Exam 10: Financial Statement Analysis

Measuring profits against sales over a period of time provides information on the increasing/decreasing profitability of the entity, and can determine whether the entity is increasing/decreasing its efficiency in each sale made.

What situations could cause a decrease in the current ratio, but an increase in the quick ratio? If this happens, is management to be commended or is a problem evident? Explain.

The statements of comprehensive income of LMA Ltd for the years ending 31 December reveal the following information: Based on this information, which of the following statements is incorrect?

Gross profit margin measures the:

If an investor (shareholder) discovers by analysing financial statements that she 'lost 5 cents for each dollar invested in the company', which ratio did she examine?

When measuring short-term solvency, the current ratio compares current assets to current liabilities, but inventory is normally excluded when calculating the quick ratio.

Lenders can be classified as short, medium or long-term lenders. In regard to financial statement analysis for lenders, which of the following statements is incorrect?

The statement of cash flow is considered a source of internal information for the financial analysis of an entity's solvency and its capacity to continue as a going concern.

The conclusion that a company 'earned 12.5c of profit for every dollar invested in assets' by the company reflects which of the following?

Under the efficient markets hypothesis (EMH), it is possible that individual shares may be under- or over-priced.

The social environment in which an entity operates includes factors such as concern for the natural environment and ensuring full employment, and is directly relevant to an analysis of business performance.

Charmaine Company has a return on assets of 12% and a return on ordinary shareholders' equity of 15%. What causes the difference in the two returns?

A company has the following accounts: I Paid up capital II Reserves III Retained profits IV Dividends payable Return on equity is net profit divided by:

Which of the following is a technique for analysing financial statement data?

Ratio analysis is a technique used for analysing financial statements, but it is only useful if it is based on items from the same financial statement; that is, if the items being compared are either exclusively all from the statement of comprehensive income or all from the balance sheet.

Given a high value, which of the following ratios best indicates that a retailing company is controlling the cost of the products it sells?

As the proportion of debt increases in a firm's capital structure, what can we say with certainty about the firm's risk and financial leverage?

Use the following information to answer questions 28 and 29. Kestal Ltd reported sales of $500 000 for the year ending 31 December. The net profit before interest and tax was $120 000, and the net profit after tax was $90 000. The average of total assets was $1 000 000. The average shareholders' equity was $700 000. -What is the return on equity for the year ending 31 December?

A company has no prepayments and has a current ratio of 0.98:1 and a quick ratio of 0.95:1. This indicates that the company cannot pay its debts if called upon to do so.

External sources can provide relevant information when industry trends and business risk are being analysed.