Question 1

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

Accepted Answer

The formula given in the question is of operating profit margin, which is calculated by dividing the operating profit before interest and taxation by sales and multiplying by 100/1.

Question 2

A firm has total assets of $800,000 and total liabilities of $200,000.If profit after tax and interest is $120,000,the return on shareholders' funds is:
A) 20%.
B) 8%.
C) 12.5%.
D) 9%.

Accepted Answer

The return on shareholders' funds is calculated as (Profit after tax and interest / Shareholders' Funds) * 100. Shareholders' funds can be calculated as Total Assets - Total Liabilities = $800,000 - $200,000 = $600,000. Therefore, the return on shareholders' funds is ($120,000 / $600,000) * 100 = 20%.

Question 3

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) ii, i, iii.
B) iii, ii, i.
C) iii, i, ii.
D) i, ii, iii.

Accepted Answer

The first step in any analysis should be to identify the users and their information needs. Once these are clear, appropriate ratios can be selected and calculated. Finally, the ratios must be interpreted and evaluated to draw meaningful conclusions. Therefore, the correct order is iii, i, ii.

Question 4

A firm has total assets of $800,000 and total liabilities of $300,000.There are no preference shareholders.Earnings before interest and taxes are $100,000.Interest is $21,000 and taxes are $34,000.The return on ordinary shareholders' funds is:
A) 8.0%.
B) 12.5%.
C) 9.0%.
D) 3.8%.

Accepted Answer

The answer of A firm has total assets of $800,000...

Question 5

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) 3.1%.
B) 11.0%.
C) 6.2%.
D) 12.2%.

Accepted Answer

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

Question 6

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) gearing ratios.
D) efficiency ratios.

Accepted Answer

The ratios that measure the degree of risk associated with borrowing money from outsiders to finance the business are gearing ratios. Gearing ratios determine the extent to which a company's activities are funded by owner's equity compared to creditor's equity. It examines the company's level of debt and its capacity to pay back the debt. This ratio is vital in determining the company's financial stability and its ability to meet its financial obligations. Therefore, it is the best choice in this scenario.

Question 7

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

Accepted Answer

Interest is added back to profit before tax when calculating return on total assets to examine the efficient use of resources independently from the method of financing. The return on total assets measures how effectively a company utilizes its assets to generate profits, irrespective of whether these assets were financed through equity or debt. By removing the effect of interest expenses, the calculation provides a clearer picture of the company's operational efficiency. Choices A and B are incorrect because they do not reflect the main reason for adding back interest to profit before tax when calculating return on total assets.

Question 8

FCo had a profit of $100,000 before tax,after deducting $16,000 in interest expense.F Co's non-current liabilities and equity total $1,000,000.Return on capital employed,before interest and tax is:
A) 13%.
B) 11.6%.
C) 10%.
D) 9%.

Accepted Answer

To calculate the return on capital employed before interest and tax, we need to divide the profit before interest and tax (PBIT) by the capital employed. 
PBIT = $100,000 + $16,000 (interest expense) = $116,000
Capital employed = non-current liabilities + equity = $1,000,000
Return on capital employed = PBIT/capital employed = $116,000/$1,000,000 = 0.116 or 11.6%

Question 9

From the following information,calculate Moore Ltd's rate of return on ordinary shareholders' funds.
Ordinary share capital $600,000.
Retained profits and reserves $200,000.
180,000 fully paid $2.00 10% Preference shares.
Net profit after tax and before preference dividend $276,000.
A) 30.0%.
B) 16.0%.
C) 20.0%.
D) 26.0%.

Accepted Answer

Rate of return on ordinary shareholders' funds = Net profit after tax and before preference dividend / (Ordinary share capital + Retained profits and reserves) * 100= 276,000 / (600,000 + 200,000) * 100= 276,000 / 800,000 * 100= 30%

Question 10

If gross profit is $540,000,interest expense is $200,000,sales is $1,800,000 and total assets are $5,400,000,calculate the gross profit margin.
A) 6.3%.
B) 18.9%.
C) 30%.
D) 10%.

Accepted Answer

Gross profit margin is calculated by dividing gross profit by sales and multiplying by 100. 
Gross profit margin = (gross profit / sales) x 100%
Gross profit margin = (540,000 / 1,800,000) x 100%
Gross profit margin = 30%

Question 11

The adequacy of the gross profit margin depends on:
A) selling price.
B) buying price.
C) total expenses.
D) Both A and B.

Accepted Answer

The gross profit margin is calculated by subtracting the cost of goods sold (buying price) from the sales revenue (selling price). Therefore, both A (selling price) and B (buying price) are factors that affect the adequacy of the gross profit margin. Total expenses (C) are deducted from the gross profit margin to arrive at the net profit margin, which is a separate metric.

Question 12

$\begin{array}{lllll}&\times\times  \times  \mathrm{Co}\
&&&&\text { Industry Average }\
&2013 & 2014 & 2015 & 2015 \
\text { Retum on Capital Employed } & 12.6 \% & 11.7 \% & 10.8 \% & 12 \% \
\text { Operating Profit Margin } & 9 \% & 9 \% & 9 \% & 8 \% \
\text { Gross Profit Margin } & 30 \% & 31 \% & 33 \% & 35 \%
\end{array}$ 
REQUIRED:
Discuss what the above ratios reveal about the profitability of the firm XXX Co.

Accepted Answer

The answer of \(\begin{array}{lllll}&\times\times  \times  \mathrm{Co}\
&&&&\text { Industry...

Question 13

Which statement concerning financial ratios is not true?
A) A ratio expresses the relationship between two figures appearing in the financial statements.
B) Ratios are easy to interpret but difficult to calculate.
C) Ratios adjust for scale of operations and allow comparisons between businesses of different sizes.
D) None of the above, i.e., all are true statements.

Accepted Answer

Ratios can be easy or difficult to calculate, depending on the complexity of the formula involved. However, they can be more difficult to interpret, especially when used in isolation without a benchmark or industry standard.

Question 14

The ratio which is considered to be the primary measure of overall profitability as it assesses how effectively the business has used its funds is:
A) return on ordinary shareholders' funds.
B) gross profit margin.
C) return on capital employed.
D) operating profit margin.

Accepted Answer

Return on capital employed (ROCE) is considered to be the best measure of overall profitability because it takes into account both the profits generated by a company and the capital invested in the business. ROCE indicates how efficiently a company has used its capital to generate profits. It is calculated by dividing earnings before interest and tax (EBIT) by the capital employed (total assets minus current liabilities). The higher the ROCE, the better the company has used its funds.

Question 15

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

Accepted Answer

To fully evaluate the success of a business during a given period, it is best to compare it against multiple benchmarks. Budgeted performance provides insight into whether the company was able to meet its own expectations and goals. Past performance shows whether the company has improved or declined relative to previous periods. Comparing performance to competitors in the same industry can help identify areas where the company could improve or gain a competitive advantage. Therefore, all of the above options are valuable benchmarks for evaluating business performance.

Question 16

Ratios should not be used in isolation because:
A) different ratios may give contradictory messages.
B) their behaviour is interrelated.
C) a decision will often have a number of aspects.
D) all of the above.

Accepted Answer

Different ratios may give contradictory messages due to their interrelated behavior. A decision will often have multiple aspects, and considering ratios in isolation may not provide a complete picture. Therefore, it is important to analyze multiple ratios and consider broader business factors when making decisions.

Question 17

Which of these is not an efficiency ratio?
A) Current ratio.
B) Average settlement period for accounts receivable.
C) Asset turnover period.
D) Average inventory turnover period.

Accepted Answer

The current ratio is a liquidity ratio, not an efficiency ratio. Efficiency ratios are used to measure how effectively a company uses its assets to generate revenue and include average settlement period for accounts receivable, asset turnover period, and average inventory turnover period.

Question 18

BBB Ltd has provided information from its financial statements for the year ended 30 June 2015.
$$\begin{array} { l r } 
\text { Sales (all on credit) } & \$ 1,900,000 \
\text { Gross profit on sales } & 900,000 \
\text { Net profit } & 150,000 \
\text { Cost of sales } & 1,000,000 \
\text { Inventory at end of year } & 200,000 \
\text { Accounts receivable at end of year } & 500,000
\end{array}$$
The company trades 365 days per year.
-The number of times BBB's inventory turned over for 2015 is:
A) 2.0 times.
B) 5.0 times.
C) 5.5 times.
D) 2.2 times.

Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory. Given the cost of sales (COGS) is $1,000,000 and the inventory at the end of the year is $200,000 (assuming no beginning inventory or it's the same as the end), the inventory turnover ratio is $1,000,000 / $200,000 = 5.0 times.

Question 19

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

Accepted Answer

Gross profit margin is a ratio that indicates how much profit a company makes on each dollar of sales after accounting for the cost of goods sold. Therefore, its formula is calculated by dividing gross profit (net sales minus cost of goods sold) by sales (or net revenue).

Question 20

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

Accepted Answer

Investment ratios are specifically designed to evaluate the returns and performance of shares held for investment purposes. Liquidity ratios assess a company's ability to meet short-term obligations, gearing ratios analyze the company's capital structure, and efficiency ratios measure a company's ability to utilize its assets and resources effectively. None of these ratios are specifically tailored to assess share investment returns and performance.

Quiz 8: Analysis and Interpretation of Financial Statements

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

A firm has total assets of $800,000 and total liabilities of $200,000.If profit after tax and interest is $120,000,the return on shareholders' funds is:

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 firm has total assets of $800,000 and total liabilities of $300,000.There are no preference shareholders.Earnings before interest and taxes are $100,000.Interest is $21,000 and taxes are $34,000.The return on ordinary shareholders' funds is:

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.

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

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

FCo had a profit of $100,000 before tax,after deducting $16,000 in interest expense.F Co's non-current liabilities and equity total $1,000,000.Return on capital employed,before interest and tax is:

From the following information,calculate Moore Ltd's rate of return on ordinary shareholders' funds. Ordinary share capital $600,000. Retained profits and reserves $200,000. 180,000 fully paid $2.00 10% Preference shares. Net profit after tax and before preference dividend $276,000.

If gross profit is $540,000,interest expense is $200,000,sales is $1,800,000 and total assets are $5,400,000,calculate the gross profit margin.

The adequacy of the gross profit margin depends on:

Which statement concerning financial ratios is not true?

The ratio which is considered to be the primary measure of overall profitability as it assesses how effectively the business has used its funds is:

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

Ratios should not be used in isolation because:

Which of these is not an efficiency ratio?

The formula for gross profit margin is gross profit divided by:

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