Question 1

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

Accepted Answer

The current ratio measures the company's ability to pay its current liabilities with its current assets. It is a liquidity ratio and gives an indication of the short-term financial health of the company. The higher the current ratio, the better the company's ability to meet its current obligations. The other ratios mentioned (profit margin, debt-to-equity, and return on assets) are measures of profitability and leverage, which may be relevant but do not specifically indicate the company's ability to meet its current obligations.

Question 2

Saw Ltd's inventory at 30 June 2018 was $20 000. Sales for the year ended 30 June 2018 were $125 000 and the gross margin was 20 per cent. What was the inventory turnover?

Accepted Answer

The inventory turnover ratio is calculated as Cost of Goods Sold (COGS) divided by average inventory. Given that the gross margin is 20%, the COGS is 80% of sales, which is $125,000 * 80% = $100,000. Assuming the inventory at the start of the period is the same as the end (or using the ending inventory as an approximation for average inventory), the inventory turnover is $100,000 / $20,000 = 5 times per annum.

Question 3

Which of the following could explain an increase in the gross margin ratio?

Accepted Answer

A decrease in prices of raw materials would result in a decrease in cost of goods sold, which is the denominator in the gross margin ratio calculation. This would lead to an increase in the gross margin ratio.

Question 4

Which of the following would NOT decrease the return on equity ratio?

Accepted Answer

The answer of Which of the following would NOT decrease...

Question 5

Sales of Slider Ltd are $250 million and the operating profit after tax is $25 million. Asset turnover is 4 times p.a. What is the value of Slider Ltd's total assets?

Accepted Answer

Asset turnover is calculated as Sales / Total Assets. Given that the asset turnover is 4 times p.a. and sales are $250 million, we can calculate the total assets as $250 million / 4 = $62.5 million.

Question 6

The financial records of Del Ltd reveal the following at 30 June 2019:  What was the number of days' inventory on hand?

Accepted Answer

The formula for calculating days' inventory on hand is: 
(Days in period / Cost of sales) * Average inventory 
= (365 / 416,000) * [(73,000 + 89,000) / 2] 
= 121.7 days

Question 7

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?

Accepted Answer

ROA (Return on Assets) = Operating profit after tax / Average Total Assets
Asset turnover = Sales / Average Total Assets
We can calculate Average Total Assets using the formula: 
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Let's assume Beginning Total Assets = Ending Total Assets, for simplicity. 
Then, Asset turnover = Sales / Total Assets 
1.25 = 100 / Total Assets 
Total Assets = 80 
ROA = 10 / 80 
ROA = 0.125 or 12.5% 
Therefore, the correct answer is B.

Question 8

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

Accepted Answer

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

Question 9

Tomlin Ltd's accounts receivable for year ended 31 December 2019 was $200 000. The number of days in receivables was 146 days. What were the credit sales for the year?

Accepted Answer

The formula for calculating credit sales is:
Credit sales = Average accounts receivable x Number of days in period / 365
We are given the number of days in receivables as 146 days. To calculate the average accounts receivable, we need to know the beginning and ending accounts receivable balances, which are not provided in the question. Therefore, we cannot calculate the credit sales accurately. However, we can use the accounts receivable turnover ratio to estimate the credit sales. The accounts receivable turnover ratio is calculated as follows:
Accounts receivable turnover = Net credit sales / Average accounts receivable
The accounts receivable turnover can also be expressed as the number of times receivables are collected during the period. The accounts receivable turnover for Tomlin Ltd is:
Accounts receivable turnover = 365 / Number of days in receivables
Accounts receivable turnover = 365 / 146 = 2.5 times
We can estimate the credit sales by multiplying the average accounts receivable by the accounts receivable turnover ratio as follows:
Credit Sales = Average accounts receivable x Accounts receivable turnover
Credit Sales = $200 000 x 2.5 = $500 000
Therefore, the best choice is C, $500 000.

Question 10

Which of the following is NOT true of common size statements?

Accepted Answer

Common size statements express figures as a percentage of a common base, but in the case of the balance sheet, it can be expressed as a percentage of total assets or liabilities and shareholders' equity. Therefore, not all balance sheet figures are expressed as a percentage of shareholders' equity.

Question 11

Which of the following could NOT explain an increase in the return on equity ratio?

Accepted Answer

Purchasing land on credit would increase assets and liabilities on the balance sheet, but would not directly affect the return on equity ratio. The other choices, share buyback, declaring a final dividend, and an increase in gross profit, could all lead to an increase in return on equity.

Question 12

Which of the following statements about the profit margin is NOT true?

Accepted Answer

While gross margin is a component of profit margin, it is not the only factor that determines it. Other factors such as operating expenses and taxes also affect profit margin.

Question 13

The inventory of Dyer Ltd for year ended 31 December 2018 was $70 000. The number of days' inventory on hand was 91.25. What was the cost of goods sold for the year?

Accepted Answer

The cost of goods sold (COGS) can be calculated using the formula: COGS = (Inventory / Days' inventory on hand) * 365. Plugging in the given values: COGS = ($70,000 / 91.25) * 365 = $280,000.

Question 14

The financial records of Del Ltd reveal the following at 30 June 2019:  What was the number of days' sales in receivables?

Accepted Answer

To calculate number of days' sales in receivables, we use the formula:
Number of days' sales in receivables = (Accounts Receivable / Net Sales) x Number of Days
Here, we are not given the Net Sales. So, we need to calculate it first.
Net Sales = Gross Sales - Sales Returns and Allowances
= $600,000 - ($15,000 + $10,000)
= $575,000

Now, we can calculate the number of days' sales in receivables:
Number of days' sales in receivables = ($90,000 / $575,000) x 365
= 57.39 days
= 60.8 days (rounded to one decimal place)
Therefore, the best choice is A.

Question 15

Which of the ratios listed helps to indicate pricing strategy?

Accepted Answer

Profit margin is the ratio that indicates pricing strategy. It shows the percentage of profit a company earns on its sales, indicating the efficiency of the pricing strategy in relation to production costs.

Question 16

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

Accepted Answer

The profit margin ratio indicates the average profit on each dollar of sales by dividing the net income by total sales.

Question 17

Alda Ltd's accounts receivable for year ended 30 June 2019 was $150 000. Cost of goods sold was $382 500 and the gross margin was 15 per cent. All sales are made on credit. What was the accounts receivable turnover?

Accepted Answer

The answer of Alda Ltd's accounts receivable for year ended...

Question 18

Alda Ltd's accounts receivable for year ended 30 June 2019 was $150 000. Cost of goods sold was $382 500 and the gross margin was 15 per cent. All sales are made on credit. What was the number of days' sales in receivables?

Accepted Answer

First, calculate the total sales. The gross margin is 15%, so the cost of goods sold ($382,500) represents 85% of total sales. Total sales = $382,500 / 0.85 = $450,000. To find the days' sales in receivables, divide the accounts receivable by total sales, then multiply by 365 days. Days' sales in receivables = ($150,000 / $450,000) * 365 = 121.7 days.

Question 19

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

Accepted Answer

The quick ratio (also known as the acid-test ratio) only takes into account the most liquid assets, such as cash and accounts receivable, and excludes inventory. This ratio is specifically designed to indicate whether a company's current liabilities can be paid without having to sell inventory. Thus, it is the best choice for this question.

Question 20

Saw Ltd's inventory at 30 June 2018 was $20 000. Sales for the year ended 30 June 2018 were $125 000 and the gross margin was 20 per cent. What was the number of days' inventory on hand?

Accepted Answer

The answer of Saw Ltd's inventory at 30 June 2018...

Quiz 15: Financial Statement Analysis