QUESTION TWO

1. What is accounting analysis? Explain (3 Marks)
2. What is the process to carry out an accounting analysis? (4 marks)
3. What gives rise to accounting distortions? Explain (4 marks)
4. The following information has been extracted from the books of ABC Company Limited for the period ended 2013.

Statement of Income for the Years Ended	2013	2012	2011
Net sales	Sh.12,237.7	Sh.11,396.9	Sh. 10,584.2
Cost of sales	Sh.5,536.1	Sh.5,191.9	Sh.4,747.2
Selling, general and administrative expenses	Sh.4,355.2	Sh.6,205.0	Sh.5,837.0
Other (incomes) expenses	Sh.185.9	Sh.69.2	Sh.90.3
Operating profit	Sh. 2,160.5	Sh.2,215.0	Sh.2,122.1
Interest expense(net)	Sh.158.7	Sh.136.0	Sh.119.7
Income before income taxes	Sh.2,001.8	Sh.2,079.0	Sh.2,002.4
Income taxes expenses	Sh. 648.4	Sh. 727.6	Sh.673.5
Earnings per share, basic	2.57	2.54	2.45
Earnings per share, diluted	2.46	2.43	2.33

Required

1. Prepare the Common size Analysis of ABC Company Limited. (5 marks)
2. Using 2011 as thee base year, compute the trend percentages for all the elements of the financial statement (5 marks)
3. Comment Briefly on the above Analysis (4 marks)

QUESTION THREE

You are planning to analyze XYZ Companys Statement of Financial Position as at December 31 2014. The following information is readily available:

1. Beginning and ending balances are identical for both accounts receivables and inventory.
2. Net income is Sh. 1,300,000
3. Times interest earned is 5 (income taxes are zero).
4. Company has 5% bonds outstanding issued at par
5. Gross profit margin 10%
6. Gross profit margin 30%
7. Inventory turnover is 5 times
8. Average collection period is 72 days
9. Sales to end of year working capital are 4.
10. Current ratio is 1.5
11. Acid test is1.0 (excludes prepaid expenses)
12. Plant and equipment sh. 6,000,000, net book value
13. Dividend paid on 8% non-participating preferred are sh. 40,000
14. There were no charges in the common shares.
15. The preferred shares were issued two years ago at par
16. Earnings per share are sh. 3.75
17. Common stock has a sh.5 par value and was issued at par
18. Retained earnings at January 1, 2013 are sh. 350,000

Required:

1. Prepare the statement of Income for the year ended December 31, 2014 (5 marks)
2. Prepare the companys statement of financial position as at December 31, 2014 (include the following account classifications: cash, inventory, prepaid expenses, plant and equipment(net), current liabilities and shareholders equity (14 marks)
3. XYZ is currently audited by KPMG. Who pays KMPG for its audit of XYZ? To whom is KMPG providing assurance regarding the fair presentation of the citigroup financial statements? List two market forces faced by KMPG that increase the probability that the firm effectively performed an audit with the interests of financial statement users in mind (6 marks)