Deck 7: Interpreting Financial Statements

Question 1

Ratio analysis can interpret performance against several criteria, including:

A) Profitability, assets and cash flows
B) Profitability, liquidity and gearing
C) Liquidity, Debt and Equity
D) Profits, Debt and Equity

Answer 1

Profitability, liquidity and gearing

Question 2

The difference between ROI and ROCE ratios is due to:

A) Interest, tax and long-term debt
B) Tax and shareholders' funds
C) Long-term debt and shareholders' funds
D) Interest and long-term debt

Answer 2

Interest, tax and long-term debt

Question 3

Gross margin is

A) The difference between sales and cost of goods sold
B) Gross profit as a percentage of sales
C) Operating profit as a percentage of sales
D) The difference between gross profit and operating profit

Answer 3

Gross profit as a percentage of sales

Question 4

Sales in 2014 were £4,000,000 and in the previous year £3,750,000. Sales growth is closest to:

A) 106.25%
B) 106.7%
C) 6.25%
D) 6.7%

Question 5

Use the following information extracted from ABC's Income Statement and Balance Sheet to answer questions:Sales £4,200,000; Gross profit £2,700,000; Receivables £630,000; Payables £275,000; Inventory £300,000. ABC calculates its financial ratios based on being open for business 6 days per week for 50 weeks per year

-ABC's days' sales outstanding were:

A) 40
B) 45
C) 50
D) 55

Question 6

Use the following information extracted from ABC's Income Statement and Balance Sheet to answer questions:Sales £4,200,000; Gross profit £2,700,000; Receivables £630,000; Payables £275,000; Inventory £300,000. ABC calculates its financial ratios based on being open for business 6 days per week for 50 weeks per year

-ABC's inventory turn was:

A) 5
B) 7
C) 9
D) 14

Question 7

Use the following information extracted from ABC's Income Statement and Balance Sheet to answer questions:Sales £4,200,000; Gross profit £2,700,000; Receivables £630,000; Payables £275,000; Inventory £300,000. ABC calculates its financial ratios based on being open for business 6 days per week for 50 weeks per year

-ABC's days' payables outstanding were:

A) 30
B) 45
C) 50
D) 55

Question 8

Use the following information to answer questions.The Balance Sheet of MNO Company shows current assets of £1,250,000; current liabilities of £900,000; non-current assets of £2,400,000; and long-term debt of £750,000.

-Shareholders' funds are:

A) £3,650,000
B) £1,650,000
C) £2,000,000
D) £1,000,000

Question 9

Use the following information to answer questions.The Balance Sheet of MNO Company shows current assets of £1,250,000; current liabilities of £900,000; non-current assets of £2,400,000; and long-term debt of £750,000.

-The working capital ratio is closest to:

A) 192%
B) 139%
C) 120%
D) 110%

Question 10

Use the following information to answer questions.The Balance Sheet of MNO Company shows current assets of £1,250,000; current liabilities of £900,000; non-current assets of £2,400,000; and long-term debt of £750,000.

-The gearing ratio is closest to:

A) 45%
B) 37%
C) 27%
D) 20%

Question 11

Use the following information to answer questions.The Balance Sheet of MNO Company shows current assets of £1,250,000; current liabilities of £900,000; non-current assets of £2,400,000; and long-term debt of £750,000.

-Total capital employed is:

A) £1,650,000
B) £2,000,000
C) £2,750,000
D) £3,650,000

Question 12

A company has capital employed of €1,000,000 and generates a profit after tax of €300,000. The change in return on investment between a Balance Sheet with 60% debt and one with 40% debt is:

A) From 75% to 50%
B) From 50% to 75%
C) From 60% to 43%
D) From 43% to 60%

Question 13

A business has current assets of $35,000 and current liabilities of $20,000. It collects its receivables more quickly and uses $10,000 of its cash at bank to repay a long-term debt. The effect on the working capital ratio after the long-term debt is repaid is to:

A) Increase from 175% to 250%
B) Increase from 175% to 350%
C) Decrease from 175% to 150%
D) Decrease from 175% to 125%

Question 14

Used the following information to answer Questions.XYZ Ltd is listed on the London Stock Exchange. On 30th June the market price for each its one million shares was £2.50. The company's profit after tax was £600,000 and the directors had paid dividends of 40 pence per share.

-The dividend yield is closest to:

A) 6%
B) 10%
C) 16%
D) 26%

Question 15

Used the following information to answer Questions.XYZ Ltd is listed on the London Stock Exchange. On 30th June the market price for each its one million shares was £2.50. The company's profit after tax was £600,000 and the directors had paid dividends of 40 pence per share.

-The dividend payout ratio is closest to:

A) 33.3%
B) 60%
C) 65%
D) 66.7%

Question 16

Used the following information to answer Questions.XYZ Ltd is listed on the London Stock Exchange. On 30th June the market price for each its one million shares was £2.50. The company's profit after tax was £600,000 and the directors had paid dividends of 40 pence per share.

-The price/earnings (P/E) ratio is closest to:

A) 4.2
B) 5.5
C) 6.0
D) 7.2

Question 17

An increase in return on capital employed may be the result of

A) Higher net profit after tax and/or lower shareholders' funds
B) Higher net profit after tax and/or lower capital employed
C) Higher operating profit before interest and tax and/or lower shareholders' funds
D) Higher operating profit before interest and tax and/or lower capital employed

Question 18

A decrease in gross margin may best be explained by:

A) Lower overhead expenses
B) Higher overhead expenses
C) Lower selling prices
D) Lower cost of goods sold

Question 19

An improvement in the acid test (or quick ratio) can best be explained by:

A) Higher levels of payables
B) Reduced levels of receivables
C) Reduced levels of inventory
D) Higher levels of inventory

Question 20

An improvement in the interest cover ratio may be best explained by:

A) Reduced debt alone
B) Reduced interest rates alone
C) Reduced debt and/or reduced interest rates
D) Reduced debt and/or reduced interest rates and/or increased profits

Question 21

If asset turnover increases, this is an indicator that:

A) Non-current assets are being sold
B) Sales have increased
C) Non-current assets are being used more efficiently to generate sales
D) Profits have increased

Question 22

An increase in dividend yield is most likely to be caused by:

A) Increased profits
B) Increased earnings per share
C) Increased market value per share
D) Decreased market value per share

Question 23

The Statement of Cash Flows would identify:

A) Repayments of long-term debt
B) Investments in new plant and equipment
C) Dividends paid to shareholders
D) All of the above

Question 24

The 'triple bottom line' refers to:

A) Income Statement, Balance Sheet and Statement of Cash Flows
B) Economic, social and environmental performance
C) Economic/rational, interpretive and critical perspectives
D) Assets, debt and equity