AAT L4 Financial Statements Interpretation 2

Question 1

Company X has a current ratio of 1.8 and an acid test (quick) ratio of 0.7. What does this suggest about the company's liquidity?

Accepted Answer

The company's liquidity depends heavily on converting inventory to cash, which may be a risk

Answer

The company has strong liquidity with no concerns

Answer

The acid test ratio shows the company is highly liquid in the short term

Answer

A current ratio of 1.8 is too high and indicates inefficient working capital management

Question 2

A company's ROCE (return on capital employed) has fallen from 18% to 12% year-on-year. Operating profit has remained constant at £600,000. What has caused the ROCE to fall?

Accepted Answer

Capital employed has increased significantly

Answer

Operating profit has fallen

Answer

Revenue has declined

Answer

Tax charges have increased

Question 3

When interpreting a company's gearing ratio, which of the following indicates HIGH financial risk?

Accepted Answer

Gearing of 75% and interest cover of 1.5 times

Answer

Gearing of 20% and interest cover of 8 times

Answer

Gearing of 45% and interest cover of 4 times

Answer

Gearing of 30% and interest cover of 6 times

Question 4

A company has operating profit of £240,000, interest payable of £40,000, and tax of £56,000. What is the profit for the year (net profit after tax)?

Accepted Answer

£144,000

Answer

£200,000

Answer

£184,000

Answer

£240,000

Question 5

An analyst notices that a company's inventory days have increased from 35 days to 62 days over the year. Which of the following is the MOST likely concern this raises?

Accepted Answer

The company may have slow-moving or obsolete inventory, or has over-purchased

Answer

The company is collecting cash from customers more quickly

Answer

The company's credit terms have become more generous

Answer

The company has improved its gross margin by buying in bulk

Question 6

Which financial statement ratio best indicates whether a company generates sufficient cash flow to service its debt obligations?

Accepted Answer

Interest cover ratio

Answer

Current ratio

Answer

Debt to equity ratio

Answer

Return on equity