Identifying Opportunities from a Client’s Financial Statements – Level 2 Feedback

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1. What is the correct calculation of the Working Capital Funding Gap Days?

Creditors Turnover Days x (Stock Turnover Days / Debtors Turnover Days) Creditors Turnover Days – (Stock Turnover Days + Debtors Turnover Days) (Stock Turnover Days – Debtors Turnover Days) x Creditors Turnover Days Growth in Stock Turnover Days – Growth in Creditors Turnover Days

2. Which one of the following statements is NOT true in terms of a specific client’s working capital on their financial statements?

Increased costs during peak seasons may necessitate additional working capital, while reduced demand during off-seasons can decrease capital needs Longer production cycles require more working capital, whereas an efficient, shorter cycle enables faster production and reduces working capital requirements It is more cost effective and less risky for a company to always fund short-term working capital requirements with long-term funding Working capital funding can assist a company in enabling business continuity, and could include an overdraft, short-term loans, or short-term revolving credit facilities

3. Which one of the following calculations is correct regarding the Equity in the Statement of Financial Position?

Equity = Total Assets minus Total Liabilities Equity = Total Assets plus Total Liabilities Equity = Total Liabilities minus Total Assets Equity = Total Income minus Total Expenses

4. Which one of the following definitions is NOT correct regarding elements included in the Financial Statements?

Assets are resources controlled by the entity, as a result of past events, from which future economic benefits are expected to flow to the entity Liabilities are obligations of the entity, arising from past transactions or events, which is expected to lead to an outflow of economic benefits from the entity Income is an increase in economic benefits during the accounting period in the form of an inflow of assets or decrease in liabilities, resulting in an increase in equity Expenses are an increase in economic benefits during the accounting period in the form of an outflow of assets or increase in liabilities, resulting in an increase in equity

5. Which one of the following statements is NOT true in terms of potential opportunities to be identified from liquidity and cash management?

A company with a high Operating Profit (Profit before Income and Tax) would not need bridging finance, since the high profit will always translate to high cash flows A company with a high Current Ratio, but with a high level of Accounts Receivable, might need short-term funding while awaiting customer payment The Cash Sufficiency Ratio indicates the adequacy of a company’s cash flows, as well as its ability to meet its commitment to the providers of capital while purchasing the needed assets If a company has substantial cash flow but poor liquidity, it may need better cash management solutions rather than additional fixed credit

6. Which one of the following statements is true regarding potential opportunities to be identified from inefficiencies identified in a company’s Statement of Comprehensive Income (Income Statement)?

Profitability ratios could include the Current Ratio, Quick Ratio and Operating Profit Margin A bank could offer a loan to upgrade manufacturing equipment to a company who suffers from increasing operational costs due to inefficiencies in operations A low or declining profit margin indicates that a company is investing heavily in obtaining long-term asset finance to improve efficiency in the future Banks could identify very little opportunities from profitability ratios, as profitability ratios are calculated with profits and not with cash flow

7. Which one of the following statements is NOT true in terms of potential opportunities to be identified from year-on-year trends?

Consistent or rapid revenue growth without a corresponding increase in profitability may suggest that the company is expanding too quickly without proper financial control A rapidly expanding company that needs help with inventory management could benefit from a working capital loan specifically tailored to manage inventory purchases Significant fixed asset growth might indicate expansion efforts and the company could benefit from tailored financing solutions such as equipment loans Year-on-year revenue growth is calculated as: (previous year line item x by current year line item) / current year line item

8. Which one of the following statements is NOT true regarding some other opportunities that can be identified from financial statements?

Industry-specific challenges, as well as macroeconomic changes, could also provide opportunities Comparing the company’s financial ratios with industry benchmarks can reveal competitive strengths or weaknesses In a rising interest rate environment, companies might seek variable rate loans, while in a falling interest rate environment, companies might seek fixed rate loans By understanding how broader economic conditions impact the client’s business, bankers can anticipate future needs