Deck 8: Analysis and Interpretation of Financial Statements

Question 1

If year one equals $800,year two equals $830 and year three equals $896 the value given to year three in a trend analysis,with year one as the base year,is

A)89%
B)100%
C)105%
D)112%

Answer 1

D

Question 2

In a vertical analysis,the base for prepaid expenses is

A)total current assets.
B)total assets.
C)prepaid expenses in the previous year.
D)total liabilities.

Answer 2

B

Question 3

Financial statements are

A)always an accurate guide to future performance.
B)often a good guide to future performance.
C)not used to predict future performance.
D)irrelevant in the prediction of future performance.

Answer 3

B

Question 4

In a vertical analysis of an income statement,the 100% figure would be

A)net sales.
B)profit.
C)cost of sales
D)gross profit.

Question 5

If average inventory is $49 500,credit sales $820 000 and cost of sales $630 000 inventory turnover in days is:

A)78 days
B)22 days
C)28.7 days
D)46.5 days

Question 6

Which of the following statements regarding inventory turnover is correct?

A)days inventory is much lower for a supermarket than a shoe retailer
B)days inventory is a measure of the average length of time it takes to sell inventory
C)days inventory is a measure of the efficiency of an entity at selling inventory
D)all the options are correct

Question 7

Vertical analysis is also known as:

A)trend analysis
B)horizontal analysis
C)ratio analysis
D)common size statements

Question 8

Profit is $109 000,after deducting interest of $11 000 and average total assets are $650 000.Return on assets to assess profitability from a management view point is:

A)18.5%
B)16.8%
C)15%
D)168%

Question 9

With ratio analysis,when an income or statement of cash flows item is compared to a balance sheet item:

A)the year-end balance of the balance sheet item should be used
B)the average of the beginning and ending year values should be taken for the balance sheet item rather than just using the year-end value.
C)the beginning balance of the balance sheet item should be used
D)none of the options is correct

Question 10

Which of the following categories of ratios is not relevant to all business entities?

A)market performance ratios
B)profitability ratios
C)liquidity ratios
D)efficiency ratios

Question 11

Days inventory is a measure of:

A)market performance
B)the average length of time it takes to sell inventory
C)profitability
D)the average length of time it takes to collect money due from debtors

Question 12

One ratio result on its own is meaningless unless it can be compared to an appropriate yardstick or benchmark.An appropriate benchmark would be

A)all the options are appropriate benchmarks
B)industry averages
C)other entities in the same industry
D)the entity's ratios over time

Question 13

What information would a financial institution contemplating giving a loan to an entity be most interested in?

A)profitability
B)cash flow
C)none of the options is correct
D)turnover of debtors

Question 14

Which ratio/s can be used to explain changes in the profit margin?

A)gross profit margin
B)expense to sales ratios
C)days inventory
D)return on equity

Question 15

The gross profit margin ratio is calculated by dividing

A)profit by sales revenue
B)profit by shareholder's equity.
C)gross profit by sales revenue.
D)sales revenue by cost of sales.

Question 16

If marketing expenses to sales ratio is 4.2% in period 1 and 5.1% in period 2,this indicates that:

A)the firm has become more efficient in controlling its marketing expenses over the period.
B)the firm has become less efficient in controlling its marketing expenses over the period
C)marketing expenses are a lower percentage of sales revenue
D)the firm is more profitable in period 2

Question 17

The asset turnover ratio is calculated by dividing

A)average total assets by sales revenue.
B)average total assets by profit.
C)profit by average total assets.
D)sales revenue by average total assets

Question 18

Horizontal analysis of financial statements includes the

A)calculation of liquidity ratios.
B)calculation of profitability ratios.
C)calculation of percentage changes from the previous year.
D)evaluation of data relative to a base year.

Question 19

A change in the inventory turnover period from 47 days to 51 days indicates:

A)inventory is being sold faster
B)it is taking longer to sell inventory
C)the inventory turnover ratio is too high
D)the inventory turnover ratio is too low

Question 20

The return on assets is a profitability ratio that measures the:

A)profit that the entity has generated specifically for its owners
B)ability of an entity to generate income from its asset investments
C)the relative amount of cash flow generated by each sales revenue dollar
D)none of the options is correct

Question 21

Net cash flows from operating activities divided by current liabilities,is the formula for:

A)the quick asset ratio
B)the cash flow ratio (liquidity)
C)the turnover of liabilities ratio
D)the debt coverage ratio

Question 22

Weston Trading Ltd has the following balance sheet figures.The quick asset ratio is:
$\begin{array}{llcc}& \text { \$ } \\ \text { Total current assets} &500000\\ \text { Total current liabilities } &150000\\ \text { Inventory} &200000\\ \text { Bank} &30000\\\end{array}$

A)1.67:1
B)1:1
C)2:1
D)3.33:1

Question 23

If Morgan Trading Pty Ltd has the following balance sheet figures the debt ratio is:
$$\begin{array} { l l }& \text {\$ } \\\text { Current assets } & 500000 \\\text { Current liabilities } & 150000 \\\text { Non-current assets } & 20000 \\\text { Noncurrent liabilities } & 50000\end{array}$$

A)71.4%
B)40%
C)30%
D)28.6%

Question 24

All of these are efficiency ratios,except:

A)asset turnover ratio.
B)times interest cover ratio.
C)days inventory.
D)times debtors turnover.

Question 25

For a retail firm the quick asset ratio will always be:

A)higher than the current ratio
B)lower than the current ratio
C)the same as the current ratio
D)sometimes higher and sometimes lower than the current ratio

Question 26

If the debtors turnover ratio changes from 45 days to 40 days this indicates that:

A)it is taking longer to collect money from trade debtors.
B)the time taken to collect money from trade debtors is decreasing
C)the time taken to sell inventory is increasing
D)none of the options is correct

Question 27

A measure of long-term solvency is

A)Return on equity ratio.
B)Profit margin.
C)Days debtors.
D)Debt to equity ratio.

Question 28

Liquidity ratios measure the ability of an entity to:

A)survive in the long-term
B)meet its short term obligations and unexpected cash needs
C)generate profit
D)all of the options are correct

Question 29

Capital structure ratios are also known as:

A)profitability ratios
B)liquidity ratios
C)management efficiency ratios
D)gearing ratios

Question 30

The current ratio is also known as the:

A)quick asset ratio
B)working capital ratio
C)cash flow ratio
D)capital structure ratio

Question 31

Westbury Pty Ltd has a current ratio of 2 to 1 and current liabilities of $22 000.If Westbury Pty Ltd has $10 000 of inventory,the quick asset ratio is:

A)1.6:1
B)2.5:1
C)1:1
D)1.2:1

Question 32

The current ratio is a

A)Liquidity ratio.
B)Cash flow ratio.
C)Profitability ratio.
D)Market performance ratio.

Question 33

Morgan Trading Pty Ltd has the following balance sheet figures;the debt to equity ratio is:
$$\begin{array} { l l } & \text {\$ } \\\text { Current assets } & 500000 \\\text { Current liabilities } & 150000 \\\text { Non-current assets } & 20000 \\\text { Noncurrent liabilities } & 50000\end{array}$$

A)71.4%
B)40%
C)30%
D)28.6%

Question 34

A high times debtors turnover indicates

A)the entities sales have increased.
B)a large percentage of the entities sales are on credit.
C)customers are clearing debts more quickly.
D)customers are clearing debts more slowly.

Question 35

Which statement is true?

A)If the equity ratio is less than 50% then the entity is more reliant on equity funding than debt funding
B)The debt ratio indicates how many dollars of debt exist per dollar of equity financing
C)If the equity ratio is 50% the debt to equity ratio is 200%
D)The sum of the debt ratio and the equity ratio equals 100%

Question 36

Which of these is not considered to be a market performance ratio?

A)Dividend per share
B)Net tangible asset backing
C)Price earnings ratio
D)Asset turnover ratio

Question 37

Which statement is not correct?

A)Low liquidity ratios are not desirable
B)High liquidity ratios are not necessarily desirable
C)Low liquidity ratios can indicate liquidity problems
D)A current ratio of greater than 2:1 means that an entity must have sufficient liquidity to pay its debts as they fall due

Question 38

Greenfields Pty Ltd has a quick asset ratio of 2 to 1 and current liabilities of $22 000.If Greenfields Pty Ltd has $10 000 of inventory,the total current assets is:

A)$44 000
B)$54 000
C)$64 000
D)$32 000

Question 39

If creditors allow 30 days from the date of purchase before requiring payment,it takes,on average 40 days to sell inventory,and debtors take,on average,45 days to pay their accounts,the length of the cash cycle is:

A)55 days
B)85 days
C)115 days
D)45 days

Question 40

Earnings per share is calculated by dividing

A)ordinary shareholder's equity by total assets.
B)profit available to ordinary shareholders by weighted number of ordinary shares.
C)profit available to ordinary shareholders by total equity.
D)profit by weighted number of ordinary shares.

Question 41

It is only necessary to calculate ________ version of the many variations of the gearing ratios.

Question 42

____________________ analysis is a technique for evaluating a series of financial statement data over a period of time.

Question 43

The first country to adopt regulations requiring its listed companies to produce an integrated report as their primary report effective 2011 was:

A)USA
B)Australia
C)South Africa
D)Germany

Question 44

Earnings before interest and ________ divided by net interest equals the interest coverage ratio.

Question 45

_________________ analysis

Question 46

Profit (before tax/after tax)____________________ divided by average equity gives return on equity.

Question 47

If the stock market price of a share on 30 June is $12 and the earnings per share for the year are 65c,the price-earnings ratio at 30 June is:

A)5:1
B)7.8:1
C)15:1
D)18.5:1

Question 48

Explaining why the ROA (return on assets)ratio has changed necessitates an examination of:

A)the liquidity ratios and asset efficiency ratios
B)the profitability ratios and the market performance ratios
C)the asset efficiency ratios and the liquidity ratios
*d,the profitability ratios and the asset efficiency ratios

Question 49

All the statements concerning net tangible asset backing (NTAB)per share are true,except:

A)intangible assets such as goodwill are excluded from the calculation
B)it calculates the cash that would be available to each shareholder if the company was liquidated.
C)the difference between NTAB and the market price of the share is an indication of the market's assessment of the entity's future growth prospects.
D)it is calculated as ordinary shareholders' equity less intangible assets divided by number of ordinary shares on issue at year-end.

Question 50

The times______________ turnover is a measure of how efficiently an entity converts their credit sales into cash.

Question 51

_____________ analysis expresses each item in a financial statement as a percentage of a base amount.

Question 52

The return on assets ratio can be calculated as

A)Profit margin × debt to total assets ratio.
B)Profit margin × asset turnover ratio.
C)Gross profit margin × return on equity.
D)Gross profit margin × cash flow to sales revenue.

Question 53

_____________ profit divided by sales revenue gives the gross profit margin.

Question 54

The dividend payout ratio can be calculated as:

A)market price per share divided by dividend per share
B)dividend per share divided by earnings per share
C)annual dividend divided by the number of ordinary shares on issue
D)current market price per share divided by dividend per share

Question 55

______________revenue divided by average total assets equals the asset turnover ratio.

Question 56

_________________ analysis is an analytical tool that involves expressing the reported financial numbers in relative terms

Question 57

____________________ is the ability of a firm to meet its short term obligations as they fall due.

Question 58

The sum of the days inventory and the days debtors represents the entity's _____________ cycle.

Question 59

The ratios used to evaluate the liquidity and short-term debt repaying ability of an entity are the current and ____________________asset ratios.

Question 60

Which of the following statements relating to Net Tangible Asset Backing per share (NTAB)is correct?

A)the share price will normally be higher than the NTAB per share
B)an excess of share price over NTAB per share

Question 61

The ratio that converts the absolute dollar amount of profit made to a per share basis is ____________________ share.