Institute of Chartered Accountants of Nigeria (ICAN) Exam 1

Explanation: The book value per share is calculated as follows: Book Value per Share=Total Assets−Total Liabilities−Preferred StockNumber of Common Shares Outstanding\text{Book Value per Share} = \frac{\text{Total Assets} - \text{Total Liabilities} - \text{Preferred Stock}}{\text{Number of Common Shares Outstanding}}Book Value per Share=Number of Common Shares OutstandingTotal Assets−Total Liabilities−Preferred Stock​

Book Value per Share=₦1,500,000−₦600,000−₦100,000100,000=₦800,000100,000=₦8\text{Book Value per Share} = \frac{₦1,500,000 - ₦600,000 - ₦100,000}{100,000} = \frac{₦800,000}{100,000} = ₦8Book Value per Share=100,000₦1,500,000−₦600,000−₦100,000​=100,000₦800,000​=₦8

Explanation: The additional paid-in capital is calculated as follows: $\text{Additional Paid-in Capital}=(\text{Issue Price}-\text{Par Value})\times \text{Number of Shares Issued}$

$\text{Additional Paid-in Capital}=(₦25-₦20)\times 10,000=₦5\times 10,000=₦50,000$

Explanation: Earnings per share (EPS) is calculated as follows: EPS=Net Income−Preferred DividendsWeighted Average Common Shares Outstanding\text{EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Average Common Shares Outstanding}}EPS=Weighted Average Common Shares OutstandingNet Income−Preferred Dividends​

EPS=₦500,000−₦50,000100,000=₦450,000100,000=₦4.50\text{EPS} = \frac{₦500,000 - ₦50,000}{100,000} = \frac{₦450,000}{100,000} = ₦4.50EPS=100,000₦500,000−₦50,000​=100,000₦450,000​=₦4.50

Explanation: The operating profit margin is calculated as follows: Operating Profit Margin=Operating ProfitNet Sales×100\text{Operating Profit Margin} = \frac{\text{Operating Profit}}{\text{Net Sales}} \times 100Operating Profit Margin=Net SalesOperating Profit​×100

First, calculate the operating profit: $\text{Operating Profit}=\text{Net Sales}-\text{Cost of Goods Sold}-\text{Operating Expenses}=₦900,000-₦600,000-₦200,000=₦100,000$

Operating Profit Margin=₦100,000₦900,000×100≈11.11%\text{Operating Profit Margin} = \frac{₦100,000}{₦900,000} \times 100 \approx 11.11\%Operating Profit Margin=₦900,000₦100,000​×100≈11.11%

Explanation: Retained earnings at the end of the period is calculated as follows: $\text{Ending Retained Earnings}=\text{Beginning Retained Earnings}+\text{Net Income}-\text{Dividends Paid}$

$\text{Ending Retained Earnings}=₦1,000,000+₦700,000-₦100,000=₦1,600,000$

Explanation: The present value of the bonds is calculated using the present value of annuities and the present value of a lump sum formula. The interest payments are an annuity, and the face value is a lump sum. The present value can be calculated as follows:

Present Value=(∑(Interest Payment(1+Market Rate)t))+(Face Value(1+Market Rate)n)\text{Present Value} = \left( \sum \left( \frac{\text{Interest Payment}}{(1 + \text{Market Rate})^t} \right) \right) + \left( \frac{\text{Face Value}}{(1 + \text{Market Rate})^n} \right)Present Value=(∑((1+Market Rate)tInterest Payment​))+((1+Market Rate)nFace Value​)

Interest Payment (annuity) = ₦2,000,000 \times 8% = ₦160,000

Market Rate = 10%

Present Value=(∑t=15(₦160,000(1+0.10)t))+(₦2,000,000(1+0.10)5)\text{Present Value} = \left( \sum_{t=1}^{5} \left( \frac{₦160,000}{(1 + 0.10)^t} \right) \right) + \left( \frac{₦2,000,000}{(1 + 0.10)^5} \right)Present Value=(∑t=15​((1+0.10)t₦160,000​))+((1+0.10)5₦2,000,000​)

Present Value=(₦160,0001.10+₦160,0001.21+₦160,0001.331+₦160,0001.4641+₦160,0001.61051)+(₦2,000,0001.61051)\text{Present Value} = \left( \frac{₦160,000}{1.10} + \frac{₦160,000}{1.21} + \frac{₦160,000}{1.331} + \frac{₦160,000}{1.4641} + \frac{₦160,000}{1.61051} \right) + \left( \frac{₦2,000,000}{1.61051} \right)Present Value=(1.10₦160,000​+1.21₦160,000​+1.331₦160,000​+1.4641₦160,000​+1.61051₦160,000​)+(1.61051₦2,000,000​)

$\text{Present Value}=\left(₦145,454.55+₦132,231.40+₦120,170.95+₦109,246.32+₦99,314.75\right)+₦1,241,071.75$

$\text{Present Value}=₦1,811,489.72\approx ₦1,811,800$

Explanation: Operating profit is calculated as follows: $\text{Operating Profit}=\text{Revenue}-\text{Cost of Goods Sold}-\text{Operating Expenses}$

$\text{Operating Profit}=₦900,000-₦500,000-₦250,000=₦150,000$

Explanation: The inventory turnover ratio is calculated as follows: Inventory Turnover Ratio=Cost of Goods SoldAverage Inventory\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}Inventory Turnover Ratio=Average InventoryCost of Goods Sold​

Inventory Turnover Ratio=₦900,000₦300,000=3.0\text{Inventory Turnover Ratio} = \frac{₦900,000}{₦300,000} = 3.0Inventory Turnover Ratio=₦300,000₦900,000​=3.0

Explanation: Cash collected from customers is calculated as follows: $\text{Cash Collected}=\text{Sales}-(\text{Ending Accounts Receivable}-\text{Beginning Accounts Receivable})$

$\text{Cash Collected}=₦400,000-(₦90,000-₦70,000)=₦400,000-₦20,000=₦380,000$

Explanation: Retained earnings at the end of the period is calculated as follows: $\text{Ending Retained Earnings}=\text{Beginning Retained Earnings}+\text{Net Income}-\text{Dividends Paid}$

$\text{Ending Retained Earnings}=₦1,200,000+₦600,000-₦100,000=₦1,700,000$

Explanation: The ending retained earnings is calculated as follows: $\text{Ending Retained Earnings}=\text{Beginning Retained Earnings}+\text{Net Income}-\text{Dividends Declared}$

$\text{Ending Retained Earnings}=₦300,000+₦80,000-₦50,000=₦330,000$

Explanation: The current ratio is calculated as follows: Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}Current Ratio=Current LiabilitiesCurrent Assets​

Rearranging to solve for current assets: $\text{Current Assets}=\text{Current Ratio}\times \text{Current Liabilities}$

$\text{Current Assets}=2.5\times ₦200,000=₦500,000$

Explanation: To find the amount of inventory purchased during the year, we use the inventory equation: $\text{Beginning Inventory}+\text{Purchases}-\text{Ending Inventory}=\text{Cost of Goods Sold}$

Rearranging to solve for purchases: $\text{Purchases}=\text{Cost of Goods Sold}+\text{Ending Inventory}-\text{Beginning Inventory}$

$\text{Purchases}=₦200,000+₦30,000-₦50,000=₦220,000$

Explanation: The carrying amount of the bonds at issuance is calculated as follows: $\text{Carrying Amount}=\text{Face Value}-\text{Discount}$

$\text{Carrying Amount}=₦1,000,000-(₦1,000,000\times 10\%)=₦1,000,000-₦100,000=₦900,000$

Explanation: The interest coverage ratio is calculated as follows: Interest Coverage Ratio=EBITInterest Expense\text{Interest Coverage Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}}Interest Coverage Ratio=Interest ExpenseEBIT​

Rearranging to solve for EBIT: $\text{EBIT}=\text{Interest Coverage Ratio}\times \text{Interest Expense}$

$\text{EBIT}=5\times ₦40,000=₦200,000$

Explanation: The accounts receivable turnover ratio is calculated as follows: Accounts Receivable Turnover Ratio=Total SalesAverage Accounts Receivable\text{Accounts Receivable Turnover Ratio} = \frac{\text{Total Sales}}{\text{Average Accounts Receivable}}Accounts Receivable Turnover Ratio=Average Accounts ReceivableTotal Sales​

Accounts Receivable Turnover Ratio=₦1,000,000₦75,000=13.33≈14\text{Accounts Receivable Turnover Ratio} = \frac{₦1,000,000}{₦75,000} = 13.33 \approx 14Accounts Receivable Turnover Ratio=₦75,000₦1,000,000​=13.33≈14

Explanation: Operating income is calculated as follows: $\text{Operating Income}=\text{Total Revenue}-\text{Cost of Goods Sold}-\text{Administrative Expenses}-\text{Selling Expenses}$

$\text{Operating Income}=₦750,000-₦450,000-₦100,000-₦50,000=₦150,000$

Explanation: The gross profit margin is calculated as follows: Gross Profit Margin=Gross ProfitNet Sales×100\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Net Sales}} \times 100Gross Profit Margin=Net SalesGross Profit​×100

First, calculate net sales and gross profit: $\text{Net Sales}=\text{Total Sales}-\text{Sales Returns}=₦1,200,000-₦100,000=₦1,100,000$

$\text{Gross Profit}=\text{Net Sales}-\text{Cost of Goods Sold}=₦1,100,000-₦600,000=₦500,000$

Gross Profit Margin=₦500,000₦1,100,000×100≈45.5%\text{Gross Profit Margin} = \frac{₦500,000}{₦1,100,000} \times 100 \approx 45.5\%Gross Profit Margin=₦1,100,000₦500,000​×100≈45.5%

Explanation: Net income is calculated as follows: $\text{Net Income}=\text{Net Sales}-\text{Cost of Goods Sold}-\text{Operating Expenses}-\text{Income Tax Expense}$

$\text{Net Income}=₦600,000-₦400,000-₦120,000-₦24,000=₦56,000$

Explanation: Operating income is calculated as follows: $\text{Operating Income}=\text{Gross Profit}-\text{Operating Expenses}$

$\text{Operating Income}=₦200,000-₦100,000=₦100,000$

Explanation: The quick ratio is calculated as follows: Quick Ratio=Quick AssetsCurrent Liabilities\text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}}Quick Ratio=Current LiabilitiesQuick Assets​

Quick assets include cash and accounts receivable (exclude inventory): $\text{Quick Assets}=\text{Cash}+\text{Accounts Receivable}=₦60,000+₦80,000=₦140,000$

$\text{Current Liabilities}=\text{Accounts Payable}+\text{Short-term Notes Payable}=₦70,000+₦50,000=₦120,000$

Quick Ratio=₦140,000₦120,000=1.17≈1.2\text{Quick Ratio} = \frac{₦140,000}{₦120,000} = 1.17 \approx 1.2Quick Ratio=₦120,000₦140,000​=1.17≈1.2

Explanation: The contribution margin ratio is calculated as follows: Contribution Margin Ratio=Sales−Variable CostsSales×100\text{Contribution Margin Ratio} = \frac{\text{Sales} - \text{Variable Costs}}{\text{Sales}} \times 100Contribution Margin Ratio=SalesSales−Variable Costs​×100

Contribution Margin Ratio=₦1,200,000−₦720,000₦1,200,000×100=₦480,000₦1,200,000×100=40%\text{Contribution Margin Ratio} = \frac{₦1,200,000 - ₦720,000}{₦1,200,000} \times 100 = \frac{₦480,000}{₦1,200,000} \times 100 = 40\%Contribution Margin Ratio=₦1,200,000₦1,200,000−₦720,000​×100=₦1,200,000₦480,000​×100=40%

Explanation: The inventory turnover ratio is calculated as follows: Inventory Turnover Ratio=Cost of Goods SoldAverage Inventory\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}Inventory Turnover Ratio=Average InventoryCost of Goods Sold​

Inventory Turnover Ratio=₦600,000₦150,000=4.0\text{Inventory Turnover Ratio} = \frac{₦600,000}{₦150,000} = 4.0Inventory Turnover Ratio=₦150,000₦600,000​=4.0

Explanation: The times interest earned ratio is calculated as follows: Times Interest Earned Ratio=EBITInterest Expense\text{Times Interest Earned Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}}Times Interest Earned Ratio=Interest ExpenseEBIT​

First, calculate EBIT: $\text{EBIT}=\text{Total Sales}-\text{Cost of Goods Sold}-\text{Operating Expenses}$

$\text{EBIT}=₦2,000,000-₦1,200,000-₦500,000=₦300,000$

Times Interest Earned Ratio=₦300,000₦100,000=3\text{Times Interest Earned Ratio} = \frac{₦300,000}{₦100,000} = 3Times Interest Earned Ratio=₦100,000₦300,000​=3

Explanation: The current ratio is calculated as follows: Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}Current Ratio=Current LiabilitiesCurrent Assets​

$\text{Current Assets}=\text{Cash}+\text{Accounts Receivable}+\text{Inventory}=₦50,000+₦70,000+₦80,000=₦200,000$

$\text{Current Liabilities}=\text{Accounts Payable}+\text{Short-term Notes Payable}=₦60,000+₦40,000=₦100,000$

Current Ratio=₦200,000₦100,000=2.0\text{Current Ratio} = \frac{₦200,000}{₦100,000} = 2.0Current Ratio=₦100,000₦200,000​=2.0

Explanation: Operating income is calculated as follows: $\text{Operating Income}=\text{Total Revenue}-\text{Cost of Goods Sold}-\text{Operating Expenses}$

$\text{Operating Income}=₦1,800,000-₦1,200,000-₦400,000=₦160,000$

Explanation: The amount of dividends paid is calculated as follows: $\text{Dividends Paid}=\text{Dividend Payout Ratio}\times \text{Net Income}$

$\text{Dividends Paid}=30\%\times ₦600,000=₦180,000$

Explanation: The break-even point in sales revenue is calculated as follows: Break-Even Point=Fixed Costs1−Variable CostsSales\text{Break-Even Point} = \frac{\text{Fixed Costs}}{1 - \frac{\text{Variable Costs}}{\text{Sales}}}Break-Even Point=1−SalesVariable Costs​Fixed Costs​

Break-Even Point=₦250,0001−₦600,000₦1,000,000=₦250,0001−0.6=₦250,0000.4=₦625,000\text{Break-Even Point} = \frac{₦250,000}{1 - \frac{₦600,000}{₦1,000,000}} = \frac{₦250,000}{1 - 0.6} = \frac{₦250,000}{0.4} = ₦625,000Break-Even Point=1−₦1,000,000₦600,000​₦250,000​=1−0.6₦250,000​=0.4₦250,000​=₦625,000

Explanation: Additional paid-in capital is the amount received from shareholders in excess of the par value of the shares. $\text{Additional Paid-In Capital}=(\text{Issue Price}-\text{Par Value})\times \text{Number of Shares}$

$\text{Additional Paid-In Capital}=(₦15-₦10)\times 10,000=₦5\times 10,000=₦50,000$

Explanation: The straight-line method of depreciation is calculated as follows: Annual Depreciation Expense=Cost of Asset+Installation Cost−Residual ValueUseful Life\text{Annual Depreciation Expense} = \frac{\text{Cost of Asset} + \text{Installation Cost} - \text{Residual Value}}{\text{Useful Life}}Annual Depreciation Expense=Useful LifeCost of Asset+Installation Cost−Residual Value​

Annual Depreciation Expense=₦500,000+₦20,000−₦50,00010=₦470,00010=₦47,000\text{Annual Depreciation Expense} = \frac{₦500,000 + ₦20,000 - ₦50,000}{10} = \frac{₦470,000}{10} = ₦47,000Annual Depreciation Expense=10₦500,000+₦20,000−₦50,000​=10₦470,000​=₦47,000

Explanation: Net sales are calculated as follows: $\text{Net Sales}=\text{Total Sales}-\text{Sales Returns and Allowances}-\text{Sales Discounts}$

$\text{Net Sales}=₦800,000-₦50,000-₦20,000=₦730,000$

Explanation: Total shareholders' equity is calculated as follows: $\text{Total Shareholders’ Equity}=\text{Total Assets}-\text{Total Liabilities}$

$\text{Total Shareholders’ Equity}=₦2,500,000-₦1,000,000=₦1,500,000$

Explanation: The straight-line method of depreciation spreads the cost of the asset evenly over its useful life. The formula is: Annual Depreciation Expense=Cost of Asset−Residual ValueUseful Life\text{Annual Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Residual Value}}{\text{Useful Life}}Annual Depreciation Expense=Useful LifeCost of Asset−Residual Value​

Annual Depreciation Expense=₦1,200,000−₦200,0005=₦1,000,0005=₦200,000\text{Annual Depreciation Expense} = \frac{₦1,200,000 - ₦200,000}{5} = \frac{₦1,000,000}{5} = ₦200,000Annual Depreciation Expense=5₦1,200,000−₦200,000​=5₦1,000,000​=₦200,000

Explanation: The cash received is calculated as follows: $\text{Cash Received}=\text{Total Sales}-(\text{Total Sales}\times \text{Discount Rate})$

$\text{Cash Received}=₦1,200,000-(₦1,200,000\times 2\%)=₦1,200,000-₦24,000=₦1,176,000$

Explanation: The accounts receivable turnover ratio is calculated as follows: Accounts Receivable Turnover Ratio=SalesAverage Accounts Receivable\text{Accounts Receivable Turnover Ratio} = \frac{\text{Sales}}{\text{Average Accounts Receivable}}Accounts Receivable Turnover Ratio=Average Accounts ReceivableSales​

Since there is no information about beginning accounts receivable, we assume the ending accounts receivable to be the average. Accounts Receivable Turnover Ratio=₦1,000,000₦100,000=10 times\text{Accounts Receivable Turnover Ratio} = \frac{₦1,000,000}{₦100,000} = 10 \text{ times}Accounts Receivable Turnover Ratio=₦100,000₦1,000,000​=10 times

Explanation: The debt-to-equity ratio is calculated as follows: Debt-to-Equity Ratio=Total LiabilitiesTotal Equity\text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}}Debt-to-Equity Ratio=Total EquityTotal Liabilities​

Debt-to-Equity Ratio=₦300,000₦500,000=0.60\text{Debt-to-Equity Ratio} = \frac{₦300,000}{₦500,000} = 0.60Debt-to-Equity Ratio=₦500,000₦300,000​=0.60

Explanation: Earnings per share (EPS) is calculated as follows: EPS=Net IncomeNumber of Common Shares Outstanding\text{EPS} = \frac{\text{Net Income}}{\text{Number of Common Shares Outstanding}}EPS=Number of Common Shares OutstandingNet Income​

EPS=₦800,000100,000=₦8\text{EPS} = \frac{₦800,000}{100,000} = ₦8EPS=100,000₦800,000​=₦8

Explanation: The straight-line method of amortization spreads the premium evenly over the life of the bond. Annual Amortization=PremiumLife of Bond\text{Annual Amortization} = \frac{\text{Premium}}{\text{Life of Bond}}Annual Amortization=Life of BondPremium​

Annual Amortization=₦1,200−₦1,0005=₦2005=₦40\text{Annual Amortization} = \frac{₦1,200 - ₦1,000}{5} = \frac{₦200}{5} = ₦40Annual Amortization=5₦1,200−₦1,000​=5₦200​=₦40

Explanation: The book value per share is calculated as follows: Book Value per Share=Total Assets−Total Liabilities−Preferred StockNumber of Common Shares Outstanding\text{Book Value per Share} = \frac{\text{Total Assets} - \text{Total Liabilities} - \text{Preferred Stock}}{\text{Number of Common Shares Outstanding}}Book Value per Share=Number of Common Shares OutstandingTotal Assets−Total Liabilities−Preferred Stock​

Book Value per Share=₦3,000,000−₦1,200,000−₦400,000200,000=₦1,400,000200,000=₦7\text{Book Value per Share} = \frac{₦3,000,000 - ₦1,200,000 - ₦400,000}{200,000} = \frac{₦1,400,000}{200,000} = ₦7Book Value per Share=200,000₦3,000,000−₦1,200,000−₦400,000​=200,000₦1,400,000​=₦7

Explanation: The net profit margin is calculated as follows: Net Profit Margin=Net IncomeTotal Revenue×100\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Total Revenue}} \times 100Net Profit Margin=Total RevenueNet Income​×100

First, calculate the net income: $\text{Net Income}=\text{Total Revenue}-\text{Cost of Goods Sold}-\text{Operating Expenses}-\text{Income Tax Expense}$

$\text{Net Income}=₦1,500,000-₦900,000-₦300,000-₦60,000=₦240,000$

Net Profit Margin=₦240,000₦1,500,000×100≈16%\text{Net Profit Margin} = \frac{₦240,000}{₦1,500,000} \times 100 \approx 16\%Net Profit Margin=₦1,500,000₦240,000​×100≈16%