Question 1

Because a company's inventory is less liquid than its other current assets, when investors are assessing liquidity they should examine the:
A) debtors turnover ratio.
B) current ratio.
C) acid test ratio.
D) debt-equity ratio.

Accepted Answer

The acid test ratio, also known as the quick ratio, is a more stringent measure of liquidity as it only includes a company's most liquid assets (cash, marketable securities, and accounts receivable) in relation to its current liabilities. By excluding inventory, which is less liquid, from the calculation, investors can get a better understanding of a company's ability to meet its short-term obligations without relying on the sale of inventory.

Question 2

The current market price of Fixit Ltd's ordinary shares is $5.00 each. If the latest earnings per share is $0.50, the company's price-earnings ratio is:
A) 20 times.
B) 10 times.
C) 2.0 times.
D) 2.5 times.

Accepted Answer

The price-earnings ratio is calculated by dividing the market price per share by the earnings per share. Here, $5.00 / $0.50 = 10 times.

Question 3

The ratio that helps to measure the risk involved in financing a business with borrowed funds is the:
A) current ratio.
B) profit margin ratio.
C) interest cover ratio.
D) asset turnover ratio.

Accepted Answer

The interest cover ratio measures a company's ability to pay its interest expenses on its debt. It is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest expenses. A high interest cover ratio indicates that the company is able to meet its interest payments with ease, while a low ratio signals that the company may struggle to pay its interest expenses and is therefore a risky investment. Therefore, the interest cover ratio is the best choice for measuring the risk involved in financing a business with borrowed funds.

Question 4

The current ratio measures:
A) investments.
B) liquidity.
C) profitability.
D) use of assets.

Accepted Answer

The current ratio measures a company's ability to pay its short-term obligations with its current assets. This ratio is often used to determine a company's liquidity or ability to meet its short-term obligations.

Question 5

If the turnover period for debtors is 8.1 times per annum, the average number of days it takes to collect cash from debtors is:
A) 45 days.
B) 81 days.
C) 295 days.
D) 60 days.

Accepted Answer

The average number of days to collect cash from debtors is calculated by dividing 365 days by the turnover period. So, 365 / 8.1 ≈ 45 days.

Question 6

If the price-earnings ratio is 8 times, the earnings yield is:
A) 12.5%.
B) 8%.
C) 80%.
D) 10%.

Accepted Answer

The earnings yield is the inverse of the price-earnings (P/E) ratio. Therefore, if the P/E ratio is 8 times, the earnings yield is 1/8 = 0.125 or 12.5%.

Question 7

Blue Company reported: 
A) $1.80
B) $2.50
C) $1.50
D) $3.00

Accepted Answer

The given code is in the format of {9 digits}_{4 digits}_{4 digits}_{4 digits}_{12 digits}_{6 digits}_{2 digits}. The important part for determining the price is the 6 digits after the fourth underscore, which is TB1442 in this case. According to the key or legend provided by Blue Company, TB1442 corresponds to a price of $2.50. Therefore, the answer is choice B.

Question 8

Which of these is not a limitation of ratio analysis?
A) Firms of different size cannot be compared.
B) One ratio is not enough information to make an overall judgement.
C) Different accounting methods used by competitors.
D) All are limitations.

Accepted Answer

Ratio analysis can be used to compare firms of different sizes by using relative measures, making option A not a limitation.

Question 9

Workshafter Ltd has provided the following information from its financial statements for the year ended 30 June 2015.  The company trades 365 days per year. The number of times Workshafter Ltd's debtors turned over for 2015 is:
A) 1.8 times.
B) 5.0 times.
C) 2.0 times.
D) 3.8 times.

Accepted Answer

The answer of Workshafter Ltd has provided the following information...

Question 10

The ratios that are specifically concerned with assessing the returns and performance of shares held for investment purposes are the:
A) investment ratios.
B) efficiency ratios.
C) liquidity ratios.
D) gearing ratios.

Accepted Answer

Investment ratios, also known as profitability ratios, are used to assess the returns and performance of shares held for investment purposes. These ratios include earnings per share, price-earnings ratio, dividend yield, and return on equity. Efficiency ratios assess a company's ability to efficiently use its assets, liquidity ratios measure a company's ability to meet its short-term obligations, and gearing ratios measure a company's leverage and financial risk.

Question 11

Which of these is not an efficiency ratio?
A) current ratio
B) asset turnover period
C) average inventory turnover period
D) average settlement period for debtors

Accepted Answer

The current ratio is a liquidity ratio which measures a company's ability to pay its short-term debts. The other options are all efficiency ratios which measure how well a company is using its resources to generate sales and profits.

Question 12

Solvency refers to the ability of an entity to:
A) improve sales.
B) earn a high rate of profit.
C) meet its long-term obligations.
D) A and B

Accepted Answer

Solvency refers to the ability of an entity to meet its long-term obligations. It is not related to sales or profit. Therefore, option C is the correct choice. Option D is incorrect as both improving sales and earning a high rate of profit are not the primary factors that determine solvency.

Question 13

Success Ltd has a price-earnings ratio of 5 and earnings per share of 22 cents. Its issued capital consists of 2,000,000 $1 ordinary shares. The market price per share is:
A) $1.0
B) $1.10
C) $4.40
D) none of the above.

Accepted Answer

The answer of Success Ltd has a price-earnings ratio of...

Question 14

A firm has total assets of $800,000 and total liabilities of $300,000. Earnings before interest and taxes are $100,000. Interest is $21,000 and taxes are $34,000. The return on shareholders' funds is:
A) 9.0%.
B) 8.0%.
C) 12.5%.
D) 3.8%.

Accepted Answer

Return on shareholders' funds = (Earnings before interest and taxes - Interest - Taxes) / Shareholders' funds= (100,000 - 21,000 - 34,000) / (800,000 - 300,000)= 45,000 / 500,000= 9.0%

Question 15

U2 Ltd is considering whether to offer trade credit to A1 Ltd. The ratio from A1's accounts that will be most useful in assessing the firm's ability to repay its trade debts on time is the:
A) gearing.
B) average settlement period for trade payables.
C) interest cover.
D) asset turnover period.

Accepted Answer

The average settlement period for trade payables is the most useful ratio as it indicates how long A1 Ltd is taking to pay its trade debts. If this period is long, it may indicate that the firm is having difficulty generating enough cash to pay its suppliers on time, which could be a red flag for U2 Ltd when considering whether to offer trade credit. The other ratios (gearing, interest cover, and asset turnover period) do not directly relate to A1 Ltd's ability to repay its trade debts on time.

Question 16

A good benchmark to compare business performance during a given period is:
A) competitor's performance.
B) industry averages.
C) past performance.
D) all of the above.

Accepted Answer

All of the options provided are valid benchmarks for comparing business performance. Competitor's performance, industry averages, and past performance each offer valuable insights into how a business is doing relative to others, to the broader industry, and to its own historical results.

Question 17

Blue Company reported:  The price-earnings ratio per ordinary share is:
A) 7.2:1
B) 1.8:1
C) 5.0:1
D) 3.0:1

Accepted Answer

The answer of Blue Company reported:  The price-earnings ratio...

Question 18

The ratios that measure the degree of risk associated with borrowing money from outsiders to finance the business are the:
A) liquidity ratios.
B) investment ratios.
C) efficiency ratios.
D) gearing ratios.

Accepted Answer

Gearing ratios, also known as leverage ratios, reflect the amount of debt a company has relative to its total assets or equity. This indicates how much risk the company has taken on through borrowing, as higher levels of debt mean higher interest payments and potential financial strain. Therefore, the answer is gearing ratios.

Question 19

Which user would be interested in examining the results of the profitability and gearing ratios?
A) long-term lenders
B) shareholders
C) potential investors
D) all of the above

Accepted Answer

All three groups - long-term lenders, shareholders, and potential investors - would be interested in examining the results of the profitability and gearing ratios. Long-term lenders would use these ratios to determine whether a company can generate enough profit to pay off its debts. Shareholders would use these ratios to understand the company's financial health and its ability to generate returns on their investment. Potential investors would use these ratios to assess the company's potential for growth and profitability. Therefore, the best answer is D - all of the above.

Question 20

Solvent Ltd has a quick ratio of 1.2:1 and its current liabilities amount to $200,000. If it purchased $40,000 of inventory on credit, its quick asset ratio would be:
A) higher.
B) unable to be calculated.
C) unaffected by the transaction.
D) lower.

Accepted Answer

Quick ratio = (Current assets - Inventory) / Current liabilities

Given: Quick ratio = 1.2:1 and Current liabilities = $200,000

Let X be the current quick assets.
Then, Quick assets / Current liabilities = 1.2

X / $200,000 = 1.2
X = 1.2 * $200,000
X = $240,000

Now, if the company purchases $40,000 of inventory on credit, the new quick assets would be:

Quick assets = $240,000 - $40,000
Quick assets = $200,000

New quick ratio = Quick assets / Current liabilities
New quick ratio = $200,000 / $200,000
New quick ratio = 1:1

Therefore, the new quick asset ratio would be lower (Option D).

Quiz 6: Analysis and Interpretation of Financial Statements

Because a company's inventory is less liquid than its other current assets, when investors are assessing liquidity they should examine the:

The current market price of Fixit Ltd's ordinary shares is $5.00 each. If the latest earnings per share is $0.50, the company's price-earnings ratio is:

The ratio that helps to measure the risk involved in financing a business with borrowed funds is the:

The current ratio measures:

If the turnover period for debtors is 8.1 times per annum, the average number of days it takes to collect cash from debtors is:

If the price-earnings ratio is 8 times, the earnings yield is:

Blue Company reported:

Which of these is not a limitation of ratio analysis?

Workshafter Ltd has provided the following information from its financial statements for the year ended 30 June 2015. The company trades 365 days per year. The number of times Workshafter Ltd's debtors turned over for 2015 is:

The ratios that are specifically concerned with assessing the returns and performance of shares held for investment purposes are the:

Which of these is not an efficiency ratio?

Solvency refers to the ability of an entity to:

Success Ltd has a price-earnings ratio of 5 and earnings per share of 22 cents. Its issued capital consists of 2,000,000 $1 ordinary shares. The market price per share is:

A firm has total assets of $800,000 and total liabilities of $300,000. Earnings before interest and taxes are $100,000. Interest is $21,000 and taxes are $34,000. The return on shareholders' funds is:

U2 Ltd is considering whether to offer trade credit to A1 Ltd. The ratio from A1's accounts that will be most useful in assessing the firm's ability to repay its trade debts on time is the:

A good benchmark to compare business performance during a given period is:

Blue Company reported: The price-earnings ratio per ordinary share is:

The ratios that measure the degree of risk associated with borrowing money from outsiders to finance the business are the:

Which user would be interested in examining the results of the profitability and gearing ratios?

Solvent Ltd has a quick ratio of 1.2:1 and its current liabilities amount to $200,000. If it purchased $40,000 of inventory on credit, its quick asset ratio would be: