Mirchawala’s Hub of Accountancy:
FA: Financial Accounting:
Interpretation of Financial Statements:
Question#1:
X Co has sales of $28,000 and cost of sales of $21,280.
What is X Co's gross profit margin ______%?
Question#2:
Mint has the following working capital ratios:
20X2 20X1
Current ratio 1.3: 1 1.5: 1
Receivables days 80 65
Payables days 40 55
Inventory days 45 36
Which of the following statements is correct?
A. Mint is taking longer to pay suppliers in 20X2 than in 20X1
B. Mint is receiving cash from customers more quickly in 20X2 than in 20X1
C. Mint is suffering a worsening liquidity position in 20X2
D. Mint's liquidity and working capital have improved in 20X2
Question#3:
Which of the following statements about the analysis of financial statements is/are true?
(1)Comparisons of a company's financial ratios with other companies' financial ratios can help investors
understand the significance of the figures in the financial statements
(2)Ratio analysis is only useful if industry averages are available with which to make comparisons
(3)Making comparisons with other companies can be difficult because of the different accounting
policies different companies may choose
A. 1, 2 and 3
B. 1 and 3 only
C. 2 and 3 only
D. 1 only
Question#4:
Which of the following will reduce a company's gross profit ratio?
(1)A change in the product sales mix resulting in fewer sales of the more profitable products
(2)Increasing costs of purchases not passed on to customers
(3)An increase in the value of closing inventory held
A. 1, 2 and 3
B. 2 and 3 only
C. 3 only
D. 1 and 2 only
Question#5:
The draft financial statements of a limited company include the following assets and liabilities at the end
of an accounting period.
Current assets: $
Inventory 184,100
Trade receivables 139,300
Total current assets 323,400
From the desk of Sir Mustafa Ahmed Mirchawala: Page 1
Mirchawala’s Hub of Accountancy:
Current liabilities:
Bank overdraft 18,500
Trade payables 174,200
Accruals 9,300
Total current liabilities 202,000
Which of the following is the company's Quick (Acid Test) Ratio?
A. 1.60: 1
B. None of these
C. 0.69: 1
D. 0.91: 1
Question#6:
Which of the following statements is true?
A. Ratios based on historical data can predict the future performance of an entity
B. The analysis of financial statements using ratios provides useful information when compared with
previous performance or industry averages
C. An entity's management will not assess an entity's performance using financial ratios
D. The interpretation of an entity's financial statements using ratios is only useful for potential investors
Question#7:
The following extracts are from Hassan’s financial statements:
$
Profit before interest and tax 10,200
Interest (1,600)
Tax (3,300)
Profit after tax 5,300
Share capital 20,000
Reserves 15,600
35,600
Loan liability 6,900
42,500
What is Hassan’s return on capital employed?
A. 15%
B. 29%
C. 24%
D. 12%
Question#8:
The following figures are taken from the statement of financial position of GEN Co.
$m
Inventory 2
Receivables 3
Cash 1
Payables 3
Bank loan repayable in 5 years time 3
What is the current ratio?
A. 1.33
B. 2.00
C. 1.00
D. 0.33
From the desk of Sir Mustafa Ahmed Mirchawala: Page 2
Mirchawala’s Hub of Accountancy:
Question#9:
The figures shown in the table below are an extract from the financial statements of Ridgeway (capital
employed is $1.5m).
$
Revenue 1,000,000
Cost of sales (400,000)
Gross profit 600,000
Distribution expenses and administration cost (300,000)
Profit before interest and tax 300,000
Finance cost (50,000)
Profit before tax 250,000
Income tax expense (100,000)
Profit after tax 150,000
What is the return on capital employed (ROCE)?
A. 7%
B. 10%
C. 40%
D. 20%
Question#10:
What is the acid test ratio of Edward Co given the information below?
EDWARD CO TRIAL BALANCE (EXTRACT)
$
Receivables 176,000
Inventories 20,000
Trade payables 61,000
Bank overdraft 79,000
Long term loan 10,000
Retained earnings 5,000
A. 1.13:1
B. 1.40:1
C. 1.35:1
D. 1.26:1
Question#11:
Z Co has sales of $32,000 and cost of sales of $20,000.
What is Z Co's gross profit margin ______%?
Question#12:
Which of the following should the quick ratio include?
A. Inventory of finished goods
B. Raw materials and consumables
C. Long-term loans
D. Trade receivables
Question#13:
The following information for Hadrian is available.
$'000
PBIT 370
Interest (6)
Tax (80)
Profit after tax 284
From the desk of Sir Mustafa Ahmed Mirchawala: Page 3
Mirchawala’s Hub of Accountancy:
Share capital 2,000
Reserves 314
2,314
Loan liability 100
2,414
What is the return on capital employed (ROCE)______?
Question#14:
ROCE has increased from 28% in 20X2 to 35% in 20X3.
Which of the following statements relating to this increase is/are correct?
1. An increase in profit margin in 20X3 could account for the increase in ROCE.
2. The increase suggests the company is more efficient in employing its resources in 20X3 compared to
20X2.
3. If profit margin has remained constant, the increase in ROCE suggests a decrease in asset turnover.
A. 1 and 2 only
B. 2 and 3 only
C. 1 and 3 only
D. All three statements are correct
Question#15:
Z has a current ratio of 1.5, a quick ratio of 0.4 and a positive cash balance. If it purchases inventory on
credit, what is the effect on these ratios?
Current ratio Quick ratio
A Decrease Decrease
B Decrease Increase
C Increase Decrease
D Increase Increase
From the desk of Sir Mustafa Ahmed Mirchawala: Page 4
