Question 1

Possible explanations for inadequate profitability include all of the following except for:

Accepted Answer

A)  expenses are too high. 
B)  selling prices are too low. 
C)  borrowing costs too low. 
D)  excessive investment in assets in relation to revenues. 
A)  expenses are too high. 
B)  selling prices are too low. 
C)  borrowing costs too low. 
D)  excessive investment in assets in relation to revenues. C

Question 2

The quick (acid test) ratio reflects:

Accepted Answer

A)  the same information as the debt ratio. 
B)  the relationship of quick assets to fixed assets. 
C)  management's reaction time to avoid losses. 
D)  the belief that not all current assets can be liquidated immediately. 
A)  the same information as the debt ratio. 
B)  the relationship of quick assets to fixed assets. 
C)  management's reaction time to avoid losses. 
D)  the belief that not all current assets can be liquidated immediately. D

Question 3

Which statement concerning the cash flow adequacy ratio is incorrect?

Accepted Answer

A)  A ratio of 100% or more over several years indicates an inadequate ability to generate sufficient operating cash to cover requirements. 
B)  The ratio assesses the entity's ability to generate sufficient operating cash flow to cover its main cash requirements. 
C)  The main requirements for cash from operations is to pay debts, acquire assets and pay dividends. 
D)  A fall in the ratio indicates a lower ability to generate operating cash to meet requirements. 
A)  A ratio of 100% or more over several years indicates an inadequate ability to generate sufficient operating cash to cover requirements. 
B)  The ratio assesses the entity's ability to generate sufficient operating cash flow to cover its main cash requirements. 
C)  The main requirements for cash from operations is to pay debts, acquire assets and pay dividends. 
D)  A fall in the ratio indicates a lower ability to generate operating cash to meet requirements. A

Question 4

Which of these are limitations of financial analysis?
I. Use of historical data
II. Invalid comparisons
III. Ratio results often contain errors in calculations
IV. Historical cost financial reports are not adjusted for inflation
V. Non-quantitative factors are not considered

Accepted Answer

A)  I, II, III and IV only 
B)  I, II, III and V only 
C)  I, II, IV and V only 
D)  I, II, III, IV and V 
A)  I, II, III and IV only 
B)  I, II, III and V only 
C)  I, II, IV and V only 
D)  I, II, III, IV and V

Question 5

Profit before finance costs is used in calculating return on total assets because:

Accepted Answer

A)  interest rates are hard to predict. 
B)  it is simpler to calculate than profit after deducting finance costs. 
C)  the efficient use of resources should be examined independently of the method of financing. 
D)  interest is a tax deduction for a company. 
A)  interest rates are hard to predict. 
B)  it is simpler to calculate than profit after deducting finance costs. 
C)  the efficient use of resources should be examined independently of the method of financing. 
D)  interest is a tax deduction for a company.

Question 6

_________________is calculated as annual dividend per ordinary share divided by market price per ordinary share.

Accepted Answer

A)  dividend yield. 
B)  dividend per share. 
C)  earnings per share. 
D)  dividend payout ratio. 
A)  dividend yield. 
B)  dividend per share. 
C)  earnings per share. 
D)  dividend payout ratio.

Question 7

Ratios are normally divided into three general groups, which of these is not one of those groups?

Accepted Answer

A)  Liability ratios 
B)  Liquidity ratios 
C)  Profitability ratios 
D)  Financial stability ratios 
A)  Liability ratios 
B)  Liquidity ratios 
C)  Profitability ratios 
D)  Financial stability ratios

Question 8

Which of the following businesses is likely to have the highest inventory turnover ratio?

Accepted Answer

A)  jeweller. 
B)  music shop. 
C)  fish and chip shop. 
D)  car dealership. 
A)  jeweller. 
B)  music shop. 
C)  fish and chip shop. 
D)  car dealership.

Question 9

In a trend analysis of Lester Company, which of the following changes appear to be the most significant in requiring further investigation?

Accepted Answer

A)  An increase in revenue of 12%. 
B)  An increase in total assets of 5%. 
C)  An increase of 15% in borrowing costs. 
D)  A decrease of 4% in motor vehicle expenses. 
A)  An increase in revenue of 12%. 
B)  An increase in total assets of 5%. 
C)  An increase of 15% in borrowing costs. 
D)  A decrease of 4% in motor vehicle expenses.

Question 10

All of the following are limitations of financial ratio analysis except for:

Accepted Answer

A)  suitable yardsticks may not be available with which to compare results. 
B)  year-end data is not necessarily typical of the position during the year. 
C)  excessive information is being disclosed in company annual reports. 
D)  it is the past performance that is being analysed. 
A)  suitable yardsticks may not be available with which to compare results. 
B)  year-end data is not necessarily typical of the position during the year. 
C)  excessive information is being disclosed in company annual reports. 
D)  it is the past performance that is being analysed.

Question 11

Which of the following ratios would be the most helpful to an investor who is investing in ordinary shares primarily for dividends rather than for appreciation in market price?

Accepted Answer

A)  dividend yield. 
B)  current ratio. 
C)  rate of return on ordinary equity. 
D)  return on total assets. 
A)  dividend yield. 
B)  current ratio. 
C)  rate of return on ordinary equity. 
D)  return on total assets.

Question 12

Profit less income tax, divided by revenue, is the formula for:

Accepted Answer

A)  return on equity. 
B)  return on assets. 
C)  profit margin. 
D)  earnings per share. 
A)  return on equity. 
B)  return on assets. 
C)  profit margin. 
D)  earnings per share.

Question 13

A profit ratio for a retailer of 8.2% in 2019 compared to 7.6% in 2018 indicates:

Accepted Answer

A)  a declining profit margin. 
B)  no change in the profit margin. 
C)  an improving profit margin. 
D)  impending bankruptcy. 
A)  a declining profit margin. 
B)  no change in the profit margin. 
C)  an improving profit margin. 
D)  impending bankruptcy.

Question 14

Which of the following ratios measure the adequacy of profits?
I. Profit compared to sales
II. Profit compared to equity
III. Profit compared to total assets
IV. Profit before interest and finance costs/ finance costs

Accepted Answer

A)  II and IV 
B)  I and II only 
C)  I, III and IV 
D)  I, II and III only 
A)  II and IV 
B)  I and II only 
C)  I, III and IV 
D)  I, II and III only

Question 15

Financial ratios are used for all the following purposes except:

Accepted Answer

A)  by creditors to monitor liquidity. 
B)  by shareholders to assess profitability. 
C)  by taxation authorities to determine the amount of tax payable. 
D)  by management for planning and control. 
A)  by creditors to monitor liquidity. 
B)  by shareholders to assess profitability. 
C)  by taxation authorities to determine the amount of tax payable. 
D)  by management for planning and control.

Question 16

The calculation for dividend yield on ordinary shares is:

Accepted Answer

A)  annual dividend divided by earnings. 
B)  market price divided by dividend per share. 
C)  dividend per share divided by market price per share. 
D)  annual dividend divided by number of ordinary shares. 
A)  annual dividend divided by earnings. 
B)  market price divided by dividend per share. 
C)  dividend per share divided by market price per share. 
D)  annual dividend divided by number of ordinary shares.

Question 17

Profit before finance costs and taxation divided by average total assets is the formula for:

Accepted Answer

A)  dividend yield. 
B)  profit margin. 
C)  earnings per share. 
D)  return on total assets. 
A)  dividend yield. 
B)  profit margin. 
C)  earnings per share. 
D)  return on total assets.

Question 18

Johnson Foods Company had a before-tax profit of $250 000 after deducting interest expenses of $18 000. Johnson Foods' liabilities and equity total $1 875 000. Return on total assets, before finance costs and tax is:

Accepted Answer

A)  14.29%. 
B)  13.33%. 
C)  12.37%. 
D)  unable to be calculated from the information provided. 
A)  14.29%. 
B)  13.33%. 
C)  12.37%. 
D)  unable to be calculated from the information provided.

Question 19

_____________analysis measures an entity's financial structure and its ability to continue to operate into the future and meet its long-term cash obligations.

Accepted Answer

A)  trend 
B)  liquidity 
C)  working capital 
D)  financial stability 
A)  trend 
B)  liquidity 
C)  working capital 
D)  financial stability

Question 20

When calculating the quick (acid test) ratio, which of the following is normally deducted from current assets?

Accepted Answer

A)  Current liabilities 
B)  Cash and prepayments 
C)  Inventory and prepaid expenses 
D)  Inventory and accounts receivable 
A)  Current liabilities 
B)  Cash and prepayments 
C)  Inventory and prepaid expenses 
D)  Inventory and accounts receivable

Exam 19: Analysis and Interpretation of Financial Statements

Possible explanations for inadequate profitability include all of the following except for:

The quick (acid test) ratio reflects:

Which statement concerning the cash flow adequacy ratio is incorrect?

Which of these are limitations of financial analysis? I. Use of historical data II. Invalid comparisons III. Ratio results often contain errors in calculations IV. Historical cost financial reports are not adjusted for inflation V. Non-quantitative factors are not considered

Profit before finance costs is used in calculating return on total assets because:

_________________is calculated as annual dividend per ordinary share divided by market price per ordinary share.

Ratios are normally divided into three general groups, which of these is not one of those groups?

Which of the following businesses is likely to have the highest inventory turnover ratio?

In a trend analysis of Lester Company, which of the following changes appear to be the most significant in requiring further investigation?

All of the following are limitations of financial ratio analysis except for:

Which of the following ratios would be the most helpful to an investor who is investing in ordinary shares primarily for dividends rather than for appreciation in market price?

Profit less income tax, divided by revenue, is the formula for:

A profit ratio for a retailer of 8.2% in 2019 compared to 7.6% in 2018 indicates:

Which of the following ratios measure the adequacy of profits? I. Profit compared to sales II. Profit compared to equity III. Profit compared to total assets IV. Profit before interest and finance costs/ finance costs

Financial ratios are used for all the following purposes except:

The calculation for dividend yield on ordinary shares is:

Profit before finance costs and taxation divided by average total assets is the formula for:

Johnson Foods Company had a before-tax profit of $250 000 after deducting interest expenses of $18 000. Johnson Foods' liabilities and equity total $1 875 000. Return on total assets, before finance costs and tax is:

_____________analysis measures an entity's financial structure and its ability to continue to operate into the future and meet its long-term cash obligations.

When calculating the quick (acid test) ratio, which of the following is normally deducted from current assets?

Decision Making and the Role of Accounting

Financial Statements for Decision Making

Recording Transactions

Adjusting the Accounts and Preparing Financial Statements

Completing the Accounting Cycle Closing and Reversing Entries

Accounting for Retailing

Accounting for Systems

Partnerships: Formation, Operation and Reporting

Companies: Formation and Operations

Regulation and the Conceptual Framework

Cash Management and Control

Receivables

Inventories

Non-Current Assets: Acquisition and Depreciation

Non-Current Assets: Revaluation, Disposal and Other Aspects

Liabilities

Presentation of Financial Statements

Statement of Cash Flows

Accounting for Manufacturing

Cost Accounting Systems

Cost-Volume-Profit Analysis for Decision Making

Budgeting for Planning and Control

Performance Evaluation for Managers

Differential Analysis, Profitability Analysis and Capital Budgeting

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