Financial accounting and reporting I

9 OBJECTIVE BASED QUESTIONS

01. The acid test also known as quick ratio should include which of the following?
(1) Inventory
(2) Accounts receivables
(3) Bank overdraft
(4) Accruals
(a) (1), (2), (3) and (4)
(b) (1), (2) and (3) only
(c) (1), (2) and (4) only
(d) (2), (3) and (4) only

02. Salik has net current liabilities in its statement of financial position. He has decided to pay off
its accounts payables using surplus cash.
What will be the effect of the above transaction on the current ratio?
(a) Decrease
(b) Increase
(c) No effect
(d) The ratio could either increase or decrease

03. Extracts from the statement of Comprehensive Income and statement of financial position of
the Huda Limited are shown below:
Rs.
Revenue from sales (all on credit) 900,000
Cost of goods sold 756,000
Purchases (all on credit) 504,000
Receivables 112,500
Trade payables 75,600
Inventory 333,000
What is the length of the working capital cycle (also known as the operating or cash cycle) to
the nearest day?
(a) 170 days
(b) 152 days
(c) 261days
(d) 60 days

04. Which of the following should be included in acid test or quick ratio?
(a) Finished goods inventory
(b) raw materials and consumables
(c) long-term loans
(d) Accounts payable

© Emile Woolf International 434 The Institute of Chartered Accountants of Pakistan

 Chapter 10: Interpretation of financial statements

05. Given below are included in the financial statements of Haris Limited for the year ending 30
June:
2015 2016
Rs. 000 Rs. 000
Receivables for disposal of PPE 36 54
Accounts receivables 108 72
144 126
Sales for the year amounted to Rs. 630,000, of which Rs. 90,000 were cash sales.
The average receivables turnover (in times) during the year ended 30 June 2016 was?
(a) 7
(b) 6
(c) 5
(d) 4

06. Dawn Limited has provided following information:

31st December 31st December
2014 2015
Rs. 000 Rs. 000
Non -current assets 36 61.2
Inventory 18 23.4
Accounts receivable 25.2 19.8
Bank balance 5.4 3.6
Accounts payable 19.8 16.2
Sales on credit 252 216
Purchases on credit 144 108
Which TWO of the following statements are correct?
(a) Net current assets have increased between the two years
(b) The quick (acid test) ratio has improved between the two years
(c) Customers are paying more quickly in 2015 than in 2014
(d) Dawn Limited is paying its suppliers more quickly in 2015 than in 2014

07. Amir sells fish and Abid sells books. Both operate on a 50% mark-up on cost.
However, their gross profit ratios are as follows.
Amir 25%
Abid 33%
The highest gross profit ratio of the bookseller may be because?
(a) There is more wastage with fish stocks than with book stocks
(b) Amir has a substantial bank loan whereas the Abid’s business is entirely financed by
her family
(c) Amir has expensive high street premises whereas Abid has cheaper back street
premises
(d) Amir’s turnover is declining whereas that of the Abid is increasing

© Emile Woolf International 435 The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting I

08. Maira Limited has a current ratio of 2:1.

This ratio will decrease if Maira Limited
(a) will receive cash in respect of a long-term loan
(b) will receive cash in respect of a short-term loan
(c) pays an existing trade payable
(d) writes off an existing receivable against the provision for doubtful debts

09. Haris Limited has positive working capital.

What effect will the payment of a declared (payable) dividend using cash balances have upon
the current ratio and working capital?
(a) Increase in current ratio and increase in working capital
(b) Increase in current ratio and no effect on working capital
(c) No effect on current ratio and working capital
(d) Decrease in current ratio and decrease in working capital

10. After declaring a final dividend, Kashan Limited has a current ratio of 2.0 and a quick asset
ratio of 0.8.
If the company now uses its positive cash balance to pay that final dividend, what will be the
effect upon the two ratios?
(a) Increase in current ratio and increase in quick asset ratio
(b) Increase in current ratio and decrease in quick asset ratio
(c) Decrease in current ratio and increase in quick asset ratio
(d) Decrease in current ratio and decrease in quick asset ratio

11. The draft accounts of Super Star Limited for the year ended 31 December 2018 include the
following:

Revenue Rs. 360 million

Gross profit Rs. 90 million

It was subsequently discovered that the revenue was overstated by Rs. 45 million and the
closing inventory understated by Rs. 15 million.
After correction of these errors the gross profit percentage will be?
(a) 9.5%
(b) 19.0%
(c) 23.8%
(d) 33.3%

© Emile Woolf International 436 The Institute of Chartered Accountants of Pakistan

 Chapter 10: Interpretation of financial statements

12. The following has been extracted from the financial statements of a business.
SOCI Rs. SOFP Rs.
Profit from operations 86,400 7% debenture 117,000
Debenture interest (8,190) Ordinary share capital 171,000
Profit for the year 72,360 Share premium 13,500
Retained earnings 63,000
What was the return on capital employed (ROCE)?
(a) 19.9%
(b) 23.7%
(c) 29.2%
(d) 34.9%

13. Waris Limited buys and sells a single product. The following is an extract from its statement
of financial position at 31 December 2018.
2018 2017
Rs. 000 Rs. 000
Inventory 75 60
Receivables 24 36
Sales and purchases during 2018 were Rs. 300,000 and Rs. 180,000 respectively. 20% of
sales were for cash.
Which TWO of the following are correct?
(a) Average receivables collection period is 37 days
(b) Average receivables collection period is 46 days
(c) Gross profit % is 35%
(d) Gross profit % is 45%

14. A company’s gearing ratio (Debt/Equity) is 60%. This would rise if

(a) The decrease in shareholders’ equity is equal in amount to decrease in long term loans
(b) The increase in shareholders’ equity is equal in amount to decrease in long term loans
(c) The part of long term loans are repaid
(d) Right issue of shares of 1 for 5 is made

15. A business has the following trading account for the year ending 31 May 2018:
Rs. Rs.
Sales 450,000
Opening inventory 40,000
Purchases 260,500
300,500
Less: closing inventory (60,000) (240,500)
Gross profit 209,500

© Emile Woolf International 437 The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting I

Its rate of inventory turnover for the year is?

(a) 4.9 times
(b) 5.3 times
(c) 7.5 times
(d) 9 times

16. Tara Ltd produces a single product with a margin on sales of 25%.
Total sales for the year Rs. 400,000
Receivables collection period 64 days
Average receivables Rs. 32,000
The value of inventory held during the year was constant.
The cost of credit sales was?
Rs. ___________

17. The following are extracts from the financial statements of Laiba Ltd for the year ended 31
December 2018.
Statement of financial position Statement of Comprehensive Income
Rs. 000 Rs. 000
Issued share capital 3,600 Operating profit 1,431
Reserves 1,800 Debenture interest (216)
5,400 1,215
12% debenture 2018 1,800
7,200
What is the return (%) on long-term funds?

___________%

18. The opening inventory for a business was Rs. 108,000. The closing inventory was Rs.
144,000.
Inventory turnover for the year was 10 times.
The gross margin was 30%.
What were the sales for the year?
Rs. ___________

19. Adeel Limited has trade payables (creditors) of Rs. 12,000 and a bank overdraft of Rs. 3,000.
Its current ratio is 2.5: 1 and its quick (acid test) ratio is 1.5:1.
What is the value of its inventory (stock)?
Rs. ___________

© Emile Woolf International 438 The Institute of Chartered Accountants of Pakistan

 Chapter 10: Interpretation of financial statements

20. Extracts from statement of financial position of Turab Limited at 31 March 2019 are presented
below:
Rs. 000
Loans due in more than one year 32
5% loan notes 24
Ordinary shares - Rs. 1 each fully paid 80
6% redeemable preferred shares, Rs. 1 each fully paid 16
Retained profits 104
Revaluation reserve 40
The gearing ratio is (to one decimal place)?

___________%

21. Which ratio is considered as safe margin of solvency?

(a) Liquid ratio
(b) Quick ratio
(c) Current ratio
(d) Net profit ratio

22. Liquid ratio is also known as

i. Quick ratio
ii. Acid test ratio
iii. Working capital ratio
iv. Stock turnover ratio
(a) i. and ii.
(b) i. and iii.
(c) iii. and iii.
(d) iii. and iv.

23. Care pharmacy Ltd. has a current ratio equal to 1.6 and a quick ratio equal to 1.2. The
company has Rs.200 million in sales and its current liabilities are Rs.10 million. what is the
value of company's current assets?
(a) Rs.14 million
(b) Rs.16 million
(c) Rs.18 million
(d) Rs.20 million

© Emile Woolf International 439 The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting I

24. Determine working capital turnover ratio if, current assets is Rs.150 million, current liabilities
is Rs.100 million and Sales during the year are Rs.500 million.
(a) 5 times
(b) 10 times
(c) 15 times
(d) 20 times

25. A debtor turnover ratio of 12 times means that:

(a) one-twelfth of debtors will turn out to be bad debts
(b) debtors are about twelve times as big as creditors
(c) in any given month, twelve debtors are expected to pay in full
(d) the average debtor takes about one month to pay.

26. What is the impact of collection of debtors on the current ratio;

(a) Increase
(b) Decrease
(c) No impact
(d) None of the above

27. Which of the following is not included in the computation of acid test ratio?
(a) Debtors
(b) Cash at bank
(c) Short-term investments
(d) Stock

28. Determine inventory turnover ratio if, opening inventory is Rs.31 million, closing inventory is
Rs.29 million, sales are Rs.320 million and gross profit margin is 25%.
(a) 6 times
(b) 8 times
(c) 11 times
(d) 16 times

29. Debt-equity ratio is a sub-part of

(a) Short-term solvency ratios
(b) Long-term solvency ratios
(c) Debtors turnover ratios
(d) None of the above

© Emile Woolf International 440 The Institute of Chartered Accountants of Pakistan

 Chapter 10: Interpretation of financial statements

30. Night Limited has a current ratio of 1.8. This ratio will increase if Night Limited:
(a) receives cash in respect of a short term loan
(b) receives cash from an existing receivable
(c) pays an existing trade payable
(d) purchases inventory on credit

31. Night Limited has a current ratio of 1.8. This ratio will increase if Night Limited:
(a) receives cash in respect of a short term loan
(b) receives cash from an existing receivable
(c) pays an existing trade payable
(d) purchases inventory on credit

32. Which of the following companies is most likely to face cash flow problems?
(a) A loss making government organisation
(b) A company which has recently sold part of its operations so as to concentrate on its
core areas
(c) A reasonably profitable and long established company with no expansion plans
(d) A profitable retailer about to embark on ambitious expansion plans

33. A company has current ratio and quick ratio of 2.0 and 0.8 respectively. If the company uses
its positive cash balance to pay a creditor, it will:
(a) increase current ratio as well as quick ratio
(b) increase current ratio and decrease quick ratio
(c) have no effect on current ratio as well as quick ratio
(d) decrease current ratio as well as quick ratio

34. Which of the following would increase gearing ratio?

(a) Issuance of shares at premium
(b) Issuance of shares at discount
(c) Issuance of bonus shares
(d) Declaration and payment of cash dividend

© Emile Woolf International 441 The Institute of Chartered Accountants of Pakistan