6. CPA Financial Accounting & Reporting Module 6

An entity wishes to increase its return on investment (ROI). Which of the following courses of action will help to achieve this in the short term?

• A Increase sales
• Issue ordinary shares
• Revalue land and buildings
• Increase the level of dividends paid to equity shareholders

The following information relates to M at 31 December 20X3: Trade receivables 80,000 Current asset investments (cash on deposit) 10,000 Trade payables 75,000 Bank overdraft 100,000 The entity has decided to take the following steps to reduce the overdraft. 1. Inventory with a book value of $8000 will be sold at a loss of $2000. 2. Customers will be offered a cash discount of 10 per cent for immediate payment. Customers owing amounts with a total book value of $20 000 are expected to take advantage of this offer. In return, the entity's bankers have agreed to make a loan of $40 000, which will be used immediately to purchase new machinery. The loan will be repayable in five equal instalments, the first of which falls due on 31 December 20X4. Assuming that all the above transactions take place on 31 December 20X3, what is the revised quick (acid test) ratio on that date?

• 0.39:1
• 0.44:1
• 0.46:1
• 0.51:1

Z has a current ratio of 1.5, a quick ratio of 0.4 and a positive cash balance. If it purchases inventory on credit, what is the effect on these ratios?

• Current ratio: Increase - Quick ratio: Increase
• Current ratio: Decrease - Quick ratio: Increase
• Current ratio: Increase - Quick ratio: decrease
• Current ratio: decrease - Quick ratio: decrease

KL has the following capital and reserves at 31 December 20X9: Ordinary shares 300,000 8% irredeemable preference shares 100,000 Retained earnings 150,000 Total 550,000 KL also had $200 000 10 per cent loan notes on issue throughout the year. Retained profit for the year was $20 000 after paying the preferred dividend and an ordinary dividend of $7500. What was the return on equity for the year ended 31 December 20X9?

• 5.0 per cent
• 6.1 per cent
• 6.7 per cent
• 9.2 per cent

The accounting ratios of ABC are very similar to the average ratios for the industry in which it operates. ABC has an average operating profit margin of 24 per cent and an average asset turnover of 0.9. This entity is likely to be:

• A an architect.
• a food retailer.
• a manufacturer.
• an insurance broker.

An entity has the following capital structure. Ordinary shares 100 000 10% Redeemable preference shares 50 000 Retained earnings 80 000 TOTAL: 230 000 12% loan notes 100 000 TOTAL: 330 000 What is the gearing ratio?

• A 30.3 per cent
• 43.5 per cent
• 45.5 per cent
• 83.3 per cent

X's asset turnover is very low compared with that of its main competitor. What could be the reason for this?

• A X has a smaller proportion of productive assets than its competitor.
• X has recruited a number of additional production staff during the year.
• X embarked on a major program of capital investment towards the end of the previous year.
• X carries its non-current assets at historic cost, while its competitor carries them at current value.

The following information relates to an entity. Credit sales for the year ended 31 December $5,600,000 Credit purchases for the year ended 31 December 20X6 $4,500,000 Trade receivables at 31 December 20X6 $690,000 Trade payables at 31 December 20X6 $250,000 The entity's cash cycle has been calculated at 105 days. How much inventory did the entity hold at 31 December 20X6 (to the nearest thousand dollars)?

• A $493 000
• $614 000
• $986 000
• $1 227 000

Information from the statement of financial position of MNO has been expressed as percentages of total assets less current liabilities: Land and property 78 Other non-current assets 19 Inventories and work in progress – Trade receivables 459 Cash/short-term investments 89 TOTAL = 645 Bank overdraft (5) Trade payables (540) Total assets less current liabilities 100 In which of the following industries could MNO be operating?

• Retailing
• House building
• Manufacturing
• Insurance broking

ST, UV and WX are listed entities operating in the same business sector. At 31 October 20X6, their P/E ratios were reported as follows: ST 16.2 UV 12.7 WX 8.4 Which of the following statements about these P/E ratios is correct? The P/E ratios suggest that

• A ST has the highest earnings per share of the three entities.
• ST is regarded by the market as the riskiest of the three entities.
• UV represents the safest investment because its P/E lies approximately midway between the other two.
• WX's share price may be relatively lower than that of ST and UV because of an adverse effect such as a profit warning.