Open UniversityofMauritius

MSc FINANCIAL MANAGEMENT AND INVESTMENT (OUpm001)

EXAMINATION FOR: May/June 2018

MODULE: Financial Reporting and Analysis

(OUpm001111)

DURATION: 3 HOURS

READING TIME: 15 Minutes

INSTRUCTIONS TO CANDIDATES

1. The paper consists of Section A and Section B.

2. Section A is compulsory.
3. Answer any TWO questions from Section B.
4. Always start a new question on a fresh page.
5. The use of a scientific calculator is allowed
6. Total marks: 100

This paper consists of 4 questions and 10 pages

Page 1 of 10
 SECTION A - COMPULSORY
SECTION A

QUESTION 1 (40 marks)

IAS 1 requires that one of the elements of a set of financial statements is a Cash flow
statement.

(i) Explain the benefits of cash flow information. [5 marks]

(ii) What are the key principles specified by IAS 7 for the preparation of a statement of
cash flows. [8 marks]

(ii) Write down the Cash Flow Statement for Lambda Ltd for the year ended 31
March 2018 from the information given hereunder. [27 marks]

Income Statement for the year ended 31 March 2018

MUR 000
Sales 18,000
Cost of sales (12,000)
Gross profit 6,000
Net operating expenses (2,958)
Profit on sale of land 240
Loss on sale of plant (162)
Profit before interest and tax 3,120
Finance cost (120)
Profit before tax 3,000
Corporate tax expense (1,200)
Net profit 1,800

Page 2 of 10
Statement of Financial Position as at 31 March 2018 and 2017

2018 2017
MUR000 MUR000
Non-current assets
Property, plant and equipment (Note 1) 13,788 12,408
Intangible assets (Note 2) 1,080 2,520
14,868 14,928
Current assets
Inventories 7,200 4,800
Trade receivables 5,400 4,080
Short-term investments
(Maturity: 30 days) 90 0
Cash at bank 90 60
12,780 8,940
Total assets 27,648 23,868

Equity and Liabilities

Equity
Ordinary shares MUR10 each 6,000 4,800
Share premium account 1,200 300
7% preference shares 6,000 6,000
Revaluation surplus 1,200 600
Retained earnings 3,900 2,100
18,300 13,800
Liabilities
Non-current liabilities
10% debentures 900 1,200
Current liabilities
Trade payables 4,080 3,240
Bank overdraft 3,348 4,068
Dividends 0 420
Corporate tax 1,020 1,140
8,448 8,868
Total equity and liabilities 27,648 23,868

Page 3 of 10
Note 1 – Property, plant and equipment (PPE) (MUR 000)
Land Buildings Plant Vehicles Total
Cost
At 1 April 2017 9,600 2,400 2,520 600 15,120
Additions 2,400 600 360 3,360
Revaluations 600 600
Disposal (1,800) _____ (720) ____ 2,520
At 31 March 2018 10,800 3,000 2,160 600 16,560
Depreciation
At 1 April 2017 1,152 1,200 360 2,712
Charge for the 60 432 120 612
year
Adj. for disposal _____ _____ (552) ____ (552)
At 31 March 2018 3,600 1,212 1,080 480 2,772
Net Book Values
At 31 March 2018 10,800 1,788 1,080 120 13,788
At 31 March 2017 9,600 1,248 1,320 240 12,408

Note 2 – Research & development (R&D) cost ofMUR 1,440,000 was written
off during the year ended 31 March 2018

Page 4 of 10
 SECTION B
Answer any TWO questions from this section
QUESTION 2

Sunsunny plc started operations on 1 January 2012 manufacturingan exclusive brand of

textile products.To satisfy the growing demand of its products, Sunsunny plc has
increased production levels. The textile sector is very competitive and a large proportion
of the Sunsunny plc’s product costs are fixed. As a consequence, Sunsunny plc spends
heavily on advertising toincrease sales volume. Profits after tax for the year ended 31
December 2015 stood at MUR 2,100,00 increasing to MUR 2,523,000 in 2016 achieving
a record high of MUR 3,600,000 in 2017.

At the start of operations in 2012,Sunsunny plc was initially financed by a combination

of equity and debt. The debt finance consisted of a loan of MUR 2,025,000 which was
repayable in October 2017.

On 1 April 2017Sunsunny plc's shares were being traded at MUR 6 but over the past 6
months the share price had been trading at around MUR 5.10. The accounts for the
year ended 31 December 2017 have just been published and thishas triggered a sharp
fall in the company's share price to MUR 4.05 as at 31 March 2018. Apparently analysts
and investors have been very critical of the overall performance and financial position of
the company for the year ended 31 December 2017. The directors are perplexed by the
fact that the company has achieved record sales and profits for the current year just
ended but yet analysts appear to have shifted their view of the company.

The directors would like to identify the reasons behind the change in sentiment towards
the business.

The following information has been extracted from the published accounts of Sunsunny
plc for the year ended 31 December 2017.

Page 5 of 10
Balance sheet as at 31 December 2017
2017 2016
MUR’ MUR’ MUR’ MUR’
000 000 000 000
ASSETS
Non-current assets
Property, plant and equipment 2,850 4,200
Current assets
Inventories 3,225 1,575
Trade receivables 5,805 3,285
Cash at bank 480 975
9,510 5,835
Total assets 12,360 10,035
EQUITY AND LIABILITIES
Equity
Issued share capital (MUR 3) 2,400 1,500
Share premium 600 0
Retained earnings 7,485 4,185
10,485 5,685

Current liabilities
Trade payables 375 1,320
Loan 0 2,025
Taxation payable 1,200 750
Dividend payable 300 255
1,875 4,350
12,360 10,035

Income statement for the year ended 31 December 2017

2017 2016
MUR’ 000 MUR’ 000
Sales 29,568 19,122
Cost of sales (12,648) (9,804)
Gross profit 16,920 9,318
Selling and distribution expenses (4,485) (2,775)
Administration expenses (7,500) (3,075)
Profit from operations 4,935 3,468
Net interest cost (135) (195)
Profit before tax 4,800 3,273
Corporate tax expenses (1,200) (750)
Net profit for period 3,600 2,523

Page 6 of 10
Cash flow statement for the year ended 31 December 2017
2017 2016
MUR’ 000 MUR’ 000
Cash flow from operating activities
Net profit before tax 4,800
Adjustments for: Depreciation 630
Interest expense 135
Profit on disposal of Property, plant and equipment (165)
5,400
(Increase)/decrease in inventories (1,650)
(Increase)/decrease in trade and other receivables (2,520)
Increase/(decrease) in trade and other payables (945)
Cash generated from operations 285
Interest paid -
Corporate tax paid (750)
Net cash used in operating activities (465)
Cash flow from investing activities
Proceeds from sale of equipment 885
Cash flow from investing activities 885
Cash flow from financing activities
Cash proceeds from issue of shares 1,500
Interest paid (135)
Loan repaid (2,025)
Dividends paid (255)
Cash flows used in financing activities (915)
Increase/(decrease) in cash and cash (495)
equivalent
Cash and cash equivalent at 31 December 2016 975
Cash and cash equivalent at 31 December 2017 480

The following additional information is available:

1. Ordinary share capital comprises shares with a nominal value of Rs3.
2. There were no purchases of property, plant and equipment during the year.
3. Straight line depreciation for the year amounted to Rs 630,000.
4. The gain on disposal of an item of motor vehicle was Rs165,000.
5. All sales are made on credit.
6. In view of the profitable track record ofthe company, it was customary for
directors to agree the amount of proposed dividends before the year-end.

Page 7 of 10
Following, the wave of criticism which followed the release of the 2017 accounts, the
financial director has been paying closer attention to the performance of other
companies in the same sector and has compiled the following industry average ratios:
Operating profit margin 25%
Earnings per share 2.2
Asset utilization 1.5
Price earnings ratio 2.5
Gross profit margin 40%
Current ratio 2
Debtors collection period 60 days
Inventory turnover 6 times
Non-current assets as a % of total assets 45%

Required:
(a) From the information in the financial statements above, calculate the various ratios
which would shed light on the following:
(i) Profitability ratios [5 marks]
(ii) Liquidity ratios [3 marks]
(iii) Efficiency ratios [4 marks]
(iv) Gearing ratios [2 marks]
(v) Stock market ratios [2 marks]

(b) Using the ratios calculated under (a) discuss whether or not you agree with the
views shared by investors and analysts. [14 marks]

Page 8 of 10
QUESTION 3 (30 marks)
(a) Explain the concept of
(i) an associate and [3 marks]
(ii) the equity method of accounting for an associate. [3 marks]

(b) The summary Statements of Financial Position of Wood Ltd, Plank Ltd and Dust
Ltd as at 31 December 2016 are as follows:

Statement of Financial Position at 31 December 2017

Wood Plank Dust Ltd

Ltd Ltd
MUR’000 MUR’000 MUR’000
Non-Current assets
PPE 150 120 135
Investment in Plank at cost 225 -
Current assets 135 180 60
510 300 195

Ordinary share capital (MUR10) 300 120 75

Revenue Reserves 180 90 60
Current liabilities 30 90 360
510 300 195

On 31 December 2016Wood had acquired 80% of the shares in Plank at a cost

of MUR 180,000 and 25% of the share capital of Dust Ltd at a cost of MUR
45,000. Wood Ltd controlsPlank Ltd and exercises significant influence over Dust
Ltd.

At the time of acquisition, Plank’s profits stood at MUR 30,000 and an item of
PPE in the books of Plank Ltd was undervalued by MUR 30,000. This item of
PPE had a remaining useful life of 5 years at date of acquisition.

At the time of acquisition, DustLtd’s profits stood at MUR 45,000 and its net
assets at that date were deemed to reflect fair values.

Page 9 of 10
 Goodwill in Plank Ltd is deemed to have been impaired by 20% since the date of
acquisition. The fair value of non-controlling interest at 31 December 2016 was
MUR 45,000.

There was no impairment in the investment in Dust Ltd.

During the year ended 31 December 2017, Plank Ltd sold goods to Wood Ltd for
MUR 30,000 and Wood Ltd still has 40% of the goods in stock at balance sheet
date. Plank Ltd applies a margin of 25% on all sales.

Prepare the Consolidated Statement of financial position of Wood group at 31

December 2017. [24 marks]

QUESTION 4 (30 marks)

(a) You have just been appointed a member of the Finance Committee reporting to
the Board of Directors of the company where you are employed. Your
responsibilities include ensuring that financial information prepared by the
Accountant in the organization complies with the provision of the 2010 Conceptual
Framework regarding qualitative characteristics. Explain the fundamental
qualitative characteristics and enhancing characteristics that financial information
must possess. [15 marks]

(b) The 2010 Conceptual Framework for Financial Reporting identifies a number of
primary users of financial reports as well as other users who are not within the
primary user group. Identify the various users in each group and explain why and
how each user would be using information from the financial reports.
[15 marks]

Page 10 of 10