Question 1

The statement concerning the average settlement period for creditors that is correct is:
A) A change in the creditors turnover period of 56 days to 65 days means that creditors are being paid faster.
B) It is always best for the business to make creditors wait for their money for as long as possible.
C) Creditors provide a free source of finance for a business.
D) It is best to pay creditors as quickly as possible.

Accepted Answer

Creditors do indeed provide a free source of finance for a business, as the business can use the goods or services supplied without immediate payment, effectively borrowing resources without interest until the payment is due.

Question 2

Why is interest added back to profit before tax when calculating return on total assets?
A) because the efficient use of resources should be examined independently from the method of financing
B) to indicate to lenders that some risk is involved
C) because interest rates vary over time
D) A and B

Accepted Answer

Return on total assets is a measure of a company's ability to generate profits from its assets, independent of the financing method. The efficient use of resources should be examined independently from the method of financing, and adding back interest expense helps achieve this.

Question 3

Which of these are alternative measures of gearing?
A) total liabilities/total assets
B) long-term liabilities/ total owners' equity
C) total liabilities/total owners' equity
D) All are alternative measures of gearing.

Accepted Answer

All options (A, B, and C) represent different ways to calculate gearing, which is a measure of a company's financial leverage. Gearing ratios compare the owner's equity or capital to borrowed funds, indicating the degree to which a firm's operations are funded by debt versus shareholders' equity.

Question 4

Using the formula gearing ratio = long-term liabilities/(shareholders' funds + long-term liabilities) × 100/1, calculate the gearing ratio from the following information. Long-term liabilities are $18m; shareholders' funds are $14m.
A) 44%
B) 128%
C) 78%
D) 56%

Accepted Answer

The gearing ratio is calculated as ($18m / ($14m + $18m)) × 100 = 56%.

Question 5

Which of these is not an advantage of a shorter inventory turnover period?
A) It means that fewer funds are tied up in inventory so more are available for use in the business.
B) It means that inventory is less likely to become obsolete or out of date.
C) It means that less storage space is needed for inventory.
D) It means that management can have the cost advantage of buying in bulk.

Accepted Answer

A shorter inventory turnover period means that inventory is sold quickly and therefore there is less risk of it becoming obsolete or out of date. It also means that less storage space is needed for inventory, which can reduce costs. Additionally, it means that fewer funds are tied up in inventory, which can allow for more funds to be available for use in the business. However, a shorter turnover period may not allow management to take advantage of cost savings from buying in bulk, as they may need to purchase inventory more frequently.

Question 6

Which of these is not an advantage of using borrowed funds to finance a business?
A) Lenders do not dilute ownership interest in the business.
B) Interest on borrowing is a legal commitment that must be met.
C) Interest on borrowings is tax-deductible.
D) Borrowing can be used to boost returns to owners as long as the return on the funds exceeds the cost of interest.

Accepted Answer

The statement "Interest on borrowing is a legal commitment that must be met" is actually an advantage. The other options are all advantages of using borrowed funds to finance a business.

Question 7

The ratios that are specifically concerned with assessing the efficiency with which assets have been used by the business are the:
A) liquidity ratios.
B) gearing ratios.
C) efficiency ratios.
D) investment ratios.

Accepted Answer

Efficiency ratios are specifically concerned with assessing the efficiency with which assets have been used by the business. Liquidity ratios assess the ability of a company to meet its short-term obligations, gearing ratios assess the level of debt in a company's capital structure, and investment ratios assess the returns generated on investments.

Question 8

Operating cash flows ÷ current liabilities is the formula for the:
A) repayment of long-term borrowing ratio.
B) current ratio.
C) cash flow from operations ratio.
D) none of the above

Accepted Answer

The formula "Operating cash flows ÷ current liabilities" is used to calculate the cash flow from operations ratio, which measures a company's ability to cover its current liabilities with the cash flow generated from its core business operations.

Question 9

Net profit before interest and taxation, divided by sales × 100/1 is the formula for:
A) return on shareholders' funds.
B) asset turnover period.
C) net profit margin.
D) return on total assets.

Accepted Answer

The formula given is for calculating net profit margin, which is a measure of a company's profitability.

Question 10

The formula for net profit margin is net profit before interest and tax divided by:
A) total assets.
B) total equity.
C) sales.
D) share capital + long-term loans.

Accepted Answer

Net profit margin is calculated by dividing net profit before interest and tax by sales. This ratio helps to determine a company's profitability by measuring how much of each dollar of sales is actually generating profit after accounting for expenses.

Question 11

Which of these is not considered a limitation of financial ratio analysis?
A) There is no adjustment for the effects of inflation.
B) Ratios are difficult to calculate.
C) It does not consider qualitative factors.
D) All of the above.

Accepted Answer

Ratios are not difficult to calculate as long as the necessary financial information is available. Therefore, option B is not considered a limitation of financial ratio analysis. Options A and C are considered limitations as inflation can distort ratios and qualitative factors can significantly impact a company's financial performance, but may not be captured in the numerical analysis of ratios. Therefore, the correct answer is B.

Question 12

Dividend yield on ordinary shares is calculated as:
A) dividends per share divided by market price per share.
B) annual dividend divided by earnings.
C) annual dividend divided by issued capital.
D) none of the above.

Accepted Answer

Dividend yield is calculated by dividing the dividends per share by market price per share. This gives an idea of the return a shareholder can expect based on the amount of dividends received, relative to the price of the stock. Option B is incorrect as it calculates a payout ratio, while option C is incorrect as it divides the dividend by the total issued capital of the company, which is not used to calculate dividend yield.

Question 13

Which of these is a factor that can influence the amount a company is prepared to distribute as dividends to its shareholders?
A) investors' expectations
B) the availability of cash
C) the need to retain funds within the business for future growth
D) all of the above

Accepted Answer

All of the factors listed - investors' expectations, availability of cash, and the need for future growth - can influence a company's decision on how much to distribute as dividends to shareholders. For example, if investors have high expectations for dividends, the company may feel pressure to distribute more even if it means retaining less cash for future growth. Conversely, if the company has a significant need for cash to fund future growth, it may choose to retain more cash and distribute less as dividends, even if investors are expecting more.

Question 14

Place the key steps in financial ratio analysis in order of occurrence.
 i) Select the ratios considered appropriate and carry out the calculations.
Ii) Interpret and evaluate what the ratios reveal.
Iii) Identify the users and their information needs.
A) i, ii, iii
B) iii, i, ii
C) iii, ii, i
D) ii, i, iii

Accepted Answer

The correct sequence for conducting financial ratio analysis starts with identifying the users and their information needs (iii), followed by selecting the appropriate ratios and performing the calculations (i), and finally interpreting and evaluating what the ratios reveal (ii).

Question 15

If current assets exceed current liabilities, the payment of creditors will:
A) increase the current ratio.
B) decrease the current ratio.
C) increase the level of cash held.
D) do none of the above.

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. If current assets exceed current liabilities, this will increase the numerator and therefore increase the current ratio.

Question 16

Calculate the return on capital employed if net profit before interest and tax is $440,000, shareholders' funds are $4,000,000 and long-term loans are $3,000,000.
A) 12.2%
B) 11.0%
C) 6.2%
D) 3.1%

Accepted Answer

The answer of Calculate the return on capital employed if...

Question 17

Which of these is a limitation of financial ratio analysis?
A) Year-end data is not necessarily typical of the position during the year.
B) Suitable yardsticks for comparisons are not always available.
C) Ratios have a restricted vision as they only assess the past.
D) All of the above.

Accepted Answer

All of the options mentioned are limitations of financial ratio analysis. Year-end data might not represent the financial position of a company throughout the entire year, suitable comparisons might not always be available, and ratios only provide a view of the past and cannot predict future performance.

Question 18

Use this data to calculate earnings per ordinary share (EPS) for Orange Ltd. 
A) $0.19
B) $0.39
C) $0.61
D) $0.43

Accepted Answer

The answer of Use this data to calculate earnings per...

Question 19

The acid test ratio eliminates from its calculation because it is considered the least liquid of the current assets.
A) debtors
B) government securities
C) inventory
D) bank bills

Accepted Answer

The acid test ratio, also known as the quick ratio, focuses on the most liquid current assets that can be easily converted into cash to meet short-term obligations. Inventory is considered the least liquid current asset as it may take time to sell or convert into cash, hence it is eliminated from the calculation of the acid test ratio. Debtors (accounts receivable), government securities, and bank bills are all relatively more liquid than inventory and are included in the calculation of the ratio.

Question 20

Worshafter Ltd has provided 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 inventory turned over for 2015 is:
A) 5.0 times.
B) 2.2 times.
C) 5.5 times.
D) 2.0 times.

Accepted Answer

The answer of Worshafter Ltd has provided information from its...

Quiz 6: Analysis and Interpretation of Financial Statements

The statement concerning the average settlement period for creditors that is correct is:

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

Which of these are alternative measures of gearing?

Using the formula gearing ratio = long-term liabilities/(shareholders' funds + long-term liabilities) × 100/1, calculate the gearing ratio from the following information. Long-term liabilities are $18m; shareholders' funds are $14m.

Which of these is not an advantage of a shorter inventory turnover period?

Which of these is not an advantage of using borrowed funds to finance a business?

The ratios that are specifically concerned with assessing the efficiency with which assets have been used by the business are the:

Operating cash flows ÷ current liabilities is the formula for the:

Net profit before interest and taxation, divided by sales × 100/1 is the formula for:

The formula for net profit margin is net profit before interest and tax divided by:

Which of these is not considered a limitation of financial ratio analysis?

Dividend yield on ordinary shares is calculated as:

Which of these is a factor that can influence the amount a company is prepared to distribute as dividends to its shareholders?

Place the key steps in financial ratio analysis in order of occurrence. i) Select the ratios considered appropriate and carry out the calculations. Ii) Interpret and evaluate what the ratios reveal. Iii) Identify the users and their information needs.

If current assets exceed current liabilities, the payment of creditors will:

Calculate the return on capital employed if net profit before interest and tax is $440,000, shareholders' funds are $4,000,000 and long-term loans are $3,000,000.

Which of these is a limitation of financial ratio analysis?

Use this data to calculate earnings per ordinary share (EPS) for Orange Ltd.

The acid test ratio eliminates from its calculation because it is considered the least liquid of the current assets.

Worshafter Ltd has provided 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 inventory turned over for 2015 is: