Current Liabilities: 2,90,000 2,90,000
Non-current Liabilities:
Bond Payable due in 5 years 2,40,000 1,60,000
Total Liabilities 5,30,000 4,20,000
Stockholder's Equity:
Common Stock (Tk.10 per share) 3,00,000 3,00,000
Retained 'Earnings 4,46,000 4,00,000
Total Stockholder's Equity 7,46,000 7,00,000
Total Liabilities & stockholder's Equity 13,76,000 11,20,000
Additional data:
The common stock recently sold at Tk.60.00 per share and the dividends per share -11.15. The year-end balance in the
allowance for doubtful accounts was Tk.20,000 for 2016 & Tk.8,000 for 2015. Irredeemable Preference share dividend
Tk.30,000 for 2016.
Cash flow for ordinary share Tk.2, 00,000.

Required: Justify the Z score model and comment.

2016 2015
WC=CA-CL 4,30,000-2,90,000=140,000 254,000-260,000=-6,000
TA 13,76,000 11,20,000
RE 4,46,000 4,00,000
EBIT 70,800+10,600+22,000=103,400 62,400+9,000+18,000=89,400
MVE 60*30,000=18,00,000 60*30,000=18,00,000
BVTL 530,000 4,20,000
SV 10,00,000 10,00,000
WC = Working Capital, TA = Total Assets, RE = Retained Earnings; EDIT=Earnings before Interest and Taxes; MVE = Market Value of
Equity; BVTL= Book Value of Total Liabilities; SV = Sales Value.
WC RE EBIT MVE SV
We know, Altman Z-Score = 1.20× TA + 1.40× TA + 3.30× TA + 0.60× BVTL + 1.00× TA

Page 35 of 35
Z score for 2016
140,000 4,46,000 103,400 18,00,000 1,00,000
= 1.20× 13,76,000 + 1.40× 13,76,000 + 3.30× 13,76,000 + 0.60× 5,30,000 + 1.00× 13,76,000
=2.93
Comment: The company is in gray zone meaning in stable stage

Z score for 2015

-6,000 4,00,000 89,400 18,00,000 1,00,000
= 1.20× 11,20,000 + 1.40× 11,20,000 + 3.30× 11,20,000 + 0.60× 4,20,000 + 1.00× 11,20,000
=3.42
Comment: The company is in safe zone

Mid term
st
1 Mid
1. State the significant of the following ratios
i. Acid Test Ratio ii. Inventory turnover ii. ROE iii.P/E

The price-to-earnings (P/E) ratio reveals the amount of payment that the
market is likely to make for a stock. This is on the basis of the earnings
of an organization, both the past and future. A high PE ratio tells us that
the price of a stock is high relative to earnings. In contrast, a low PE ratio
tells us that the price of a stock is low relative to earnings.
Significance of Price to Earnings Ratio
1. The PE ratio is quite useful to the investors.
2. It helps them decide whether there is an overvaluation or
undervaluation of an organization's stock against its earnings.
3. The ratio reflects the willingness of the market to spend for the
current and future organizational operations.
4. If there is a high price to earnings ratio, the market would have a
positive impression of the organization's growth potential and would
likely spend much.
5. Generally speaking, a high price to earnings ratio reflects high
earnings growth expectations by investors.

2nd Mid
Write Short notes
Altman Z-Score:
Altman's Z-score quantifies the financial stability of a company to predict how likely a company will become insolvent. It
uses a statistical technique (multiple discriminant analysis) to produce a predictor that is a linear function of several

Page 36 of 36
explanatory variables. This predictor classifies or predicts the likelihood of bankruptcy or non-bankruptcy. Five financial
ratios are included in the Z-score:

We can view X1, X2, X3, X4, and X5 as reflecting (1) liquidity, (2) age of firm and cumulative profitability, (3) profitability, (4)
financial structure, and (5) capital turnover rate, respectively.
Benish M Score
Beneish's M-Score is a mathematical model that uses eight financial ratios weighted by coefficients to identify whether a
company has manipulated its profits. It was created by Professor Messod Beneish who published a paper in June 1999
called The Detection of Earnings Manipulation.
Beneish surmises that companies are incentivized to manipulate profits if they have high sales growth, deteriorating
gross margins, rising operating expenses and rising leverage. They are likely to manipulate profits by accelerating sales
recognition, increasing cost deferrals, raising accruals and reducing depreciation. These eight ratios are explained in
greater detail as follows:
1. Days' Sales in Receivables Index (DSRI): A large increase in receivable days might suggest accelerated revenue
recognition to inflate profits.
2. Gross Margin Index (GMI): A deteriorating gross margin sends a negative signal about a firm's prospects and
creates an incentive to inflate profits.
3. Asset Quality Index (AQI): An increase in long term assets (for example, the capitalisation of costs), other than
property plant and equipment, relative to total assets indicates that a firm has potentially increased its
involvement in cost deferral to inflate profits.
4. Sales Growth Index (SGI): High sales growth does not imply manipulation but high growth companies are more
likely to commit financial fraud because their financial position and capital needs put pressure on managers to
achieve earnings targets. If growth firms face large stock prices losses at the first indication of a slowdown, they
may have greater incentives to manipulate earnings.
5. Depreciation (DEPI): A falling level of depreciation relative to net fixed assets raises the possibility that a firm has
revised upwards the estimated useful life of assets, or adopted a new method that is income increasing.
6. Sales, General and Administrative Expenses (SGAI): Analysts might interpret a disproportionate increase in SG&A
relative to sales as a negative signal about a firm's future prospects, thereby creating an inventive to inflate
profits.
7. Leverage Index (LVGI): Leverage is measured as total debt relative to total assets. An increase in leverage
creates an incentive to manipulate profits in order to meet debt covenants.
8. Total Accruals to Total Assets (TATA): Total accruals are calculated as the change in working capital (other than
cash) less depreciation relative to total assets. Accruals, or a portion thereof, reflect the extent to which
managers make discretionary accounting choices to alter earnings. A higher level of accruals is, therefore,
associated with a higher likelihood of profit manipulation.
The eight variables are then weighted together according to the following formula:
Beneish M-Score = -4.84 + 0.92*DSRI + 0.528*GMI + 0.404*AQI + 0.892*SGI + 0.115*DEPI – 0.172*SGAI + 4.679*TATA
– 0.327*LVGI
Beneish concluded that if a company scored greater than -2.22 (i.e. a less negative or positive number) there was a likely
probability of profit manipulation. We have recreated the formula and attempted to calculate the results for 3,600 Asian
companies with a market capitalisation exceeding US$1bn. Unfortunately, Beneish designed his formula with US disclosure
in mind and many Asian companies do not distinguish between COGS and SG&A. As such, we can't calculate the formula
for 19% of our sample, including the majority of those in Australiana and India. That's a shame because the latter market
would have been particularly interesting. Our calculations suggest that 96% of all companies score within a range of +/-
5. We have displayed the scoring system in the following chart to make it easier to understand:

Page 37 of 37
Comparative balance sheet accounts of Sharpe Company are presented below.
SHARPE COMPANY
COMPARATIVE BALANCE SHEET, AS OF DECEMBER 31

2021
2020
Particulars Amount
Amount (Tk.)
(Tk.)
Assets
Cash 70,000 51,000
Accounts Receivable 1,55,000 1,30,000
Inventory 75,000 61,000
Debt investments (available-for-sale) 55,000 85,000
Equipment 70,000 48,000
Buildings 1,45,000 1,45,000
Land 40,000 25,000
Total Assets 6,10,000 5,45,000
Liabilities and Stockholders' Equity
Allowance for Doubtful Accounts 10,000 8,000
Accumulated Depreciation—Equipment 21,000 14,000
Accumulated Depreciation—Buildings 37000 28000
Accounts Payable 66000 60,000
Income Taxes Payable 12000 10,000
Long-Term Notes Payable 62000 70,000
Common Stock 3,10,000 2,60,000
Retained Earnings 92,000 95,000
Total Liabilities and Stockholders' Equity 6,10,,000 5,45,000
Additional data:
i. Equipment that cost Tk.10, 000 and was 60% depreciated was sold in 2021.
ii. Cash dividends were declared and paid during the year.
iii. Common stock was issued in exchange for land.
iv. Debt investments that cost Tk.35, 000 were sold during the year.
v. There were no write-offs of uncollectible accounts during the year.
Sharpe's 2021 Income Statement is as follows.
Sales revenue 9,50,000
Less: Cost of goods sold 6,00,000
Gross profit 3,50,000
Less: Operating expenses (includes depreciation
expense and bad debt expense) 2,50,000
Income from operations 1,00,000
Other revenues and expenses
Gain on sale of investments 15,000
Loss on sale of equipment (3,000) 12,000
Income before taxes 1,12,000
Income taxes 45,000
Net income 67,000
Instructions:
i. Compute net cash provided by operating activities under the direct method;
ii. Prepare a Statement of Cash Flows using the indirect method.
iii. Compute Free cash Flows

Net Cash Provided by Operating Activities

Cash receipts from customers $925,000 (1)
Cash payments:
To suppliers $608,000(2)
For operating expenses 226,000(3)
For income taxes 43,000 (4)

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 877,000
Net cash provided by operating activities 48,000

(1) (Sales Revenue) less (Increase in Accounts Receivable) $950,000 – $25,000 = $925,000
(2) (Cost of Goods Sold) plus (Increase in Inventory) less(Increase in Accounts Payable)
$600,000 + $14,000 – $6,000 = $608,000
3) (Operating Expenses) less (Depreciation Expense) less(Bad Debt Expense)
$250,000 – $22,000* – $2,000 = $226,000
(4) (Income Taxes) less (Increase in Income Taxes Payable) $45,000 – $2,000 = $43,000
Equipment depreciation *$21,000 – [$14,000 – ($10,000 X .60)] = $13,000
Building depreciation $37,000 – $28,000 = 9,000
$22,000
(b) SHARPE COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income $67,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense $22,000
Gain on sale of investments (15,000)
Loss on sale of equipment 3,000
Increase in accounts receivable (net) (23,000)
Increase in inventory ( 14,000)
Increase in accounts payable 6,000
Increase in income taxes payable. 2,000 (19,000 )
Net cash provided by operating activities 48,000
Cash flows from investing activities
Purchase of investments
[$55,000 – ($85,000 – $35,000] (5,000)
Purchase of equipment
[$70,000 – ($48,000 – $10,000)] (32,000)
Sale of investments ($35,000 + $15,000) 50,000
Sale of equipment
[$10,000 – ($10,000 X 60%)] – $3,000 1,000
Net cash provided by investing activities 14,000
Cash flows from financing activities
Payment of long-term notes payable (8,000)
Cash dividends paid
[($95,000 + $67,000) – $92,000] (70,000)
Issuance of common stock. 35,000 *
Net cash used by financing activities (43,000 )
Net increase in cash 19,000
Cash, January 1, 2017 51,000
Cash, December 31, 2017 $70,000
Noncash investing and financing activities
Issuance of common stock for land.................. $15,000
*$310,000 – $260,000 = $50,000; $50,000 – ($40,000 – $25,000) = $35,000

Tk Tk
Cash provided by Operating Activities 48,000
-Capital Expenditure
-Purchase of equipment (37,000)
-Cash Dividend (70,000) (107,000)

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Free Cash Flow -59,000

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