Ratio Analysis

Ali has been asked to make a loan of $30,000 to Mudessar’s business. Ali has the money and is keen to earn more interest on his cash than he currently does.

Which TWO of the following areas of Mudessar’s financial statements should Ali consider before lending to Mudessar

• 1. Amount of existing debt

• Capital

• GP percentage

• Net profit percentage

Accounting ratios are most useful when each calculation is analysed separately

• True

• False

Lenders are most concerned with gearing and liquidity ratios.

• True

• False

Investors can use ratios to compare businesses to assess their relative profitability and stability.

• True

• False

Management tend to use profitability ratios only

• True

• False

Which of the following factors could cause a company’s gross profit percentage on sales to fall below the expected level?

1. 1) Overstatement of the opening inventory valuation

2. 2) The incorrect inclusion in purchases of invoices relating to goods received from suppliers in the following period

3. 3) The incorrect inclusion in sales of invoices relating to goods despatched to customers in the following period

4. 4) Increased discounts received from suppliers

• 1 and 2

• 1 and 3

• 2 and 4

• 3 and 4

Which of the following factors would cause a company’s gearing ratio to fall?

1.  1 for 1 bonus issue of ordinary shares

2. 1 for 2 rights issue of ordinary shares

3. An issue of loan notes

4. An upward revaluation of land and buildings

• 1 and 2

• 1 and 3

• 2 and 4

• 3 and 4

Which of the following could improve a company's gearing?

• A.Restructuring loans to obtain a lower interest rate

• B.Making a bonus issue of ordinary shares

• C.Revaluing property upwards

• D.Paying suppliers more quickly

Hassan’s business has the following liquidity ratios:

Inventory turnover period 63 days

Receivables days 48 days

Payables days 70 days

What is Hassan’s business’s operating cycle?

• A.181 days

• B.41 days

• C.55 days

• D.85 days

Purple Co has a gross profit margin of 25% compared with 35% last year.

What plausible reason might management of Purple Co give to explain the fall in gross profit margin?

• Sales have fallen from last year

• Prices of goods and services have increased but this has been passed on to customers

• 1. Selling prices have been reduced to encourage more sales to be made

• Competition in the market has fallen due to the failure of a rival business