Deck 18: Financial Reporting: Segment Reporting, value Added Statements, highlights Statements and Future-Oriented Financial Information

Question 1

A business reports the following in its financial statements: $$\begin{array} { l r } \text { Net profit before tax } & \$ 100 \\\text { Interest expense } & 20 \\\text { Income tax expense } & 30 \\\text { Preference dividends paid } & 10 \\\text { Ordinary dividends paid } & 20 \\\text { Total assets at the beginning of the year } & 750 \\\text { Total assets at the end of the year } & 850 \\\text { Total liabilities at the beginning of the year } & 375 \\\text { Total liabilities at the end of the year } & 425\end{array}$$
Its 'times dividends earned' ratio is:

A) 12.0 times
B) 7.0 times
C) 3.0 times
D) both, or either, B and/or C

Answer 1

both, or either, B and/or C

Question 2

A business reports the following in its financial statements:
$$\begin{array} { l r } \text { Net profit before tax } & \$ 150 \\\text { Interest expense } & 20 \\\text { Income tax expense } & 30 \\\text { Total assets at the beginning of the year } & 700 \\\text { Total assets at the end of the year } & 850\end{array}$$ Its rate of return on total assets is:

A) 19.4%
B) 21.9%
C) 16.8%
D) 4.83%

Answer 2

21.9%

Question 3

A company reports the following in relation to its latest financial year:
$$\begin{array} { l r } \text { Current assets } & \$ 300 \\\text { Non-current assets } & 700 \\\text { Current liabilities } & 150 \\\text { Non-current liabilities } & 250 \\\text { Shareholders' equity } & 600\end{array}$$
If the company earns a net profit after tax in the following year of $40,all received in cash,and uses this cash to repay some of its non-current liabilities,and there are no other changes in its balance sheet,its total-debt-to-equity ratio will be:

A) unchanged
B) 36.0%
C) 56.25%
D) 34.6%

Answer 3

36.0%

Question 4

Which of the following is not a likely benefit of including a highlights statement in the annual report of a business?

A) It provides unskilled readers of the report with a simple summary of key financial indicators
B) The statement is regarded by many readers as being highly informative
C) Performance indicators can be calculated and then clearly set out in the highlights statement
D) Management can select what items are to be included in the report

Question 5

The 'current ratio' is usually calculated as:

A) current assets minus goodwill ÷ current liabilities
B) current assets ÷ current liabilities
C) current assets excluding inventory ÷ current liabilities
D) current liabilities ÷ current assets

Question 6

AASB 8 'Operating Segments' requires entities to report:

A) segments that correspond to internal management reports
B) segment information that is more consistent with other parts of their annual reports
C) more segment information in their interim financial statements
D) all of the above

Question 7

A business reports the following in its financial statements:
$$\begin{array} { l r } \text { Net profit before tax } & \$ 100 \\\text { Interest expense } & 20 \\\text { Income tax expense } & 30\end{array}$$ Its 'times interest earned' ratio is:

A) 6.0 times
B) 5.0 times
C) 3.5 times
D) 4.0 times

Question 8

When evaluating whether to calculate diluted earnings per share (EPS),a company issuing convertible notes should consider:

A) the time weighting factor
B) if the notes potentially convert to ordinary shares
C) if conversion of the notes is likely to increase earnings, or decrease losses, per share
D) both B and C must be considered

Question 9

Reporting by segments of a business is believed to have a number of disadvantages.Which of the following is not likely to be such a disadvantage?

A) Segment information may not be sufficiently reliable
B) The costs to a business of providing segment information may exceed the benefits to investors
C) Providing segment information may assist a business's competitors
D) Investors invest in a whole company and not in its individual segments

Question 10

Which of the following items need not be shown when reporting primary segment information for a business?

A) Segment results
B) Segment revenues
C) Segment receivables
D) Segment liabilities

Question 11

Henry James Ltd,a large retailing business,reports the following (all in $ millions):
$$\begin{array} { l r } \text { Cost of goods sold } & \$ 52.0 \\\text { Cost of services purchased } & 16.0 \\\text { Salaries and wages } & 12.0 \\\text { Interest expense } & 0.2 \\\text { Depreciation and amortisation } & 2.0 \\\text { Dividends paid } & 1.2 \\\text { Sales revenue } & 90.0\end{array}$$
The 'gross value added' for this business is:

A) $6.4
B) $10.0
C) $22.0
D) $38.0

Question 12

Reporting by segments of a business is believed to have a number of advantages.Which of the following is not likely to be such an advantage?

A) Allowing better assessment of expected returns from and risks of investing
B) Preventing management from hiding failures in decision making
C) Increasing the net profit of a business
D) Improving investors' decision making

Question 13

A company reports the following in relation to its latest financial year:
$$\begin{array} { l r } \text { Current assets } & \$ 175 \\\text { Non-current assets } & 300 \\\text { Current liabilities } & 50 \\\text { Non-current liabilities } & 250\end{array}$$ Writing a cheque for $25 to pay off some long-term debentures payable means that the current ratio will be:

A) 7.0 times
B) 3.0 times
C) unchanged
D) 5.5 times

Question 14

Under the provisions of Australian Accounting Standard AASB 133,a basic earnings per share is calculated as:

A) profit or loss including extraordinary items and after income tax expense ÷ weighted average number of ordinary shares outstanding during the reporting period
B) profit or loss excluding extraordinary items and before income tax expense ÷ weighted average number of ordinary shares outstanding during the reporting period
C) profit or loss including extraordinary items but before income tax expense ÷ weighted average number of ordinary shares outstanding during the reporting period
D) profit or loss before income tax expense ÷ weighted average number of ordinary shares outstanding during the reporting period

Question 15

A company reports the following in relation to the year ended 30/6/2012:
Number of ordinary shares issued at 1/7/2011 $\quad10 000$
Number of preference shares issued
(paying an annual dividend of $\$ 2.00$ per share) $\quad1800$
On $31 / 3 / 2012$ a further 1000 ordinary shares were issued.
Net profit from ordinary activities, after income tax $\quad \$ 20000$
The company's basic earnings per share figure (to the nearest tenth of a cent)is:

A) $1.95
B) $1.67
C) $2.00
D) $1.79

Question 16

'Value added' can best be defined as:

A) sales revenue less the cost of all bought-in materials and services and all wages and salaries
B) sales revenue less the cost of all bought-in materials and services
C) sales revenue less the cost of all bought-in materials and services, all wages and salaries and interest expense
D) sales revenue less the cost of all bought-in materials and services, all wages and salaries, interest expense and income tax expense

Question 17

A business reports the following in its financial statements:
$$\begin{array} { l r } \text { Net profit before tax } & \$ 100 \\\text { Interest expense } & 20 \\\text { Income tax expense } & 30 \\\text { Preference dividends paid } & 10 \\\text { Ordinary dividends paid } & 15 \\\text { Total assets at the beginning of the year } & 750 \\\text { Total assets at the end of the year } & 850 \\\text { Total liabilities at the beginning of the year } & 375 \\\text { Total liabilities at the end of the year } & 425\end{array}$$
Its rate of return on shareholders' equity is:

A) 11.25%
B) 15.0%
C) 7.5%
D) 22.5%

Question 18

According to paragraph 19 of AASB 8,after which number of reportable segments should an entity consider whether a practical limit has been reached?

A) 10
B) 15
C) 8
D) None of the above

Question 19

A company reports the following in relation to its latest financial year:
$$\begin{array} { l r } \text { Net profit } & \$ 12000 \\\text { Number of ordinary shares issued } & 5000 \\\text { Number of preference shares issued } & \\\text { (paying an annual dividend of } 50 \text { cents per share) } & 500\end{array}$$
The company's basic earnings per share figure is:

A) $2.00
B) $2.20
C) $2.10
D) $2.35

Question 20

Which of the following statements relating to AASB 8 is not true?

A) It adopts a management approach
B) It applies to all for profit entities
C) Reconciliations are required for revenues, profit and loss and other material items
D) None; all of the statements are true

Question 21

What benefits is an investor likely to gain if a business presents financial information for its various separate major organisational divisions and/or geographical areas of operations? Are there any likely costs (direct or indirect)to the investor from the presentation of this information?

Question 22

Many companies,especially larger companies,now include a highlights statement in their annual reports.What are the main items likely to be included in such a statement? What are the perceived benefits of giving this information? Also explain any possible disadvantages of publishing a highlights statement.

Question 23

Explain and illustrate,with simple examples,both the usefulness and any possible dangers in using the:
rate-of-return on total assets ratio
rate-of-return on equity ratio
times dividends earned ratio
Why are these described as 'efficiency ratios'?

Question 24

Discuss the benefits of the 'management approach' adopted by AASB 8.

Question 25

The presentation of future-oriented financial information in company annual reports:

A) is most helpful in monitoring management's stewardship function
B) should be set out so as to enable a comparison with actual results at the end of the year
C) is now required in most English-speaking countries
D) all of the above