Question 1

Ratios should not be used in isolation because:
A) their behaviour is inter-related.
B) different ratios may give contradictory messages.
C) a decision will often have a number of aspects.
D) all of the above.

Accepted Answer

Ratios should not be used in isolation because their behaviour is inter-related, different ratios may give contradictory messages, and a decision will often have a number of aspects. It is important to consider multiple factors and sources of information when making decisions, rather than relying solely on one ratio or metric.

Question 2

F Co had a profit of $100,000 before tax, after deducting $16,000 in interest expense. F Co's liabilities and equity total $1,000,000. Return on total assets, before interest and tax, is:
A) 9%.
B) 10%.
C) 11.6%.
D) 13%.

Accepted Answer

Return on total assets before interest and tax can be calculated as follows:

Return on total assets = (Profit before tax + Interest expense) / Total assets

= (100,000 + 16,000) / 1,000,000

= 0.116 or 11.6%

Therefore, the correct answer is C.

Question 3

The type of analysis being carried out when a company's gross profit ratio for three years is graphed and compared with the average industry gross profit ratio calculated over the same time period is:
A) gearing analysis.
B) vertical analysis.
C) parallel analysis.
D) trend analysis.

Accepted Answer

This is trend analysis because it involves comparing the company's gross profit ratio over time with the industry average over the same period to determine any trends or patterns.

Question 4

The statement concerning financial ratios that is not true is:
A) Ratios are easy to interpret but difficult to calculate.
B) A ratio expresses the relationship between two figures appearing in the financial statements.
C) Ratios adjust for scale of operations and allow comparisons between businesses of different sizes.
D) None of the above.

Accepted Answer

Ratios are relatively easy to calculate but may be difficult to interpret correctly without proper analysis and context.

Question 5

If gross profit is $540,000, interest expense is $200,000, sales is $1,800,000 and total assets are $5,400,000, calculate the gross profit margin.
A) 18.9%
B) 30%
C) 10%
D) 6.3%

Accepted Answer

Gross Profit Margin = (Gross Profit / Sales) x 100%
 
Gross Profit Margin = ($540,000 / $1,800,000) x 100%
 
Gross Profit Margin = 30%

Question 6

Dividends announced during the period ÷ the number of shares on issue is the formula for:
A) the dividend payout ratio.
B) the dividend yield ratio.
C) the dividend per share ratio.
D) the return on dividends ratio.

Accepted Answer

This formula calculates the dividend per share ratio, which is the amount of dividends paid for each share of a company's stock. The dividend payout ratio measures the percentage of earnings paid out as dividends, while the dividend yield ratio measures the return on investment from dividends. The return on dividends ratio is not a commonly used financial ratio.

Question 7

Sports Ltd reports the following information:  If current assets represent 60% of total assets, Sports Ltd's current ratio is:
A) 50%.
B) 150%.
C) 67%.
D) 200%.

Accepted Answer

The answer of Sports Ltd reports the following information: ...

Question 8

Which of these ratios measure returns to shareholders?
A) earnings per share
B) return on shareholders' funds
C) dividend yield
D) all of the above

Accepted Answer

All of the above ratios measure returns to shareholders.

- Earnings per share (EPS) is the amount of profit allocated to each outstanding share of common stock. It shows how much of a company's profit is generated per share of its stock, and thus it can indicate the profitability of the company to its shareholders.

- Return on shareholders' funds, also known as return on equity (ROE), is a measure of how much profit a company generates with the money shareholders have invested. It measures the return on the owners' investment in the business and shows how well the company is using its equity to generate profits.

- Dividend yield is the ratio of annual dividends per share to the current market price per share. It shows how much a company pays out in dividends relative to its stock price, and thus it can indicate the return on investment that shareholders receive through dividends.

Question 9

If sales for 2015 are $4,000,000 and for 2016 are $6,000,000, and total assets at the end of 2015 are $1,000,000 and at the end of 2016 are $2,000,000, the asset turnover period ratio for 2016 is:
A) 91 days.
B) 146 days.
C) 109 days.
D) 1460 days.

Accepted Answer

The answer of If sales for 2015 are $4,000,000 and...

Question 10

The ratio which is considered to be the best measure of overall profitability when judging the performance of internal management is:
A) return on total assets.
B) return on ordinary shareholders' funds.
C) gross profit margin.
D) net profit margin.

Accepted Answer

Return on total assets (ROTA) is considered the best measure of overall profitability when judging the performance of internal management because it shows how effectively management is using the company's total assets to generate profits.

Question 11

From the following information calculate Moore Ltd's rate of return on ordinary shareholders' funds. Ordinary share capital $600,000 Retained profits and reserves $200,000
180,000 $2.00 10% Preference shares, each fully paid
Net profit after tax and before preference dividend $276,000
A) 30.0%
B) 26.0%
C) 20.0%
D) 16.0%

Accepted Answer

The rate of return on ordinary shareholders' funds is calculated as (Net profit after tax - Preference dividend) / (Ordinary share capital + Retained profits and reserves). The preference dividend is 10% of $360,000 ($2.00 x 180,000 shares), which is $36,000. Therefore, the return is ($276,000 - $36,000) / ($600,000 + $200,000) = $240,000 / $800,000 = 30.0%.

Question 12

Which of these ratios is not directly relevant to the evaluation of a company's short-term liquidity position?
A) current ratio
B) net profit ratio
C) quick ratio
D) acid test ratio

Accepted Answer

The net profit ratio measures profit relative to sales and does not provide information about the company's ability to meet its short-term obligations. The current ratio, quick ratio, and acid test ratio are all measures of short-term liquidity.

Question 13

The statement that is not correct is:
A) A business will prefer a longer average inventory turnover time rather than a shorter turnover time.
B) A business will prefer a shorter settlement time for its accounts receivable rather than a longer settlement period.
C) An asset turnover figure of 1.5 times is preferred to a figure of 1.2 times.
D) None of the statements, i.e. all are correct.

Accepted Answer

A business would prefer a shorter average inventory turnover time, as this indicates that they are able to sell their inventory faster and keep their cash flow moving. A longer turnover time can indicate that inventory is not selling as quickly, which can lead to cash flow problems.

Question 14

The following information was extracted from the financial records of Goss Ltd for the year ended 30 June 2015:  If there are 365 trading days per year, calculate for the managing director the number of days that debtors are outstanding at 30 June 2015.
A) 114 days
B) 51 days
C) 86 days
D) 43 days

Accepted Answer

The answer of The following information was extracted from the...

Question 15

Dollar Ltd has a current ratio of 2:1. This means that:
A) its current assets are insufficient to meet its current liabilities.
B) there is $2 of current assets for every $1 of current liabilities.
C) its current assets are half its current liabilities.
D) its current assets are equal to its current liabilities.

Accepted Answer

A current ratio of 2:1 means that there are $2 of current assets for every $1 of current liabilities. This indicates that the company has sufficient current assets to cover its short-term obligations.

Question 16

Which business would you expect to have the highest current ratio?
A) retailer
B) manufacturer
C) service business that sells for cash
D) service business that sells on credit

Accepted Answer

The answer of Which business would you expect to have...

Question 17

Trendy Ltd's net profit after tax was $1,200 and its interest expense was $400. Assuming corporate tax is $400, what is the company's interest cover ratio?
A) 5.0
B) 3.0
C) 1.2
D) 1.8

Accepted Answer

The interest cover ratio is calculated as Earnings Before Interest and Taxes (EBIT) divided by interest expense. To find EBIT, add net profit after tax ($1,200) and tax ($400) to get $1,600, then add interest expense ($400) to get $2,000. Divide $2,000 by the interest expense ($400) to get an interest cover ratio of 5.0.

Question 18

If Sharpe Products Ltd has a asset turnover ratio of 2 times and a net profit margin of 6.5%, the return on total assets is:
A) 8.5%.
B) 13.0%.
C) 6.5%.
D) 30.0%.

Accepted Answer

Return on Total Assets = Asset Turnover Ratio * Net Profit Margin

= 2 * 6.5%

= 13.0%

Question 19

If Line Ltd has a current ratio of 2.5:1 and current assets are $600,000, how much are the company's current liabilities?
A) $200,000
B) $300,000
C) $360,000
D) $240,000

Accepted Answer

The answer of If Line Ltd has a current ratio...

Question 20

The adequacy of the gross profit margin depends on:
A) selling price.
B) buying price.
C) total expenses.
D) both A and B

Accepted Answer

The gross profit margin is calculated by subtracting the cost of goods sold from the total revenue and expressing this as a percentage of total revenue. Therefore, it depends on both the selling price (revenue) and the buying price (cost of goods sold). Additionally, the gross profit margin must also be sufficient to cover total expenses in order for the business to be profitable.

Quiz 6: Analysis and Interpretation of Financial Statements

Ratios should not be used in isolation because:

F Co had a profit of $100,000 before tax, after deducting $16,000 in interest expense. F Co's liabilities and equity total $1,000,000. Return on total assets, before interest and tax, is:

The type of analysis being carried out when a company's gross profit ratio for three years is graphed and compared with the average industry gross profit ratio calculated over the same time period is:

The statement concerning financial ratios that is not true is:

If gross profit is $540,000, interest expense is $200,000, sales is $1,800,000 and total assets are $5,400,000, calculate the gross profit margin.

Dividends announced during the period ÷ the number of shares on issue is the formula for:

Sports Ltd reports the following information: If current assets represent 60% of total assets, Sports Ltd's current ratio is:

Which of these ratios measure returns to shareholders?

If sales for 2015 are $4,000,000 and for 2016 are $6,000,000, and total assets at the end of 2015 are $1,000,000 and at the end of 2016 are $2,000,000, the asset turnover period ratio for 2016 is:

The ratio which is considered to be the best measure of overall profitability when judging the performance of internal management is:

From the following information calculate Moore Ltd's rate of return on ordinary shareholders' funds. Ordinary share capital $600,000 Retained profits and reserves $200,000 180,000 $2.00 10% Preference shares, each fully paid Net profit after tax and before preference dividend $276,000

Which of these ratios is not directly relevant to the evaluation of a company's short-term liquidity position?

The statement that is not correct is:

The following information was extracted from the financial records of Goss Ltd for the year ended 30 June 2015: If there are 365 trading days per year, calculate for the managing director the number of days that debtors are outstanding at 30 June 2015.

Dollar Ltd has a current ratio of 2:1. This means that:

Which business would you expect to have the highest current ratio?

Trendy Ltd's net profit after tax was $1,200 and its interest expense was $400. Assuming corporate tax is $400, what is the company's interest cover ratio?

If Sharpe Products Ltd has a asset turnover ratio of 2 times and a net profit margin of 6.5%, the return on total assets is:

If Line Ltd has a current ratio of 2.5:1 and current assets are $600,000, how much are the company's current liabilities?

The adequacy of the gross profit margin depends on: