Use of historical cost accounting means asset values can be reliably verified but it has a number of shortcomings which need to be considered when *ysing financial statements.Which one of these is a possible result of the use of historical cost accounting during a period of inflation?
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1 .Which of the following should be accounted for in the consolidated financial statements of Company Ausing equity accounting?1 An investment in 51% of the ordinary shares of W Co2 An investment in 20% of the preference (non-voting) shares of X Co3 An investment in 33% of the ordinary shares of Y Co4 An investment in 20% of the ordinary shares of Z Co, and an agreement with other shareholders to appoint the majority of the directors to the board of Z Co
A 1 and 4 only B 2 only C 3 only D 3 and 4 only
2 .An entity carries its property at revalued amount. Property values have fallen during the current period andan impairment loss has been recognised on the property, however its carrying amount is still higher than itsdepreciated historical cost.What is the effect of the impairment on these ratios?
A ROCE:Decrease; Gearing:Increase B ROCE:Decrease; Gearing:Increase C ROCE:Increase; Gearing:Decrease D ROCE:Increase; Gearing:Increase
3 .A company has a current ratio of 1.5, a quick ratio of 0.4 and a positive cash balance. If it purchases inventory on credit, what is the effect on these ratios?
A Current ratio:Decrease; Quick ratio:Decrease B Current ratio:Decrease; Quick ratio:Increase C Current ratio:Increase; Quick ratio:Decrease D Current ratio:Increase; Quick ratio:Increase
4 .Fritwell has an asset turnover of 2.0 and an operating profit margin of 10%. It is launching a new product which is expected to generate additional sales of USD1.6 million and additional profit of USD120,000. It will require additional assets of USD500,000.Assuming there are no other changes to current operations, how will the new product affect these ratios?
A Operating profit margin: Decrease; ROCE: Decrease B Operating profit margin: Decrease; ROCE: Increase C Operating profit margin: Increase; ROCE: Decrease D Operating profit margin: Increase; ROCE: Increase
5 .Which of the following is a possible reason why a company's inventory holding period increases from one year to the next?
A An increase in demand for its products B A reduction in selling prices C Obsolete inventory lines D Seasonal fluctuations in orders
7 .Creative accounting measures are often aimed at reducing gearing.Which one of these is not a measure which can be used to reduce (or not increase) gearing?
A Re-negotiating a loan to secure a lower interest rate B Treating a finance lease as an operating lease C Repaying a loan just before the year end and taking it out again at the beginning of the next year. D 'Selling' an asset under a sale and leaseback agreement
8 .If a company wished to maintain the carrying amount in the financial statements of its non-current assets, which one of the following would it be unlikely to do?
A Enter into a sale and operating leaseback B Account for asset –based government grants using the deferral method C Revalue its properties D Change the depreciation method for new asset acquisitions from 25% reducing balance to ten years straight line
9 .Trent uses the formula: (trade receivables at year end/revenue for the year) × 365 to calculate how long on average (in days) its customers take to pay.Which of the following would not affect the correctness of the above calculation of the average number of days a customer takes to pay?
A Trent experiences considerable seasonal trading B Trent makes a number of cash sales through retail outlets C Reported revenue does not include a 15% sales tax whereas the receivables do include the tax D Trent factors with recourse the receivable of its largest customer
10 .A company measures the average time to collect receivables as:[Receivables at end of financial year/Annual credit sales] × 365 daysAccounting ratios have just been calculated from the financial statements for the financial year that has just ended. These show an abnormally high average time to collect receivables, compared with ratios calculated for the previous financial year.Which of the following may help to explain this unusually high turnover period for trade receivables?1 There was an unusually large sale on credit close to the end of the financial year.2 The company has seasonal trade, and sales in the final quarter of the year are always higher than in the other quarters.3 However, sales in the final quarter of the year that has just ended were lower than in the previous year.
A Reason 1 only B Reason 2 only C Reason 3 only D Reasons 1, 2 and 3
