Question 1

Which of the following would not form part of the financial statements?
A) Statement of changes in equity
B) Cash flow statement
C) Income statement
D) Directors' remuneration report

Accepted Answer

The directors' remuneration report is typically included in the annual report but is not part of the financial statements, which consist of the balance sheet, income statement, statement of changes in equity, and cash flow statement.

Question 2

The following segmental information is provided for Powerage Ltd.
$\begin{array}{lcccc}
&\text { Audio America } & \text { Audio Europe } & \text { Visual America } & \text { Visual Europe } \
&£ \mathrm{m}&£ \mathrm{m}&£ \mathrm{m}&£ \mathrm{m}\\
\text { Sales } & 600 & 360 & 70 & 120 \
\text { Operating profit } & 18 & 20 & 17 & 16 \
\text { Net operating assets } & 240 & 300 & 30 & 40
\end{array}$

Which segment would you suggest needs to become more profitable?
A) Audio America
B) Audio Europe
C) Visual America
D) Visual Europe

Accepted Answer

B

Question 3

"Minority interest" refers to the owners of shares which have no voting rights

Accepted Answer

Minority interest refers to the ownership of a smaller percentage of a company's shares, regardless of voting rights. It does not depend on whether the shares have voting rights or not.

Question 4

The following segmental information is provided for Powerage Ltd.
$\begin{array}{lcccc}
&\text { Audio America } & \text { Audio Europe } & \text { Visual America } & \text { Visual Europe } \
&£ \mathrm{m}&£ \mathrm{m}&£ \mathrm{m}&£ \mathrm{m}\\
\text { Sales } & 600 & 360 & 70 & 120 \
\text { Operating profit } & 18 & 20 & 17 & 16 \
\text { Net operating assets } & 240 & 300 & 30 & 40
\end{array}$

Which segment is producing most sales in relation to capital employed?
A) Audio America
B) Audio Europe
C) Visual America
D) Visual Europe

Accepted Answer

The answer of The following segmental information is provided for...

Question 5

Which of the following statements is correct?
A) In a group or consolidated statement of financial position the share capital of the parent company and its subsidiaries are shown
B) In a group or consolidated statement of financial position the retained earnings of the parent company and its subsidiaries are shown
C) In a group or consolidated statement of financial position the figures for non-current assets and current assets of the parent company and its subsidiaries are added together
D) All of the above statements are correct

Accepted Answer

In a group or consolidated statement of financial position, non-current assets and current assets of the parent company and its subsidiaries are added together. Share capital and retained earnings are shown separately for the parent company and its subsidiaries.

Question 6

Which of the following would you associate with the Director's report?
A) Cash flow statement
B) Five year summary
C) Business review
D) Balance sheet

Accepted Answer

The Director's report typically includes a business review, which provides insights into the company's operations, performance, and strategy over the reporting period. This section is meant to give shareholders and stakeholders an overview of how the business has been managed and its future prospects.

Question 7

Which of the following z-scores would suggest a company was likely to fail?
A) 1.86
B) 2.99
C) 1.72
D) 1.90

Accepted Answer

Z-scores below 1.81 typically suggest a company is at risk of bankruptcy, making option C (1.72) indicative of likely failure.

Question 8

If one company buys another for less than the net book value of its assets,this is regarded as "negative goodwill" and does not require that the assets and liabilites be revalued at "fair value"

Accepted Answer

Negative goodwill occurs when the purchase price is less than the fair value of the net assets acquired, but it still requires that the assets and liabilities of the acquired company be revalued at fair value according to accounting standards. Negative goodwill is recognized as a gain in the income statement.

Question 9

Which of the following z-scores would suggest a company was not likely to fail?
A) 1.86
B) 2.99
C) 1.72
D) 1.90

Accepted Answer

Z-scores above 2.99 suggest a company is not likely to fail, indicating financial stability.

Question 10

A one-off loss is likely to be a major problem for company

Accepted Answer

A one-off loss, by definition, is an isolated event and not indicative of the company's ongoing financial health. While it may impact short-term financials, it doesn't necessarily pose a major problem for the company in the long term.

Question 11

High levels of debt in a company is always a cause for concern

Accepted Answer

While high levels of debt can indicate potential financial instability, it can also be a strategic tool for growth and investment, depending on the company's ability to manage and service the debt.

Question 12

The following segmental information is provided for Powerage Ltd.
$\begin{array}{lcccc}
&\text { Audio America } & \text { Audio Europe } & \text { Visual America } & \text { Visual Europe } \
&£ \mathrm{m}&£ \mathrm{m}&£ \mathrm{m}&£ \mathrm{m}\\
\text { Sales } & 600 & 360 & 70 & 120 \
\text { Operating profit } & 18 & 20 & 17 & 16 \
\text { Net operating assets } & 240 & 300 & 30 & 40
\end{array}$

Which segment has the lowest profit sales ratio?
A) Audio America
B) Audio Europe
C) Visual America
D) Visual Europe

Accepted Answer

The profit sales ratio is calculated by dividing the operating profit by the sales for each segment. For Audio America, it's $18 / 600 = 0.03$ or 3%, which is the lowest among the given options.

Question 13

According to Altman (1983)the amount of working capital in relation to total assets is an important component in predicting the failure of a company,while measures of return on capital employed (ROCE)can not help predict failure

Accepted Answer

Altman's Z-score model for predicting bankruptcy indeed considers the working capital to total assets ratio as an important component, but it also includes measures of profitability and productivity, such as return on assets (ROA), which is conceptually similar to ROCE, indicating that profitability measures also play a role in predicting company failure.

Question 14

The following segmental information is provided for Powerage Ltd.
$\begin{array}{lcccc}
&\text { Audio America } & \text { Audio Europe } & \text { Visual America } & \text { Visual Europe } \
&£ \mathrm{m}&£ \mathrm{m}&£ \mathrm{m}&£ \mathrm{m}\\
\text { Sales } & 600 & 360 & 70 & 120 \
\text { Operating profit } & 18 & 20 & 17 & 16 \
\text { Net operating assets } & 240 & 300 & 30 & 40
\end{array}$

Which segment is most profitable in relation to capital employed?
A) Audio America
B) Audio Europe
C) Visual America
D) Visual Europe

Accepted Answer

The profitability in relation to capital employed can be calculated as Operating Profit / Net Operating Assets. For each segment: - Audio America: 18 / 240 = 0.075 - Audio Europe: 20 / 300 = 0.0667 - Visual America: 17 / 30 = 0.5667 - Visual Europe: 16 / 40 = 0.4 Visual America has the highest profitability in relation to capital employed.

Question 15

In a group or consolidated balance sheet,the retained earnings figure for the group is the sum of the retained earnings for the parent company and all of the retained earnings for each subsidiary

Accepted Answer

In a consolidated balance sheet, the retained earnings figure for the group reflects the parent company's retained earnings plus its share of the post-acquisition retained earnings of the subsidiaries, not the sum of all retained earnings of the parent and each subsidiary.

Question 16

When a company is in financial distress,creditors may suffer direct financial loss,but shareholders can not loose their investment because they have limited liability

Accepted Answer

Shareholders can lose their entire investment if a company goes bankrupt, as their claims are subordinate to those of creditors. Limited liability means they cannot lose more than they invested.

Question 17

Deferred taxation is a "liability" that may never have to be paid

Accepted Answer

Deferred taxation refers to the temporary differences between the tax base of an asset or liability and its carrying amount in the financial statements. It creates a liability because future taxes will eventually need to be paid, but it may be possible that the liability will never have to be paid if the temporary differences reverse before they become taxable. Therefore, deferred taxation is a liability that may or may not have to be paid.

Question 18

A company with interest cover of 10 is less safe than a company with interest cover of 2

Accepted Answer

The higher the interest cover, the safer the company's financial position, as it means the company is generating more profit to cover its interest payments. Therefore, a company with an interest cover of 10 is safer than a company with an interest cover of 2.

Question 19

Which of the following is not included in the calculation of a Z-Score?
A) Working capital
B) Cash Flow
C) Market value of equity
D) Sales

Accepted Answer

Cash Flow is not included in the calculation of a Z-Score, which is a financial model used to predict the likelihood of a business's bankruptcy. The Z-Score formula includes variables such as working capital, retained earnings, earnings before interest and taxes, market value of equity, and sales, but not cash flow.

Question 20

The International Accounting Standards Board (IASB)require companies to publish information related to business or geographical segments

Accepted Answer

The International Accounting Standards Board (IASB) does require companies to publish information related to business or geographical segments. This information is used to provide a clearer picture of a company's operations and performance. It allows investors and stakeholders to understand how different aspects of a company are performing and how they may be affected by various factors, such as changes in market conditions, regulatory changes, or other events.

Quiz 7: Advanced Interpretation of Company and Group Accounts

Which of the following would not form part of the financial statements?

"Minority interest" refers to the owners of shares which have no voting rights

Which of the following statements is correct?

Which of the following would you associate with the Director's report?

Which of the following z-scores would suggest a company was likely to fail?

If one company buys another for less than the net book value of its assets,this is regarded as "negative goodwill" and does not require that the assets and liabilites be revalued at "fair value"

Which of the following z-scores would suggest a company was not likely to fail?

A one-off loss is likely to be a major problem for company

High levels of debt in a company is always a cause for concern

According to Altman (1983)the amount of working capital in relation to total assets is an important component in predicting the failure of a company,while measures of return on capital employed (ROCE)can not help predict failure

In a group or consolidated balance sheet,the retained earnings figure for the group is the sum of the retained earnings for the parent company and all of the retained earnings for each subsidiary

When a company is in financial distress,creditors may suffer direct financial loss,but shareholders can not loose their investment because they have limited liability

Deferred taxation is a "liability" that may never have to be paid

A company with interest cover of 10 is less safe than a company with interest cover of 2

Which of the following is not included in the calculation of a Z-Score?

The International Accounting Standards Board (IASB)require companies to publish information related to business or geographical segments