Question 1

Financial stability refers to the ability of an entity to:

Accepted Answer

A)  pay its rent. 
B)  earn a high rate of profit. 
C)  meet its long-term obligations. 
D)  pay its current obligations on time. 
A)  pay its rent. 
B)  earn a high rate of profit. 
C)  meet its long-term obligations. 
D)  pay its current obligations on time.

Question 2

Calculate the dividend yield for the year ending 30 June 2019 using the following information: interim dividend was 8c per ordinary share; the final dividend 12c per share; and the market price per share on 30 June 2019 was $6.00.

Accepted Answer

A)  2.18%. 
B)  3.33%. 
C)  33.33%. 
D)  30.00%. 
A)  2.18%. 
B)  3.33%. 
C)  33.33%. 
D)  30.00%.

Question 3

The profit margin ratio measures:

Accepted Answer

A)  return to shareholders. 
B)  the rate of return on total assets. 
C)  the proportion of each sales dollar that represents profit. 
D)  the difference between the purchase price and the selling price of inventory. 
A)  return to shareholders. 
B)  the rate of return on total assets. 
C)  the proportion of each sales dollar that represents profit. 
D)  the difference between the purchase price and the selling price of inventory.

Question 4

In relation to the price-earnings ratio (P/E ratio), which statement is incorrect?

Accepted Answer

A)  Higher P/E ratios tend to be associated with growth companies. 
B)  As expectations of future profits increase the P/E ratio tends to fall. 
C)  It measures how much investors are willing to pay for each dollar of earnings. 
D)  A P/E ratio of 5.2 means that the shares of the company are selling at 5.2 times current profits. 
A)  Higher P/E ratios tend to be associated with growth companies. 
B)  As expectations of future profits increase the P/E ratio tends to fall. 
C)  It measures how much investors are willing to pay for each dollar of earnings. 
D)  A P/E ratio of 5.2 means that the shares of the company are selling at 5.2 times current profits.

Question 5

The following ratios are measures of aspects of a firm's profitability, except for:

Accepted Answer

A)  return on total assets. 
B)  earnings yield. 
C)  dividend yield. 
D)  current ratio. 
A)  return on total assets. 
B)  earnings yield. 
C)  dividend yield. 
D)  current ratio.

Question 6

When calculating the rate of return on total assets the interest is added back to profit before tax:

Accepted Answer

A)  because it must be paid regardless of profits. 
B)  because interest rates are variable over time. 
C)  to indicate to lenders that some risk is involved. 
D)  to reflect the fact that the efficient use of resources should be examined independently from the method of financing. 
A)  because it must be paid regardless of profits. 
B)  because interest rates are variable over time. 
C)  to indicate to lenders that some risk is involved. 
D)  to reflect the fact that the efficient use of resources should be examined independently from the method of financing.

Question 7

Which of the following statements concerning the current ratio is incorrect?

Accepted Answer

A)  The current ratio can be manipulated at balance date,e.g. by using cash to pay off short-term debt. 
B)  A high current ratio may indicate excessive investment in working capital. 
C)  A low current ratio may indicate difficulty in meeting short-term commitments. 
D)  A current ratio of 1.5 to 1 should always be maintained. 
A)  The current ratio can be manipulated at balance date,e.g. by using cash to pay off short-term debt. 
B)  A high current ratio may indicate excessive investment in working capital. 
C)  A low current ratio may indicate difficulty in meeting short-term commitments. 
D)  A current ratio of 1.5 to 1 should always be maintained.

Question 8

Which of the following statements is incorrect?

Accepted Answer

A)  Fundamental analysis is engaged in by many analysts. 
B)  Fundamental analysis assumes that an analyst can study all the published information in relation to an entity and determine whether its shares are under/over-valued. 
C)  Fundamental analysis assumes that an analyst should concentrate on studying data about an entity from a primary source and give little weight to secondary sources of information. 
D)  Fundamental analysis assumes that an analyst can study all the published information in relation to an entity and determine whether its shares are correctly valued. 
A)  Fundamental analysis is engaged in by many analysts. 
B)  Fundamental analysis assumes that an analyst can study all the published information in relation to an entity and determine whether its shares are under/over-valued. 
C)  Fundamental analysis assumes that an analyst should concentrate on studying data about an entity from a primary source and give little weight to secondary sources of information. 
D)  Fundamental analysis assumes that an analyst can study all the published information in relation to an entity and determine whether its shares are correctly valued.

Question 9

Which of the following are sources of financial information about companies?
I. Published financial statements (annual reports)
II. The Internet
III. The Stock Exchange
IV. Financial newspapers and journals
V. Financial advisory services

Accepted Answer

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

Question 10

Financial stability refers to the ability of an entity to:

Accepted Answer

A)  minimise expenses. 
B)  increase market share. 
C)  meet long-term obligations. 
D)  achieve a high rate of profit. 
A)  minimise expenses. 
B)  increase market share. 
C)  meet long-term obligations. 
D)  achieve a high rate of profit.

Question 11

Buyer Co has ordered goods on credit from Seller Co. Before Seller ships the goods it would like to be sure that Buyer will be able to pay for them within the normal credit period. Assuming Seller has access to Buyer's financial statements, which of the following ratios will be of the most interest to Seller Co.?

Accepted Answer

A)  Current ratio 
B)  Debt ratio 
C)  Price earnings ratio 
D)  Dividend yield ratio 
A)  Current ratio 
B)  Debt ratio 
C)  Price earnings ratio 
D)  Dividend yield ratio

Question 12

Which statement concerning earnings per share is incorrect?

Accepted Answer

A)  Earnings per share is regarded as one of the least important financial ratios. 
B)  It represents a conversion of the absolute dollar amount of profit to a per share basis. 
C)  If profits increase earnings per share could still decrease if share capital increases at a greater rate than profits. 
D)  In calculating earnings per ordinary share, preference dividends are deducted from profit. 
A)  Earnings per share is regarded as one of the least important financial ratios. 
B)  It represents a conversion of the absolute dollar amount of profit to a per share basis. 
C)  If profits increase earnings per share could still decrease if share capital increases at a greater rate than profits. 
D)  In calculating earnings per ordinary share, preference dividends are deducted from profit.

Question 13

Windbreaker Limited has a current ratio of 2.5:1. Which of the following actions will decrease this ratio?

Accepted Answer

A)  Declaration of a dividend 
B)  Sale of a machine for cash 
C)  Issue of long-term debentures 
D)  Collection of an account receivable 
A)  Declaration of a dividend 
B)  Sale of a machine for cash 
C)  Issue of long-term debentures 
D)  Collection of an account receivable

Question 14

The current (working capital) ratio is calculated by dividing:

Accepted Answer

A)  profit by current assets. 
B)  revenue by current assets. 
C)  current liabilities by current assets. 
D)  current assets by current liabilities. 
A)  profit by current assets. 
B)  revenue by current assets. 
C)  current liabilities by current assets. 
D)  current assets by current liabilities.

Question 15

Using borrowed funds in an attempt to earn a return greater than the cost of borrowing is referred to as:

Accepted Answer

A)  equity funding. 
B)  capital budgeting. 
C)  gearing or leverage. 
D)  overdraft financing. 
A)  equity funding. 
B)  capital budgeting. 
C)  gearing or leverage. 
D)  overdraft financing.

Question 16

The average market price of Lavendar Ltd's ordinary shares is $5.40 and the earnings per ordinary share are 90c. The P/E ratio is:

Accepted Answer

A)  6.0 
B)  4.86 
C)  16.67 
D)  unable to be calculated from the information provided. 
A)  6.0 
B)  4.86 
C)  16.67 
D)  unable to be calculated from the information provided.

Question 17

Vertical analysis of a statement of financial position usually:

Accepted Answer

A)  calculates each balance sheet item as a percentage of sales. 
B)  calculates each balance sheet item as a percentage of share capital. 
C)  calculates each balance sheet item as a percentage of the bank balance. 
D)  calculates each balance sheet item as a percentage of total assets (funds). 
A)  calculates each balance sheet item as a percentage of sales. 
B)  calculates each balance sheet item as a percentage of share capital. 
C)  calculates each balance sheet item as a percentage of the bank balance. 
D)  calculates each balance sheet item as a percentage of total assets (funds).

Question 18

The formula to calculate receivables (debtors) turnover in times per annum is:

Accepted Answer

A)  365 divided by net sales 
B)  Net sales revenue divided by total assets 
C)  Net sales revenue divided by average receivables balance 
D)  Average receivables balance divided by net sales revenue 
A)  365 divided by net sales 
B)  Net sales revenue divided by total assets 
C)  Net sales revenue divided by average receivables balance 
D)  Average receivables balance divided by net sales revenue

Question 19

Which of the following are possible uses of financial analysis?
I. By shareholders to assess future profitability and financial stability
II. By management for planning and control
III. By financial analysts to predict future share price
IV. By the government to estimate taxation payable

Accepted Answer

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

Exam 19: Analysis and Interpretation of Financial Statements

Financial stability refers to the ability of an entity to:

Calculate the dividend yield for the year ending 30 June 2019 using the following information: interim dividend was 8c per ordinary share; the final dividend 12c per share; and the market price per share on 30 June 2019 was $6.00.

The profit margin ratio measures:

In relation to the price-earnings ratio (P/E ratio), which statement is incorrect?

The following ratios are measures of aspects of a firm's profitability, except for:

When calculating the rate of return on total assets the interest is added back to profit before tax:

Which of the following statements concerning the current ratio is incorrect?

Which of the following statements is incorrect?

Which of the following are sources of financial information about companies? I. Published financial statements (annual reports) II. The Internet III. The Stock Exchange IV. Financial newspapers and journals V. Financial advisory services

Financial stability refers to the ability of an entity to:

Which statement concerning earnings per share is incorrect?

Windbreaker Limited has a current ratio of 2.5:1. Which of the following actions will decrease this ratio?

The current (working capital) ratio is calculated by dividing:

Using borrowed funds in an attempt to earn a return greater than the cost of borrowing is referred to as:

The average market price of Lavendar Ltd's ordinary shares is $5.40 and the earnings per ordinary share are 90c. The P/E ratio is:

Vertical analysis of a statement of financial position usually:

The formula to calculate receivables (debtors) turnover in times per annum is:

Which of the following are possible uses of financial analysis? I. By shareholders to assess future profitability and financial stability II. By management for planning and control III. By financial analysts to predict future share price IV. By the government to estimate taxation payable

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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