CIMA BA3 · Chapter 13
Analysis of financial statements MCQs with Answers
10 multiple-choice questions on Analysis of financial statements for CIMA BA3 Fundamentals of Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A company has current assets of $48,600 and current liabilities of $27,000. What is its current ratio?
- A) 0.56:1
- B) 1.0:1
- C) 1.8:1
- D) 2.8:1
Show answer & explanation
Answer: C) 1.8:1
Current ratio = current assets / current liabilities = $48,600 / $27,000 = 1.8:1.
Question 2
A company has current assets of $48,600, of which inventory is $21,600, and current liabilities of $27,000. What is its quick (acid test) ratio?
- A) 0.56:1
- B) 0.8:1
- C) 1.0:1
- D) 1.8:1
Show answer & explanation
Answer: C) 1.0:1
Quick ratio = (current assets - inventory) / current liabilities = ($48,600 - $21,600) / $27,000 = $27,000 / $27,000 = 1.0:1.
Question 3
A company's trade receivables at the year end are $36,000. Revenue, all on credit, was $292,000 and cost of sales was $219,000. What is the receivables collection period (to the nearest day)?
- A) 8 days
- B) 45 days
- C) 54 days
- D) 60 days
Show answer & explanation
Answer: B) 45 days
Receivables collection period = trade receivables / credit sales x 365 = $36,000 / $292,000 x 365 = 45.0, i.e. 45 days. Cost of sales is not used because receivables are measured at selling price.
Question 4
A company made a gross profit of $72,000 on revenue of $240,000. Which of the following is correct?
- A) Gross profit margin is 42.9% and mark-up on cost is 30%
- B) Gross profit margin and mark-up on cost are both 30%
- C) Gross profit margin is 30% and mark-up on cost is 23.1%
- D) Gross profit margin is 30% and mark-up on cost is 42.9%
Show answer & explanation
Answer: D) Gross profit margin is 30% and mark-up on cost is 42.9%
Margin = gross profit / revenue = $72,000 / $240,000 = 30%. Cost of sales = $240,000 - $72,000 = $168,000. Mark-up = gross profit / cost of sales = $72,000 / $168,000 = 42.9% (to one decimal place).
Question 5
A company has profit before interest and tax of $46,800, equity of $210,000 and non-current liabilities (long-term loans) of $50,000. What is its return on capital employed?
- A) 5.6%
- B) 18%
- C) 22.3%
- D) 29.2%
Show answer & explanation
Answer: B) 18%
Capital employed = equity + non-current liabilities = $210,000 + $50,000 = $260,000. ROCE = profit before interest and tax / capital employed = $46,800 / $260,000 x 100 = 18%.
Question 6
A company has long-term loans of $90,000 and equity of $210,000. What is its gearing ratio, measured as debt / (debt + equity)?
- A) 30%
- B) 42.9%
- C) 70%
- D) 233%
Show answer & explanation
Answer: A) 30%
Gearing = debt / (debt + equity) = $90,000 / ($90,000 + $210,000) = $90,000 / $300,000 = 30%. Measured as debt / equity it would be 42.9%, so the method used must always be stated.
Question 7
A company holds inventory of $27,000 at the year end. Cost of sales for the year was $219,000 and revenue was $292,000. What is the inventory holding period (to the nearest day)?
- A) 6 days
- B) 8 days
- C) 34 days
- D) 45 days
Show answer & explanation
Answer: D) 45 days
Inventory holding period = inventory / cost of sales x 365 = $27,000 / $219,000 x 365 = 45.0, i.e. 45 days. Inventory is held at cost, so cost of sales (not revenue) is used. Option B (8) is the inventory turnover in times ($219,000 / $27,000 = 8.1), not a period in days.
Question 8
A company's receivables collection period has risen from 38 days to 57 days. Which of the following is the most likely explanation?
- A) Customers are paying more quickly than before
- B) Credit control has become less effective, or customers have been given longer credit terms
- C) The company has switched mainly to cash sales
- D) The company has written off a large number of irrecoverable debts
Show answer & explanation
Answer: B) Credit control has become less effective, or customers have been given longer credit terms
A longer collection period means customers are taking longer to pay, which may reflect weaker credit control or a decision to offer longer terms to win sales. A switch to cash sales or large write-offs would usually reduce receivables and shorten the period.
Question 9
A company has revenue of $500,000, capital employed of $250,000 and an operating profit margin (profit before interest and tax / revenue) of 8%. What is its return on capital employed?
- A) 4%
- B) 8%
- C) 10%
- D) 16%
Show answer & explanation
Answer: D) 16%
Asset turnover = revenue / capital employed = $500,000 / $250,000 = 2 times. ROCE = operating profit margin x asset turnover = 8% x 2 = 16%. Check: profit before interest and tax = 8% x $500,000 = $40,000; $40,000 / $250,000 = 16%.
Question 10
A company's current ratio is 2:1. Which of the following transactions would increase the current ratio?
- A) Paying a trade payable from the bank balance
- B) Buying inventory on credit
- C) Selling inventory at cost for cash
- D) Using the bank balance to buy a new machine
Show answer & explanation
Answer: A) Paying a trade payable from the bank balance
When the ratio is above 1, an equal reduction in current assets and current liabilities increases it: for example, current assets of $200,000 and liabilities of $100,000 become $180,000 and $80,000 after a $20,000 payment, a ratio of 2.25:1. Buying inventory on credit increases both equally and lowers the ratio (220:120 = 1.83:1). Selling at cost for cash swaps one current asset for another, leaving it unchanged, and buying a machine reduces current assets only.