Deck 8: Analysis and Interpretation of Financial Statements

Question 1

If an entity has increased its profit from $25 000 last year to $40 000 this year,have they become more profitable?

A) Maybe.
B) Same both years.
C) Yes.
D) No.

Answer 1

A

Question 2

A financial institution contemplating giving a loan to an entity would be most interested in:

A) the entity's ability to generate cash flows.
B) an entity's ability to generate profits.
C) an entity's ability to pay its employees.
D) an entity's ability to pay its suppliers.

Answer 2

A

Question 3

Calculate the cash flow to sales ratio using the following data.
$\begin{array}{|l|r|}\hline \text{Sales revenue} & \$ 650000 \\\hline \text{Ending cash balance for the period} & 22500 \\\hline \text{Net cash inflow from operating activities} & 84000 \\\hline\end{array}$

A) 3.46%
B) 7.74%
C) 9.46%
D) 12.92%

Answer 3

12.92%

Question 4

Which of the following categories of ratios is only relevant to a listed company?

A) Profitability ratios.
B) Liquidity ratios.
C) Market performance ratios.
D) Efficiency ratios.

Question 5

Using the data below to perform a trend analysis,and assuming that year 1 is the base year,the value assigned to sales revenue for year 2 is:
$\begin{array}{|l|r|}\hline &\text{ Sales Revenue} \\\hline \text{Year 1 }& \$ 180000 \\\hline \text{Year 2} & 155000 \\\hline \text{Year 3 }& 210000 \\\hline\end{array}$

A) 135
B) 100
C) 116
D) 86

Question 6

Financial analysis is more meaningful if the ratios can be compared to an appropriate benchmark such as:

A) industry averages.
B) economic industry sector.
C) changes over time.
D) all of the options are appropriate benchmarks.

Question 7

The days debtors ratio indicates:

A) the average length of time it takes an entity to pay its account payable.
B) the average length of time it takes an entity to collect its accounts receivable.
C) an entity's efficiency in paying back its borrowings.
D) an entity's efficiency in raising capital.

Question 8

Which of the following statements about horizontal analysis is correct?

A) it requires a minimum of 3 years of data to provide meaningful analysis.
B) it compares numbers reported on a financial statement to others on the same statement.
C) it compares numbers reported on the financial statements in the current period with those from the previous period.
D) it determines the profitability of an entity.

Question 9

Which of the following statements regarding days inventory is incorrect?

A) Days inventory is much higher for a supermarket than a clothing 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 of the above options are incorrect.

Question 10

From the information provided below,management of an entity calculate the return on assets (rounded to the nearest whole number)to be:
$\begin{array}{|l|r|}\hline\text{ Net profit after-tax }& \$ 109000 \\\hline \text{Net profit before interest and tax }& 152000 \\\hline \text{Beginning balance of total assets} & 620000 \\\hline \text{Ending balance of total assets} & 840000 \\\hline\end{array}$

A) 15%
B) 21%
C) 18%
D) 13%

Question 11

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

A) the balance sheet item should first be calculated as an average amount for the year.
B) the ending balance of the balance sheet item should be used.
C) the beginning balance of the balance sheet item should be used.
D) a meaningful comparison of items between these statements cannot be made.

Question 12

The profit margin ratio is calculated by dividing:

A) profit (loss) by sales revenue.
B) profit (loss) by shareholders' equity.
C) gross profit (loss) by sales revenue.
D) profit (loss) by net assets.

Question 13

Financial analysis can be categorised as:

A) vertical and horizontal analysis.
B) ratio analysis.
C) trend analysis.
D) all of the above.

Question 14

If the beginning balance of inventory is $16 000 and the ending balance is $30 000,credit sales for the period are $420 000 and cost of sales are $380 000,the days inventory calculation is:

A) 29 days.
B) 22 days.
C) 20 days.
D) 26 days.

Question 15

Relying on absolute values in an entity's financial statements to predict future risks is not meaningful because:

A) an increase in the profit figure does not necessarily indicate an increase in the profitability of the entity.
B) an increase in non-current liabilities does not necessarily mean the entity has become more reliable on external funding.
C) an increase in current liabilities does not necessarily mean the entity is having liquidity problems.
D) all of the above statements are correct.

Question 16

The profitability ratio that measures an entity's ability to generate a profit from its asset investments is:

A) profit margin.
B) return on equity.
C) gross profit margin.
D) return on assets.

Question 17

In a vertical analysis of a statement of profit or loss,the 100% figure would be assigned to:

A) sales.
B) gross profit.
C) expenses.
D) net profit.

Question 18

In a vertical analysis,the anchor point for accounts payable is:

A) total assets.
B) total current liabilities.
C) total liabilities.
D) total equity.

Question 19

If an entity's selling and distribution expenses to sales ratio increases from 2.5% in one year to 3.8% the following year,this indicates that:

A) the entity has become more efficient in controlling its selling and distribution expenses over the period.
B) the entity has become less efficient in controlling its selling and distribution expenses over the period.
C) selling and distribution expenses are a lower percentage of sales.
D) the entity's profitability has decreased.

Question 20

Financial analysis is useful for:

A) evaluating the performance of an entity.
B) evaluating the financial health of an entity.
C) decision making.
D) all of the above.

Question 21

The current ratio is also known as the:

A) working capital ratio.
B) cash flow ratio.
C) quick ratio.
D) acid-test ratio.

Question 22

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

A) quick ratio.
B) operating ratio.
C) debt coverage ratio.
D) cash flow ratio

Question 23

Which of the following statements is correct?

A) Low liquidity ratios are undesirable.
B) High liquidity ratios may indicate excessive investments in unproductive current assets.
C) Low liquidity ratios can indicate liquidity problems.
D) All of the above statements are correct.

Question 24

Aspect Ltd has the following balance sheet figures.The current ratio is:
$\begin{array}{lr}\text { Total current assets } & \$ 450000 \\ \text { Total current liabilities } & 150000 \\ \text { Inventory } & 200000 \\ \text { Bank overdraft } & 30000\end{array}$

A) 2:1
B) 1.67:1
C) 3.75:1
D) 3:1

Question 25

Which of the following statements concerning net tangible asset backing (NTAB)per share is not true?

A) it determines the cash available per share if the company liquidates.
B) the difference between NTAB and the market share price is an indication of the market's assessment of the entity's future growth prospects.
C) it expresses the book value of an entity's tangible assets per ordinary share issued.
D) intangible assets are excluded from the calculation.

Question 26

Capital structure ratios are also known as:

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

Question 27

Which of the following statements is not true?

A) If the equity ratio is less than 50% then the entity is more reliant on debt funding than equity funding.
B) The sum of the debt ratio and the equity ratio does not have to equal 100%.
C) The debt ratio indicates how many dollars of debt exist per dollar of assets.
D) If the debt to equity ratio is more than 100%, the entity is more reliant on debt funding than equity funding.

Question 28

Fernvale Pty Ltd has a current ratio of 2:1 with total current liabilities of $30 000.If Fernvale Pty Ltd's inventory is $7 500,the quick ratio is:

A) 2.67:1
B) 1.75:1
C) 2.25:1
D) 1.6:1

Question 29

The quick ratio is used to determine an entity's:

A) liquidity.
B) profitability.
C) efficiency.
D) performance.

Question 30

A measure of long-term solvency is:

A) debt ratio.
B) debt to equity ratio.
C) equity ratio.
D) all these options measure long-term solvency.

Question 31

If the days debtors ratio changes from 32 days to 38 days this indicates that:

A) the entity is becoming more efficient at collecting money from trade debtors.
B) the time taken to collect money from trade debtors is increasing.
C) the time taken to sell inventory is increasing.
D) the time taken to pay suppliers of inventory is increasing.

Question 32

Liquidity ratios measure the ability of an entity to:

A) remain a going concern.
B) meet its short-term obligations and unexpected cash needs.
C) generate profit.
D) all of the options are correct.

Question 33

Greenacres Ltd has a quick ratio of 1.5:1 with total current liabilities of $50 000.If Greenacres Ltd has inventory of $25 000,the total current assets is:

A) $25 000
B) $75 000
C) $100 000
D) $50 000

Question 34

Which of the following does not measure asset efficiency?

A) Asset turnover ratio.
B) Return on assets.
C) Days inventory.
D) Times debtors turnover.

Question 35

If the market share price is $20 and the earnings per share is calculated to be $2.50,the price earnings ratio is:

A) 4 times.
B) 5 times.
C) 8 times.
D) 12.5 times.

Question 36

Assuming an entity sells inventory only on credit terms,use the following information to calculate the length of the entity's activity cycle and cash cycle.
Days inventory is 60 days.
Days debtors is 35 days.
Days creditors is 30 days.

A) Activity cycle is 95 days; cash cycle is 65 days.
B) Activity cycle is 65 days; cash cycle is 95 days.
C) Activity cycle is 65 days; cash cycle is 30 days.
D) Activity cycle is 95 days; cash cycle is 30 days.

Question 37

Which of these is a market performance ratio?

A) Earnings per share.
B) Dividends per share.
C) Price earnings ratio.
D) All of these options are market performance ratios.

Question 38

Delta Pty Ltd has the following balance sheet figures.The debt to equity ratio is:
$\begin{array}{|l|r|}\hline \text{Current assets }& \$ 300000 \\\hline\text{ Current liabilities} & 200000 \\\hline\text{ Non-current assets} & 650000 \\\hline \text{Non-current liabilities }& 150000 \\\hline\end{array}$

A) 58.3%
B) 36.8%
C) 23.1%
D) 80.0%

Question 39

A high times debtors turnover indicates:

A) the entity's credit sales have decreased.
B) a small percentage of the entity's sales are on credit.
C) the entity is more efficient in collecting monies owing from customers.
D) customers are taking longer to pay their accounts.

Question 40

Baxter Trading Pty Ltd has the following balance sheet figures.The debt ratio is:
$\begin{array}{|l|r|}\hline \text{Current assets }& \$ 300000 \\\hline\text{ Current liabilities} & 200000 \\\hline\text{ Non-current assets} & 800000 \\\hline \text{Non-current liabilities} & 350000 \\\hline\end{array}$

A) 50%
B) 43.75%
C) 66.67%
D) 31.82%

Question 41

_________________ analysis assists users in their decision making by expressing an entity's financial performance and position in relative terms.

Question 42

The dividend pay-out ratio represents:

A) the proportion of the current period's profits that are distributed to shareholders.
B) the amount of dividends that have been paid as a proportion of the number of shares issued.
C) the earnings available to be paid out per share.
D) the amount of dividends paid out as a proportion of the operating cash flows.

Question 43

_________________ analysis involves reviewing the industry in which an entity operates.

Question 44

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

Question 45

Explaining why the ROE (return on equity)ratio has changed requires an examination of the:

A) asset efficiency ratios and debt ratios.
B) profitability ratios and the market performance ratios.
C) return on assets and financial risk.
D) profitability ratios and the asset efficiency ratios.

Question 46

Return on equity measures the profit generated compared to the _____________ investment.

Question 47

________ before interest and tax divided by net finance costs equals times interest earned.

Question 48

An entity's profit margin is affected by which of the following ratios?

A) Gross profit margin and expense ratios.
B) Inventory and debtors days ratios.
C) Gross profit margin and return on assets.
D) Debt and equity ratios.

Question 49

If the ____________________ ratio is less than 50%,the entity relies more on debt funding than equity funding.

Question 50

Limitations of ratio analysis can be caused by:

A) purchasing expensive machinery at the end of the financial year.
B) estimations of employee benefits.
C) different depreciation methods adopted by entities in the same industry.
D) all of the above.

Question 51

The gross profit margin is calculated as gross profit divided by _____________ _____________.

Question 52

Expressing each item in a financial statement as a percentage of a base amount is known as _____________ analysis.

Question 53

Which of the following statements concerning price earnings ratio (PER)is true?

A) PER is calculated as current market price divided by dividends per share.
B) PER is calculated as total shareholders' equity divided by earnings per share.
C) PERs are commonly between 10 and 15 times for industrial companies.
D) PER is not affected by a change in the share price.

Question 54

The ______________ turnover ratio measures the effectiveness of an entity in generating sales revenue.

Question 55

____________________ is excluded from the quick ratio as it is the asset that takes the longest to convert to cash.

Question 56

Average inventory divided by cost of sales equals the ______________ inventory ratio.

Question 57

It is argued that the cash flow ratio is a better measure of ________ than the current ratio as it uses cash flows generated over the whole reporting period rather than at a particular point in time.

Question 58

Profit available to ordinary shareholders divided by the weighted number of ordinary shares is the calculation for:

A) net tangible asset backing (NTAB) per share.
B) dividend per share.
C) operating cash flow per share.
D) earnings per share.

Question 59

Companies are required to ____________________ their earnings per share at the bottom of their statement of profit or loss.

Question 60

Using financial analysis to assist users in answering the 'why' questions requires a thorough understanding of:

A) ratio measurements only.
B) preparation of the financial statements only.
C) all ratio measurements and how they interrelate.
D) only some of the ratio measurements.

Question 61

Ratios can be impacted by the accounting policy choices and ___________ made by an entity.

Question 62

The information provided by financial statements alone is not enough to form predictions about an entity's financial ___________.