ACCA FA · Chapter 14
Interpretation of financial statements MCQs with Answers
10 multiple-choice questions on Interpretation of financial statements for ACCA FA Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A company has trade receivables of $62,000 at its year end. Its revenue, all on credit, is $520,000, and its cost of sales is $390,000. What are its trade receivables collection days, to the nearest day (using a 365-day year)?
- A) 58 days
- B) 37 days
- C) 44 days
- D) 8 days
Show answer & explanation
Answer: C) 44 days
Receivables days = trade receivables / credit sales x 365 = $62,000 / $520,000 x 365 = 43.5, which rounds to 44 days. Using cost of sales instead of revenue gives 58 days, which is incorrect because receivables are stated at selling price. 8 is the receivables turnover in times, not days.
Question 2
A company has revenue of $400,000 and cost of sales of $300,000. What is its gross profit margin?
- A) 25%
- B) 75%
- C) 133.3%
- D) 33.3%
Show answer & explanation
Answer: A) 25%
Gross profit = $400,000 - $300,000 = $100,000. Gross profit margin = gross profit / revenue = $100,000 / $400,000 = 25%. The figure of 33.3% is the mark-up on cost ($100,000 / $300,000), a common confusion.
Question 3
A company has current assets of $84,000, including inventory of $30,000, and current liabilities of $48,000. What is its quick (acid test) ratio, to two decimal places?
- A) 0.63:1
- B) 1.75:1
- C) 0.89:1
- D) 1.13:1
Show answer & explanation
Answer: D) 1.13:1
Quick ratio = (current assets - inventory) / current liabilities = ($84,000 - $30,000) / $48,000 = $54,000 / $48,000 = 1.125, which rounds to 1.13:1. The current ratio, including inventory, is $84,000 / $48,000 = 1.75:1.
Question 4
A company has profit before interest and tax of $90,000, equity of $400,000 and 9% loan notes (non-current) of $200,000. What is its return on capital employed (ROCE)?
- A) 12%
- B) 18%
- C) 22.5%
- D) 15%
Show answer & explanation
Answer: D) 15%
Capital employed = equity + non-current liabilities = $400,000 + $200,000 = $600,000. ROCE = profit before interest and tax / capital employed = $90,000 / $600,000 = 15%. Using equity only gives 22.5%, and using profit after interest ($90,000 - $18,000 = $72,000) gives 12%.
Question 5
A company has equity of $400,000 and non-current borrowings of $200,000. What is its gearing, calculated as debt / (debt + equity)?
- A) 66.7%
- B) 33.3%
- C) 25%
- D) 50%
Show answer & explanation
Answer: B) 33.3%
Gearing = debt / (debt + equity) = $200,000 / ($200,000 + $400,000) = $200,000 / $600,000 = 33.3%. Calculated as debt / equity, the figure would be 50%, so it is important to check which definition is required.
Question 6
A company has profit before interest and tax of $90,000 and finance costs of $18,000. What is its interest cover?
- A) 4 times
- B) 6 times
- C) 0.2 times
- D) 5 times
Show answer & explanation
Answer: D) 5 times
Interest cover = profit before interest and tax / finance costs = $90,000 / $18,000 = 5 times. Using profit after interest ($72,000 / $18,000) gives 4 times, which understates the cover.
Question 7
A company has closing inventory of $45,000, opening inventory of $39,000, cost of sales of $300,000 and revenue of $400,000. What are its inventory holding days based on closing inventory, to the nearest day (using a 365-day year)?
- A) 55 days
- B) 7 days
- C) 51 days
- D) 41 days
Show answer & explanation
Answer: A) 55 days
Inventory days = closing inventory / cost of sales x 365 = $45,000 / $300,000 x 365 = 54.75, which rounds to 55 days. Using revenue gives 41 days, and using average inventory ($42,000) gives 51 days, which is not the basis asked for. 7 is the inventory turnover in times (rounded), not days.
Question 8
A company's trade receivables collection period has increased from 35 days to 52 days. Which of the following is the most likely explanation?
- A) The company has started offering early settlement discounts
- B) A greater proportion of sales is now made for cash
- C) Credit control has become less effective
- D) Major customers have started paying more quickly
Show answer & explanation
Answer: C) Credit control has become less effective
A longer collection period means customers are taking longer to pay, which may indicate weaker credit control, more generous credit terms or customers in financial difficulty. Early settlement discounts, faster-paying customers and more cash sales would all tend to shorten the collection period.
Question 9
A company has revenue of $750,000, capital employed of $500,000 and an operating profit margin of 12%. What is its return on capital employed?
- A) 18%
- B) 1.5%
- C) 8%
- D) 12%
Show answer & explanation
Answer: A) 18%
ROCE = operating profit margin x asset turnover. Asset turnover = $750,000 / $500,000 = 1.5 times. ROCE = 12% x 1.5 = 18%. Check: operating profit = 12% x $750,000 = $90,000, and $90,000 / $500,000 = 18%. Dividing the margin by asset turnover gives 8%.
Question 10
A company has current assets of $120,000 and current liabilities of $60,000. It then pays a trade payable of $20,000 in cash. What is its current ratio after the payment?
- A) 2.5:1
- B) 1.67:1
- C) 2.0:1
- D) 3.5:1
Show answer & explanation
Answer: A) 2.5:1
After the payment, current assets = $120,000 - $20,000 = $100,000 and current liabilities = $60,000 - $20,000 = $40,000. Current ratio = $100,000 / $40,000 = 2.5:1. When the ratio is above 1, paying a liability from current assets increases it. Reducing only current assets gives 1.67:1.