Deck 5: Financial Statement Analysis

Question 1

Which of the following statements is true?

A) An excess of inventory will lead to a high current asset ratio figure.
B) An increasing inventory turnover signifies a reducing number of days inventory is held.
C) If inventory prices are declining inventory turnover will tend to decrease.
D) All of the above are true.
E) A and B are true.

Answer 1

E

Question 2

Financial ratio analysis is used:

A) By stock brokers to analyse company performance.
B) By shareholders to gauge profitability and liquidity.
C) By managers to support decision making.
D) By creditors to appraise short term financial stability of a company.
E) All of the above.

Answer 2

E

Question 3

The current asset ratio is an indicator of a company's capacity to:

A) Meet short-term debt obligations
B) Earn a strong rate of return
C) Cover long term debt obligations
D) Secure a strong short-term asset turnover
E) Earn the company's owners a good return in the short-term only.

Answer 3

A

Question 4

Which of the following statements is true with respect to financial stability?

A) Financial stability ratios provide a basis for determining a company's capacity to improve sales.
B) Financial stability ratios provide a basis for determining the likelihood of a company's share price improving.
C) Financial stability ratios provide a basis for determining whether a company's earnings per share is satisfactory.
D) A financial stability analysis can be broken into short-term and long-term perspectives.
E) None of the above.

Question 5

Which of the following is not an indicator of profitability?

A) Net profit to sales
B) Gross profit margin
C) Times interest earned
D) Return on capital employed
E) Return on ordinary shareholder's equity

Question 6

In the most recent year, the Decadent Hotel earned $150,000 of profit before tax, after the deduction of $30,000 in interest expense. The Hotel's liabilities are $600,000 and its owner's equity is $900,000. What is the hotel's return on total assets, before interest and tax?

A) 13%
B) 12%
C) 11%
D) 10.6%
E) 9%

Question 7

A company's financial leverage concerns:

A) Its capacity to earn profit.
B) Its capacity to pay off current liabilities.
C) Its capacity to lever inventory to achieve a high turnover
D) Its capacity to pay dividends
E) None of the above

Question 8

In the most recent year, Byron Bay Events financial statements reported net profit of $70,000 after deducting interest expense of $20,000 and income tax of $30,000. The company liabilities are $400,000 and its owner's equity is $800,000. What is the hotel's return on total assets, before interest and tax?

A) 7.5%
B) 8.75%
C) 11.25%
D) 12%
E) 10%

Question 9

Which of the following is consistent with a decreased operating profit margin?

A) A decrease in fixed costs relative to variable costs
B) A reduction in inventory turnover
C) Average number of days to collect accounts receivable increasing from 20 to 25.
D) An increase in the times interest earned ratio.
E) None of the above.

Question 10

The Supremo Hotel's pizzeria incurred $40,000 in cost of sales when generating sales of $100,000 last year. Its food inventory account was $750 at the start of the year and $1,250 at the end of the year.
Food stocks were held in inventory for how many days on average during the year (assume a 360-day year)?

A) 3.6 days
B) 4.5 days
C) 9.0 days
D) 40 days
E) None of the above

Question 11

Which of the following contributes to a higher ROI:

A) Increasing number of days to collect accounts receivable
B) Decreasing total asset turnover ratio
C) Decreasing debt to assets ratio
D) Stable gross profit margin
E) Increasing inventory turnover.

Question 12

Which of the following contributes to a lower ROI for a business?

A) Higher levels of assets held in anticipation of increasing sales
B) An increase in gross profit margin
C) Increasing total asset turnover
D) Decreasing number of days to collect accounts receivable
E) A decrease in the times interest earned ratio

Question 13

Which of the following statements is true about the acid test ratio?

A) The acid test ratio's calculation involves deducting current liabilities from a company's most liquid current assets.
B) Current liabilities that are due for payment in less than a year are stated as a percentage of current assets.
C) The acid test ratio is a useful measure of short term liquidity in a business that has slow moving inventory stock.
D) Current liabilities are deducted from current assets net of inventories and prepayments.
E) If calculated correctly, the acid test ratio will always be greater than one.

Question 14

Which of the following statements concerning Revpar is true?

A) It is not as complete a measure of hotel performance as the widely-used room occupancy measure.
B) It represents a useful gauge of a hotel's financial stability.
C) It represents an amalgamation of the room rate and occupancy performance measures.
D) If it is increasing in a hotel, the hotel's ROI must also be increasing.
E) Revpar is calculated by dividing daily room letting revenue by the number of rooms sold.

Question 15

An appraisal of a company's long term financial stability relative to a second company's long term financial stability can be achieved by:

A) Determining each company's trend in paying dividends
B) Comparing each company's times interest earned ratio
C) Comparing each company's current asset ratio
D) Comparing each company's earnings per share.
E) Comparing the total asset turnover for the two companies.

Question 16

Which of the following statements is true?

A) A high accounts receivable turnover figure will contribute towards a high current asset ratio.
B) An increasing accounts receivable turnover figure signifies a reduction in the average number of days to collect accounts receivable.
C) If selling prices are increasing the accounts receivable turnover figure will tend to increase.
D) An increase in the accounts receivable balance will result in an increase in the accounts receivable turnover figure.
E) None of the above are true.

Question 17

ROI can be seen to comprise two elements:

A) Profit margin and owners equity return.
B) Gross profit and asset revenue.
C) Profit margin and asset turnover.
D) Return on equity and asset turnover.
E) None of the above.

Question 18

The debt to equity ratio is an indicator of:

A) A company's capacity to use debt to lever up returns to equity holder holders.
B) The extent equity funds are drawn upon to pay off debt.
C) The amount paid to debt holders relative to the returns earned by equity holders.
D) The long-term indebtedness of a company.
E) None of the above.

Question 19

The relative profitability of two companies can be appraised by calculating and comparing:

A) The earnings per share for each company.
B) The times interest earned for each company.
C) The return on investment for each company.
D) The current ratio for each company.
E) None of the above

Question 20

The souvenir shop in a hotel foyer incurred $60,000 in cost of sales when generating sales of $140,000 last year. Its inventory account balance was $2,500 at the start of the year and $3,500 at the end of the year.
The merchandise sold was held in the shop's inventory for how many days on average during the year (assume a 360-day year)?

A) 18 days
B) 16 days
C) 12 days
D) 8 days
E) None of the above

Question 21

Which of the following statements is untrue:

A) The results of a ratio analysis convey limited information unless they are compared to some benchmark data.
B) ROI can be calculated in a range of ways that include: return on equity and return on assets available.
C) ROI can be dissected into two parts: profit margin and financial stability.
D) When calculating an asset turnover ratio, it is better to use an average of the asset balance through the year, rather than the asset balance at the end of the year.
E) An increase in inventory turnover does not always represent a desirable development.

Question 22

An appraisal of a company's long term financial stability relative to a second company's long term financial stability can be achieved by:

A) Determining each company's EPS trend
B) Comparing each company's acid test ratio
C) Comparing each company's asset turnover ratio
D) Comparing each company's debt ratio.
E) Comparing the dividend payment trend for the two companies.

Question 23

Which of the following statements is true about the current asset ratio?

A) An increase in the accounts receivable turnover ratio will generally result in an increase in the current ratio.
B) The current asset ratio is calculated by deducting current liabilities from current assets.
C) The current asset ratio is widely used as an indicator of a company's long term liquidity.
D) If calculated correctly, the current asset ratio will always be greater than one.
E) The current asset ratio is calculated by dividing current assets by current liabilities.

Question 24

Which of the following statements concerning revenue yield per restaurant seat is true?

A) It represents an amalgamation of the seat turnover and average spend per head performance measures.
B) If it is increasing in a restaurant, the restaurant's ROI must also be increasing.
C) Revenue yield per seat can be calculated by dividing daily restaurant revenue by the number of customers served.
D) It is not as complete a measure of restaurant performance as the widely-used seat turnover measure.
E) It represents a useful gauge of a restaurant's financial stability.

Question 25

Which of the following contributes to a higher ROI for a business?

A) A decreasing debt to assets ratio
B) An increase in sales while holding costs constant
C) A decreasing inventory turnover
D) Increasing number of days to collect accounts receivable
E) A decrease in the times interest earned ratio

Question 26

Which ratio provides insight into a company's capacity to pay its current liabilities?

A) Current asset ratio
B) Acid test ratio
C) Times interest earned ratio
D) Debt to equity ratio
E) Both A. and B.

Question 27

Which of the following impacts on the profit margin or asset turnover elements that comprise the ROI 'Dupont formula'?

A) Earnings per share
B) Debt to assets ratio
C) Inventory turnover
D) Current asset ratio
E) Times interest earned

Question 28

The Great Barrier Reef Coral Dive company reported EBIT of $30,000 and sales of $375,000 in 2010. Its asset base grew from $250,000 at the beginning of the year to $350,000 by 31^st December 2010. What is its 2010 ROI?

A) 12%
B) 8.57%
C) 10%
D) 8%
E) None of the above.

Question 29

The relative financial stability of two companies can be appraised by calculating and comparing:

A) The earnings per share for each company.
B) The times interest earned for each company.
C) The return on investment for each company.
D) The inventory turnover for each company.
E) None of the above

Question 30

The Gold Coast Professional Conference Organisation company took an average of 32 days to collect its accounts receivable in 2010. In 2011, it incurred $70,000 in expenses when generating sales of $250,000. Its accounts receivable balance was $25,000 at the start of 2011 and $31,250 at the end of the year.
Compared to 2010, during 2011 has the company been faster or slower in collecting its accounts receivable? (Assume a 360-day year).

A) 4 days slower
B)4 days faster
C) 8.5 days slower
D)13 days slower
E)13 days faster

Question 31

Which of the following statements is untrue?:

A) Ratio analysis is most usually conducted in the context of a benchmark such as past performance, goal achievement, performance of similar organisations, industry average data, etc.
B) A ratio analysis can be systematically structured by investigating a company's profit performance and its financial stability.
C) It is common to investigate the financial stability of an organisation according to two perspectives: the short term and the long term.
D) Analysis of the profitability of a firm can be conducted according to two perspectives: profit margin and financial stability.
E) When calculating ROI, what is meant by 'return' and also 'investment' is dependent on the context in which the analysis is being made.

Question 32

Which of the following ratios provides an evaluation of a company's ability to pay its current liabilities?

A) Times interest earned ratio.
B) Debt to equity ratio.
C) Price earnings ratio.
D) Profit margin ratio.
E) Current ratio.

Question 33

In its last financial year, the Dubbo Hotel reported net profit of $40,000, gross profit of $30,000, sales of $240,000 and average assets of $360,000. What was the hotel's gross profit margin?

A) 12.5%.
B) 16.66%.
C) 8.33%.
D) 11.11%.
E) 15%.

Question 34

Which of the following computations would provide a measure of a hotel's average room rate for a month?

A) Total letting revenue for the month / daily average rooms available.
B) Total letting revenue for the month /number of rooms sold in the month.
C) Total letting revenue for the month / total rooms available during the month.
D) Total letting revenue for the month /daily average rooms sold during the month.
E) Total letting revenue for the month / average room letting revenue during the month.

Question 35

Which of the following statements is true about the current asset ratio?

A) An increase in the accounts receivable turnover ratio will generally result in an increase in the current ratio.
B) The current asset ratio is calculated by deducting current liabilities from current assets.
C) When calculating the current asset ratio, inventory should be deducted from other current assets.
D) If calculated correctly, the current asset ratio will always be greater than one.
E) None of the above statements concerning the current asset ratio is true.

Question 36

The current asset ratio is an indicator of a company's capacity to:

A) Meet short-term debt obligations
B) Earn a strong rate of return
C) Cover long term debt obligations
D) Secure a strong short-term asset turnover
E) Earn the company's owners a good return in the short-term only.

Question 37

A company's financial leverage concerns:

A) Its capacity to earn profit.
B) Its capacity to pay off current liabilities.
C) Its capacity to lever inventory to achieve a high turnover
D) Its capacity to pay dividends
E) Its capacity to pay long term debt

Question 38

Which of the following contributes to a higher ROI?

A) Increasing number of days to collect accounts receivable
B) Increasing total asset turnover ratio
C) Increasing accounts receivable
D) Stable gross profit margin
E) Decreasing inventory turnover.

Question 39

Which of the following statements concerning Revpar is true?

A) It is not as complete a measure of hotel performance as the widely-used average room rate.
B) It represents a useful gauge of a hotel's financial stability.
C) Revpar is calculated by dividing daily room letting revenue by the number of rooms sold.
D) If it is increasing in a hotel, the hotel's ROI must also be increasing.
E) Considered individually, it represents a more complete performance measure than average room rate or percentage room occupancy.

Question 40

An appraisal of a company's long term financial stability relative to a second company's long term financial stability can be achieved by:

A) Determining each company's trend in paying dividends
B) Comparing each company's earnings before interest (EBIT) trend
C) Calculating each company's current asset ratio
D) Calculating each company's debt to equity ratio
E) Comparing the total asset turnover for the two companies.

Question 41

Which of the following statements is true?

A) A high accounts receivable turnover figure will contribute towards a high current asset ratio.
B) An increasing accounts receivable turnover figure signifies an increase in the average number of days to collect accounts receivable.
C) If selling prices are increasing, the accounts receivable turnover figure will tend to increase.
D) If credit sales are constant, an increase in the accounts receivable balance will result in a decrease in the accounts receivable turnover figure.
E) None of the above are true.

Question 42

In the most recent year, the Decadent Hotel earned $220,000 of profit before tax, after the deduction of $40,000 in interest expense. The Hotel's liabilities are $800,000 and its owner's equity is $1,200,000. What is the hotel's return on total assets, before interest and tax?

A) 13%
B) 9%
C) 11%
D) 10.6%
E) 12%

Question 43

Which of the following statements regarding gross profit is correct?

A) A reduction in gross profit margin will positively affect net profit margin.
B) Gross profit is calculated as revenue less variable expenses.
C) Gross profit is calculated as revenue less direct costs.
D) Any change in the gross profit margin can have a significant effect on the net profit margin.
E) A decline in total sales will reduce the gross profit margin.