Exam 10: Financial Statement Analysis

Thorpedo Ltd reported a return on assets of 15% for the year ending 31 December. It also acquired a licence for cash by paying $1m at the end of the year ending 31 December. This licence is expected to generate net profits of $0.1m per year and the asset is not amortised. Assuming the results for the next financial year mirror the year ending 31 December and the licence did increase net profit by $0.1m. What is the effect on Thorpedo Ltd's return on assets for this subsequent financial year?

The use of debt to increase a company's return on equity is:

The owners of a small entity, such as a sole trader, have greater access to the entity's accounting information than the equity participants of a large entity such as a public company. However, for the purposes of financial statement analysis, the accounting information needs of equity participants are the same.

Use the following information to answer questions 25 and 26. -Assuming that all sales have been made on credit and rounding up to two decimal places, what are the accounts receivables turnovers for Wannamaker's and Delano's?

Which of the following companies, whose ROE and ROA are given, is probably the most valued by shareholders?

Return on equity for Delta company is 7%. This means that:

Which of the following statements concerning the comparison of financial information between firms is not true?

For financial information to be useful for analysis, it must be both relevant and reliable. Other required qualitative characteristics are:

Which of the following is a measure of short-term solvency?

The most common information needs of users of financial statement analysis relate to profitability, liquidity and risk.

The 'true and fair view' of the auditor with respect to the financial statements of an entity, asserts that the financial assertions contained in the report are accurate in detail.

Profit from ordinary operations divided by sales is:

Inventory turnover in days indicates:

A lower than normal price/earnings ratio could mean:

The owners of an entity are regarded as equity investors whether they are sole traders, partnerships or shareholders in a multinational corporation, whereas preference shareholders may be classified as equity or debt investors depending on the characteristics of the shares.

If a company has a debt to equity ratio of 1:48, it means that for every $1 of equity, the company has $1.48 in liabilities.

A higher than normal price/earnings ratio could mean:

Which of the following assets would be used in calculating the current ratio but not normally in determining the quick ratio?

Unlike ordinary shareholders, preference shareholders are more likely to be interested in the extent to which profit is safe, rather than in profit growth, due to the fact that the return on their investment is typically fixed.

Effective financial analysis relies on internal sources of information such as the financial statements and notes to the accounts, as well as external sources such as the financial press and trade journals.