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Analysing Financial Statements

Unit: Financial Reporting

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December 2025

 2 Questions
Question 4
​ ​ ​ ​​The following completed financial statements for the year ended 31 October 2025 together with the relevant comparatives were extracted from the accounting records of Pemways Limited, a public limited company. 

 Statement of profit or loss and other comprehensive income for the year ended 31 October 2025:

Sh.“000”
Revenue
36,000
Cost of sales 
(26,350)
Gross profit 
9,650
Distribution costs
(2,630)
Administrative expenses 
(3,290)
Profit from operations 
3,730
Finance costs 
(1,000)
Investment income (dividend received) 
150
Profit before tax 
2,880
Income tax expense  
(940)
Profit for the year
1,940
Other comprehensive income: 
Gain on property revaluation 
7,000
Fair value gain on equity investments 
600
Total comprehensive income for the year
9,540

Statement of financial position as at 31 October: 

2025
2024
Sh.“000”
Sh.“000”
Assets: 
Non-current assets: 
Property, plant and equipment 
37,470
24,160
Investment in equity instruments 
12,100
-
Current assets: 
Inventory
9,580
6,880
Trade receivables 
6,500
5,590
Cash and cash equivalents 
3,330
1,870
Total assets 
68,980
38,500
Equity and liabilities:
Equity
Ordinary share capital (Sh.10 par value) 
40,000
20,000
Share premium 
4,000
4,000
Revaluation reserve
6,800
-
Financial asset reserve
600
-
Retained earnings 
4,040
2,350
Total equity 
55,440
26,350
Non-current liabilities: 
12.5% loan stock (2028) 
8,400
7,600
Deferred tax 
880
960
Current liabilities: 
Trade payables 
3,640
3,100
Current tax
620
490
Total equity and liabilities 
68,980
38,500

Additional information:
1.
The property, plant and equipment comprised of: 
31 October 2025
31 October 2024
Sh. “000” 
Sh. “000” 
Cost of valuation 
47,900
33,400 
Accumulated depreciation  
(10,430)
 (9,240)
Carrying amount 
37,470
24,160
2.
On 1 November 2024, the company revalued its property for the first time to a fair value of Sh.24 million (land: Sh.6 million). The property had cost Sh.25 million (land: Sh.5 million). The building was being depreciated on a straight-line basis at the rate of 2% per annum and had a remaining economic useful life of thirty (30) years as at the date of revaluation. The company did not account for deferred tax on this revaluation. However, it made an inter-reserve transfer for excess depreciation upon revaluation.
3.
During the year ended 31 October 2025, a motor vehicle with a cost of Sh.2,000,000 and an accumulated depreciation of Sh.800,000 was disposed of for cash proceeds of Sh.1,020,000. The gain or loss on this disposal has been included in the distribution costs.
4.
The company acquired new investments in equity investments instruments for cash and designated them as at fair value through other comprehensive income.
5.
During the year to 31 October 2025, the company made a 1 for 5 bonus issue of ordinary shares, utilising the share premium account.
6.
 All sales and purchases were made on credit.

Required:
A statement of cash flows for Pemways Limited for the year ended 31 October 2025, using the indirect method.  


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Question 5c
​ ​ ​​As a newly employed accountant of Bakers Ltd., you have been presented with the following financial statements: 

 Statement of profit or loss for the years ended 30 June:

2024
Sh.“000”
2025
Sh.“000”
Net turnover
456,500
420,000
Cost of sales 
(295,000)
 (227,000)
Gross profit
161,500
193,000
Operating expenses 
(109,500)
(93,000)
Operating profit 
52,000
100,000
Interest expenses 
(14,500) 
(3,000)
Investment income
5,000
4,500
Profit before tax
42,500
101,500
Income tax 
(12,500)
 (15,000)
Profit for the year 
30,000
86,500

Statement of retained earnings for the year ended 30 June:

2024
2025
Sh.“000”
Sh.“000”
Retained profit brought forward 
149,500
89,500
Net profit for the year 
30,000
86,500
179,500
176,000
Dividends:   Preference shares 
(10,000)
(9,000)
Dividends:   Ordinary shares 
(12,000)
(17,500)
Retained profit carried forward 
157,500
149,500

Statement of financial position as at 30 June:  

2024
2025
Sh.“000”
Sh.“000”
Assets:
Property, plant and equipment 
106,000
132,000
Goodwill
10,000
5,000
Inventories
147,000
118,500
Account receivable 
80,000
24,000
Cash and bank balances 
26,000
28,500
369,000
308,000
Equity and liabilities: 
Share capital: 
Ordinary shares 
50,000
50,000
Preference shares 
40,000
25,000
Retained earrings
157,500
149,500
Account payable 
37,500
26,500
Accruals 
25,500
20,000
Debentures
58,500
37,000
369,000
308,000

Required: 

Compute for the two years, the following ratios: 

(i) Return on capital employed. 

(ii) Assets turnover. 

(iii) Current ratio. 

(iv) Quick ratio.

(v) Debt to equity ratio. 


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August 2025

 1 Questions
Question 4a
​​Explain THREE benefits of using common size approach in analysing financial statements compared to other methods.


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April 2025

 2 Questions
Question 2b
​ ​ ​ ​​Venture Capital presented the following financial statements of Brook Limited for analysis: 

 Brook Limited 
 Income statement for the year ended 31 December 2024:

Sh.“000”
Revenue
6,514,978
Cost of sales 
(1,680,408)
Gross profit
4,834,570
Less expenses: 
Salaries and wages 
2,072,010
Rent and rates 
246,934
Other administrative expenses 
1,567,938
Total operating expenses 
3,886,882
Profit before interest, tax, depreciation and amortisation 
947,688
Less depreciation and amortisation 
(312,736)
Earnings before interest and tax
634,952
Finance costs
 (62,178)
Profit before tax
572,774
Less income tax
(171,284)
Profit after tax 
 401,490

Brook Limited 
Statement of financial position for the year ended 31 December:

2023
2024
Non-current assets:
Sh.“000”
Sh.“000”
Land and buildings
3,389,440
3,549,100
Plant and equipment
1,236,168
1,326,944
Motor vehicles  
30,002
47,930
4,655,610
4,923,974
Accumulated depreciation 
(2,591,522)
(2,837,670)
Total non-current assets 
2,064,088
2,086,304
Goodwill
433,210
505,580
2,497,298
2,591,884
Current assets: 
Inventory
134,046
141,118
Trade receivables 
93,176
87,888
Cash
147,266
124,542
Total current assets 
374,488
353,548
Total assets 
2,871,786
2,945,432
Financed by: 
Equity and liabilities: 
Equity :
Ordinary share capital 
1,015,472
1,025,470
Retained earnings
(1,172,392)
(1,451,668) 
 (156,920)
(426,198)
Non-current liabilities:
Loan notes 
1,941,650
2,227,898
Current liabilities: 
Trade payables
824,224
854,320
Accrued expenses   
262,832
289,412
1,087,056
1,143,732
Total equity and liabilities
2,871,786
2,945,432

Required: 

 (i) Vertical analysis on the statement of profit or loss for the year ended 31 December 2024. 

 (ii) Horizontal analysis on the statement of financial position. 


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Question 1d
​​International Financial Reporting Standard (IFRS) 5 “Non-current asset held for sale and discontinued operations” provides guidance on the accounting treatment of discontinued operations and non-current assets held for sale. 

Required: 

 (i) With reference to IFRS 5, explain the meaning of discontinued operations. 

 (ii) Discuss the IFRS 5 criteria which must be satisfied in order for a non-current asset to be classified as held for sale.


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December 2024

 1 Questions
Question 5c
​ ​ ​ ​​Baraka Ltd. is a private limited company that operates in the hospitality industry. 

 The following statements of financial position have been extracted from accounting records of the company for analysis purposes: 

 Statement of financial position as at 31 August:
2024
2025
Sh.“000”
Sh.“000”
Assets:  
Non-current assets: 
Property, plant and equipment 
23,760
13,440
Intangible assets 
16,720
11,760
40,480
25,200
Current assets: 
Inventories
20,240
14,560
Trade receivables  
17,600
10,640
Cash and cash equivalents      
9,680
5,600
Total assets 
88,000
56,000
Equity and liabilities: 
Equity:
Ordinary share capital 
17,600
14,000
Share premium 
1,760
1,400
Retained profit 
15,840
9,240
Total equity 
35,200
24,640
Non-current liabilities: 
Long term loans 
14,080
7,840
Deferred tax 
7,040
3,360
Current liabilities: 
Trade payables
18,480
12,880
Current tax
13,200
7,280
Total equity and liabilities 
88,000
56,000

Required: 
Prepare common-size vertical statements of financial position as at 31 August 2023 and 31 August 2024. 


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August 2024

 1 Questions
Question 1b
​​Explain THREE limitations of common size financial statements.


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August 2023

 1 Questions
Question 1b
​​Citing TWO practical examples, explain the meaning and application of “predictive analytics”, in the context of financial analysis.


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April 2023

 1 Questions
Question 1c
​​Summarise FIVE limitations of ratios in analysing financial performance.


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December 2022

 3 Questions
Question 4c
​​Comment on the changes between the two years as reflected in the ratios calculated in (b) above.


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Question 4b
​ ​​The following draft financial statements were extracted from the books of Mrima Limited as at 31 December: 

 Statement of profit or loss for the year ended 31 December:
2021
2020
Sh.“000”
Sh.“000”
Sales
1,167,800
972,600
Operating profit 
41,340
34,476
Finance cost 
(3,968) 
(3,968)
Profit before tax 
37,372
30,508
Taxation
(14,052) 
(11,468)
Profit for the period 
23,320
19,040
Dividends paid 
(4,800)
(4,480)
Retained profit for the year 
18,520
14,560
Retained profit brought forward 
61,640
47,080
Retained profit brought forward 
80,160
61,640

Statement of financial position as at 31 December:
2021
2020
Non-current assets: 
Sh.“000”
Sh.“000”
Equipment
25,400
9,990
Current assets: 
Inventory
100,910
80,290
Trade receivables 
86,740
80,420
Bank balances   
11,580
24,184
199,230
184,894
Total assets 
224,630
194,884
Equity and liabilities: 
Capital and reserves: 
Shares of Sh.20 each 
19,840
19,840
Retained earnings 
80,160
61,640
100,000
81,480
Non-current liabilities: 
10% debentures 
39,680
39,680
Current liabilities: 
Trade payables 
74,460
65,208
Taxation
6,520
4,946
Accruals
3,970
3,570
84,950
73,724
Total equity and liabilities 
224,630
194,884

Required: 
 Calculate for each year, TWO ratios for each of the following user groups, which are of particular significance to them: 

(i) Shareholders. 

(ii) Trade payables.

(iii) Internal management. 
 


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Question 4a
​​Ratio analysis has over time proven to be a useful financial tool for decision making. However, reliance on ratios for decision making has inherent limitations. 

 Required: 
 Citing SIX limitations, justify the above statement.


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August 2022

 1 Questions
Question 5b
​ ​​Dragon Limited is a public entity which has grown in recent years by acquiring established business entities. The directors of Dragon Limited have identified two potential entities targeted for a takeover. The directors believe that the shareholders of the two target companies would be receptive to a takeover. 

 As a pre-requisite to the takeover decision, the directors have tasked a firm of consultants to carry out a cross sectional analysis of the financial statements of the two potential target companies which operate in the same industry sector. 

 The financial statements of the two entities as at 30 April 2022 are shown below: 

 Statement of profit or loss for the year ended 30 April 2022:

Able Limited 
Ceda Limited 
Sh.“000”
Sh.“000”
Revenue
87,500
140,000
Cost of sales 
(66,500) 
(114,800) 
Gross profit 
21,000
25,200
Distribution costs 
(1,495)
(2,710)
Administrative expenses  
(2,880)
(5,340)
Operating profit 
16,625
17,150
Finance costs  
(875)
(3,150)
Profit before tax 
15,750
14,000
Income tax expense
(3,150)
(3,500)
Profit for the year 
12,600
10,500

Statement of financial position as at 30 April 2022: 
Able Limited 
Ceda Limited 
Sh.“000”
Sh.“000”
Assets: 
Non-current assets:
Property
9,800
10,500
Owned plan
7,000
8,050
Right-of-use asset   
-
17,500
16,800
36,050
Current assets: 
Inventory
5,600
11,900
Trade receivables 
7,350
17,850
Bank
3,850
700
Total assets 
33,600
66,500
Equity and liabilities:
Equity: 
Ordinary share capital (Sh.10 par value) 
3,500
7,000
Revaluation surplus 
1,750
3,150
Retained earnings    
5,600
9,450
Total equity 
10,850
19,600
Non-current liabilities: 
Lease liability 
-
14,700
10% loan notes 
15,750
17,500
Current liabilities: 
Trade payables 
4,375
7,350
Lease liability 
-
2,450
Current tax
2,625
4,900
Total equity and liabilities 
33,600
66,500

Required: 
 (i) Common size statements of profit or loss for the two entities for the year ended 30 April 2022. 

(ii) Common size statements of financial position as at 30 April 2022. 

(iii) Advise the directors of Dragon Limited on the best company for take over. 


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April 2022

 1 Questions
Question 2
​ ​ ​ ​ ​​Super Cars Limited deals in car accessories. Roughly 75% of sales are on credit while the balance are on cash sales. 

Super Cars Limited engaged an analyst who extracted the following summary of industry ratios:

Return on year end capital employed
28.1%
Net asset (equal to capital employed) turnover
4 times
Gross profit margin
17%
Net profit (before tax) margin
6.30%
Current ratio
1.6:1
Closing inventory holding period
46 days
Trade receivables collection period
45 days
Trade payables' payment period
55 days
Dividend yield
3.75%
Dividend cover
2 times

Super Cars Limited summarised financial statements for the year ended 31 December 2021 are as provided below: 

Statement of profit or loss for the year ended 31 December 2021
Sh."000"
Sh."000"
Revenue
20,000
Cost of sales
(17,250)
Gross profit
2,750
Operating expenses
(1,850)
900
Profit on disposal of plant
200
Finance cost
(100)
Profit before tax
1,000
Income tax expense
(250)
Profit for the period
750

Statement of financial position as at 30 December 2021
Sh."000"
Sh."000"
Non-current assets:
Property, plant and equipment
2,750
Current assets:
Inventory
1,250
Trade receivables
1,800
3,050
Total assets
5,800
Equity and liabilities:
Capital and reserves:
Ordinary shares of Sh.100 each

500
Retained earnings
1,900
2,400
Non-current liabilities:
8% debentures
1,000
Current liabilities:
Trade payables
2,150
Current tax
200
Bank overdraft
50
2,400
Total equity and liabilities
5,800

Additional information:
  1. Super Cars Limited received Sh.600,000 from the sale of plant that had a carrying amount of Sh.400,000 at the date of its sale. 
  2. The market price of Super Cars Limited's shares throughout the year averaged Sh.375 each. 
  3. There were no issues or redemption of shares or loans during the year. 
  4. Dividends paid during the year ended 31 December 2021 amounted to Sh.450,000, maintaining the same dividend paid in the year ended 31 December 2020. 

Required: 
(a) With reference to the industry ratios, compute the equivalent ratios for Super Cars Limited for the year ended 31 December 2021.

 (b) Using the ratios computed in (a) above, analyse the financial performance and position of Super Cars Limited for the year ended 31 December 2021 compared to the industry. 


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December 2021

 3 Questions
Question 3c
​ ​​ The following are extracts of financial statements from the books of Zawadi Ltd.:

 Extracts of the income statement for the year ended 30 April:​​

2020
2021
Sh."000"
Sh."000"
Sales revenue
476,200
701,800
Cost of sales (approximates purchases)
(372,388)
(583,898)
Gross profit
103,812
117,902
Administrative expenses
(21,962)
(30,692)
Distribution costs
(23,800)
(33,450)
Finance costs
(7,200)
(10,800)
Profit before tax
50,850
42,960

Extracts of the statement of financial position as at 30 April:
2020
2021
Sh."000"
Sh."000"
Non-current assets:
Property, plant and equipment
888,140
1,777,500
Intangible assets
130,000
104,000
1,018,140
1,881,500
Current assets:
Inventories
81,000
81,400
Trade receivables
95,240
175,450
Cash and cash equivalents
60,455
78,650
236,695
335,500
Current liabilities:
Trade payables
111,715
204,365
Current tax payable
68,120
92,635
179,835
297,000

Assume a 365-day financial year. 

Required:
 Analyse and interpret the performance and efficiency of the company for the two years ended 30 April 2020 and 2021 using: 

(i) Gross profit margin. 

(ii) Return on capital employed. 

(iii) Inventory turnover period. 

(iv) Trade receivables collection period. 

(v) Trade payables payment period.


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Question 3b
​​Summarise four attributes of good financial statement analysis.


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Question 3a
​​Various analytical tools are today utilised in financial statements analysis. Some of these tools include: 

  • Ratio analysis. 
  • Trend analysis. 
  • Common size financial statements. 

Required: 
In the context of the statement above, describe how each of the above tools is utilised in practice.


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