QUESTION TWO (20 MARKS) KAMWENDO, a listed entity on the ZSE, has just published its financial statements for the year ended 31 December 2016. KAMWENDO operates a chain of 26 supermarkets in one of the six major provinces of its country of operation. During 2016, there has been speculation in newspapers that the entity was likely to be a takeover target for one of the larger chains of supermarkets that is currently under-represented in KAMWENDO's province. A recent newspaper report has suggested that KAMWENDO's directors are unlikely to resist a takeover. The six board members are all nearing retirement, and all own significant minority shareholdings in the business. You have been approached by a private shareholder in KAMWENDO. She is concerned that the directors have a conflict of interests and that the financial statements for 2016 may have been manipulated. The income statement and summarized statement of changes in equity of KAMWENDO (All Figures in million kwachas), with comparatives, for the year ended 31 December 20015, and a balance sheet, with comparatives, at that date are as follows: Kamwendo: Income statement for the year ended 31 December 2016 2016 1260 1181 2015 1215 79 20 Net Revenue Cost of Goods Sold Gross Profit Operating Expenses Profit from Operations Finance Costs Profit before Tax Income tax expense Profit for the Period 28 Kamwendo: Summarized statement of changes in equity for the year ended 31 December 2016 2015 2016 276 Opening balance Profit for the period Dividends 78 2016 575 Non Current Assets Goodwill 100 47 Current Assets Inventory Trade Receivables Cash 12 46 13 46 12 105 785 71 746 Equity Share Capital Retained Profits 150 151 150 126 301 Non Current Liabilities Interest bearing Borrowings Deffered Tax 142 25 140 21 167 Current Liabilities Trade and other payables Short term borrowings 297 273 2036 309 317 789 Notes: 1. KAMWENDO's directors have undertaken a reassessment of the useful lives of non-current tangible assets during the year. In most cases, they estimate that the useful lives have increased and the depreciation charges in 2016 have been adjusted accordingly. 2. Six new stores have been opened during 2016, bringing the total to 26. 3. Four key ratios for the supermarket sector (based on the latest available financial statements of twelve listed entities in the sector) are as follows: i) Annual sales per store: K29,8m ii) Gross profit margin: 5,9% iii) Net profit margin: 3,9% iv) Non-current asset turnover (including both tangible and intangible non-current assets): 1,93 Required: (a) Prepare a report, addressed to the investor, analyzing the performance and position of KAMWENDO based on the financial statements and supplementary information provided above. The report should also include comparisons with the key sector ratios, and it should address the investor's concerns about the possible manipulation of the 2016 financial statements. QUESTION TWO (20 MARKS) KAMWENDO, a listed entity on the ZSE, has just published its financial statements for the year ended 31 December 2016. KAMWENDO operates a chain of 26 supermarkets in one of the six major provinces of its country of operation. During 2016, there has been speculation in newspapers that the entity was likely to be a takeover target for one of the larger chains of supermarkets that is currently under-represented in KAMWENDO's province. A recent newspaper report has suggested that KAMWENDO's directors are unlikely to resist a takeover. The six board members are all nearing retirement, and all own significant minority shareholdings in the business. You have been approached by a private shareholder in KAMWENDO. She is concerned that the directors have a conflict of interests and that the financial statements for 2016 may have been manipulated. The income statement and summarized statement of changes in equity of KAMWENDO (All Figures in million kwachas), with comparatives, for the year ended 31 December 20015, and a balance sheet, with comparatives, at that date are as follows: Kamwendo: Income statement for the year ended 31 December 2016 2016 1260 1181 2015 1215 79 20 Net Revenue Cost of Goods Sold Gross Profit Operating Expenses Profit from Operations Finance Costs Profit before Tax Income tax expense Profit for the Period 28 Kamwendo: Summarized statement of changes in equity for the year ended 31 December 2016 2015 2016 276 Opening balance Profit for the period Dividends 78 2016 575 Non Current Assets Goodwill 100 47 Current Assets Inventory Trade Receivables Cash 12 46 13 46 12 105 785 71 746 Equity Share Capital Retained Profits 150 151 150 126 301 Non Current Liabilities Interest bearing Borrowings Deffered Tax 142 25 140 21 167 Current Liabilities Trade and other payables Short term borrowings 297 273 2036 309 317 789 Notes: 1. KAMWENDO's directors have undertaken a reassessment of the useful lives of non-current tangible assets during the year. In most cases, they estimate that the useful lives have increased and the depreciation charges in 2016 have been adjusted accordingly. 2. Six new stores have been opened during 2016, bringing the total to 26. 3. Four key ratios for the supermarket sector (based on the latest available financial statements of twelve listed entities in the sector) are as follows: i) Annual sales per store: K29,8m ii) Gross profit margin: 5,9% iii) Net profit margin: 3,9% iv) Non-current asset turnover (including both tangible and intangible non-current assets): 1,93 Required: (a) Prepare a report, addressed to the investor, analyzing the performance and position of KAMWENDO based on the financial statements and supplementary information provided above. The report should also include comparisons with the key sector ratios, and it should address the investor's concerns about the possible manipulation of the 2016 financial statements
