Deck 15: Financial Statement Analysis

Question 1

Which of the ratios listed helps to indicate the ability of the company to meet its current obligations?

A) Current ratio
B) Profit margin
C) Debt-to-equity
D) Return on assets

Answer 1

A

Question 2

Saw Ltd's inventory at 30 June 2018 was $20 000. Sales for the year ended 30 June 2018 were $125 000 and the gross margin was 20 per cent. What was the inventory turnover?

A) 1.25 times p.a.
B) 5 times p.a.
C) 5.25 times p.a.
D) None of the above

Answer 2

B

Question 3

Which of the following could explain an increase in the gross margin ratio?

A) A decrease in interest rates
B) A decrease in prices of raw materials
C) A decrease in depreciation on a delivery vehicle
D) An increase in advertising expenses

Answer 3

B

Question 4

Which of the following would NOT decrease the return on equity ratio?

A) An increase in company income tax
B) Declaring a dividend
C) Increased cost of goods sold
D) Issue of shares

Question 5

Sales of Slider Ltd are $250 million and the operating profit after tax is $25 million. Asset turnover is 4 times p.a. What is the value of Slider Ltd's total assets?

A) $6.25 million
B) $10 million
C) $62.5 million
D) $100 million

Question 6

The financial records of Del Ltd reveal the following at 30 June 2019: What was the number of days' inventory on hand?

A) 80 days
B) 90 days
C) 121.7 days
D) 133.8 days

Question 7

The operating profit after tax of Calculus Ltd is $10 million and sales are $100 million. Asset turnover is 1.25 times p.a. What is Calculus Ltd's ROA?

A) 10 per cent
B) 12.5 per cent
C) 20 per cent
D) None of the above

Question 8

Which of the following could NOT lead to an increase in debtors' turnover?

A) Receipt of cash from debtors
B) Increase in selling price of goods
C) Tighter credit controls
D) Increase in cash sales

Question 9

Tomlin Ltd's accounts receivable for year ended 31 December 2019 was $200 000. The number of days in receivables was 146 days. What were the credit sales for the year?

A) $80 000
B) $300 000
C) $500 000
D) This cannot be determined from the information provided

Question 10

Which of the following is NOT true of common size statements?

A) All balance sheet figures are expressed as a percentage of shareholders' equity.
B) All figures in the income statement are expressed as a percentage of sales.
C) Common size statements enable trends over time for a single company to be detected.
D) Common size statements assist in comparing companies of different sizes.

Question 11

Which of the following could NOT explain an increase in the return on equity ratio?

A) Share buyback
B) Declaring a final dividend
C) Increase in gross profit
D) Purchase of land on credit

Question 12

Which of the following statements about the profit margin is NOT true?

A) The profit margin indicates the percentage of sales revenue that ends up as profit.
B) If gross margin increases, the profit margin must increase.
C) If the asset turnover ratio remains constant and the profit margin increases, return on assets must have increased.
D) If the sales price decreases and expenses stay consistent, the profit margin will decrease.

Question 13

The inventory of Dyer Ltd for year ended 31 December 2018 was $70 000. The number of days' inventory on hand was 91.25. What was the cost of goods sold for the year?

A) $140 000
B) $259 000
C) $280 000
D) None of the above

Question 14

The financial records of Del Ltd reveal the following at 30 June 2019: What was the number of days' sales in receivables?

A) 60.8 days
B) 90 days
C) 120 days
D) None of the above

Question 15

Which of the ratios listed helps to indicate pricing strategy?

A) Current ratio
B) Profit margin
C) Asset turnover
D) Return on assets

Question 16

Which of the ratios listed helps to indicate the average profit on each dollar of sales?

A) Current ratio
B) Profit margin
C) Gross margin
D) Return on assets

Question 17

Alda Ltd's accounts receivable for year ended 30 June 2019 was $150 000. Cost of goods sold was $382 500 and the gross margin was 15 per cent. All sales are made on credit. What was the accounts receivable turnover?

A) 2.55 times p.a.
B) 2.93 times p.a.
C) 2.8 times p.a.
D) 3 times p.a.

Question 18

Alda Ltd's accounts receivable for year ended 30 June 2019 was $150 000. Cost of goods sold was $382 500 and the gross margin was 15 per cent. All sales are made on credit. What was the number of days' sales in receivables?

A) 121.7 days
B) 143.1 days
C) 260.4 days
D) 301.4 days

Question 19

Which of the ratios listed helps to indicate whether current liabilities could be paid without having to sell the inventory?

A) Current ratio
B) Profit margin
C) Quick ratio
D) Debt to equity

Question 20

Saw Ltd's inventory at 30 June 2018 was $20 000. Sales for the year ended 30 June 2018 were $125 000 and the gross margin was 20 per cent. What was the number of days' inventory on hand?

A) 50 days
B) 64 days
C) 69.5 days
D) 73 days

Question 21

Which of the following could explain a substantial increase in the current ratio (presently 1:1)?

A) Purchase of inventory for cash
B) Sale of a major noncurrent asset near year-end
C) A large prepayment near year-end
D) A cash deposit received for work to be done next year

Question 22

The following question relates to PQR, which has the following ratios: return on assets, (ROA) 12 per cent; return on equity (ROE) 15 per cent; and current ratio (CR) of 1.8:1. A company declares and pays a final dividend. The effect of this transaction is to:

A) decrease CR but not affect ROA and ROE.
B) decrease CR but increase ROA and ROE.
C) decrease CR, increase ROA and not affect ROE.
D) have no effect.

Question 23

Which of the following could explain a decrease in the quick ratio?

A) Issue of share capital
B) A change in the depreciation method used
C) Slow-moving inventory
D) Increase in accounts payable

Question 24

The following question relates to PQR, which has the following ratios: return on assets, (ROA) 12 per cent; return on equity (ROE) 15 per cent; and current ratio (CR) of 1.8:1. Additional credit sales of $2 million (cost price $1.5 million) are made. This transaction will:

A) increase ROA, ROE and CR.
B) increase ROA and ROE but not CR.
C) increase ROA and CR but not ROE.
D) increase ROA and ROE but decrease CR.

Question 25

The following question relates to PQR, which has the following ratios: return on assets, (ROA) 12 per cent; return on equity (ROE) 14 per cent; and current ratio (CR) of 1.8:1. The company changed accounting methods by deciding to capitalise rather than expense a research and development outlay. This will:

A) increase ROE, but have no effect on ROA and CR.
B) increase ROA, ROE and CR.
C) increase ROA and ROE but have no effect on CR.
D) have no effect on ROA, ROE or CR.

Question 26

A company's current ratio is presently 2:1. Which of the following transactions would decrease that ratio?

A) Depreciation of plant and equipment
B) Purchase of inventory on credit
C) Payment of accounts payable
D) Receive payment from accounts receivable

Question 27

The following question relates to PQR, which has the following ratios: return on assets, (ROA) 12 per cent; return on equity (ROE) 14 per cent; and current ratio (CR) of 1.8:1. The company purchased raw materials on credit for $400 000. This transaction will:

A) decrease ROA, ROE and CR.
B) decrease ROA and CR, but not ROE.
C) decrease ROA only.
D) have no effect.

Question 28

The following question relates to PQR, which has the following ratios: return on assets, (ROA) 12 per cent; return on equity (ROE) 15 per cent; and current ratio (CR) of 1.8:1. A customer provides a deposit of $500 000 near year-end. The product will not be delivered until next year. This transaction will:

A) increase ROA and ROE but decrease CR.
B) increase ROA and ROE but have no effect on CR.
C) decrease CR but have no effect on ROA or ROE.
D) decrease ROA and CR but have no effect on ROE.

Question 29

Chicago Ltd is a large retailer of hardware equipment that sells its products through a network of suburban stores. Shown below are the calculation of some of its key ratios for 2019 and 2018. Which of the above ratios explains why ROA has decreased from 2018 to 2019?

A) Profit Margin
B) Asset Turnover
C) Current Ratio
D) Debt to Equity Ratio

Question 30

The following question relates to PQR, which has the following ratios: return on assets, (ROA) 10 per cent; return on equity (ROE) 12 per cent; and current ratio (CR) of 1.8:1. Directors decided to revalue land upwards by $350 000. This transaction will:

A) increase ROA and ROE.
B) decrease ROA and ROE.
C) decrease ROA but have no effect on ROE.
D) have no effect.

Question 31

Good credit control is signalled by:

A) high accounts receivable turnover and high days sales in receivables.
B) low accounts receivable turnover and low days sales in receivables.
C) low accounts receivable turnover and high days sales in receivables.
D) high accounts receivable turnover and low days sales in receivables.