Deck 8: Understanding Financial Reports: Trend Analysis

Question 1

Day & Co's trade payables increased by 6% between 20X4 and 20X5.Which one of the following is a plausible explanation for the increase?

A)The government has increased indirect taxation rates.
B)Prices of raw materials have decreased during the year.
C)The business is taking longer at the end of 20X5 to pay its current liabilities than at the end of 20X4.
D)The business is taking longer to collect amounts due to it at the end of 20X5 compared to 20X4.

Answer 1

The business is taking longer at the end of 20X5 to pay its current liabilities than at the end of 20X4.

Question 2

The four enhancing characteristics of financial information identified by the IASB are:

A)comparability, verifiability, timeliness and understandability.
B)conciseness, correctness, reliability and relevance.
C)reliability, verifiability, relevance and comparability.
D)understandability, timeliness, comparability and faithful representation.

Answer 2

comparability, verifiability, timeliness and understandability.

Question 3

Carnforth Amberly, a professional partnership, has the following results for 20X2 and 20X3: Millie Carnforth, the senior partner, had expected a 7% increase in fees between 20X2 and 20X3, and a 20% increase in net profit.
Which one of the following statements is correct?

A)Both revenue and net profit are better than expected.
B)Revenue is better than expected but net profit is worse than expected.
C)Both revenue and net profit are worse than expected.
D)Revenue is worse than expected, but net profit is better than expected.

Answer 3

Both revenue and net profit are better than expected.

Question 4

Otter Services Limited had the following results in 20X1 and 20X2: Which one of the following statements is incorrect?
Between 20X1 and 20X2:

A)Revenue increased at a faster rate than selling expenses.
B)Gross profit margin worsened.
C)Net profit margin improved.
D)Other expenses decreased by more than 5%.

Question 5

Trev's revenue for 20X6 was £346 410, and for 20X7 was £366 270.His gross profit margin in 20X6 was 26.2%, improving to 26.3% in 20X7.In 20X8 he expects revenue to increase by the same percentage as between 20X6 and 20X7.Gross profit margin is likely to remain static at 26.3%. What is Trev's expected gross profit in 20X8 (to the nearest £)?

A)£101 852
B)£96 329
C)£101 552
D)£106 775

Question 6

Which one of the following statements describes common size analysis: Common size analysis:

A)is an alternative term for horizontal analysis.
B)is a comparison of the financial statements of two or more companies of a similar size.
C)extends vertical analysis over more than one accounting period.
D)uses the figures related to a single accounting period only.

Question 7

Which two of the following useful characteristics of financial information are identified as key characteristics by the IASB?
A.Accuracy
B. Conciseness
C. Faithful representation
D. Relevance

A)A and C
B)A and B
C)C and D
D)B and D

Question 8

May & Co's equity (share capital and retained earnings) decreased by 4% between 20X3 and 20X4.Which two of the following are plausible explanations for the decrease?
A.The business made a substantial loss in the 20X4 financial year.
B. Inventory and trade payables were both higher at the 20X4 year end because inventory was being built up to fulfil a large order.
C. A substantial bad trade receivable amount was written off during the 20X4 financial year.
D. The business disposed of several non-current assets at their carrying amounts during the 20X4 financial year.The assets were surplus to requirements and were not replaced.

A)B & D
B)B & C
C)A & D
D)A & C

Question 9

Which one of the following statements describes horizontal analysis? Horizontal analysis is:

A)a comparison between two or more companies in the same industry sector.
B)an analysis of the components of total assets.
C)a comparison of all accounting figures in relation to a single key figure such as total assets.
D)an analysis of comparable accounting figures over a period of time.

Question 10

The revenue figure for Yates Clothing Co Limited was £772 600 for the 20X6 financial year.Between 20X6 and 20X7 revenue increased by 5%, and by 7.2% between 20X7 and 20X8.Gross profit in 20X8 was 24.3% of revenue. What was the gross profit figure for the company in 20X8 (to the nearest £)?

A)£210 646
B)£211 322
C)£187 742
D)£166 513

Question 11

Naria's business has the following trading results in 20X4 and 20X5: Which one of the following statements is correct?
Between 20X4 and 20X5:

A)Gross profit increased by less than 5%.
B)Gross profit and revenue increased at the same rate.
C)Gross profit margin improved.
D)Revenue increased by over 5%.

Question 12

Which one of the following useful characteristics of financial information is identified as a key characteristic by the IASB?

A)Relevance
B)Complexity
C)conciseness
D)accuracy

Question 13

Extracts from the 20X3 and 20X4 accounts of Goodge and Patel are as follows: Two of the following four statements are correct:
Between 20X3 and 20X4
A. Gross profit margin increased slightly
B. Revenue increased by 4.5%
C. Cost of sales increased by more than £15 000
D. The interest rate payable on loans increased slightly
Which two statements are correct?

A)A and D
B)A and B
C)C and B
D)C and D

Question 14

Pixley Potter Limited has the following results for 20X5 and 20X6: A recent survey of similar businesses shows that between 20X5 and 20X6 revenue increased on average by 2.2% and gross profit by 5.0%.
Which one of the following statements is correct?
A horizontal analysis of Pixley Potter's revenue and gross profit figures for 20X6 and 20X7 shows:

A)The company had a higher than average increase in revenue and a lower than average increase in gross profit.
B)The company had a lower than average increase in revenue and a lower than average increase in gross profit.
C)The company had a lower than average increase in revenue and a higher than average increase in gross profit.
D)The company had a higher than average increase in revenue and a higher than average increase in gross profit.

Question 15

The revenue figure for Beechwood & Co for 20X4 was £286 630.This was 5.3% higher than the figure for 20X3 which itself was 2.8% higher than the 20X2 figure.In 20X2 the operating profit percentage was 16.5%. What was the operating profit of the business in 20X2 (to the nearest £)?

A)£47 294
B)£51 195
C)£43 690
D)£43 463

Question 16

Which one of the following statements describes vertical analysis? Vertical analysis:

A)compares the financial statements of businesses engaged in similar activities.
B)examines the relationship between revenue and the gross and net profit figures.
C)calculates the growth or decline in key figures such as revenue over several accounting periods.
D)involves an analysis of each figure in the financial statements expressed as a percentage of a key figure such as revenue.

Question 17

Ainul's business had the following trade receivables and trade payables at 31 March 20X6: Total assets in 20X6 were £385 520 (20X5 - £387 772).
Which of the following statements are correct?
A.Trade receivables as a percentage of total assets have decreased between 20X5 and 20X6.
B.Trade payables as a percentage of total assets have decreased between 20X5 and 20X6.
Applying vertical analysis:

A)Neither of them
B)Both of them
C)A only
D)B only

Question 18

Paul is keen to expand his business.He has set himself a target of increasing revenue by 12% between 20X3 and 20X4 and of increasing gross profit by 13.5%. His actual results for 20X3 and 20X4 are as follows:
Which one of the following statements is correct?

A)Revenue is better than expected, but gross profit is worse than expected.
B)Both revenue and gross profit are worse than expected.
C)Both revenue and gross profit are better than expected.
D)Revenue is worse than expected, but gross profit is better than expected.

Question 19

Zee and Co's operating profit increased by 3% between 20X6 and 20X7.Which one of the following is NOT a plausible explanation for the increase?

A)Cost of purchases increased, but Zee and Co were able to more than recover the increases in their own selling prices.
B)The interest rate applicable to the business overdraft reduced by 2%.
C)The volume of higher margin sales increased.
D)Zee and Co made substantial savings on operating expenses.

Question 20

Saleema's business had the following current assets at 31 December 20X9 and 20X8: Total assets in 20X9 were £228 760 (20X8 - £214 270).
Which of the following statements are correct?
A.Inventory as a percentage of total assets has increased between 20X8 and 20X9.
B. Trade receivables as a percentage of total assets was higher in 20X8 than in the subsequent year.
Applying vertical analysis:

A)Both of them
B)B only
C)Neither of them
D)A only

Question 21

Bloodworth is engaged in the sale of spare parts for tractors and farm machinery.It has a close rival, Ketley Limited.Extracts from the statements of profit or loss of the two companies for the year ended 31 December 20X1 are as follows: Ketley's gross profit margin is higher than Bloodworth's.However, Ketley charges depreciation of £18 000 on its storage facilities to operating expenses whereas Bloodworth includes the equivalent charge in its cost of sales.After making the appropriate adjustment for this difference, which of the following statements are correct?
A. Operating profit margin remains unchanged.
B. Bloodworth's gross profit margin now exceeds that of Ketley.

A)Neither of them
B)Both of them
C)B only
D)A only

Question 22

In its 20X3 financial year Tee Limited made a gross profit margin of 23.5% on revenue of £1 800 200.Its closest rival, Dee Limited, made a gross profit margin of 24.7% in the same period.By what percentage (to one decimal place) would the revenue of Tee Limited need to increase in order to make the same gross profit margin as Dee Limited, assuming that the cost of sales figure remains exactly the same?

A)2.8%
B)3.2%
C)1.2%
D)1.6%

Question 23

Extracts from the common size analysis for Denton Products Limited over a three-year period are as follows: Statement of financial position elements are expressed in terms of total assets which were as follows:
20X3 £663 700
20X4 £675 300
20X5 £681 400
Which of the following statements are correct?
A.The non-current assets figure in £s has increased slightly over the period covered by the analysis.
B. The long-term borrowings figure in £s has increased slightly over the period covered by the analysis.

A)Both of them
B)B only
C)A only
D)Neither of them

Question 24

Extracts from Ron Bayliss's statements of profit or loss over a four-year period are as follows: Which one of the following statements is correct?
Analysed horizontally, these figures show:

A)A gradually decreasing percentage of revenue growth but a gradually increasing gross profit margin percentage.
B)A gradually decreasing percentage of revenue growth and a gradually decreasing gross profit margin percentage.
C)A gradually increasing percentage of revenue growth but a gradually decreasing gross profit margin percentage.
D)A gradually increasing percentage of revenue growth and a gradually increasing gross profit margin percentage.

Question 25

Extracts from Robina's financial statements show the following: Using common size analysis, with total assets as the base figure, which of the following are correct?
A. Long-term borrowings have decreased over the period covered by the financial statements relative to total assets.
B. Non-current assets have decreased over the period covered by the financial statements relative to total assets.

A)Neither of them
B)B only
C)A only
D)Both of them

Question 26

Silworth Limited and De Souza Limited are both engaged in fish canning operations.The trading accounts for the two companies for the year ended 31 March 20X7 are as follows: The majority of Silworth's business, and the whole of De Souza's, comprises fish canning.However, Silworth also runs a fish farming operation.15% of Silworth's revenue arise from fish farming and this operation yields a gross profit margin of 22.7%.
Which one of the following statements is correct?

A)Silworth's gross profit margin on fish canning is higher than De Souza's but its revenue is lower.
B)Silworth's gross profit margin on fish canning is lower than De Souza's and its revenue is also lower.
C)Silworth's gross profit margin on fish canning is higher than De Souza's and its revenue is also higher.
D)Silworth's gross profit margin on fish canning is lower than De Souza's but its revenue is higher.

Question 27

AB Limited reports revenue of £752 200 in its 20X4 financial year, and its gross profit margin in the period is 27.3%.The gross margin of its rival CD Limited is higher at 28.2%.The directors of AB think that it will be possible to increase revenue by 1.7% in the 20X5 financial year.What is the maximum increase permissible to cost of sales if the directors wish to achieve the same gross profit margin as that of CD Limited?

A)Insufficient information given
B)£9296
C)£2412
D)£12 787

Question 28

Brinscall Limited and Petworth Limited are both engaged in travel agency activities.While 100% of the revenue of Petworth arises from this activity, Brinscall Limited is also engaged in running its own watersports holidays.20% of Brinscall's revenue arises from the latter activity, which yields a gross profit margin of 36.2%. The most recent trading account figures for the two companies are as follows:
Which one of the following statements is correct?

A)Brinscall's gross profit margin on travel agency is lower than Petworth's but its revenue is higher.
B)Brinscall's gross profit margin on travel agency is lower than Petworth's, and its revenue is also lower.
C)Brinscall's gross profit margin on travel agency is higher than Petworth's but its revenue is lower.
D)Brinscall's gross profit margin on travel agency is higher than Petworth's and its revenue is also higher.

Question 29

Extracts from Harald's statements of profit or loss over a four-year period are as follows: Which one of the following statements is correct?
Analysed horizontally, these figures show:

A)A gradually increasing percentage of revenue growth but a gradually decreasing gross profit margin percentage.
B)A gradually decreasing percentage of revenue growth and a gradually decreasing gross profit margin percentage.
C)A gradually decreasing percentage of revenue growth but a gradually increasing gross profit margin percentage.
D)A gradually increasing percentage of revenue growth and a gradually increasing gross profit margin percentage.

Question 30

Sturgeon and Hak Limited (S&H) runs a chain of restaurants.Revenue for 20X4 was £10 804 000, and the company's net profit margin was 17.2%.S&H is in fierce competition with a similar chain of restaurants, Carver and Bell Limited (C&H).S&H's managing director has heard from a contact that C&H's net profit margin for 20X4 was 20.3%.What percentage increase (to one decimal place) would be required in S&H's revenue in order to achieve the same net profit margin as C&H, assuming that their cost figures remain exactly the same?

A)3.1%
B)18.0%
C)3.9%
D)25.4%