WorksheetsFA - Ch-20) Ratio (Interpretation of Financial Statements)
Total questions: 30
Worksheet time: 46mins
Which one of the following would help a company with high gearing to reduce its gearing ratio?
Making a rights issue of equity shares
Issuing further long-term loan notes
Making a bonus issue of shares
Paying dividends on its equity shares
A company's gross profit as a percentage of sales increased from 24% in the year ended 31 December 20X1 to 27% in the year ended 31 December 20X2.
Which of the following events is most likely to have caused the increase?
An increase in sales volume
A purchase in December 20X1 mistakenly being recorded as happening in January 20X2
Overstatement of the closing inventory at 31 December 20X1
Understatement of the closing inventory at 31 December 20X1
From the following information regarding the year to 31 August 20X6, what is the accounts payable payment period?
You should calculate the ratio using purchases as the denominator.
40 days
50 days
53 days
57 days
Which of the following transactions would result in an increase in capital employed?
Selling inventory at a profit
Writing off a bad debt
Paying a payable in cash
Increasing the bank overdraft to purchase a non-current asset
Which of the following is a ratio which is used to measure how much a business owes in relation to its size?
Asset turnover
Profit margin
Gearing
Return on capital employed
A business operates on a gross profit margin of 331/3%. Gross profit on a sale was $800, and expenses were $680.
What is the net profit margin?
3.75%
5%
11.25%
22.67%
The industry the company operates in has a current ratio norm of 1.8. Companies who manage liquidity well in this industry have a current ratio lower than the norm.
Which of the following statements accurately describes the company’s liquidity position?
Liquidity appears to be well managed as the bank overdraft is relatively low
Liquidity appears to be poorly-controlled as shown by the large payables balance
Liquidity appears to be poorly-controlled as shown by the company’s relatively high current ratio
Liquidity appears to be poorly-controlled as shown by the existence of a bank overdraft
Why is analysis of financial statements carried out?
So that the analyst can determine a company’s accounting policies
So that the significance of financial statements can be better understood through comparisons with historical performance and with other companies
To get back to the ‘real’ underlying figures, without the numbers being skewed by the requirements of International Financial Reporting Standards
To produce a report that can replace the financial statements, so that the financial statements no longer need to be looked at
What is the acid test ratio of Edward Co given the information below?
EDWARD CO TRIAL BALANCE (EXTRACT)
1.13:1
1.40:1
1.35:1
1.26:1
After proposing a final dividend, Kenilworth Co has a current ratio of 2.0 and a quick ratio of 0.8.
If the company now uses its positive cash balance to pay that final dividend, what will be the effect upon these two ratios?
Increase current ratio and decrease quick ratio
Increase current ratio and increase quick ratio
Decrease current ratio and decrease quick ratio
Decrease current ratio and increase quick ratio
Thatch plc's current ratio this year is 1.33:1 compared to that of 1.25:1 last year. Which of the following would be possible explanations?
1 Thatch made an unusually large sale immediately prior to the year end.
2 Thatch paid its payables earlier than usual out of a bank overdraft.
3 Thatch made an unusually large purchase of goods for cash immediately prior to the year end and these goods remain in inventory.
4 Thatch paid its payables earlier than usual out of a positive cash balance.
1 and 2 only
1 and 3 only
1 and 3 only
1 and 4 only
Analysis of the statement of financial position of Charon for the year ended 20X9 reveals the following relationships:
Current ratio 2:1
Sales: current assets - 5:1
Acid test ratio - 1.5:1
If the sales for the year were $30 million, what is the value of inventory that will appear in the statement of financial position?
$1.5m
$10.5m
$3.0m
$4.5m
Which of the following statements is correct?
Xena’s liquidity and working capital has improved in 20X9
Xena is receiving cash from customers more quickly in 20X9 than in 20X8
Xena is suffering from a worsening liquidity position in 20X9
Xena is taking longer to pay suppliers in 20X9 than in 20X8
The following figures are taken from the statement of financial position of GEN Co.
Bank loan repayable in 5 years time What is the current ratio?
1.33
2.00
1.00
0.33
Financial analysts calculate ratios from the published financial statements of large companies. Which one of the following reasons is UNLIKELY to be a reason why they calculate and analyze financial ratios?
Ratios can reduce lengthy or complex financial statements into a fairly small number of more easily-understood indicators.
Ratios can indicate whether a business is at serious risk of insolvency.
Ratios can help with comparisons between businesses in the same industry.
Ratios can indicate changes in the financial performance and financial position of a business over time.
A company’s quick ratio has increased from 0.9:1 at 31 December 20X1 to 1.5:1 at 31 December 20X2.
Which of the following events could explain this increase?
Improved inventory control
The refinancing of a long-term loan
A reduction in payables
An increase in payables
If the current ratio for a company is equal to its quick ratio, which of the following statements is true?
The current ratio must be greater than one.
The company does not carry any inventory.
Receivables plus cash is greater than payables minus inventories.
Working capital is positive.
Based on this information, what is Razil's sales revenue for the year?
$982,800
$1,090,000
$2,520,000
$1,080,000
The gross profit percentage of sales is 40%.
What is the sales revenue for the year?
$1,333,500
$1,587,500
$2,381,250
The sales revenue is impossible to calculate from this information.
An electrical store and a cake shop both have the same mark up on cost. However, the gross profit margin of the electrical store is significantly higher than that of the cake shop.
Which of the following is a possible reason for this?
The cake shop has a higher turnover of inventory than the electrical store.
The electrical store takes advantage of trade-discounts for bulk buying.
The cake shop has a higher level of wastage of inventory than the electrical store.
The cake shop's revenue is increasing, while that of the electrical store is decreasing
The following are types Of key performance indicators (KPIS):
(i) Return on capital employed
(ii) Gross profit percentage
(iii) Acid test ratio
(ivy Gearing ratio
Which of the above KPIs would be used to assess the liquidity Of a company?
(i) and (ii)
(iii) only
(iv) only
(iii) and (iv)
Why would a company want to encourage the use of non-financial performance
indicators?
TO encourage short-termism
To look at the fuller picture of the business
To enable results to be easily manipulated to the benefit of the manager
To prevent goal congruence
The following extracts relate to Company X and Company Y for 20Xl Revenue 20,000 26,000
Cost of sales (15,400 (21,050)
Gross profit 4,600 4,900
Expenses 2,460 2,770
Operating profit 2,140 2,180
What is the operating profit margin for companies for 20XI?
10.7%,8.38%
8.38%,10.7%
23%,19%
12%,10%
Companies A and B are both involved in retailing.
ended 30 September 20X1 was as follows:
Relevant information for the year
Sales revenue- 50,000 2,00,000
Profit- 10,000 10,000
Capital employed- 50,000 50,000
Which Of the following statements is true?
The profit margin of both companies is the same
Company B is generating more profit from every $1 Of asset employed than Company A
Company B is using its assets more efficiently
Company B is controlling its costs better than Company A
The trading account Of Calypso for the year ended 30 June 20XO is set out below:
Sales
Opening inventories-50,000
Purchases-312,500
Closing inventories-312,500
Cost of sales-312,500
Gross profit-105,500
The following amounts have extracted from the company'S statement Of financial
position at 30 June 20XO.
Trade receivables-60,000
Prepayments-4,000
Cash in hand-6,000
Bank overdraft-8,000
Trade payables-40,000
Accruals-3,000
Declared dividends-5,000
Which one of the following correctly gives the inventories holding period (using average
inventories) and the current ratio for Calypso Ltd for the period?
33 days,1.25:1
49 days,1.25:1
49 days,1.93:1
33 days,1.93:1
Binny Co has annual sales of and a current ratio of 3.2:1. All of its sales are for
cash and are priced at a mark-up on cost Of 50%. The average cash balance is $40,000 and
the inventory holding period is 90 days.
Assuming 360 days in a year, what is Binny CO's quick ratio (acid test ratio)?
0.64
0.53
0.80
1.56
The following information is available for Pind CO. a manufacturing company. You are
provided with an extract from the Statement Of Profit or Loss:
Operating profit-42,000
Interest charges-(16,000)
Profit before tax-26,000
Taxation-(5,460)
20,540
Pind Co has an operating profit margin of 15%. You are provided with an extract from its
Statement of Financial Position:
Equity and reserves
Total equity and reserves-420,000
Non.current liabilities
Loan-150,000
5% Preference shares-40,000
Current liabilities
Payables-50,000
Which TWO Of the following statements are correct?
1.A reduction in the tax rate will improve the interest cover ratio.
2.If the level of long term debt in Pind Co is reduced, the interest cover and
dividend cover ratios will improve.
3.If the level of long term debt in Pind Co is reduced, the asset turnover ratio will
improve.
4.Financial gearing is a measure of risk, but interest cover is a measure of
profitability.
(1) and (2)
(2) and (3)
(3) and (4)
(1) and (4)
Which TWO Of the following statements are correct?
1. A reduction in the tax rate will improve the interest cover ratio.
2. If the level of long term debt in Pind Co is reduced, the interest cover and
dividend cover ratios will improve.
3. If the level of long term debt in Pind Co is reduced, the asset turnover ratio will
improve,
4. Financial gearing is a measure of risk, but interest cover is a measure of
profitability.
(1) and (2)
(2) and (3)
(3) and (4)
(1) and (4)
Pind co has a current ratio Of 1.5 and a quick ratio Of 0.9.
If cash in the bank is used to pay some Of the payable, what will be the effect on the
current and quick ratios?
Increase,Increase
Increase,Decrease
Decrease,Increase
Decrease,Decrease
Which of the following statement(s) is/are true?
If the turnover of Pind Co increased by 20%, the asset turnover would increase
by 20%.
If Pind co has a different depreciation policy to its competitors, the asset
turnover ratio will not be comparable.
(1) only
(2) only
Both (1) and (2)
Neither (I) nor (2)
