Question 1

The statement concerning the average settlement period for creditors that is correct is:

Accepted Answer

A)  A change in the creditors turnover period of 56 days to 65 days means that creditors are being paid faster. 
B)  It is always best for the business to make creditors wait for their money for as long as possible. 
C)  Creditors provide a free source of finance for a business. 
D)  It is best to pay creditors as quickly as possible.

Question 2

Blue Company reported:

Accepted Answer

A)  $1.80 
B)  $2.50 
C)  $1.50 
D)  $3.00

Question 3

Using the formula gearing ratio = long-term liabilities/(shareholders' funds + long-term liabilities) × 100/1, calculate the gearing ratio from the following information. Long-term liabilities are $18m; shareholders' funds are $14m.

Accepted Answer

A)  44% 
B)  128% 
C)  78% 
D)  56%

Question 4

The ratios that measure the degree of risk associated with borrowing money from outsiders to finance the business are the:

Accepted Answer

A)  liquidity ratios. 
B)  investment ratios. 
C)  efficiency ratios. 
D)  gearing ratios.

Question 5

The type of analysis being carried out when a company's gross profit ratio for three years is graphed and compared with the average industry gross profit ratio calculated over the same time period is:

Accepted Answer

A)  gearing analysis. 
B)  vertical analysis. 
C)  parallel analysis. 
D)  trend analysis.

Question 6

If current assets exceed current liabilities, the payment of creditors will:

Accepted Answer

A)  increase the current ratio. 
B)  decrease the current ratio. 
C)  increase the level of cash held. 
D)  do none of the above.

Question 7

Why is interest added back to profit before tax when calculating return on total assets?

Accepted Answer

A)  because the efficient use of resources should be examined independently from the method of financing 
B)  to indicate to lenders that some risk is involved 
C)  because interest rates vary over time 
D)  A and B

Question 8

The ratio that helps to measure the risk involved in financing a business with borrowed funds is the:

Accepted Answer

A)  current ratio. 
B)  profit margin ratio. 
C)  interest cover ratio. 
D)  asset turnover ratio.

Question 9

Which of these ratios measure returns to shareholders?

Accepted Answer

A)  earnings per share 
B)  return on shareholders' funds 
C)  dividend yield 
D)  all of the above

Question 10

If Sharpe Products Ltd has a asset turnover ratio of 2 times and a net profit margin of 6.5%, the return on total assets is:

Accepted Answer

A)  8.5%. 
B)  13.0%. 
C)  6.5%. 
D)  30.0%.

Question 11

The ratios that are specifically concerned with assessing the efficiency with which assets have been used by the business are the:

Accepted Answer

A)  liquidity ratios. 
B)  gearing ratios. 
C)  efficiency ratios. 
D)  investment ratios.

Question 12

The current market price of Fixit Ltd's ordinary shares is $5.00 each. If the latest earnings per share is $0.50, the company's price-earnings ratio is:

Accepted Answer

A)  20 times. 
B)  10 times. 
C)  2.0 times. 
D)  2.5 times.

Question 13

Which business would you expect to have the highest current ratio?

Accepted Answer

A)  retailer 
B)  manufacturer 
C)  service business that sells for cash 
D)  service business that sells on credit

Question 14

U2 Ltd is considering whether to offer trade credit to A1 Ltd. The ratio from A1's accounts that will be most useful in assessing the firm's ability to repay its trade debts on time is the:

Accepted Answer

A)  gearing. 
B)  average settlement period for trade payables. 
C)  interest cover. 
D)  asset turnover period.

Question 15

Which of these is a factor that can influence the amount a company is prepared to distribute as dividends to its shareholders?

Accepted Answer

A)  investors' expectations 
B)  the availability of cash 
C)  the need to retain funds within the business for future growth 
D)  all of the above

Question 16

Which of these is not an efficiency ratio?

Accepted Answer

A)  current ratio 
B)  asset turnover period 
C)  average inventory turnover period 
D)  average settlement period for debtors

Question 17

Which of these is not a limitation of ratio analysis?

Accepted Answer

A)  Firms of different size cannot be compared. 
B)  One ratio is not enough information to make an overall judgement. 
C)  Different accounting methods used by competitors. 
D)  All are limitations.

Question 18

Solvency refers to the ability of an entity to:

Accepted Answer

A)  improve sales. 
B)  earn a high rate of profit. 
C)  meet its long-term obligations. 
D)  A and B

Question 19

If the turnover period for debtors is 8.1 times per annum, the average number of days it takes to collect cash from debtors is:

Accepted Answer

A)  45 days. 
B)  81 days. 
C)  295 days. 
D)  60 days.

Question 20

Sports Ltd reports the following information:  If current assets represent 60% of total assets, Sports Ltd's current ratio is:

Accepted Answer

A)  50%. 
B)  150%. 
C)  67%. 
D)  200%.

Exam 6: Analysis and Interpretation of Financial Statements