Deck 25: Analysis and Interpretation of Financial Statements

Question 1

Why is interest added back to profit before tax when calculating the rate of return on total assets?

A)To reflect the fact that the efficient use of resources should be examined independently from the method of financing
B)Because it must be paid regardless of profits
C)Because interest rates are variable over time
D)To indicate to lenders that some risk is involved

Answer 1

A

Question 2

Mercer Company Ltd had a profit of $100 000 before tax,after deducting $16 000 in interest expense.Mercer's liabilities and equity total $1 000 000.Return on total assets,before finance costs and tax is:

A)8.4%
B)10.0%
C)11.0%
D)11.6%

Answer 2

D

Question 3

All of these ratios are indicators of profitability except:

A)Return on total assets
B)Earnings per share
C)Equity ratio
D)Profit margin

Answer 3

Equity ratio

Question 4

Dividend yield on ordinary shares is calculated as:

A)Market price/dividend per share
B)Dividend per share/market price per share
C)Annual dividend/earnings
D)Annual dividend/number of ordinary shares

Question 5

The profit margin ratio measures:

A)The rate of return on total assets
B)The difference between the purchase price and the selling price of inventory
C)The proportion of each sales dollar that represents profit
D)Return to shareholders

Question 6

Financial statements in which each item is stated as a percentage of some specific base item in the same statement are known as:

A)Comparative statements
B)Common size statements
C)General purpose statements
D)Base rate statements

Question 7

The quick ratio acid test ratio)reflects:

A)The belief that not all current assets can be liquidated immediately
B)The same information as the debt ratio
C)The relationship of quick assets to fixed assets
D)Management's reaction time to avoid losses

Question 8

World Consulting has the following data available: $$\begin{array} { l r } \text { Sales } & \$ 2000000 \\\text { Selling expenses } & 200000 \\\text { Profit } & 400000\end{array}$$ Using vertical analysis express selling expenses as a percentage of the base amount.

A)50%
B)20%
C)10%
D)12%

Question 9

How many of these ratios measure the adequacy of profits?
.Profit before interest and finance costs/ finance costs
.Profit compared to total assets
.Profit compared to sales
.Profit compared to equity

A)1
B)2
C)3
D)4

Question 10

A company has a current ratio of 3:1.Which action will decrease this ratio?

A)Issue of long-term debentures
B)Sale of equipment for cash
C)Declaration of a dividend
D)Collection of an account receivable

Question 11

When calculating the quick acid test)ratio which of these is normally deducted from current assets?

A)Inventory and accounts receivable
B)Cash and prepayments
C)Accounts receivable and inventory
D)Inventory and prepaid expenses

Question 12

The ratio which would be most helpful to an investor who is investing in ordinary shares primarily for dividends rather than for appreciation in market price,is:

A)Return on total assets
B)Dividend yield
C)Rate of return on ordinary equity
D)Current ratio

Question 13

Schultz Consultancy reports: $$\begin{array} { l r } \text { Total assets } & \$ 950000 \\\text { Profit } & 30000 \\\text { Current liabilities } & 285000\end{array}$$ If current assets = 60% of total assets Schultz's current ratio is:

A)1 to 2
B)3 to 2
C)2 to 1
D)2 to 3

Question 14

Financial stability refers to the ability of an entity to:

A)Earn a high rate of profit
B)Reduce expenses
C)Increase market share
D)Meet long-term obligations

Question 15

Kaplan has a current ratio of 2.5 to 1 and current liabilities of $12 000.If Kaplan has $9000 of inventory what is the quick ratio?

A)2.25 to 1
B)2.00 to 1
C)1.75 to 1
D)1.50 to 1

Question 16

Besides the information in annual reports how many of these are sources of financial information about companies which is useful for analysing their performance and financial position?
.The Internet
.The Stock Exchange
.Financial newspapers and journals
. Stock brokers
.Information on competitors

A)2
B)3
C)4
D)5

Question 17

Financial ratios are used for all of the following purposes except:

A)By taxation authorities to determine the amount of tax payable
B)By shareholders to assess profitability
C)By creditors to monitor liquidity
D)By management for planning and control

Question 18

The statement concerning the current working capital)ratio that is incorrect is: e.g.by using cash to pay off short-term debt

A)A low current ratio may indicate difficulty in meeting short-term commitments
B)A current ratio of $1.50 of current assets for each $1 of current liabilities should always be maintained
C)A high current ratio may indicate excessive investment in working capital
D)The current ratio can be manipulated at balance date,

Question 19

$\begin{array} { l c } & \text { Per share } \\\text { Carrying value on 31 Decem ber, current year } & \$ 16 \\\text { Quoted market value on 31 December, current year } & 12 \\\text { Earnings per share for the current year } & 4 \\\text { Dividend per share for the current year } & 2\end{array}$

-Which P/E ratios and earnings yields do not match?

A)P/E ratio 5; earnings yield 20%
B)P/E ratio 8; earnings yield 12.5%
C)P/E ratio 9; earnings yield 12 %
D)P/E ratio 10; earnings yield 10%

Question 20

Profit less income tax,divided by revenue,is the formula for:

A)Return on assets
B)Profit margin
C)Earnings per share
D)Return on equity

Question 21

Fricker's financial records reveal this information at 31 December 2014. $$\begin{array} { l c } \text { Net Sales for } 2014 & \$ 90000 \\\text { Cost of Sales for } 2014 & 60000 \\\text { Ending Inv entory } & 12500 \\\text { B eginning Inventory } & 17500\end{array}$$ The number of days taken to turn over average inventory for 2014 is:

A)91 days
B)71 days
C)76 days
D)61 days

Question 22

E___________ per share is the conversion of the absolute dollar amount of profit after tax to a per-share basis.

Question 23

How many of these are limitations of financial analysis?
I The past is an imperfect guide to the future
II The effect of inflation is not considered
III Undisclosed changes in accounting policies
IV Inconsistent classification

A)One
B)Two
C)Three
D)Four

Question 24

All of these are limitations of financial ratio analysis except:

A)Year-end data is not necessarily typical of the position during the year
B)It is past performance that is being analysed
C)Suitable yardsticks may not be available with which to compare results
D)Excessive information disclosed in company annual reports

Question 25

R____________ turnover is a measure of how many times average accounts receivables are converted into cash during the year.

Question 26

To be useful for decision-making ratio results need to be compared with other information to provide standards or y__________ against which to measure the results.

Question 27

Buyer Co has ordered goods on credit from Seller Co.Before Seller ships the goods it would like to be sure that Buyer will be able to pay for them within the normal credit period.Assuming Seller has access to Buyer's financial statements,in which of the following ratios will Seller be most interested?

A)Dividend yield ratio
B)Price earnings ratio
C)Debt ratio
D)Current ratio

Question 28

Of the following firms the one that would be expected to have the fastest inventory turnover is:

A)Used car lot
B)Jewellery store
C)Clothing store
D)Bakery

Question 29

The ________________ ratio is a more rigorous measure of short-term liquidity than the current ratio.

Question 30

An increase in the inventory turnover ratio is normally considered to be favourable but could be unfavourable if it means:

A)Inventory is less likely to become obsolete
B)Liquidity is greater
C)The firm not carrying enough inventory to meet its customer's needs
D)Storage costs of inventory are lower

Question 31

A high dividend payout ratio means that management is reinvesting a high/low_______ proportion of its profits internally.

Question 32

The r__________ on total assets is a profitability ratio calculated by the formula,profit before income tax and finance costs dividing by average total assets.

Question 33

Cash flows from operating activities divided by repayments of long-term borrowings + assets acquired + dividends paid)is the formula for:

A)Cash flow adequacy ratio
B)Repayment of long-term borrowing ratio
C)Debt coverage ratio
D)Operations index

Question 34

Financial stability refers to the ability of an entity to:

A)Improve sales
B)Meet its long-term obligations
C)Earn a high rate of profit
D)Pay its rent

Question 35

The statement relating to the debt ratio of a company that is not true is:

A)It can be calculated by relating liabilities to total funds
B)It is an indicator of a company's long-term solvency
C)It is a measure of the extent of a company's gearing
D)A higher level of debt is normally preferable from a creditor's point of view

Question 36

The incorrect statement is:

A)Fundamental analysis assumes that an analyst can study all the published information in relation to an entity and determine whether its shares are under/over-valued
B)Fundamental analysis assumes that an analyst should concentrate on studying data about an entity from a primary source and give little weight to secondary sources of information
C)Fundamental analysis is engaged in by many analysts
D)Fundamental analysis assumes that an analyst can study all the published information in relation to an entity and determine whether its shares are correctly valued

Question 37

This is Recker's Manufacturing's balance sheet at year-end. $$\begin{array} { l c } \text { Current assets } & \$ 200,000 \\\text { Long-term assets } & 400,000 \\\text { Current liabilities } & 50,000 \\\text { Long-term liabilities } & 100,000 \\\text { Share cap ital } & 200,000 \\\text { Retained earnings } & 250,000\end{array}$$ The equity ratio is:

A)33%
B)50%
C)75%
D)300%

Question 38

In a trend analysis of K Company which of these changes appears to be the most significant in requiring further investigation?

A)An increase of 13% in revenues
B)An increase of 11% in bad debts written off
C)An increase of 7% in total assets
D)An increase of 8% in accounts receivable

Question 39

L______________ is the ability of a firm to meet its short-term obligations.

Question 40

Leverage measures:

A)Whether the firm can pay its current liabilities
B)Profit as a portion of equity
C)Whether the firm can pay its long-term liabilities
D)The proportion of borrowed funds compared to equity

Question 41

The formula,total assets divided by total equity,measures the l__________ ratio,which is a variation of the debt ratio and the equity ratio.

Question 42

The t_________ interest earned ratio measures the ability of a firm to meet its interest payments out of current earnings.

Question 43

If the debt ratio is 54% the equity ratio must be _______%.