Deck 6: Ratio Analysis 1: Profitability, Efficiency, and Performance

Question 1

Ratios are an absolute measure.

Answer 1

False

Question 2

Ratios must be calculated on a consistent basis in order to generate a valid trend analysis across several years.

Answer 2

True

Question 3

While ratios are a proportion calculated on a consistent basis across different time periods, they fail to overcome the problem of figures changing from year to year.

Answer 3

False

Question 4

Which one of the following statements is not true?

A) Ratios are a starting point in the interpretation and evaluation of financial information.
B) The calculation of the same ratio over several different time periods enables comparisons to be made between those different time periods to determine whether that ratio is rising, falling or staying the same.
C) Larger numbers always indicate an improvement in relative terms.
D) A ratio expresses the relationship between two different figures.

Question 5

At 1 October 2018, Jennifer, a market trader, had inventory which had cost her £15,000 to buy. During the financial year ended 30 September 2019, Jennifer made further purchases of goods for resale on her market stall at a gross cost of £125,000. Her suppliers gave her discounts of £1,200 on her purchases during the year. During the financial year ended 30 September 2019, Jennifer made sales of £250,000 while incurring van running costs of £20,000 and paying the local council £8,000 in rent for her market stall. At 30 September 2019, Jennifer had inventory on hand which had cost her £16,800 to buy. What is Jennifer's gross profit % for the financial year ended 30 September 2019?

A) 39.52%
B) 40.00%
C) 50.72%
D) 51.20%

Question 6

Imran Limited has sales for the year ended 31 December 2019 of £747,000. The company allowed its customers discounts of £5,000 during the year. £3,000 of these discounts allowed were not taken up by customers who paid the full price for goods supplied. Inventory at 1 January 2019 was £22,500 while inventory at 31 December 2019 was £17,500. Purchases of goods during the year amounted to £425,000. Imran Limited's suppliers allowed bulk discounts of £11,000 to the company during the year. What is Imran Limited's gross profit % for the year ended 31 December 2019?

A) 42.44%
B) 42.67%
C) 43.91 %
D) 44.13%

Question 7

Marwan Limited has total sales for the year ended 31 October 2019 of £1,050,000 before taking into account sales returns of £50,000. Inventory at 1 November 2018 was £45,000 while inventory at 31 October 2019 was £60,000. Purchases of goods during the year amounted to £635,000. What is Marwan Limited's gross profit % for the year ended 31 October 2019?

A) 35.00%
B) 38.00%
C) 40.95%
D) 45.71%

Question 8

Trickey Limited has total sales for the year ended 31 August 2019 of £500,000. Inventory at 1 September 2018 was £65,000. Purchases of goods during the year amounted to £320,000 and discounts received were £10,000. Gross profit percentage for the year was 40%. What is the value of closing inventory?

A) £55,000
B) £75,000
C) £85,000
D) £95,000

Question 9

For the financial year ended 31 December 2019, Jemima Plc has revenue of £28m, cost of sales of £14m, finance income of £0.3m, distribution and selling costs of £3m, finance expense of £2m, income tax of £3m and administration expenses of £2.5m. What is Jemima Plc's operating profit % for the financial year ended 31 December 2019?

A) 13.57%
B) 24.29%
C) 30.36%
D) 50.00%

Question 10

During the financial year ended 31 March 2020, Marie Limited generated sales of £148,000. The company allowed its customers discounts of £5,000 (£2,000 of which were not taken up by customers who paid the full price for the goods supplied) while the cost of sales was £74,000. Selling and distribution costs totalled up to £15,000 and administration expenses incurred came to £21,000. Interest of £6,000 was paid to the bank. What is Marie Limited's operating profit % for the year ended 31 March 2020?

A) 21.62%
B) 22.67%
C) 25.68%
D) 26.67%

Question 11

For the financial year ended 31 January 2020, Zainab Limited reported sales of £650,000 and a gross profit of £260,000. Selling and distribution costs totalled up to £54,000 and administration expenses incurred came to £76,000. Finance expense was £7,500 and finance income received was £2,500. The company incurred an irrecoverable debt of £10,000 and the tax charge on the profit for the year was £23,000. What is Zainab Limited's operating profit % for the year ended 31 January 2020?

A) 14.15%
B) 17.69%
C) 18.46%
D) 20.00%

Question 12

Which one of the following statements describes the profit before tax %?

A) The profitability % after adding all income and deducting all expenses and charges for the period under review.
B) The profitability % on the basis of revenue - all operating costs, but before taking into account the effects of net finance costs and income tax.
C) The profitability % after deducting all costs incurred and adding all income earned.
D) The profitability % after deducting all the direct costs of production of goods sold or all the direct costs of goods bought for resale.

Question 13

Which one of the following statements does not describe a feature of the profit before tax %?

A) Eliminates the distorting effect of changes in tax rates.
B) Takes into account income and profits earned from all sources, trading, investment and exceptional income and profits.
C) Represents the profitability % after deducting all the costs incurred in operations and financing.
D) Represents the profitability % after adding in all the income and deducting all the costs and all the charges incurred by a company.

Question 14

For the financial year ended 30 November 2019, Pedro Limited reports revenue of £1,000,000, operating profit of £350,000, finance income of £15,000, finance expense of £50,000 and a taxation charge of £63,000. What is Pedro Limited's profit before tax % for the financial year ended 30 November 2019?

A) 22.20%
B) 25.20%
C) 28.50%
D) 31.50%

Question 15

In the financial statements for the year ended 30 September 2019 Ines Limited reports revenue of £600,000, cost of sales of £270,000, administration expenses of £80,000, finance income of £12,000, finance expense of £24,000 and selling and distribution costs of £76,000. What is Ines Limited's profit before tax % for the financial year ended 30 September 2019?

A) 23%
B) 27%
C) 29%
D) 55%

Question 16

In the financial statements for the year ended 30 June 2019, Marcelo Limited reported revenue of £850,000, operating profit of £221,000, finance income of £34,000 and a taxation charge of £85,000. What is Marcelo Limited's profit before tax % for the financial year ended 30 June 2019?

A) 30%
B) 22%
C) 20%
D) 12%

Question 17

For the financial year ended 30 November 2019 Mariana Limited reported revenue of £400,000, operating profit of £140,000, finance income of £3,000, finance expense of £10,000 and a taxation charge of £27,000. What is Mariana Limited's profit after tax % for the financial year ended 30 November 2019?

A) 25.00%
B) 26.50%
C) 30.00%
D) 33.25%

Question 18

In the financial statements for the year ended 30 June 2019, Javier Limited reported revenue of £900,000, operating profit of £270,000, finance income of £54,000, finance expense of £36,000 and a taxation charge of £63,000. What is Javier Limited's profit before tax % for the financial year ended 30 June 2019?

A) 13%
B) 21%
C) 25%
D) 32%

Question 19

In the financial statements for the year ended 30 September 2019, Diego Limited reported revenue of £500,000, operating profit of £200,000, finance expense of £50,000 and a taxation charge of £30,000. What is Diego Limited's profit before tax % for the financial year ended 30 September 2019?

A) 24%
B) 30%
C) 40%
D) 44%

Question 20

The operating profit % for Jatin Limited has risen this year. Which of the following statements would not be a potential explanation for the increase in operating profit %?

A) A reduction in the number of administrative staff during the year.
B) A reduction in advertising expenditure this year.
C) A decrease in the cost of raw materials used in production with no corresponding decrease in selling prices.
D) An increase in the returns on bank deposits during the year.

Question 21

Which of the following factors will increase the profit before tax % of a bank? Please select all that apply.

A) Reduced irrecoverable debts.
B) Lower interest rates for savers.
C) Higher staff salaries.
D) Higher interest rates for borrowers.

Question 22

Which of the following factors will decrease the operating profit % of a retailer? Please select all that apply.

A) An increase in the minimum wage paid to shop assistants.
B) Selling more goods per square metre of store space.
C) Not increasing selling prices in line with increases in purchase prices.
D) More goods being included in the twice-yearly sale.

Question 23

Which of the following factors will increase the gross profit % of an academic book publisher? Please select all that apply.

A) Bulk buying paper resulting in bulk discounts from suppliers.
B) Rival publishers publishing text books on the same subject.
C) A reduction in printing ink costs.
D) An increase in sales.

Question 24

Propark is a retailer selling clothes to the public from its stores across the country. Shirts sell for £30 each. Each shirt costs Propark £16 to buy from its suppliers. The suppliers reduce the cost of each shirt by £1. Propark passes on this purchase price reduction to its customers and reduces the selling price of shirts in its stores by £1. This reduction in purchase and selling prices will have no effect on the gross profit % generated on the sale of each shirt.

Question 25

A popular accounting text book sells for £35. Costs of producing each book are £24. Paper and ink costs increase by £1 per book. The marketing manager proposes increasing the selling price of each book to £36. He says: "increasing the cost of each book by £1 covers the increase in costs and maintains the gross profit % on each book."

Question 26

Jorge Limited has current assets of £4.5m and non-current assets of £12.5m. In the year ended 31 December 2019, Jorge Limited generated revenue of £25.5m. What is Jorge Limited's non-current asset turnover?

A) £0.49
B) £1.50
C) £2.04
D) £5.67

Question 27

Rafael Limited has property, plant and equipment of £8.0m, non-current asset investments of £1.5m, and intangible assets of £2.5m at 31 October 2019. In the year ended 31 October 2019, Rafael Limited generated revenue of £34.0m. What is Rafael Limited's non-current asset turnover?

A) £2.83
B) £3.58
C) £4.25
D) £8.50

Question 28

The lower an organization's revenue and profit per employee, the more efficiently the organization is working to generate returns to satisfy the business's objectives of profit and revenue growth.

Question 29

For the year ended 31 October 2019, Jasvinder plc has a profit before tax of £5.7m, an income tax charge of £2.3m, preference dividends of £0.4m and 9m ordinary shares in issue throughout the year. What are Jasvinder plc's earnings per share for the year ended 31 October 2019?

A) 33.33 pence
B) 37.78 pence
C) 42.22 pence
D) 63.33 pence

Question 30

For the year ended 31 March 2020, Parvinder plc has a profit before tax of £8.0m, an income tax charge of £2.0m, and issued ordinary share capital of £2.0m made up of 25 pence shares. What are Parvinder plc's earnings per share for the year ended 31 March 2020?

A) 400 pence
B) 300 pence
C) 100 pence
D) 75 pence

Question 31

For the year ended 31 December 2019, Manjinder plc has a profit after tax of £5.0m. Issued share capital of £4.0m is made up of 4 million 50 pence preference shares which carry a dividend rate of 6% and ordinary share capital of £2.0m made up of shares with a par value of 10 pence each. What are Manjinder plc's earnings per share for the year ended 31 December 2019?

A) 20.33 pence
B) 23.80 pence
C) 24.40 pence
D) 122.00 pence

Question 32

The market value of one ordinary share in Jermaine plc is 240 pence. The profit for the latest financial year to 30 April 2019 is £17.5m after charging income tax of £4.5m. Jermaine plc has 30m preference shares of £1 each in issue and these preference shares have a dividend rate of 5%. There were 70m ordinary shares in issue throughout the financial year ended 30 April 2019. What is Jermaine plc's P/E ratio?

A) 9.60
B) 10.50
C) 12.92
D) 14.61

Question 33

The market value of one ordinary share in Alberto plc is 600 pence. The profit before tax for the company's latest financial year to 30 September 2019 is £20m. Tax is charged on profit before tax at the rate of 25%. Alberto plc has ordinary share capital of £5m made up of shares with a par value of 20 pence each. Alberto plc has no preference shares in issue. What is Alberto plc's P/E ratio?

A) 1.50
B) 2.00
C) 7.50
D) 10.00

Question 34

For the year ended 30 November 2019, Trample plc has a profit after tax of £5.0m. Issued share capital of £8.0m is made up of six million 50 pence preference shares which carry a dividend rate of 5% and ordinary share capital of £5.0m made up of shares with a par value of 25 pence each. The current market price of one ordinary share in Trample plc is 400 pence. What is Trample plc's price earnings ratio?

A) 6.40
B) 16.00
C) 16.49
D) 17.02

Question 35

The lower the market's confidence in a company, the higher the P/E ratio.

Question 36

Marmora Limited makes up its financial statements to 30 September every year. On 30 November 2018, Marmora Limited paid dividends of £15,000. Profit for the year to 30 September 2019 was £75,000 and a dividend of £30,000 was paid on 28 September 2019. Marmora Limited had 150,000 ordinary shares in issue throughout the financial year to 30 September 2019. What is the dividend per share for Marmora Limited for the year ended 30 September 2019?

A) 10 pence
B) 20 pence
C) 30 pence
D) 50 pence

Question 37

Azov Limited makes up its financial statements to 30 April every year. Azov Limited has share capital of £4,000,000 made up of 2,000,000 preference shares of £1 each and £2,000,000 of ordinary shares of 50 pence each. The preference shares carry a dividend rate of 5%. Total ordinary and preference dividends of £750,000 were paid out during the year to 30 April 2019. What is the dividend per ordinary share for Azov Limited for the year ended 30 April 2019?

A) 12.50 pence
B) 16.25 pence
C) 18.75 pence
D) 32.50 pence

Question 38

Caspian Limited makes up its financial statements to 30 November every year. During the year to 30 November 2019, Caspian Limited made a profit after taxation of £800,000 and paid a dividend per ordinary share of 2 pence on 31 January 2019 and a further dividend per ordinary share of 4 pence on 30 September 2019. Caspian Limited has an ordinary share capital of £500,000 made up of shares with a par value of 12.5 pence. What is the pay-out ratio for Caspian Limited for the year ended 30 November 2019?

A) 3.75%
B) 10.00%
C) 20.00%
D) 30.00%

Question 39

The pay-out ratio is calculated by dividing:

A) Earnings per share by the dividend per ordinary share and multiplying by 100%.
B) Dividend per ordinary share by the current market price of one ordinary share and multiplying by 100%.
C) Dividend per ordinary share by the earnings per share and multiplying by 100%.
D) (Profit after tax and after preference dividends) by total ordinary dividends and multiplying by 100%.

Question 40

The ratio that expresses the distribution per share for a financial period is called the:

A) Dividend per share
B) Earnings per share
C) Dividend yield
D) Dividend cover

Question 41

For the financial year ended 31 August 2019, Jeremies plc has profit before tax of £10.5m, an income tax charge of £2.8m, preference dividends of £0.2m, a total dividend per share for the year of 2.5 pence and 75m ordinary shares in issue throughout the financial year. At 31 August 2019, one ordinary share in Jeremies was valued at 250 pence. Your colleague has calculated a ratio of 4 from the above data. Which ratio has your colleague calculated?

A) Dividend cover
B) Dividend yield
C) Earnings per share
D) Price/Earnings ratio

Question 42

Tiddler Limited has dividends per share of 30 pence, dividend cover of 3 times, 300,000 ordinary shares in issue, 200,000 preference shares of £1 each with a dividend rate of 6% and a taxation charge for the year of £94,000. What is Tiddler Limited's profit for the year?

A) £270,000
B) £282,000
C) £364,000
D) £376,000

Question 43

Xenophon Limited has dividends per share for the financial year of 20 pence, 200,000 ordinary shares with a par value of £1 each, 100,000 preference shares of £1 each with a dividend rate of 10%, profits before taxation for the year of £300,000 and a taxation charge for the year of £50,000. What is Xenophon Limited's dividend cover?

A) 6.00 times
B) 6.25 times
C) 7.25 times
D) 7.50 times

Question 44

Dividend cover is calculated by dividing:

A) The dividend on one ordinary share by the current market price of one ordinary share.
B) The dividend on one ordinary share by the earnings per share.
C) Earnings per share by the ordinary dividend per share.
D) The market value of one ordinary share by the earnings per share.

Question 45

The lower the dividend cover ratio, the more secure the dividend.

Question 46

Which one of the following statements is a description of dividend yield?

A) A measure of the pence of profit earned during an accounting period by each share.
B) The distribution per share expressed as a % of the current market price of one ordinary share.
C) An indicator of the market's confidence in a company.
D) How many times the current year ordinary dividend could be paid from profit for the year.

Question 47

Jingwen plc paid a dividend of 7 pence per ordinary share on 31 March 2019 and a dividend of 21 pence per ordinary share on 31 October 2019. Earnings per share for the financial year to 31 December 2019 were 42 pence. The current market price of one ordinary share in Jingwen plc is 350 pence. What is Jingwen plc's dividend yield?

A) 2%
B) 6%
C) 8%
D) 14%

Question 48

During the financial year ended 31 August 2019, Xiao plc paid total dividends of £480,000 including £120,000 of preference dividends. Xiao plc has £1,000,000 of ordinary share capital made up of shares with a par value of 25 pence. Earnings per share for the financial year ended 31 August 2019 were 24 pence. The current market price of one ordinary share in Xiao plc is 300 pence. What is Xiao plc's dividend yield?

A) 3%
B) 4%
C) 8%
D) 12%