FINAL TERM EXAMINATION
Spring 2010
FIN621- Financial Statement Analysis (Session - 1)
: 90 min
Marks: 69
Question No: 23 ( Marks: 1 ) - Please choose one
Which of the following could account for a company's gross profit ratio increasing from one period to the next?
► An increase in the cost of sales which has not been accompanied by an increase in the selling price of goods sold
► An increase in the selling price of goods sold which has not been accompanied by an increase in the cost of sales
► A change in the mix of goods sold so that lower profit margin goods take a greater proportion of total sales
► A change in stock valuation method at the year end which leads to a decrease in the closing stock figure
Question No: 24 ( Marks: 1 ) - Please choose one
Which of the following is MOST likely to offer you the highest rate of return together with the highest risk?
► Cash in a building society deposit account
► Preference shares
► Ordinary shares
► Government bonds
Question No: 25 ( Marks: 1 ) - Please choose one
Assume that a company total paid in capital of Rs. 57,160,000, Preferred shares Rs. 12,000,000 and commons tock Rs. 14,000,000. Calculate the amount of total legal capital of the company.
► Rs. 26,000,000
► Rs. 2000,000
► Rs. 45,160,000
► Rs. 43,160,000
Question No: 26 ( Marks: 1 ) - Please choose one
ABC Company has cumulative preferred stock and three years of dividends are owed. Using the following information, calculate the book value per share of the preferred stock.
| 9% preferred stock, Rs. 100 par, 300 shares authorized and issued | Rs. 3,000 |
| Call price | Rs. 109 |
| Retained Earnings | Rs. 28,000 |
► Rs. 109
► Rs. 202
► Rs. 211
► Rs. 118
Question No: 27 ( Marks: 1 ) - Please choose one
A company has a cost of goods sold of Rs. 530,000; the beginning inventory is Rs. 120,000, and ending inventory is Rs. 180,000. Calculate the number of days to sell the inventory. (Round the figures to the nearest whole)
► 83 days
► 125 days
► 104 days
► 100 days
Question No: 28 ( Marks: 1 ) - Please choose one
Which one of the following statement indicates the Inventory turnover ratio?
► How quickly company prepared its inventory
► How quickly company converts its inventory into cash
► How quickly company purchases its inventory
► How quickly company sells its inventory
Question No: 29 ( Marks: 1 ) - Please choose one
Operating cycle belongs to which group of ratios?
► Leverage ratios
► Liquidity ratios
► Profitability ratios
► Activity ratios
Question No: 30 ( Marks: 1 ) - Please choose one
Which of the following is the ideal position of debt ratio?
► 30%
► 60%
► 50%
► 45%
Question No: 31 ( Marks: 1 ) - Please choose one
What will be effect of purchase of inventory on open account on quick ratio of the company?
► Increase
► Decrease
► No effect
► Can not be found from the given information
Question No: 32 ( Marks: 1 ) - Please choose one
What will be the effect on the inventory turnover ratio of the company, if it changed from FIFO to LIFO during the period of inflation?
► Increase
► Decrease
► No effect
► Can not be found from the given information
Question No: 33 ( Marks: 1 ) - Please choose one
What will be the effect on the EPS of the company, if it paid stock dividend on common stock?
► Increase
► Decrease
► No effect
► Can not be found from the given information
Question No: 34 ( Marks: 1 ) - Please choose one
Which of the following is essential to conduct business activity, particularly in times of adversity?
► Profitability
► Liquidity
► Stability
► Solvency
Question No: 35 ( Marks: 1 ) - Please choose one
Failure to record the receipt of a utility bill for services already received will result in which of the following?
► An overstatement of assets
► An overstatement of liabilities
► An overstatement of equity
► An understatement of assets
Question No: 36 ( Marks: 1 ) - Please choose one
Which of the following would be the proper journal entry to record Rs. 1,000 of Dividends paid by ABC Corporation?
► Debit Dividends 1,000; Credit Cash 1,000
► Debit Accounts Payable 1,000; Credit Cash 1,000
► Debit Dividends Expense 1,000; Credit Cash 1,000
► Debit Dividends Expense 1,000; Credit Service Revenue 1,000
Question No: 37 ( Marks: 1 ) - Please choose one
How does the acid test ratio differ from the current ratio?
► It is concerned with future cash flows rather than historical cash flows
► It does not differ from the current ratio
► It excludes the value of stocks
► It excludes the trade debtors
Question No: 38 ( Marks: 1 ) - Please choose one
Which of the following provides the basis for the trial balance?
► Income statement
► Statement of cash flow
► Ledger
► Adjusting entries
Question No: 39 ( Marks: 1 ) - Please choose one
Which of the following is NOT normally required for revenue to be recognized according to the revenue principle for accrual basis accounting?
► The price is fixed or determinable
► Services have been performed
► Cash that has already been collected
► Evidence of an arrangement for customer payment exists
Question No: 40 ( Marks: 1 ) - Please choose one
If monthly financial statements are desired by management then:
► Journalizing and posting adjusting entries must be done each month
► Journalizing and posting closing entries must be done each month
► Monthly financial statements can be prepared from worksheets; adjustments and closing entries need not be entered in the accounting records
► Adjusting and closing entries must be entered in the accounting records before preparation of interim financial statements
Question No: 41 ( Marks: 1 ) - Please choose one
ABC Company sold a plant asset that originally cost Rs. 50,000 for Rs. 22,000 cash. If the company correctly reports a Rs. 5,000 gain on this sale, the accumulated depreciation on the asset at the date of sale must be:
► Rs. 33,000
► Rs. 28,000
► Rs. 27,000
► Rs. 23,000
Question No: 42 ( Marks: 1 ) - Please choose one
Which of the following statements is CORRECT regarding depreciation methods?
► Accumulated depreciation represents a fund being accumulated fro the replacement of assets
► The cost of a machine includes the cost of repairing damage to the machine during the installation process
► A company may use different depreciation methods in its financial statements and its income tax returns
► The use of an accelerated depreciation method causes an asset to wear out more quickly than does the straight line method
Question No: 43 ( Marks: 1 ) - Please choose one
The actions taken by the management to make company appear as strong as possible in its financial statements is termed as which of the following?
► Window dressing
► Understanding
► Comprehensiveness
► Materiality
Question No: 44 ( Marks: 1 ) - Please choose one
ABC Company selected ‘Abdullah and Ahmad Charted Accountants’ as its auditors / accountancy firm. After audit the auditors stated company’s audit report as:
We have examined the accounts of ABC Company up to the year ended 30th June, 2009, and other record based on these accounts and we got all the information required by us. In our opinion the financial statements and the accounts on which they are based have been prepared in conformity with GAAP and present a true and fair position of the affairs of ABC Company.
What do you think the above case is which type of following audit reports?
► Qualified Audit Opinion
► Un-qualified Audit Opinion
► Adverse Audit Opinion
► Disclaimer Audit Opinion
Question No: 45 ( Marks: 1 ) - Please choose one
All of the following users are very much concerned with the ratio analysis EXCEPT?
► Credit analyst, including banks who want to know the credibility of company
► Bond rating companies, who analyze ratios to help ascertain a company’s ability to pay its debts
► Customers, who want to know the designs and quality of the products offered
► Managers, to analyze, control, and thus improve their working operations
Question No: 46 ( Marks: 1 ) - Please choose one
In order to know the percentage of assets financed by creditors, which of the following ratio is calculated?
► Debt Ratio
► Equity Ratio
► Operating credit Ratio
► Quick Ratio
The creditors' equity ratio equals total liabilities divided by total assets. This reflects the percentage of assets financed by creditors. In the event of corporate liquidation, creditors are paid before
Question No: 47 ( Marks: 1 ) - Please choose one
Which of the following statement is the LEAST LIKELY to be correct?
► A firm that has a high degree of business risk is less likely to want to incur financial risk
► There exists little or no negotiation with suppliers of capital regarding the financing needs of the firm
► Financial ratios are relevant for making internal comparisons
► It is important to make external comparisons or financial ratios
A firm that has a high degree of business risk is much more likely to use equity financing because there is no contractual responsibility to make interest payments.
Question No: 48 ( Marks: 1 ) - Please choose one
Which of the following is LEAST likely to be presented in Notes to financial statements of a firm?
► Significant pending lawsuits
► Methods of Cost flow assumptions
► A firm’s capital resource needs and liquidity
► Sales by region or business segment
Question No: 49 ( Marks: 3 )
What do you understand by the efficiency of the operating cycle?
It is determined by activity ratios, keeping in view the conversion process, which is as follows:-
Operating Cycle = Inventory sale days (average) + Receivable Collection days (average).
Shorter operating cycle higher the quality of current assets and the greater the efficiency of management.
Question No: 50 ( Marks: 3 )
What will be the effect on the book value per share of the common stock of a company, if the corporation obtains a loan?
When a corporation obtains a bank loan there is no effect upon book value per share of common stock. Assets and liabilities both increase by its amount. Therefore, net assets will remain unchanged.
Question No: 51 ( Marks: 5 )
Current assets and current liabilities data for companies D and E are summarized as follows:
| | Company D | Company E |
| Current assets | Rs. 400,000 | Rs. 900,000 |
| Current liabilities | 200,000 | 700,000 |
| Working capital | Rs. 200,000 | Rs. 200,000 |
Requirement:
Evaluate the relative liquidity of the companies. Which company is more favorable?
· For Company D:
Current Ratio = Current Assets / Current Liabilities
= 400,000 / 200,000
= 2
· For Company E:
Current Ratio = Current Assets / Current Liabilities
= 900,000 / 700,000
= 1.285
Company D is more favorable then E.
Question No: 52 ( Marks: 5 )
Following is the balance sheet of the ABC Company.
ABC Corporation
Balance Sheet
Mar. 31, 1991
| | |
| Assets | |
| Cash | Rs. 12,500 |
| Notes receivables | 104,000 |
| Accounts receivables (net) | 68,500 |
| Inventories at cost | 50,000 |
| Plan & equipment (net of depreciation) | 646,000 |
| Total assets | Rs. 881,000 |
| Liabilities & Stockholder’s equity | |
| Accounts payable | Rs. 72,000 |
| Notes payable | 54,500 |
| Accrued liabilities | 6,000 |
| Common stock (60,000 shares, Rs. 10par) | 600,000 |
| Retained earnings | 148,500 |
| Total liabilities and owner’s equity | Rs. 881,000 |
Requirement:
Calculate the current ratio and quick ratio for both years. (2.5+ 2.5)
· Current Ratio = Current Assets / Current Liabilities
= 881,000/ 881,000
= 1
· Quick Ratio = Current Assets - Inventories / Current Liabilities
= (881,000 – 222,500) / 881,000
= 658,500 / 881,000
= 0.74
Question No: 53 ( Marks: 5 )
You have been given the two years data of XYZ company as follows:
2005 2004
Net sales 1,493,622 1,403,243
Assets:
Beginning of the year 1,039,731 889,584
End of year 1.143701 1,039,731
Calculate the Total Assets Turnover ratio for both years.
· For Year 2005:
Total Assets Turnover Ratio = 1,493,622 / 1, 114, 3701
= 0.134
· For Year 2004:
Total Assets Turnover Ratio = 1,403,243/ 1,039,731
= 1.349
