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Worksheets6. CPA Financial Accounting & Reporting Module 6
Total questions: 25
Worksheet time: 2hrs 5mins
Name
Class
Date
1.
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)
A Increase sales
b)
Issue ordinary shares
c)
Revalue land and buildings
d)
Increase the level of dividends paid to equity shareholders
2.
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?
a)
0.39:1
b)
0.44:1
c)
0.46:1
d)
0.51:1
3.
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?
a)
Current ratio: Increase - Quick ratio: Increase
b)
Current ratio: Decrease - Quick ratio: Increase
c)
Current ratio: Increase - Quick ratio: decrease
d)
Current ratio: decrease - Quick ratio: decrease
4.
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?
a)
5.0 per cent
b)
6.1 per cent
c)
6.7 per cent
d)
9.2 per cent
5.
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)
A an architect.
b)
a food retailer.
c)
a manufacturer.
d)
an insurance broker.
6.
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)
A 30.3 per cent
b)
43.5 per cent
c)
45.5 per cent
d)
83.3 per cent
7.
X's asset turnover is very low compared with that of its main competitor. What could be the reason for this?
a)
A X has a smaller proportion of productive assets than its competitor.
b)
X has recruited a number of additional production staff during the year.
c)
X embarked on a major program of capital investment towards the end of the previous year.
d)
X carries its non-current assets at historic cost, while its competitor carries them at current value.
8.
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)
A $493 000
b)
$614 000
c)
$986 000
d)
$1 227 000
9.
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?
a)
Retailing
b)
House building
c)
Manufacturing
d)
Insurance broking
10.
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)
A ST has the highest earnings per share of the three entities.
b)
ST is regarded by the market as the riskiest of the three entities.
c)
UV represents the safest investment because its P/E lies approximately midway between the other two.
d)
WX's share price may be relatively lower than that of ST and UV because of an adverse effect such as a profit warning.
11.
GG Co has the following balances in its financial statements:
Receivables 158 000
Inventories 20 000
Short-term investments 18 000
Trade payables 61 000
Bank overdraft 64 000
Income tax payable 10 000
Deposits received in advance 5 000
What is the quick ratio of GG Co given the information in the table?
a)
1.13:1
b)
1.26:1
c)
1.35:1
d)
1.40:1
12.
A reduction in which of the following items will result in an increase in the length of a company’s cash cycle?
a)
Receivables collection period
b)
Inventory holding period
c)
Payables payment period
d)
Time taken to produce goods
13.
In the year to 31 December 20X9 BK Co pays an interim equity dividend of 3.4c per share and declares a final equity dividend of 11.1c. It has 5 million $1 shares in issue and the ex div share price is $3.50. What is the dividend yield?
a)
0.04
b)
0.24
c)
0.032
d)
0.041
14.
SS Co has an asset turnover of 2.0 and an operating profit margin of 10%. It is launching a new product which is expected to generate additional sales of $1.6 million and additional profit of $120,000. It will require additional assets of $500,000. Assuming there are no other changes to current operations, how will the new product affect operating profit margin and return on investment (ROI)?
a)
Operating profit margin: Increase - Return on investment (ROI): Increase
b)
Operating profit margin: Decrease - Return on investment (ROI): Increase
c)
Operating profit margin: Increase - Return on investment (ROI): Decrease
d)
Operating profit margin: Decrease - Return on investment (ROI): Decrease
15.
TH Co carries its property at revalued amount. Property values have fallen during the current period and an impairment loss has been recognised on the property, however its carrying amount is still higher than its depreciated historical cost. Assuming there are no other changes to current operations, how will the impairment affect the return on investment (ROI) and gearing ratios of TH?
a)
Return on investment (ROI): Increase - Gearing: Increase
b)
Return on investment (ROI): Decrease - Gearing: Increase
c)
Return on investment (ROI): Increase - Gearing: Decrease
d)
Return on investment (ROI): Decrease - Gearing: Decrease
16.
Which of the following is a possible reason why a company's inventory holding period increases from one year to the next?
a)
An increase in demand for its products
b)
A reduction in selling prices
c)
Obsolete inventory lines
d)
Seasonal fluctuations in orders
17.
Which of the following measures will not reduce the level of a company’s gearing?
a)
Renegotiating a loan to secure a lower interest rate
b)
Treating a lease as a short-term rental agreement
c)
Repaying a loan just before the year end and taking it out again at the beginning of the next year
d)
Selling' an asset under a sale and leaseback agreement
18.
JF Co's return on capital employed has deteriorated as compared to the previous year. Which of the following choices is not a possible reason for this decline?
a)
The company revalued its properties which resulted in a significant increase in the carrying value as compared to three years ago.
b)
Towards the end of the current year JF made major investments in plant and machinery financed by interest-bearing borrowing.
c)
JF issued $1 million 10% loan notes to redeem $1 million redeemable preference shares at par.
d)
Asset turnover has reduced as compared to the previous year.
19.
19 Analysis of the statement of financial position of DC Co. reveals the following ratios:
Current ratio 2:1
Revenue: current assets 5:1
Acid-test ratio 1.5:1
If revenue for the year was $30 million, what is the value of inventory that will appear in the statement of financial position?
a)
$1.5m
b)
$3.0m
c)
$4.5m
d)
$10.5m
20.
What would be the immediate effect on an entity's P/E ratio and dividend yield of an announcement which caused a substantial rise in the share price?
a)
P/E ratio: Increase - Dividend yield: Increase
b)
P/E ratio: Decrease - Dividend yield: Increase
c)
P/E ratio: Increase - Dividend yield: Decrease
d)
P/E ratio: Decrease - Dividend yield: Decrease
21.
Which of the following ratios would be the least appropriate to calculate for a supermarket?
a)
Gross margin
b)
Receivable days
c)
Payable days
d)
Return on investment
22.
RT Co. has an operating profit margin of 8% in 20X9 compared with 5% in 20X8. Which of the following might explain this increase?
a)
RT Co. increased its sales during the year, by offering better discounts to its customers.
b)
RT Co. moved to an out-of-town office location where rent and employment costs were lower than they were in 20X8.
c)
Year end market research focused on public awareness of the company's product range indicates that the brands contained in closing inventory are more likely to sell this year than last.
d)
RT Co. restructured its long-term finance during 20X9, managing to reduce its finance cost.
23.
Which of the following ratios would best assess the efficiency of a manufacturing company?
a)
P/E ratio
b)
Gearing
c)
Non-current asset turnover
d)
Current ratio
24.
Which ratio does the following statement relate to? 'This ratio is a measure of the market's confidence in the future of an entity.'
a)
Dividend yield
b)
Earnings per share
c)
Return on capital employed
d)
P/E ratio
25.
Which of the following is not a valid limitation of ratio analysis of published financial statements?
a)
Published financial statements contain estimates such as depreciation.
b)
There are no prior year figures to compare to current year figures.
c)
Accounting policies may vary between companies, making comparisons difficult.
d)
D The nature and character of a business may change over time, making strictly numerical comparisons misleading.
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