Chapter 8: Interpreting Financial Statements

Test Bank

Type: multiple choice question

Title: Chapter 08 Question 01

1) The acid test ratio is a measure of:

a. The profitability of the business.

b. The short-term liquidity of the business.

c. The long-term stability of the business.

d. The future growth potential of the business.

Type: multiple choice question

Title: Chapter 08 Question 02

2) Val Ltd made an operating profit of £3,490,000 for the year ended 31 December 2024. An extract from the company's statement of financial position as at 31 December 2024, was as follows:

Financed by:

£’000

Issued ordinary share capital 8,000

Share premium account 2,410

Retained profit 10,710

21,120

The company has no long-term loans. The return on capital employed for the year ended 31 December 2024 was:

a. 43.6%.

b. 18.7%.

c. 33.5%.

d. 16.5%.

Type: multiple choice question

Title: Chapter 08 Question 03

3) Williams plc is considering paying an ordinary dividend of £2 million. At present, the company has £4.4 million in the bank. What effect will the dividend payment have on the following ratios?

a. The operating profit will decrease and the current ratio will decrease.

b. The operating profit will decrease and there will be no effect on the current ratio.

c. There will be no effect on the operating profit and the current ratio will decrease.

d. There will be no effect on the operating profit and no effect on the current ratio.

Type: multiple choice question

Title: Chapter 08 Question 04

4) Murray Ltd's trade receivable days has been getting longer and longer in recent years. Which of the following actions is NOT likely to result in an improvement in this ratio?

a. Offering a discount for prompt payment.

b. Sending reminder letters as soon as the debt is due.

c. Decreasing inventory levels.

d. Negotiating shorter credit terms with the company's main customer.

Type: multiple choice question

Title: Chapter 08 Question 05

5) An extract from Henman Ltd's accounts is given below:

£’000

Sales 1,780

Cost of sales

Opening inventory 44

Purchases 820

Closing inventory 154

710

Gross profit 1,070

Expenses 800

Operating profit 270

Which of the following statements is true?

a. Henman Ltd made a gross profit margin of 40% and an operating profit margin of 15%.

b. Henman Ltd made a gross profit margin of 60% and an operating profit margin of 15%.

c. Henman Ltd made a gross profit margin of 40% and an operating profit margin of 25%.

d. Henman Ltd made a gross profit margin of 60% and an operating profit margin of 25%.

Type: multiple choice question

Title: Chapter 08 Question 06

6) Business A is a computer manufacturer who supplies large electrical superstores on credit. Business B is a food retailer who makes cash sales. Which of the following is true?

a. Business A is likely have a higher current and acid test ratio than Business B.

b. Business B is likely have a higher current ratio than Business A and a lower acid test ratio than Business A.

c. The inventory holding period of Business B is likely to be longer than Business A.

d. Businesses A and B are likely to have similar trade receivable days.

Type: multiple choice question

Title: Chapter 08 Question 07

7) Nadal Ltd's trading account for the year ended 31 December 2024 was as follows:

£ £

Sales 320,000

Cost of sales 28,000

Purchases 240,000

Closing inventory 32,000

236,000

Gross profit 84,000

All sales and purchases were made on credit, and at 31 December 2024, trade receivables were £52,000 and trade payables were £29,000. Which of the following statements is true?

a. On average, debts are collected in 79 days and the average trade payable days is 33 days.

b. On average, debts are collected in 79 days and the average trade payable days is 44 days.

c. On average, debts are collected in 59 days and the average trade payable days is 33 days.

d. On average, debts are collected in 59 days and the average trade payable days is 44 days.

Type: multiple choice question

Title: Chapter 08 Question 08

8) Which one of the following ratios is NOT a working capital management ratio?

a. Inventory days.

b. Trade payable days.

c. Gross profit margin.

d. Trade receivable days.

Type: multiple choice question

Title: Chapter 08 Question 09

9) Which one of the following is not true of the acid test ratio?

a. It is a measure of the very short-term liquidity of a business.

b. You would expect the acid test ratio of a cash business to be lower than that for a credit business.

c. The acid test ratio will always be greater than the current ratio.

d. The higher the acid test ratio, the better the liquidity of the business.

Type: multiple choice question

Title: Chapter 08 Question 10

10) Emily Ltd had the following ratios at 31 December 2022 and 31 December 2023:

2023 2022

Gross profit margin 25% 28%

Trade payable days 40 days 44 days

Trade receivable days 35 days 30 days

Which ONE of the following statements is TRUE?

a. The gross profit margin made by E Ltd has increased from 2022 to 2023.

b. E Ltd is paying its trade payables 4 days more quickly in 2023 than in 2022.

c. E Ltd is collecting in its debts from customers more quickly in 2023 than in 2022.

d. The average length of time between goods being purchased and E Ltd paying for those goods, is 75 days in 2022.