Deck 15: Financial Statement Analysis

Question 1

The financial records of Del Ltd reveal the following at 30 June 2016:

- What was the number of days' inventory on hand?

A) 121.7 days
B) 90 days
C) 80 days
D) 133.8 days

Answer 1

121.7 days

Question 2

Which of the following statements about the debt-to-equity ratio is NOT true?

A) A high ratio indicates that the company is highly geared.
B) From a creditor's point of view,a higher measure is desirable.
C) The debt-to-equity ratio indicates the proportion of borrowing to owners' investment.
D) The debt-to-equity ratio shows the degree of risk borne by the creditors vis-à-vis the shareholders.

Answer 2

B

Question 3

Tomlin Ltd's accounts receivable for year ended 31 December 2016 was $200 000.The number of days in receivables was 146 days.What were the credit sales for the year?

A) $500 000
B) $300 000
C) $80 000
D) This cannot be determined from the information provided.

Answer 3

A

Question 4

Which of the following statements about the interest coverage ratio is NOT true?

A) The interest coverage ratio is calculated as (earnings before interest and tax)/ (interest expense).
B) The interest coverage ratio indicates the degree to which commitment to pay interest on debts is covered by the company's ability to generate profit.
C) A low coverage ratio may be a warning of solvency problems.
D) A high interest coverage ratio indicates the company is not operating at sufficient profitability levels.

Question 5

Which of the following would NOT decrease the return on equity ratio?

A) An increase in company income tax
B) Transfers from retained profits to general reserve
C) Reduced profit margins
D) Issue of shares

Question 6

Which of the following statements about a ratio is NOT true?

A) If the financial statements are materially misstated,then ratios will be misleading.
B) A ratio is always expressed as a percentage.
C) A ratio can be interpreted and used meaningfully only with a good understanding of the company.
D) Ratios are indicators that can be interpreted.

Question 7

Alda Ltd's accounts receivable for year ended 30 June 2016 was $150 000.Cost of goods sold was $382 500 and the gross margin was 15 per cent.All sales are made on credit.

-What was the number of days' sales in receivables?

A) 121.7 days
B) 143.1 days
C) 260.4 days
D) 301.4 days

Question 8

Alda Ltd's accounts receivable for year ended 30 June 2016 was $150 000.Cost of goods sold was $382 500 and the gross margin was 15 per cent.All sales are made on credit.

-What was the accounts receivable turnover?

A) 2.55 times p.a.
B) 2.93 times p.a.
C) 2.8 times p.a.
D) 3 times p.a.

Question 9

The financial records of Del Ltd reveal the following at 30 June 2016:

- What was the number of days' sales in receivables?

A) 60.8 days
B) 90 days
C) 120 days
D) 8 times

Question 10

Saw Ltd's inventory at 30 June 2016 it was $20 000.Sales for the year ended 30 June 2016 were $125 000 and the gross margin was 20 per cent.

-What was the number of days' inventory on hand?

A) 73 days
B) 69.5 days
C) 64 days
D) 50 days

Question 11

Sales of Slider Ltd are $250 million and the operating profit after tax is $25 million.Asset turnover is 4 times p.a.What is the value of Slider Ltd's total assets?

A) $6.25 million
B) $10 million
C) $62.5 million
D) $100 million

Question 12

Which of the following statements about the current ratio is NOT true?

A) The current ratio indicates whether the company has enough short-term assets to cover its short-term debts.
B) An extremely high ratio is always a favourable sign.
C) A ratio above 1 indicates that working capital is positive.
D) The current ratio is calculated as current assets divided by current liabilities.

Question 13

Which of the following statements about the profit margin is NOT true?

A) The profit margin indicates the percentage of sales revenue that ends up as profit.
B) The profit margin gives some indication of pricing strategy.
C) A supermarket would be expected to have a high profit margin.
D) If the sales price decreases and expenses stay consistent,the profit margin will decrease.

Question 14

Saw Ltd's inventory at 30 June 2016 it was $20 000.Sales for the year ended 30 June 2016 were $125 000 and the gross margin was 20 per cent.

-What was the inventory turnover?

A) 5.25 times p.a.
B) 5 times p.a.
C) It cannot be calculated from the information provided.
D) 1.25 times p.a.

Question 15

Which of the following could NOT explain an increase in the return on equity ratio?

A) Share buyback
B) Declaring a final dividend
C) Increase in profits
D) Purchase of land on credit

Question 16

The financial records of Del Ltd reveal the following at 30 June 2016: I

-f Del Ltd reduces the number of days' inventory on hand to 60,what will be the new inventory turnover?

A) 3 times p.a.
B) 6 times p.a.
C) 12 times p.a.
D) 9 times p.a.

Question 17

The financial records of Del Ltd reveal the following at 30 June 2016:

-If Del Ltd reduces the number of days' sales in receivables to 37.5,what will be the new accounts receivable turnover?

A) 6 times p.a.
B) 9.7 times p.a.
C) 12 times p.a.
D) 8 times p.a.

Question 18

The inventory of Dyer Ltd for year ended 31 December 2016 was $70 000.The number of days' inventory on hand was 91.25 days.What was the cost of goods sold for the year?

A) $140 000
B) $259 000
C) $280 000
D) None of the answers provided

Question 19

Which of the following is NOT true of common size statements?

A) All balance sheet figures are expressed as a percentage of shareholders' equity.
B) All figures in the income statement are expressed as a percentage of sales.
C) Common size statements enable trends over time for a single company to be detected.
D) Common size statements assist in comparing companies of different sizes.

Question 20

Which of the following could explain an increase in the gross margin ratio?

A) A decrease in bad debts
B) Decreasing prices of raw materials
C) A decrease in depreciation on a delivery vehicle
D) Increasing advertising expenses

Question 21

Which of the ratios listed helps to indicate pricing strategy or competition intensity?

A) Current ratio
B) Profit margin
C) Quick ratio
D) Return on assets

Question 22

Which of the ratios listed helps to indicate whether current liabilities could be paid without having to sell the inventory?

A) Current ratio
B) Profit margin
C) Quick ratio
D) Return on assets

Question 23

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance.As a result,its annual depreciation expense increases by $200 000.The company's income tax rate is 30 per cent.

-What is the effect on ROE?

A) It increases.
B) It decreases.
C) It is not effected.
D) It cannot be determined from the information provided.

Question 24

A high debt-to-equity ratio does NOT indicate that the company:

A) is highly geared.
B) is heavily in debt relative to its equity.
C) may be vulnerable to interest rate increases.
D) has a high current ratio.

Question 25

Which of the ratios listed helps to indicate the average profit on each dollar of sales?

A) Current ratio
B) Profit margin
C) Quick ratio
D) Return on assets

Question 26

Hard-up Ltd has a current ratio of 0.75.Its current liabilities amount to $200 000.It borrows $75 000 from a finance company,repayable in five years.

-What is the immediate effect of the loan on current net profit?

A) There is a decrease of $75 000.
B) There is no immediate effect.
C) It cannot be determined from the information provided.
D) There is an increase of $75 000.

Question 27

Hard-up Ltd has a current ratio of 0.75.Its current liabilities amount to $200 000.It borrows $75 000 from a finance company,repayable in five years.

-What is the current ratio following the loan?

A) 0.818
B) 1.125
C) It cannot be determined from the above information
D) None of the answers provided

Question 28

Hard-up Ltd has a current ratio of 0.75.Its current liabilities amount to $200 000.It borrows $75 000 from a finance company,repayable in five years.

-What is the effect of the loan on the debt-to-equity ratio?

A) There is an increase.
B) There is a decrease.
C) There is no effect.
D) It cannot be determined from the information provided.

Question 29

Which of the ratios listed helps to indicate whether a company has enough short-term assets to cover its short-term liabilities?

A) Current ratio
B) Profit margin
C) Debt-to-equity
D) Return on assets

Question 30

Hard-up Ltd has a current ratio of 0.75.Its current liabilities amount to $200 000.It borrows $75 000 from a finance company,repayable in five years.

-What is the effect of the loan on working capital?

A) There is no effect.
B) There is an increase of $75 000.
C) There is a decrease of $75 000.
D) It cannot be determined from the above information.

Question 31

The operating profit after tax of Calculus Ltd is $10 million and sales are $100 million.Asset turnover is 1.25 times p.a.What is Calculus Ltd's ROA?

A) 0.0125
B) 0.1
C) 0.125
D) 1.25

Question 32

Which of the following could explain a decrease in the quick ratio?

A) A change from FIFO to LIFO
B) A change in the depreciation method used
C) Slow-moving inventory
D) Increase in accounts payable

Question 33

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance.As a result,its annual depreciation expense increases by $200 000.The company's income tax rate is 30 per cent.

-What is the effect on the debt-to-equity ratio?

A) It increases.
B) It decreases.
C) There is no effect.
D) It cannot be determined from the information provided.

Question 34

Which of the ratios listed helps to indicate the ability of the company to meet its current obligations?

A) Current ratio
B) Profit margin
C) Debt-to-equity
D) Return on assets

Question 35

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance.As a result,its annual depreciation expense increases by $200 000.The company's income tax rate is 30 per cent.

-What is the effect on ROA,which was 20 per cent prior to the change?

A) It increases.
B) It decreases.
C) There is no effect.
D) It cannot be determined from the information provided.

Question 36

Which of the following could explain a substantial increase in the current ratio (presently 1:1)?

A) Purchase of inventory for cash
B) Sale of a major noncurrent asset near year-end
C) A large prepayment near year-end
D) Received a cash deposit for work to be done next year

Question 37

Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance.As a result,its annual depreciation expense increases by $200 000.The company's income tax rate is 30 per cent.

-What is the effect on the inventory turnover ratio?

A) It increases.
B) It decreases.
C) There is no effect.
D) It cannot be determined from the information provided.

Question 38

Which of the ratios listed helps to indicate the efficiency with which the resources of the company are being utilised to generate profit?

A) Current ratio
B) Profit margin
C) Quick ratio
D) Return on assets

Question 39

Which of the following could NOT lead to an increase in debtors turnover?

A) Receipt of cash from debtors
B) Increase in selling price of goods
C) Tighter credit controls
D) Increase in cash sales

Question 40

Which of the ratios listed helps to indicate the ability of a company to generate a return on its assets before considering the cost of financing those assets?

A) Current ratio
B) Profit margin
C) Quick ratio
D) Return on assets

Question 41

A company's current ratio is presently 2:1.Which of the following transactions would decrease that ratio?

A) Depreciation of plant and equipment
B) Purchase of inventory on credit
C) Payment of accounts payable
D) Receive payment from accounts receivable

Question 42

The following question relates to PQR,which has the following ratios: return on assets, (ROA)10 per cent;return on equity (ROE)12 per cent;and current ratio (CR)of 1.8:1.

-Additional credit sales of $2 million (cost price $1.5 million)are made.This transaction will:

A) increase ROA,ROE and CR.
B) increase ROA and ROE but not CR.
C) increase ROA and CR but not ROE.
D) increase ROA,increase ROE and decrease CR.

Question 43

The following question relates to PQR,which has the following ratios: return on assets, (ROA)10 per cent;return on equity (ROE)12 per cent;and current ratio (CR)of 1.8:1.

-A customer provides a deposit of $500 000 near year-end.The product will not be delivered until next year.This transaction will:

A) increase ROA and ROE,but decrease CR.
B) increase ROA and ROE,but have no effect on CR.
C) decrease CR,but have no effect on ROA or ROE.
D) decrease ROA and CR,but have no effect on ROE.

Question 44

The following question relates to PQR,which has the following ratios: return on assets, (ROA)10 per cent;return on equity (ROE)12 per cent;and current ratio (CR)of 1.8:1.

-The company changed accounting methods by deciding to capitalise rather than expense a research and development outlay.This will:

A) increase ROE,but have no effect on ROA and CR.
B) increase ROA,ROE and CR.
C) increase ROA and ROE,but have no effect on CR.
D) have no effect on ROA,ROE or CR.

Question 45

Which of the following statements is true?

A) If the asset turnover ratio remains constant and the profit margin increases,return on assets must have increased.
B) If return on assets increases,return on equity must increase.
C) If the current ratio increases,the quick ratio will also increase.
D) None of the answers provided.

Question 46

The following question relates to PQR,which has the following ratios: return on assets, (ROA)10 per cent;return on equity (ROE)12 per cent;and current ratio (CR)of 1.8:1

-Directors decided to revalue land upwards by $350 000.This transaction will:

A) increase ROA and ROE.
B) decrease ROA and ROE.
C) decrease ROA,but have no effect on ROE.
D) have no effect.

Question 47

The following question relates to PQR,which has the following ratios: return on assets, (ROA)10 per cent;return on equity (ROE)12 per cent;and current ratio (CR)of 1.8:1.

-The company purchased raw materials on credit for $400 000.This transaction will:

A) decrease ROA,ROE and CR.
B) decrease ROA and CR,but not ROE.
C) decrease ROA only.
D) have no effect.

Question 48

Chicago Ltd is a large retailer of hardware equipment that sells its products through a network of suburban stores.Shown below are the calculation of some of its key ratios for 2016 and 2015. Which of the above ratios explains why ROA has decreased from 2015 to 2016?

A) Profit Margin
B) Asset Turnover
C) Current Ratio
D) Debt to Equity Ratio

Question 49

Good credit control is signalled by:

A) high accounts receivable turnover and high days sales in receivables.
B) low accounts receivable turnover and low days sales in receivables.
C) low accounts receivable turnover and high days sales in receivables.
D) high accounts receivable turnover and low days sales in receivables.

Question 50

The following question relates to PQR,which has the following ratios: return on assets, (ROA)10 per cent;return on equity (ROE)12 per cent;and current ratio (CR)of 1.8:1.

-A company declares and pays a final dividend.The effect of this transaction is to:

A) decrease CR,but not affect ROA and ROE.
B) decrease CR,but increase ROA and ROE.
C) decrease CR,increase ROA,and not affect ROE.
D) have no effect.