Question 1

The formula for gross profit margin is gross profit divided by:

Accepted Answer

A) sales. 
B) total assets. 
C) total equity. 
D) share capital + long-term loans.

Question 2

What does financial solvency refer to the ability of an entity to do?

Accepted Answer

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

Question 3

Which of these is not an advantage of using borrowed funds to finance a business?

Accepted Answer

A) Interest on borrowings is tax deductible. 
B) Borrowing can be used to boost returns to owners, as long as the return on the funds exceeds the cost of interest. 
C) Lenders do not dilute ownership interest in the business. 
D) Interest on borrowing is a legal commitment that must be met.

Question 4

R Co had a profit of $100,000 before tax, after deducting $18,000 in interest expense. R Co's non-current liabilities and equity total $1,000,000. Return on capital employed, before interest and tax is:

Accepted Answer

A) 13%. 
B) 11.8%. 
C) 10%. 
D) 9%.

Question 5

Operating profit before interest and taxation, divided by sales × 100/1 is the formula for:

Accepted Answer

A) return on capital employed. 
B) asset turnover period. 
C) return on shareholders' funds. 
D) operating profit margin.

Question 6

Trendy Traders reported total sales amounting to $1,800,000 in the year 2018, of which 80% were on credit. At 31 December, customers owed $200,000. If the firm operates for 365 days a year, how long, on average, does it take to collect money from its debtors?

Accepted Answer

A) 29 days. 
B) 13 days. 
C) 10 days. 
D) 51 days.

Question 7

Which of the following businesses would you expect to have the highest current ratio?

Accepted Answer

A) Service business that sells on credit. 
B) Manufacturer. 
C) Retailer. 
D) Service business that sells for cash.

Question 8

If current assets exceed current liabilities, the payment of accounts payable will:

Accepted Answer

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

Question 9

Sports Ltd reports the following information: $$\begin{array} { l l } 
\text { Net profit } & \$ 30,000 \
\text { Total assets } & 950,000 \
\text { Current liabilities } & 285,000 \
\text { Deferred liabilities } & 405,000
\end{array}$$ If current assets represent 60% of total assets, Sports Ltd's current ratio is:

Accepted Answer

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

Question 10

What is a good benchmark to compare business performance during a given period?

Accepted Answer

A) budgeted performance. 
B) past performance. 
C) competitor's performance. 
D) all of the above.

Question 11

Use this data to calculate earnings per ordinary share (EPS)for Orange Ltd. $$\begin{array} { l r } 
\text { Market price for each Orange Ltd share } & \$ 7,80 \
\text { Net Profit (after interest, tax) } & \$ 6,400 \
\text { Number of ordinary shares issued } & 15,000
\end{array}$$

Accepted Answer

A) $0.19. 
B) $0.43. 
C) $0.39. 
D) $0.61.

Question 12

On what does the adequacy of the gross profit margin depend?

Accepted Answer

A) selling price. 
B) buying price. 
C) total expenses. 
D) Both A and B.

Question 13

SSS Ltd has provided the following information from its financial statements for the year ended 30 June 2018. $$\begin{array} { l r } 
\text { Sales (all on credit) } & \$ 2,000,000 \
\text { Gross profit on sales } & 1,000,000 \
\text { Net profit } & 150,000 \
\text { Cost of sales } & 1,000,000 \
\text { Inventory at end of year } & 200,000 \
\text { Accounts receivable at end of year } & 500,000
\end{array}$$ 
-The company trades 365 days per year. The number of times SSS's accounts receivable turned over for 2018 is:

Accepted Answer

A) 5.0 times. 
B) 1.8 times. 
C) 3.8 times. 
D) 4.0 times.

Question 14

Using the information below find the average inventory turnover for Vox Ltd in days. $$\begin{array} { l r } 
\text { Sales } & \$ 1,800,000 \
\text { Cost of sales } & 1,200,000 \
\text { Stock on hand start } & 360,000 \
\text { Stock on hand end } & 312,000
\end{array}$$

Accepted Answer

A) 102.2 days. 
B) 63.26 days. 
C) 94.8 days. 
D) 68 days.

Question 15

Blue Company reported: $$\begin{array} { l l } 
\text { Share price } & \$ 18 \
\text { Net profit } & \$ 3,000 \
\text { Preference dividend } & \$ 500 \
\text { Ordinary dividend } & \$ 1,000 \
\text { Issued ordinary shares } & 1,000 \text { shares }
\end{array}$$ Earnings per ordinary share is:

Accepted Answer

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

Question 16

If the turnover period for accounts receivable is 8.1 times per annum, what is the average number of days it takes to collect cash from accounts receivable?

Accepted Answer

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

Question 17

Which of these is not an advantage of a shorter inventory turnover period?

Accepted Answer

A) It means fewer funds are tied up in inventory so more are available for use in the business. 
B) It means less storage space is needed for inventory. 
C) It means that management can have the cost advantage of buying in bulk. 
D) It means that inventory is less likely to become obsolete or out of date.

Question 18

Which of these is not a limitation of ratio analysis?

Accepted Answer

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

Question 19

If earnings per share is 85c, dividend per share is 50c, and the market price of each share is $9.35, the price-earnings ratio is:

Accepted Answer

A) 18.7:1. 
B) 11:1. 
C) 9:1. 
D) 5:1.

Question 20

A company with a higher level of gearing will have:

Accepted Answer

A) a high liabilities/total assets ratio. 
B) a lower owners' equity/total assets ratio. 
C) a higher owners' equity/total assets ratio. 
D) Both A and B.

Exam 8: Analysis and Interpretation of Financial Statements