Interpretation of Financial Statements (Y7C22)

1	Which one of the following would help a company with high gearing to reduce its gearing ratio?
	A	Making a rights issue of equity shares
	B	Issuing further long-term loan notes
	C	Making a bonus issue of shares
	D	Paying dividends on its equity share
2	A company's gross profit as a percentage of sales increased from 24% in the year ended 31 December 20X1 to 27% in the year ended 31 December 20X2. Which of the following events is most likely to have caused the increase?
	A	An increase in sales volume
	B	A purchase in December 20X1 mistakenly being recorded as happening in January 20X2
	C	Overstatement of the closing inventory at 31 December 20X1
	D	Understatement of the closing inventory at 31 December 20X1
3	Which of the following transactions would result in an increase in capital employed?
	A	Selling inventory at a profit
	B	Writing off a bad debt
	C	Paying a payable in cash
	D	Increasing the bank overdraft to purchase a non-current asset
4	From the following information regarding the year to 31 August 20X6, what is the accounts payable payment period? You should calculate the ratio using purchases as the denominator.
	Sales Cost of sales Opening inventory Closing inventory Trade accounts payable at 31 August 20X6			$ 43,000 32,500 6,000 3,800 4,750
	A	40 days
	B	50 days
	C	53 days
	D	57 days
	The following information is relevant for questions 5 to 7.
	Quality Co is drafting their financial statements. An extract from their draft statement of financial position at 31 March 20X8 is set out below.
					$	$
	Non-current assets					450
	Current assets:		Inventory Receivables Prepayments		65 110 30
					250
	Current liabilities:		Payables Bank Overdraft (Note)		30 50
					80
						125
	Non-current liability:		Loan			575 (75)
						500
	Ordinary share capital SPL					400 100
						500
	Note: The bank overdraft first occurred on 30 September 20X7.
5	What is the gearing of the company? You should calculate gearing using capital employed as the denominator.
	A	13%
	B	16%
	C	20%
	D	24%
6	What is the quick ratio of the company?
	A	1.75
	B	2.56
	C	2.88
	D	3.20
7	What is the current ratio of the company?
	A	1.75
	B	2.56
	C	2.88
	D	3.20
8	Which of the following is a ratio which is used to measure how much a business owes in relation to its size?
	A	Asset turnover
	B	Profit margin
	C	Gearing
	D	Return on capital employed
9	A business operates on a gross profit margin of 331/3%. Gross profit on a sale was $800, and expenses were $680. What is the net profit margin?
	A	3.75%
	B	5%
	C	11.25%
	D	22.67%
10	A company has the following details extracted from its statement of financial position:
	Inventories Receivables Bank overdraft Payables			$’000 1,900 1,000 100 1,000
	The industry the company operates in has a current ratio norm of 1.8. Companies who manage liquidity well in this industry have a current ratio lower than the norm. Which of the following statements accurately describes the company’s liquidity position?
	A	Liquidity appears to be well managed as the bank overdraft is relatively low
	B	Liquidity appears to be poorly-controlled as shown by the large payables balance
	C	Liquidity appears to be poorly-controlled as shown by the company’s relatively high current ratio
	D	Liquidity appears to be poorly-controlled as shown by the existence of a bank overdraft
11	Why is analysis of financial statements carried out?
	A	So that the analyst can determine a company’s accounting policies
	B	So that the significance of financial statements can be better understood through comparisons with historical performance and with other companies
	C	To get back to the ‘real’ underlying figures, without the numbers being skewed by the requirements of International Financial Reporting Standards
	D	To produce a report that can replace the financial statements, so that the financial statements no longer need to be looked at