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In this document description about Financial Statement Analysis.
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Calculators must not be used to store text and/or formulae nor be capable of communication. Invigilators may require calculators to be reset. All answers are to be written in the exam paper provided in ink.^ Please write clearly as illegible writing cannot be marked. Failure to follow these requirements will lead to a deduction of marks.
Family Name:
Other Name:
Course (please indicate by ticking appropriate box)
Finance Int. Banking & Fin Int. Accounting & Fin
Shareholders’ Equity
Share capital 220,000 200,
Share premium 30,000 ‐
Retained earnings 405,000 320,
655,000 520,
Extract from Consolidated Income Statement for the year ended 31st December
2007 2006
£000 £
Operating profit 176,000 160,
Less: Finance costs
Bank interest ‐ 9,
Debenture Interest 30,000 ‐
Profit before tax 146,000 151,
Less: Tax 61,000 63,
Profit for the year 85,000 87,
Note s
Report on the respective financial positions of Durban plc at 31 st^ December 2007 and 2006 and discuss the financial developments which have occurred during the intervening period. You should include any relevant ratios to support your analysis.
(33 1/3 MARKS)
Q2. Discuss the strengths and weaknesses of models which incorporate ratios that an analyst could use to predict financial distress.
(33 1/3 MARKS)
Q3. In an international context, discuss how the choice of accounting methods, accounting estimates or even real transactions could significantly affect the analysis and interpretation of the financial statements from different countries, giving examples where possible.
(33 1/3 MARKS)
Q4. Shown below are extracts from the Annual Report for British Oil & Gas plc.
Extract from Summary Accounting Policies:
Intangible assets – exploration activities
Acquisition, exploration and evaluation expenditure incurred is charged against earnings as incurred, except in the case of areas of interest where:
a) it is expected that the expenditure will be recouped by future exploitation or sale; or
b) at the balance sheet date, exploration and evaluation activities have not reached a stage which permits a reasonable assessment of the existence of economically recoverable reserves and active and significant operations are continuing.
In these cases, the expenditure is capitalised and accumulated separately for every area of interest. The ultimate recoupment of these costs is dependent on the successful development and commercial exploitation, or sale, of the respective areas of interest.
Extract from the Consolidated Balance Sheet as at 30 June 2007
2007 £ 2006 £
Non‐current assets
Intangible Assets 11,410,290 6,776, 9
Tangible Assets 164,766 174,
Q5. a) Define “earnings management”. (4 marks)
b) Discuss the reasons why earnings may be managed and the long term effects of the practice.
(11 marks)
c) Describe TWO accounting practices that a company may use to manage earnings and for each practice explain the effect on profit, the balance sheet and cash flow.
(18 1/ marks) (TOTAL 33 1/3 MARKS)
End of Paper