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

Accepted Answer

The value for year three in a trend analysis with year one as the base year is calculated as (896/800) * 100% = 112%.

Question 2

In a vertical analysis,the base for prepaid expenses is

Accepted Answer

The base for any vertical analysis is a common denominator that represents 100%. In this case, the base for prepaid expenses would be total assets, since prepaid expenses are generally classified as a current asset. Therefore, the correct answer is B (total assets).

Question 3

Financial statements are

Accepted Answer

Financial statements can provide useful information about past and present performance, which can often be used as a guide to future performance. However, other factors such as changes in the market, competition, and economic conditions can also impact future performance, so financial statements should not be relied on entirely for predicting future results.

Question 4

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

Accepted Answer

In a vertical analysis of an income statement, the 100% figure represents the total net sales. The other items such as cost of sales, gross profit, and profit are expressed as a percentage of the net sales figure.

Question 5

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

Accepted Answer

Inventory turnover in days = (average inventory / cost of sales) x 365

= (49,500 / 630,000) x 365

= 28.7 days (rounded to one decimal place)

Therefore, the best choice is C, as it is the only option that matches the calculated inventory turnover in days.

Question 6

Which of the following statements regarding inventory turnover is correct?

Accepted Answer

All the options are correct: A) Supermarkets typically have lower days inventory than shoe retailers due to faster inventory turnover. B) Days inventory measures the average time to sell inventory. C) It also indicates the efficiency of selling inventory.

Question 7

Vertical analysis is also known as:

Accepted Answer

Vertical analysis is also commonly referred to as common size statements because it involves expressing each financial statement item as a percentage of a base amount, such as total assets or net sales. This allows for easy comparison between different periods or companies, as it shows the relative importance of each item in the overall financial picture.

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:

Accepted Answer

Return on assets (ROA) = (Profit + Interest) / Average Total Assets
= ($109,000 + $11,000) / $650,000
= $120,000 / $650,000
= 0.1846 or 18.5%
Therefore, the best choice is A) 18.5% because it accurately calculates the return on assets.

Question 9

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

Accepted Answer

When comparing an income or statement of cash flows item to a balance sheet item, it's better to take the average of the beginning and ending year values for the balance sheet item to provide a more accurate representation of its value throughout the year. Using just the year-end balance of the balance sheet item may not be reflective of its value during the entire year.

Question 10

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

Accepted Answer

Market performance ratios may not be relevant to all business entities, for example, non-publicly traded companies or those that do not have a significant presence in the stock market.

Question 11

Days inventory is a measure of:

Accepted Answer

Days inventory measures the average length of time it takes for a company to sell its inventory.

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

Accepted Answer

Comparing ratios to industry averages, other entities in the same industry, and the entity's own historical ratios are all appropriate benchmarks to assess performance.

Question 13

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

Accepted Answer

A financial institution would be most interested in the cash flow of an entity, as this indicates the ability of the entity to generate enough money to repay the loan. Profitability and turnover of debtors are also important factors, but cash flow is most relevant to the loan repayment ability.

Question 14

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

Accepted Answer

The answer of Which ratio/s can be used to explain...

Question 15

The gross profit margin ratio is calculated by dividing

Accepted Answer

The gross profit margin ratio is calculated by dividing the gross profit (which is the difference between sales revenue and cost of goods sold) by sales revenue. This means only choice C is the correct answer.

Question 16

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

Accepted Answer

The increase in the marketing expenses to sales ratio from period 1 to period 2 indicates that the firm has become less efficient in controlling its marketing expenses over the period. This could mean that they are spending more on marketing initiatives or that their sales revenue has decreased. The other options are not necessarily true based on this ratio change alone.

Question 17

The asset turnover ratio is calculated by dividing

Accepted Answer

The asset turnover ratio is calculated by dividing the sales revenue by average total assets, indicating how efficiently a company uses its assets to generate sales. Option D is the correct choice as it divides the sales revenue by the average total assets.

Question 18

Horizontal analysis of financial statements includes the

Accepted Answer

Horizontal analysis involves calculating percentage changes in financial statement items from one year to the next to identify trends over time.

Question 19

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

Accepted Answer

A longer inventory turnover period means it is taking longer to sell inventory, indicating a decrease in sales or an increase in inventory levels. Therefore, option B is the correct answer. Option A is the opposite of the correct answer, and options C and D are not relevant to the given scenario.

Question 20

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

Accepted Answer

The return on assets ratio measures how efficiently a company is utilizing its assets to generate profits. It is calculated by dividing net income by total assets. Therefore, it indicates the ability of an entity to generate income from its asset investments.

Quiz 8: Analysis and Interpretation of Financial Statements