Deck 32: The Appraisal of Company Financial Statements Using Ratio Analysis

Question 1

Net assets equals:

A) Current assets less current liabilities.
B) Non-current assets less current liabilities
C) Total assets less current liabilities
D) Fictitious assets less current liabilities

Answer 1

Total assets less current liabilities

Question 2

What is the ideal quick ratio for a business?

A) 1:1
B) 2:1
C) It does not matter so long as the business has sufficient cash in the bank
D) It depends on the industry average

Answer 2

It depends on the industry average

Question 3

In the absence of industry benchmarks what is the assumed ideal quick ratio for a business?

A) 1:1
B) 2:1
C) It does not matter so long as the business has sufficient cash in the bank
D) It cannot be determined

Answer 3

1:1

Question 4

Which of the following would indicate a strengthening of the current ratio (assume all other elements of working capital remain constant)?

A) An increasing bank overdraft
B) An increase in the period of credit taken from credit suppliers
C) A decrease in the period of credit allowed to credit customers
D) A decrease in the rate of inventory turnover

Question 5

The rate of inventory turnover is eight times when:

A) Net purchases are £120,000 and closing inventory is £15,000
B) Sales are £160,000 and average inventory at selling price is £20,000
C) Purchases are £320,000 and average inventory at cost is £40,000
D) Cost of goods sold is £240,000 and average inventory at cost is £30,000

Question 6

The percentage return on the owners opening capital for the past year was: Refer To: [simon32]

A) 15%
B) 20%
C) 25%
D) 30%

Question 7

The working capital is: Refer To: [simon32]

A) £2,000
B) £3,000
C) £5,000
D) £17,000

Question 8

The net assets figure is: Refer To: [simon32]

A) £7,350
B) £14,000
C) £19,000
D) £21,350

Question 9

The following information relates to Questions 9 to 11
The following is a summary of the profit & loss account of Fleetwood Mac Ltd for the year ended 31
December 20X1:
£'000
Sales revenue 750
Cost of sales (600)
Gross profit 150
Distribution costs (61)
Administrative expenses (27)
Interest on debentures (10)
Profit for the financial year 52
Dividends paid in the year amounted to £40,000
The following is a summary of the statements of financial position of Fleetwood Mac Ltd. as at 31
December 20X0 and 20X1:


-The earnings per share (in pence rounded to one decimal place) will be:

A) 8.7
B) 10.3
C) 17.3
D) 20.7

Question 10

The following information relates to Questions 9 to 11
The following is a summary of the profit & loss account of Fleetwood Mac Ltd for the year ended 31
December 20X1:
£'000
Sales revenue 750
Cost of sales (600)
Gross profit 150
Distribution costs (61)
Administrative expenses (27)
Interest on debentures (10)
Profit for the financial year 52
Dividends paid in the year amounted to £40,000
The following is a summary of the statements of financial position of Fleetwood Mac Ltd. as at 31
December 20X0 and 20X1:


-The gearing ratio (rounded to the nearest whole number) will be:

A) 27%
B) 37%
C) 40%
D) 67%

Question 11

The following information relates to Questions 9 to 11
The following is a summary of the profit & loss account of Fleetwood Mac Ltd for the year ended 31
December 20X1:
£'000
Sales revenue 750
Cost of sales (600)
Gross profit 150
Distribution costs (61)
Administrative expenses (27)
Interest on debentures (10)
Profit for the financial year 52
Dividends paid in the year amounted to £40,000
The following is a summary of the statements of financial position of Fleetwood Mac Ltd. as at 31
December 20X0 and 20X1:


-The return on capital employed (rounded to one decimal place) will be:

A) 7%
B) 8.4%
C) 9.6%
D) 11.5%

Question 12

The following extract information is taken from a company's statement of financial position. The company has £1.25 million in debentures, equity shares of £0.75 million, preference shares of £0.25 million, general reserves of £1.1 million and a share premium of £0.1 million. Using these book values calculate the gearing percentage for the company (Gearing is calculated as debt to total capital employed).

A) 147%
B) 77%
C) 43%
D) 39%

Question 13

Working capital is:

A) Non-current assets plus net current assets
B) Total assets less total liabilities
C) Current assets less current liabilties
D) Liquid current assets less current liabilties

Question 14

Which of the following is not a ratio that is used to explain the efficiency with which a business has been managed?

A) Return on capital employed
B) Profit margin
C) Asset turnover
D) Gearing

Question 15

The impact of an increase in the sales price of products in an entity may lead to (assume that price and demand are inversely related):

A) A fall in the profit margins of the entity
B) A rise in the profit margins of the entity may occur - subject to a fall in asset turnover
C) An increase in return on capital employed
D) An increase in asset turnover

Question 16

You are told that the company's current assets are £1,500,000. What is the book value of the company's total assets?
Refer To: [equity]

A) £1,200,000
B) £2,800,000
C) £3,000,000
D) £4,500,000

Question 17

You are told that the company's current assets are £1,500,000. What is the book value of the company's working capital?
Refer To: [equity]

A) £1,200,000
B) £2,800,000
C) £3,000,000
D) £4,500,000

Question 18

What is the book gearing ratio of this firm? Refer To: [equity]

A) 37.8%
B) 33.3%
C) 60.7%
D) None of the above

Question 19

You are told that profits for the period were £550,000. Given this, what is the return on capital employed?
Refer To: [equity]

A) 12.2%
B) 13.0%
C) 19.6%
D) 39.3%

Question 20

You are told that profits for the period were £550,000 and the market value of shares is £8,000,000. Given this, what is the return on equity?
Refer To: [equity]

A) 6.9%
B) 13.0%
C) 19.6%
D) 36.7%