Question 1

If the earnings yield is 6.67%, the price-earnings ratio is:

Accepted Answer

A) 12:1 
B) 15:1 
C) 6:1 
D) 6.7:1

Question 2

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 3

Which of these ratios measure returns to shareholders?

Accepted Answer

A) Earnings per share 
B) Dividend yield 
C) Return on ordinary shareholders' funds 
D) All of the above

Question 4

Success Ltd has a price-earnings ratio of 5 and earnings per share of 22 cents. Its issued capital consists of 2 000 000 $1 ordinary shares. The market price per share is:

Accepted Answer

A) $1.10 
B) $1.00 
C) $4.40 
D) None of the above

Question 5

What does the current ratio measure?

Accepted Answer

A) Use of assets 
B) Profitability 
C) Investments 
D) Liquidity

Question 6

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 7

What does the acid test ratio eliminate from its calculation, because it is considered the least liquid of the current assets?

Accepted Answer

A) Bank bills 
B) Accounts receivable 
C) Government securities 
D) Inventory

Question 8

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 9

Which ratio is considered to be the primary measure of overall profitability as it assesses how effectively the business has used its funds?

Accepted Answer

A) Return on ordinary shareholders' funds 
B) Gross profit margin 
C) Return on capital employed 
D) Operating profit margin

Question 10

The following information was extracted from the financial records of Ross Ltd for the year ended 30 June 2018: $\begin{array}{ll}
\text { Cash Sales } & \$ 50,000 \
\text { Credit Sales } & 200,000 \
\text { Accounts receivable } & 25,000 \
\text { Cost of Sales } & 130,000
\end{array}$ If there are 365 trading days per year, calculate for the managing director the number of days that accounts receivable are outstanding at 30 June 2018.

Accepted Answer

A) 86 days 
B) 51 days 
C) 114 days 
D) 46 days

Question 11

If gross profit is $500 000, interest expense is $200 000, sales is $1 900 000 and total assets are $5 400 000, calculate the gross profit margin.

Accepted Answer

A) 6.3% 
B) 18.9% 
C) 26.3% 
D) 10%

Question 12

If the price-earnings ratio is 8 times, the earnings yield is:

Accepted Answer

A) 8% 
B) 12.5% 
C) 80% 
D) 10%

Question 13

Because a company's inventory is less liquid than its other current assets when investors are assessing liquidity, they should examine the:

Accepted Answer

A) debt-equity ratio. 
B) accounts receivable turnover ratio. 
C) acid test ratio. 
D) current ratio.

Question 14

Dividend yield is calculated as:

Accepted Answer

A) market price per share/dividend per share. 
B) dividend per share/market price per share. 
C) dividend/ number of issued shares. 
D) net profit/market price per share.

Question 15

Brad's Engineering Pty Ltd
 $\begin{array}{lll}&2018&2017\
\text { Statement of financial positions as at 30 June } & \$ & \$ \
\text { Total Current Assets } & 11080 & 10280 \
\text { Total Fixed Assets } & 75000 & 42000\
\text { TOTAL ASSETS } & \$ 86,080 &\$ 52,280 \
\text { Total Current Liabilities } & 3400 & 1960 \
\text { Long-term Liabilities } & 20000 & 8500\
\text { TOTAL LIABILITIES }&\$23,400&\$10,460
\end{array}$ NET ASSETS (Assets - Lizbilities)$\quad$$\quad$$62,680$\quad$$41,820 SHAREHOLDERS' EQUITY
 $\begin{array}{ll}
\text { Share capital }&40,000 & 30,000 \
\text { Reserves and retained profits }&22,680 & 11,820 \
&\$62,680&\$41,820
\end{array}$ Additional Information:
 $\begin{array}{lll}&2018&2017\
\text { Net profit after interest \& tax } & \$ 10,860 & \$ 6,000 \
\text { Interest expense } & 2000 & 900 \
\text { Taxation expense } & 3000 & 1500
\end{array}$ REQUIRED:
a)From the information provided above, calculate each of the following ratios for each of the years ending 30 June 2017 and 2018.
 Gearing ratio. Use formula$\quad$$\quad$$\frac{\text {Long - term liabilities }}{\text {Share cropital and reserves + long - term lizbilities }}$ Interest cover ratio. Use formula$\quad$$\quad$$\frac{\text {Profit before interest and tax }}{\text {Interest }}$ b)Comment on the movements in the ratios over the two years and the adequacy of the level of gearing and interest cover.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of Brad's Engineering Pty Ltd
 \(\begin{array}{lll}&2018&2017\
\text { Statement...

Question 16

Dividend yield on ordinary shares is calculated as:

Accepted Answer

A) dividends per share divided by market price per share. 
B) annual dividend divided by issued capital. 
C) annual dividend divided by earnings. 
D) None of the above

Question 17

Which of these is a limitation of financial ratio analysis?

Accepted Answer

A) Suitable yardsticks for comparisons are not always available. 
B) Ratios have a restricted vision as they only assess the past. 
C) Year-end data is not necessarily typical of the position during the year. 
D) All of the above

Question 18

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 19

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 20

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

Exam 10: Analysis and Interpretation of Financial Statements