Question 1

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

Accepted Answer

The answer of _________________ analysis assists users in their decision...

Question 2

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.

Accepted Answer

The dividend pay-out ratio is calculated by dividing the dividends paid out by the net income that remains after all expenses, including taxes, have been paid. Therefore, it represents the proportion of the current period's profits that are distributed to shareholders.

Question 3

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

Accepted Answer

The answer of _________________ analysis involves reviewing the industry in...

Question 4

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

Accepted Answer

The answer of ____________________ analysis is a technique for evaluating...

Question 5

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.

Accepted Answer

ROE is influenced by the company's return on assets (ROA) and its financial leverage (debt levels). ROA shows how efficiently a company can earn a return on its investment in assets, while financial risk is associated with the company's use of debt, which affects equity returns.

Question 6

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

Accepted Answer

The answer of Return on equity measures the profit generated...

Question 7

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

Accepted Answer

The answer of ________ before interest and tax divided by...

Question 8

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.

Accepted Answer

Profit margin is calculated by subtracting expenses from revenue and dividing by revenue. Therefore, ratios that impact revenue and expenses will affect profit margin. Gross profit margin measures a company's profitability after accounting for the cost of goods sold, while expense ratios measure the efficiency of a company's operations. By improving gross profit margin and controlling expenses, a company can improve its profit margin. The other ratios listed (inventory and debtors days, return on assets, debt and equity ratios) do not directly impact profit margin.

Question 9

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

Accepted Answer

The answer of If the ____________________ ratio is less than...

Question 10

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.

Accepted Answer

All of the above options can lead to limitations of ratio analysis as they can affect the accuracy and comparability of financial statements, and therefore the ratios calculated from them. Purchasing expensive machinery at the end of the financial year can affect liquidity and profitability ratios. Estimations of employee benefits can affect profitability ratios and overall financial performance. Different depreciation methods adopted by entities in the same industry can affect asset turnover ratios and overall valuation of the company.

Question 11

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

Accepted Answer

The answer of The gross profit margin is calculated as...

Question 12

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

Accepted Answer

The answer of Expressing each item in a financial statement...

Question 13

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.

Accepted Answer

The PER is calculated as current market price divided by earnings per share. PERs vary depending on the industry and market conditions but are commonly between 10 and 15 times for industrial companies. The PER is affected by changes in the share price, as it is based on the current market price. Therefore, options A and D are incorrect. Option B is also incorrect, as the calculation of PER does not involve total shareholders' equity.

Question 14

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

Accepted Answer

The answer of The ______________ turnover ratio measures the effectiveness...

Question 15

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

Accepted Answer

The answer of ____________________ is excluded from the quick ratio...

Question 16

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

Accepted Answer

The answer of Average inventory divided by cost of sales...

Question 17

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.

Accepted Answer

The answer of It is argued that the cash flow...

Question 18

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.

Accepted Answer

The calculation for earnings per share (EPS) is the profit available to ordinary shareholders divided by the weighted number of ordinary shares outstanding. Therefore, option D is the correct answer. Option A is calculated by dividing the net tangible assets by the number of outstanding shares, option B is the total amount of dividends paid out divided by the number of outstanding shares, and option C is calculated as operating cash flow divided by the number of outstanding shares.

Question 19

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

Accepted Answer

The answer of Companies are required to ____________________ their earnings...

Question 20

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.

Accepted Answer

In order to answer the 'why' questions using financial analysis, a thorough understanding of all ratio measurements and how they interrelate is necessary. This is because different ratios provide different insights into a company's financial performance, and it's important to analyze them together to get a complete picture of the company's financial health. Simply knowing how to prepare financial statements or having knowledge of only some of the ratio measurements is not sufficient for answering 'why' questions through financial analysis.

Quiz 8: Analysis and Interpretation of Financial Statements

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

The dividend pay-out ratio represents:

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

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

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

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

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

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

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

Limitations of ratio analysis can be caused by:

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

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

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

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

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

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

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.

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

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

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