Deck 15: Financial Statement Analysis

Question 1

What was the number of days' inventory on hand?

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

Answer 1

A

Question 2

If Del Ltd reduces the number of days' inventory on hand to 60,what will be the new inventory turnover?

A) 3 times p.a.
B) 6 times p.a.
C) 12 times p.a.
D) 9 times p.a.

Answer 2

B

Question 3

Which of the following statements about the interest coverage ratio is not true?

A) The interest coverage ratio is calculated as (earnings before interest and tax)/ (interest expense).
B) The interest coverage ratio indicates the degree to which commitment to pay interest on debts is covered by the company's ability to generate profit.
C) A low coverage ratio may be a warning of solvency problems.
D) A high interest coverage ratio indicates the company is not operating at sufficient profitability levels.

Answer 3

D

Question 4

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 5

What was the number of days' sales in receivables?

A) 121.7 days
B) 143.1 days
C) it cannot be determined from the information provided
D) 301.4 days.

Question 6

What was the accounts receivable turnover?

A) 2.93 times p.a.
B) 2.55 times p.a.
C) it cannot be determined from the information provided
D) 3 times p.a.

Question 7

What was the number of days' sales in receivables?

A) 60.8 days
B) 90 days
C) 120 days
D) 8 times.

Question 8

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 profits
D) a write down in the value of land that reverses a previous revaluation increment.

Question 9

Good credit control is signalled by:

A) high debtors turnover and high days' sales in debtors
B) low debtors turnover and low days' sales in debtors
C) low debtors turnover and high days' sales in debtors
D) high debtors turnover and low days' sales in debtors.

Question 10

What was the number of days' inventory on hand?

A) 73 days
B) 69.5 days
C) it cannot be calculated from the information provided
D) 50 days.

Question 11

Which of the following statements about earnings per share (EPS)is NOT true?

A) Accounting standards require it to be disclosed in every set of accounts.
B) EPS is calculated as: (net operating profit - dividends on preference shares)/ (weighted average number of ordinary shares outstanding).
C) EPS relates the accounting earnings and market price of the shares.
D) The ratio can be difficult to calculate for consolidated companies.

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) The profit margin gives some indication of pricing strategy or competition intensity.
C) A supermarket would be expected to have a high profit margin.
D) The profit margin is a useful measure of performance.

Question 13

Tomlin Ltd's average accounts receivable for year ended 31 December 2012 was $200 000.The number of days in receivables was 146 days.What were the credit sales for the year?

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

Question 14

Which of the following would NOT adversely affect return on equity?

A) an increase in company income tax
B) transfers from retained profits to general reserve
C) reduced margins in an aggressive market place
D) a decrease in operating profit.

Question 15

What was the inventory turnover?

A) 5.25 times p.a.
B) 5 times p.a.
C) it cannot be calculated from the information provided
D) 1.25 times p.a.

Question 16

Which of the following statements concerning the price-to-earnings (PE)ratio is NOT true?

A) The PE ratio is calculated as: (current market price per share)/ (dividend payout ratio).
B) High-PE companies are those that are popular.
C) The PE ratio compares present performance with expectations of future performance.
D) A company with a low price PE ratio is expected to show reduced future performance.

Question 17

The average inventory of Dyer Ltd for year ended 31 December 2012 was $70 000.The number of days' inventory on hand was 91.25 days.What was the cost of goods sold for the year?

A) $259 000
B) $280 000
C) it cannot be determined from the information provided
D) $140 000.

Question 18

Which of the following statements about a ratio is NOT true?

A) A ratio has little meaning on its own.
B) A ratio is always expressed as a percentage.
C) A ratio can be interpreted and used meaningfully only with a good understanding of the company.
D) Ratios are indicators that can be interpreted.

Question 19

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

A) a decrease in bad debts
B) decreasing prices of raw materials
C) a decrease in depreciation on a delivery vehicle
D) increasing advertising expenses.

Question 20

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

A) All balance sheet figures are expressed as a percentage of total assets.
B) All figures in the income statement are expressed as a percentage of operating profit before tax.
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 21

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

A) current ratio
B) profit margin
C) quick ratio
D) return on assets.

Question 22

What is the effect on the inventory turnover ratio?

A) It increases.
B) It decreases.
C) There is no effect.
D) It cannot be determined from the information provided.

Question 23

What is the immediate effect of the loan on current net profit?

A) There is a decrease of $75 000.
B) There is no immediate effect.
C) It cannot be determined from the information provided.
D) There is an increase of $75 000.

Question 24

What is the effect on ROE?

A) It increases.
B) It decreases.
C) It's not effected.
D) It cannot be determined from the information provided.

Question 25

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) return on assets

Question 26

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.

Question 27

Which of the ratios listed helps to indicate whether a company has enough short-term assets to cover its short-term liabilities?

A) current ratio
B) profit margin
C) debt-to-equity
D) return on assets.

Question 28

Which of the following statements about the debt-to-equity ratio is NOT true?

A) A high ratio indicates that the company is highly geared.
B) From a creditor's point of view,a higher measure is desirable.
C) The debt-to-equity ratio indicates the proportion of borrowing to owners' investment.
D) The debt-to-equity ratio shows the degree of risk borne by the creditors vis-à-vis the shareholders.

Question 29

What is the current ratio following the loan?

A) 0.818
B) 1.125
C) it cannot be determined from the above information
D) 0.1125.

Question 30

If Del Ltd reduces the number of days' sales in receivables to 37.5,what will be the new accounts receivable turnover?

A) 6 times p.a.
B) 9.7 times p.a.
C) 12 times p.a.
D) 8 times.

Question 31

What is the effect of the loan on the debt-to-equity ratio?

A) There is an increase.
B) There is a decrease.
C) There is no effect.
D) It cannot be determined from the information provided.

Question 32

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) 0.0125
B) 0.1
C) 0.125
D) 1.25.

Question 33

What is the effect of the loan on working capital?

A) There is no effect.
B) There is an increase of $75 000.
C) There is a decrease of $75 000.
D) It cannot be determined from the above information.

Question 34

Which of the ratios listed helps to indicate the efficiency with which the resources of the company are being utilised to generate profit?

A) current ratio
B) profit margin
C) quick ratio
D) return on assets.

Question 35

A high debt-to-equity ratio does NOT indicate that the company:

A) is highly geared
B) is heavily in debt relative to its equity
C) may be vulnerable to interest rate increases
D) has a high current ratio

Question 36

Which of the ratios listed helps to indicate the ability of a company to generate a return on its assets before considering the cost of financing those assets?

A) current ratio
B) profit margin
C) quick ratio
D) return on assets.

Question 37

Which of the ratios listed helps to indicate pricing strategy or competition intensity?

A) current ratio
B) profit margin
C) quick ratio
D) return on assets.

Question 38

Which of the following statements about the current ratio is NOT true?

A) The current ratio indicates whether the company has enough short-term assets to cover its short-term debts.
B) An extremely high ratio is always a favourable sign.
C) A ratio above 1 indicates that working capital is positive.
D) The current ratio is calculated as current assets divided by current liabilities.

Question 39

What is the effect on ROA,which was 0.2 prior to the change?

A) It increases.
B) It decreases.
C) There is no effect.
D) It cannot be determined from the information provided.

Question 40

What is the effect on the debt-to-equity ratio?

A) It increases.
B) It decreases.
C) There is no effect.
D) It cannot be determined from the information provided.

Question 41

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,increase ROE and decrease CR.

Question 42

Which of the following statements is true?

A) If the asset turnover ratio remains constant and the profit margin increases,return on assets must have increased.
B) If return on assets increases,return on equity must increase.
C) If the current ratio increases,the quick ratio will also increase.
D) If return on assets decrease return on equity will increase.

Question 43

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 44

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 45

Which of the following could NOT explain a substantial increase in the current ratio?

A) slow collection of debtors
B) sale of a major noncurrent asset near year-end
C) a large prepayment near year-end
D) a change from LIFO to FIFO.

Question 46

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 47

Directors decided to revalue land upwards by $200 000.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 48

A company declares and pays an interim 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 49

The company purchased raw materials on credit for $200 000.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 50

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

A) a change from FIFO to LIFO
B) a change in the depreciation method used
C) slow-moving inventory
D) increase in accounts payable