Question 1

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

Accepted Answer

The current ratio measures a company's ability to pay its short-term liabilities with its current assets. Therefore, it is a good indication of a company's ability to meet its current obligations. Profit margin, debt-to-equity, and return on assets are not direct indicators of a company's ability to meet current obligations.

Question 2

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

Accepted Answer

Return on assets (ROA) helps to indicate the ability of a company to generate a return on its assets before considering the cost of financing those assets. Other ratios listed such as current ratio, quick ratio, and profit margin do not directly measure the return generated by a company's assets.

Question 3

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

Accepted Answer

The current ratio measures a company's ability to pay its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a company has more short-term assets available to cover its short-term liabilities.

Question 4

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

Accepted Answer

ROA (Return on Assets) = Net Income/Total Assets.
Given, Operating profit after tax = $10 million and Sales = $100 million. 
We can calculate the total assets as follows: 
Asset Turnover = Sales/Total Assets
1.25 times p.a. = $100 million/Total Assets
Total Assets = $80 million.

ROA = $10 million/$80 million = 0.125 or 12.5%. 
Therefore, the answer is option C.

Question 5

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

Accepted Answer

The answer of Which of the following could NOT lead...

Question 6

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

Accepted Answer

Profit margin calculates the percentage of profit earned on each dollar of sales, making it the ratio that helps indicate the average profit on each dollar of sales.

Question 7

Which of the following could explain a substantial increase in the current ratio (presently 1:1)?
A) Purchase of inventory for cash
B) Sale of a major noncurrent asset near year-end
C) A large prepayment near year-end
D) Received a cash deposit for work to be done next year

Accepted Answer

The answer of Which of the following could explain a...

Question 8

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

Accepted Answer

Return on assets (ROA) measures the ability of a company to effectively use its assets to generate profits. It is calculated by dividing net income by total assets. The higher the ROA, the more efficiently a company is using its resources to generate profit. Current ratio and quick ratio measure a company's liquidity, while profit margin only shows the profitability of a company without considering its asset utilization.

Question 9

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance. As a result, its annual depreciation expense increases by $200 000. The company's income tax rate is 30 per cent. What is the effect on ROE?
A) It increases.
B) It decreases.
C) It is not effected.
D) It cannot be determined from the information provided.

Accepted Answer

Switching from straight-line to reducing balance depreciation method will increase the company's depreciation expenses, leading to lower net income. Lower net income will result in a lower ROE, as ROE is calculated by dividing net income by total equity. Therefore, the effect on ROE is a decrease.

Question 10

Hard-up Ltd has a current ratio of 0.75. Its current liabilities amount to $200 000. It borrows $75 000 from a finance company, repayable in five years. 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.

Accepted Answer

The loan increases the company's current assets (cash) by $75,000 without immediately affecting current liabilities, thus increasing working capital by the same amount.

Question 11

Hard-up Ltd has a current ratio of 0.75. Its current liabilities amount to $200 000. It borrows $75 000 from a finance company, repayable in five years. 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.

Accepted Answer

The hard-up Ltd's current assets are 0.75 times its current liabilities, which means that its current assets are $150 000. If it borrows $75 000, then its total liabilities will increase to $275 000 ($200 000 + $75 000), and its current assets will remain the same. Therefore, its current ratio will decrease to 0.545 ($150 000 / $275 000). As a result, the debt-to-equity ratio will increase because the company has taken on more debt.

Question 12

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

Accepted Answer

The quick ratio is calculated as (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. An increase in accounts payable increases the denominator, potentially decreasing the quick ratio. The other options do not directly affect the quick ratio's components.

Question 13

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance. As a result, its annual depreciation expense increases by $200 000. The company's income tax rate is 30 per cent. 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.

Accepted Answer

Changing the depreciation method from straight-line to reducing balance, which increases the annual depreciation expense, will reduce the company's net income. This reduction in net income decreases retained earnings, part of equity, leading to an increase in the debt-to-equity ratio as the equity component decreases while the debt remains constant.

Question 14

Hard-up Ltd has a current ratio of 0.75. Its current liabilities amount to $200 000. It borrows $75 000 from a finance company, repayable in five years. What is the current ratio following the loan?
A) 0.818
B) 1.125
C) It cannot be determined from the above information
D) None of the answers provided

Accepted Answer

To calculate the new current ratio after the loan, we need to first calculate the new current assets.

Current assets = (Current ratio x Current liabilities) + Borrowed funds 
= (0.75 x $200 000) + $75 000 
= $225 000

New current ratio = Current assets / Current liabilities 
= $225 000 / $200 000 
= 1.125

Therefore, the new current ratio is 1.125, which corresponds to answer choice B.

Question 15

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

Accepted Answer

The quick ratio measures the ability of a company to meet its short-term liabilities with its most liquid assets, excluding inventory. Therefore, it is the best ratio to indicate whether current liabilities can be paid without having to sell inventory. The other ratios listed do not necessarily provide information on inventory's impact on liquidity.

Question 16

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.

Accepted Answer

A high debt-to-equity ratio means that a company is heavily in debt relative to its equity, which may make it highly geared and vulnerable to interest rate increases. It does not indicate that the company has a high current ratio. Therefore, the only correct option is D.

Question 17

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance. As a result, its annual depreciation expense increases by $200 000. The company's income tax rate is 30 per cent. 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.

Accepted Answer

The change in the depreciation method does not directly affect the inventory turnover ratio, which measures how efficiently a company is selling its inventory. Therefore, there is no effect on the inventory turnover ratio.

Question 18

Hard-up Ltd has a current ratio of 0.75. Its current liabilities amount to $200 000. It borrows $75 000 from a finance company, repayable in five years. 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.

Accepted Answer

The loan does not affect current net profit as it is not an expense or revenue item. Therefore, there is no immediate effect on the current ratio or net profit.

Question 19

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance. As a result, its annual depreciation expense increases by $200 000. The company's income tax rate is 30 per cent. What is the effect on ROA, which was 20 per cent prior to the change?
A) It increases.
B) It decreases.
C) There is no effect.
D) It cannot be determined from the information provided.

Accepted Answer

Since the annual depreciation expense increases, the company's net income will decrease, leading to a decrease in the ROA. Therefore, the answer is B.

Question 20

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

Accepted Answer

Profit margin is the ratio of net income to revenues and is a good indicator of how effectively a company is pricing its products, managing costs, and competing in the market. A higher profit margin indicates effective pricing strategy or lower competition intensity.

Quiz 15: Financial Statement Analysis

Which of the ratios listed helps to indicate the ability of the company to meet its current obligations?

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?

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

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?

Which of the following could NOT lead to an increase in debtors turnover?

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

Which of the following could explain a substantial increase in the current ratio (presently 1:1) ?

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

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance. As a result, its annual depreciation expense increases by $200 000. The company's income tax rate is 30 per cent. What is the effect on ROE?

Hard-up Ltd has a current ratio of 0.75. Its current liabilities amount to $200 000. It borrows $75 000 from a finance company, repayable in five years. What is the effect of the loan on working capital?

Hard-up Ltd has a current ratio of 0.75. Its current liabilities amount to $200 000. It borrows $75 000 from a finance company, repayable in five years. What is the effect of the loan on the debt-to-equity ratio?

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

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance. As a result, its annual depreciation expense increases by $200 000. The company's income tax rate is 30 per cent. What is the effect on the debt-to-equity ratio?

Hard-up Ltd has a current ratio of 0.75. Its current liabilities amount to $200 000. It borrows $75 000 from a finance company, repayable in five years. What is the current ratio following the loan?

Which of the ratios listed helps to indicate whether current liabilities could be paid without having to sell the inventory?

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

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance. As a result, its annual depreciation expense increases by $200 000. The company's income tax rate is 30 per cent. What is the effect on the inventory turnover ratio?

Hard-up Ltd has a current ratio of 0.75. Its current liabilities amount to $200 000. It borrows $75 000 from a finance company, repayable in five years. What is the immediate effect of the loan on current net profit?

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance. As a result, its annual depreciation expense increases by $200 000. The company's income tax rate is 30 per cent. What is the effect on ROA, which was 20 per cent prior to the change?

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