CSS Accountancy & Auditing Interpretation of Financial Statements

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CSS Accounting & Auditing
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Interpretation of Financial Statements

The Income Statement of the Abdul Rehman & Co for the year on December 31 (for each year 2015 & 2016) is given as under:
2016 2015
Sales Rs. 900,000 Rs. 800,000
Cost of goods sold Beginning inventory 43,000 40,000
Purchases 637,000 483,000
Goods available for sale 680,000 523,000
Ending inventory 70,000 43,000
Cost of goods sold 610,000 480,000
Gross margin 290,000 320,000
Operating expenses 248,000 280,000
Income before taxes 42,000 40,000
Income taxes 17,000 18,000
Net income 25,000 22,000
Plus: Retained earnings, beginning balance 137,000 130,000
Less: Dividends0 15,000
Retained earnings, ending balance 162,000 137,000
The Balance sheet of the Company as on December 31 for each year is given as under:
Assets 2015 2016
Cash Rs. 20,000 Rs.17,000
Marketable securities 20,000 22,000
Notes receivable 4,000 3,000
Accounts receivable 50,000 56,000
Merchandise inventory 70,000 43,000
Prepaid expenses 4,000 4,000
Property, plant & equipment (net) 340,000 310,000
Total assets 508,000 455,000
Liabilities and Stockholders’ Equity
Accounts payable 40,000 38,000
Salaries payable 2,000 3,000
Taxes payable 4,000 2,000
Bonds payable, 8% 100,000 100,000
Preferred stock, 6%, Rs100 par, cumulative 50,000 50,000
Common stock, Rs 10 par 150,000 125,000
Retained earnings 162,000 137,000
Total liabilities and stockholders’ equity 508,000 455,000
Required: Horizontal Analysis and Vertical Analysis for the above given financial
statements (Income Statement & Balance Sheet) of Abdul Rehman & Co. and comment on
the results.

Q.1 (CSS – 2017, Paper # 1, Section – A, Q. # 4 (20 Marks)

The following financial data were taken from the annual financial statements of Smith Corporation:

Details 2007 2008 2009

Current assets $ 450,000 $ 400,000 $ 500,000

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Current liabilities 390,000 300,000 340,000
Sales 1,450,000 1,500,000 1,400,000
Cost of goods sold 1,180,000 1,020,000 1,120,000
Inventory 280,000 200,000 250,000
Accounts receivable 120,000 110,000 105,000
Required: (A). Based on these data, calculate the following for 2008 and 2009:
1. Working capital 2. Current ratio
3. Acid-test ratio 4. Accounts receivable turnover
5. Merchandise inventory turnover 6. Inventory turnover in days
(B). Evaluate the results of your computations in regard to the short-term liquidity of the firm.

Q.1 (CSS – 2016, Paper # 1, Section – A, Q. # 4 (b) (20 Marks)

Rabika Limited has the following balance sheet and income statement for 2015. (in thousands rupees)
Balance Sheet
Assets Rupees Liabilities Rupees
Cash 400 Accounts Payable 320
Accounts Receivable 1,300 Accruals 260
Inventories 2,100 Short term Loans 1,100
Current Assets 3800 Current Liabilities 1,680
Net Fixed Assets 3,320 Long Term Debt 2,000
Share Holder’s equity 3,440
Total Assets 7,120 Total Liabilities & Equity 7,120

Income Statement
Accounts Rupees
Net Sales (All Credit) 12,680
Cost of Goods Sold * 8,930 *
Gross Profit 3,750
Selling, General & Admn. Expenses 2,230
Interest Expense 460
Profit Before Tax 1,060
Taxes 390
Profit after Tax 670
* Includes depreciation of Rs. 480
On the basis of this information, compute the following:
Current ratio
Acid test ratio
Average collection period
Inventory turnover ratio
Debt to net worth ratio
Gross profit margin
Net profit margin
Rate of return on common stock equity

Q.1 (CSS – 2015, Paper # 1, Section – A, Q. # 3) (20 Marks)

Listed below are nine technical terms:
Trend percentage Leverage
Inventory turnover Vertical analysis
Yield Operating cycle
Return on assets Quick ratio
Book value per share
Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the
accounting term described, or answer “None” if the statement does not correctly describe any of the term.
(a) Buying assets with money raised by borrowing or by issuing preferred stock.
(b) The proportion of total assets financed by stockholders, as distinguished from creditors.
(c) Net asset represented by each share of stock.
(d) Changes in financial statement items from a base year to following years expressed as a percentage of the base year
amount and designed to show the extent and direction of change.
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CSS Accountancy & Auditing Interpretation of Financial Statements
(e) Dividends per share divided by market price per share.
(f) Average time period between the purchase of merchandise and the conversion of this merchandise back into cash.
(g) Comparison of a particular financial statement item to a total including that item.
(h) Net sales divided by average inventory.
(i) Comparison of highly liquid current assets (cash, marketable, securities and receivable) with current liabilities.

Q.2 (CSS – 2015, Paper # 1, Section – A, Q. # 4(a)) (10 Marks)

Discuss the limitations of ratio analysis and why they arise. Do you think that they are so serious as to undermine the validity
of this approach to the analysis of financial statements?

Q.3 (CSS – 2015, Paper # 1, Section – B, Q. # 7)

Acne Plumbing Company’s balance sheet of year 2011: (20 Marks)
Assets Rs. Liabilities Rs.
Cash 30,000 Accounts payable 230,000
Accounts receivable 200,000 Accruals 200,000
Inventory 400,000 Bank loan 100,000
Net fixed assets 800,000 Long term debt 300,000
Common stock 100,000
Retained earning 500,000
Total assets 1,430,000 Liabilities and stock 1,430,000
Further information: Sales were Rs. 4,000,000/-, Cost of Goods sold were Rs. 3,200,000/- Net Profit was Rs. 300,000/-.
Required:
Compute the following ratios:
Current ratio, Acid test ratio, Average collection period, Inventory turnover, Total debt to equity, Long term debt to equity,
Gross profit margin, Net profit margin, Total assets turnover, Return on assets.

Q.4 (CSS – 2014, Paper # 1, Section – A, Q. # 3) (20 Marks)

The following is the balance sheet of Shine Company as on December 31, 2013.
Liabilities Rs. Assets Rs.
Equity share capital 120000 Fixed assets 360000
Reserves and surplus 80000 Less depreciation 100000 260000
6% mortgage debentures 140000 Current assets:
Current liabilities: Cash 10000
Creditors 12000 Investment 30000
Bills payable 20000 Stock 60000
Outstanding expenses 2000 Sundry debtors 40000
Taxation provision 26000
400000 400000
Other information: Net sales Rs. 600000; cost of goods sold Rs. 516000; net income before tax Rs. 40000; net income after tax
Rs. 20000.
Required: Calculate current ratio; debt equity ratio; gross profit ratio and operating ratio

Q.5 (CSS – 2013, Paper # 1, Section – A, Q. # 3) (20 Marks)

The following results of a company are available:
a. Current Ratio 6: 1
b. Quick Ratio 0.50: 1
c. Debt Equity Ratio 90:10
d. Collection index 136 days
e. Time Interest Earned 08: 1
Required: Offer your comments on each of the above regarding their adequacy or otherwise.

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CSS Accountancy & Auditing Interpretation of Financial Statements
Q.6 (CSS – 2012, Paper # 1, Section – B, Q. # 8) (18 Marks)
(a) You have the following information on BB Corp:
Current ratio 2.0
Quick ratio 1.4
Current liabilities Rs. 100,000
Inventory turnover 6x
Gross profit margin 0.20

REQUIRED: Given these figures, calculate the firm’s sales. (09)

(b) Following are the selected data taken from Books of A Ltd at the end of year 2005:
Cash Rs. 108,000
Account Receivable beg 380,000
Account Receivable end 350,000
Marketable Securities 142,000
Merchandise Inventory beg 120,000
Merchandise Inventory end 150,000
Accounts Payable 200,000
Bills Payable 50,000
Credit Sales (Net) 18,25,000
Cost of Goods Sold 540,000
Total Operating Expenses. 600,000
REQUIRED: On the basis of above information, find out: (09)
1. Working Capital 2. Current Ratio 3. Quick Ratio
4. Inventory Turnover 5. Account Receivable Turnover 6. Gross Profit Percentage
7. Net Profit Percentage 8. Operating Expenses Rate

Q.7 (CSS – 2011, Paper # 1, Section – B, Q. # 8) (18 Marks)

At the end of the year, the following information was obtained from the accounting records of the Agility Office Products:
Sales (all on credit) ......................... Rs. 2,700,000
Cost of goods sold ........................... 1,755,000
Average Inventory ........................... 351,000
Average accounts receivable.......... 300,000
Interest expense ............................... 45,000
Income taxes .................................... 84,000
Net income ....................................... 159,000
Average investment in assets .......... 1,800,000
Average stockholders’ equity ......... 795,000
INSTRUCTIONS
(a) From the information given, compute the following:
1. Inventory Turnover
2. Account receivable turnover
3. Total operating expenses
4. Gross profit percentage
5. Return on average stockholders’ equity
6. Return on average assets
(b) Agility has an opportunity to obtain a long-term loan at an annual interest rate of 12% and could use this additional capital at

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the same rate of profitability as indicated above. Would obtaining the loan be desirable from the viewpoint of the
stockholders? Explain.

Q.8 (CSS – 2010, Paper # 1, Q. # 4) (25 Marks)

Below is given the balance sheet of Sunlight Company Limited as on 31st December, 1988

Liabilities Rs. Assets Rs.

Share capital 200000 Fixed assets 550000
Reserve fund 150000 Stock in trade 250000
Bank overdraft 200000 Liquid assets 150000
Sundry creditors 400000
950000 950000
Bank overdraft is a permanent arrangement made with the bank. Calculate current ratio; quick ratio; debt-equity ratio; fixed
assets ratio; and proprietary ratio.

Q.9 (CSS – 2010, Paper # 1, Q. # 5) (25 Marks)

Following are summarised balance sheets of a company. Prepare a Comparative balance sheet.
Liabilities 2004 2005 Assets 2004 2005
Rs. Rs. Rs. Rs.
Ordinary capital Rs.10 each 38000 46000 Fixed assets 40000 45000
Reserves 5000 5400 Investment 4000 8000
Loans 600 1600 Current assets 1000 2000
Current liabilities 1400 2000
45000 55000 45000 55000

Q.10 (CSS – 2009, Paper # 1, Q. # 3) (25 Marks)

Complete the 2007 balance sheet for Premier Industries using the information that follows it.
Premier Industries
Balance Sheet at December 31, 2007
Rs. Rs.
Cash 30,000 Accounts Payable 120,000
Marketable securities 25,000 Notes Payable ---
Accounts receivable --- Accruals 20,000
Inventories --- Long-term debt ---
Net fixed assets --- Stockholders’ equity 600,000

The following financial data for 2007 are also available:

1. Sales totaled Rs. 1,800,000
2. The gross profit margin was 25 per cent
3. Inventory turnover was 6.0.
4. There are 360 days in the year.
5. The average collection period was 40 days.
6. The current ratio was 1.60.
7. The total asset turnover ratio was 1.20.
8. The debt ratio was 60 per cent.

Q.11 (CSS – 2008, Paper # 1, Q. # 4) (25 Marks)

The following data are extracted from the published accounts of two companies in an industry:
X Co. Ltd Y Co. Ltd.
Rs. Rs.
Sales 16,00,000 15,00,000
Profit after tax 61,500 79,000

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CSS Accountancy & Auditing Interpretation of Financial Statements
Equity Capital 5,00,000 4,00,000
(Rs. 10 per share fully paid)
General Reserve 1,16,000 3,21,000
Long–Term Debts 4,00,000 3,30,000
Creditors 1,91,000 2,74,500
Bank Credit (short term) 30,000 1,00,000
Fixed Assets 7,99,500 7,95,000
Inventories 1,65,500 4,04,500
Other Current Assets 2,72,000 2,26,000

You are required to calculate the following Ratios of both companies:

(a) Current ratio
(b) Quick Ratio
(c) Net Profit Ratio
(d) Stock turnover
(e) Debt equity ratio

Q.12 (CSS – 2007, Paper # 1, Q. # 3) (25 Marks)

Following information is developed from the accounting records of Sana Chemicals Limited:
(1) Current Ratio 2.5
(2) Liquid Ratio 1.5
(3) Proprietary Ratio (Fixed Assets to Proprietor’s Fund) 0.75
(4) Working Capital Rs. 150,000
(5) Reserves and Surplus Rs. 100,000
(6) Bank Overdraft (Current Liability) Rs. 25,000
Required: Find out Current Assets, Current Liabilities, Stock, Liquid Assets and Fixed Assets. Also prepare a statement of
Proprietor’s Fund and a Balance Sheet.

Q.13 (CSS – 2006, Paper # 1, Q. # 4) (25 Marks)

Working capital of X Company at December 31, 2005 exceeds the working capital at December 31, 2004 by Rs.50,000 as
reported below:
2005 2004
Particulars Rs. Rs.
Current Assets
Cash, Marketable securities & accounts receivable 150,000 250,000
Merchandise inventory
Total Current Assets 450,000 250,000
Current Liabilities 600,000 500,000
300,000 250,000
300,000 250,000
Required:
Undertake liquidity analysis with particular reference to:
(1) Current ratio
(2) Quick ratio
(3) Working capital
First calculate the ratios, later compare the same with reference to standard ratios and later present a lucid analysis.

Q.14 (CSS – 2003, Paper # 1, Q. # 4) (20 Marks)

The Directors of Master Public Limited Company requires Rs.500 million to invest in a new project. Extracts from the financial
statements are as under:
Profit and Loss Account for the year ended December 31:
Particulars 2001 Million Rs. 2002 Million Rs.

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CSS Accountancy & Auditing Interpretation of Financial Statements
Sales 6,175 6,329
Operating Profit 350 320
Less: Interest Payable (30) (30)
Net Profit before Income Tax 320 290
Income Tax (128) (116)
Net Profit after tax 192 174
Summarised Balance Sheet as at December 31:
Particulars 2001 Million R.s. 2002 Million Rs.
Assets:
Fixed Assets (Net) 901 1,664
Stocks 447 426
Debtors 308 321
Balance at Bank 52 11
1,708 1,822

Capital & Liabilities:

Paid up Capital 500 500
Reserves and Surpluses 525 649
Loan – 10% Debentures 300 300
Creditors 205 207
Taxation Payable 128 116
Dividends 50 50
1,708 1,822
Required:
Undertake financial analysis by using pertinent ratios and present your candid review on the performance of the Company.

Q.15 (CSS – 2002, Paper # 1, Q. # 3) (20 Marks)

The following information relating to Dawood Company in respect of year 2001 is available:
Net Sales 1,200,000
Cost of goods sold 760,000
Cross profit on sales 440,000
Selling, general and others expenses 350,000
Operating income 90,000
Income Tax 40,500
Net income 40,500
Dividend paid 35,000
Net increase in retained earnings 14,500
Balance Sheet Data
Assets Rs.
Cash 60,000
Accounts Receivables 300,000
Inventory-at cost (Beginning of year Rs.420,000) 380,000
Prepaid expenses 30,000
Land, building and equipment 760,500
Intangible assets 100,500
Other fixed assets 70,000
1,700,000
Capital and liabilities
RS.
Accounts payable 120,000
Accrued expenses 25,000
Income tax payable 39,500
Miscellaneous current liabilities 10,000

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CSS Accountancy & Auditing Interpretation of Financial Statements
Bonds 300,000
Deferred revenues 10,000
Paid up share capital 700,000
Additional paid-in-Capital Retained earnings 310,000
- appropriated 80,000
- un appropriated 105.500
1,700,000
Required:
Calculate the following ratios and offer your comments in terms of interpretation:
(1) Amount of working capital (compute amount)
(2) Current Ratio.
(3) Acid Test Ratio.
(4) Day accounts receivable uncollected (use 360 days per year and assume all sales on credit basis)
(5) Inventory turnover rate.
(6) Ratio of shareholders equity to total liabilities.

Q.16 (CSS – 2001, Paper # 1, Q. # 3) (20 Marks)

Comparative date for Mehdi Corporation Ltd., for the two-years period 1999-2000 are presented below:
1999 2000
Rs. Rs.
Net Sales 1,000,000 1,200,000
Cost of Goods sold 630,000 760,000

Gross Profit on Sales 340,000 440,000

Selling, General, and other expenses 300,000 340,000

Net operating Income 10,000 90,000

Income Taxes 15,000 35,000

Net operating Income 10,000 90,000

Income Taxes 15,000 35,000
Net Income 25,000 55,000
Dividends paid 30,000 40,000
Net increase (decrease) in retained (5,000) 15,000
earning
BALANCE SHEET DATA
1999 2000
Assets
Rs. Rs.
Cash 35,000 55,000
Trade notes and accounts receivable 320,000 400,000
Inventory (at cost) 380,000 420,000
Prepaid expenses 10,000 30,000
Plant and Equipment (net) 600,000 680,000
Intangibilities 100,000 100,000
Other assets 5,000 15,000
1,450,000 1,700,000

Liabilities and Shareholders Equity

Rs. Rs.
Trade notes and accounts Payable 165,000 205,000
Wages, interest, dividends Payable 25,000 45,000
Income taxes Payable 15,000 35,000
Miscellaneous Current liabilities 15,000 10,000
5% bonds payable 300,000 300,000
Deferred revenues 10,000 10,000
6% Preferred shares, Rs.100 par 200,000 200,000
Ordinary Share Capital (Rs. 10 each) 400,000 500,000
Premium on Share Capital 200,000 260,000
Appropriated Profits 60,000 80,000
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CSS Accountancy & Auditing Interpretation of Financial Statements
Inappropriate Profits 60,000 55,000
1,450,000 1,700,000
Required:
From the foregoing data calculate the following for 2000:
(1) The ratio of net sales to average total assets.
(2) The ratio of net sales to average plant and Equipment.
(3) The rate earned on net sales.
(4) The gross profit rate on net sales.
(5) The rate earned on average total sales.
(6) The rate earned on average shareholders equity.
(7) The number of times bond interest requirements were earned (before income taxes).
(8) The number of times preferred dividend requirements were earned.

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