Chapter 22 Analysis and Interpretation - Test 2

1. VCE ACCOUNTING
UNIT 4 – CONTROL AND ANALYSIS OF BUSINESS PERFORMANCE
CHAPTER 22 – ANALYSIS AND INTERPRETATION
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Page | 1
Chapter 22 Test 2 – Analysis and Interpretation
Name ___________________________________________
Circle the correct response for each question:
1. (a) (b) (c) (d)
2. (a) (b) (c) (d)
3. (a) (b) (c) (d)
4. (a) (b) (c) (d)
5. (a) (b) (c) (d)
6. (a) (b) (c) (d)
7. (a) (b) (c) (d)
8. (a) (b) (c) (d)
9. (a) (b) (c) (d)
10. (a) (b) (c) (d)
11. (a) (b) (c) (d)
12. (a) (b) (c) (d)
13. (a) (b) (c) (d)
14. (a) (b) (c) (d)
15. (a) (b) (c) (d)
16. (a) (b) (c) (d)
17. (a) (b) (c) (d)
18. (a) (b) (c) (d)
19. (a) (b) (c) (d)
20. (a) (b) (c) (d)
21. (a) (b) (c) (d)
22. (a) (b) (c) (d)
23. (a) (b) (c) (d)
24. (a) (b) (c) (d)
25. (a) (b) (c) (d)
Total /25 marks

2. VCE ACCOUNTING
UNIT 4 – CONTROL AND ANALYSIS OF BUSINESS PERFORMANCE
CHAPTER 22 – ANALYSIS AND INTERPRETATION
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Page | 2
Chapter 22 Test 2 – Analysis and Interpretation
The following information relates to four businesses competing in the same industry:
Business A Business B Business C Business D
Asset Turnover Ratio 4.3 3.7 3.1 4.6
Return on Owner’s Investment 57.2% 68.3% 48.9% 54.7%
Net Profit Margin 4.1% 2.9% 7.9% 3.9%
Gross Profit Margin 48.9% 61.7% 56.2% 49.1%
1. The Return on Assets (ROA) for Business C is:
a) 15.8%
b) 45.8%
c) 24.5%
d) 48.3%
2. The firm with the lowest Return on Assets (ROA) is:
a) Business A
b) Business B
c) Business C
d) Business D
A small business provided the following ratios regarding its operating efficiency over the last two
years:
2014 2015
Stock Turnover (in days) 28 34
Creditors Turnover (in days) 64 78
Debtors Turnover (in days) 47 39
3. The firm’s Cash Cycle for 2014 is:
a) 75 days
b) 92 days
c) 111 days
d) 139 days
4. On average, the time taken to repay suppliers for stock purchased on credit changed from 2014
to 2019 by:
a) +6 days
b) -8 days
c) -2 days
d) +14 days

3. VCE ACCOUNTING
UNIT 4 – CONTROL AND ANALYSIS OF BUSINESS PERFORMANCE
CHAPTER 22 – ANALYSIS AND INTERPRETATION
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Page | 3
5. Which of the following statements is true regarding the firm in 2015?
a) The firm is repaying creditors 5 days before cash is received from selling stock and collecting
cash from debtors
b) The firm is repaying creditors 39 days after cash is received from selling stock and collecting
cash from debtors
c) The firm is repaying creditors 5 days after cash is received from selling stock and collecting
cash from debtors
d) The firm is repaying creditors 39 days before cash is received from selling stock and
collecting cash from debtors
The following information was provided from the Balance Sheet of four small businesses:
Business A Business B Business C Business D
Current Assets ($) 44,200 45,100 44,800 43,700
Current Liabilities ($) 38,900 32,800 34,000 30,100
6. The firm with the highest Working Capital Ratio is:
a) Business A
b) Business B
c) Business C
d) Business D
A small business published the following information for its accountant:
2014
$
2015
$
Cash at bank 4,600 0
Debtors control 3,400 4,100
Stock control 27,500 22,600
Bank overdraft 0 1,800
Creditors control 15,700 16,200
GST clearing (credit balance) 900 1,100
Accrued wages 1,000 800
7. The firm’s Working Capital Ratio in 2014 and 2015 is:
2014 2015
a) 0.50:1 0.75:1
b) 2.02:1 1.57:1
c) 2.02:1 1.34:1
d) 2.02:1 1.48:1

4. VCE ACCOUNTING
UNIT 4 – CONTROL AND ANALYSIS OF BUSINESS PERFORMANCE
CHAPTER 22 – ANALYSIS AND INTERPRETATION
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Page | 4
8. From 2014 to 2015, for every $1 of the firm’s current liabilities it:
a) Had 68 cents more in current assets to pay them
b) Had 68 cents less in current assets to pay them
c) Had 70 cents more in current assets to pay them
d) Had 70 cents less in current assets to pay them
The following information relates to two different businesses for the last two years:
2014
$
2015
$
Cash at bank 4,900 0
Debtors control 10,700 16,000
Stock control 44,100 42,000
Prepaid expenses 1,800 1,500
Bank overdraft 0 3,000
Creditors control 17,800 17,000
GST clearing (credit balance) 1,600 1,200
Accrued wages 1,000 600
9. The firm’s Working Capital Ratio in 2014 and 2015 is:
2014 2015
a) 3.01:1 2.73:1
b) 0.33:1 0.37:1
c) 3.01:1 3.32:1
d) 3.36:1 2.95:1
10. The firm’s Quick Asset Ratio in 2014 and 2015 is:
2014 2015
a) 0.85:1 0.93:1
b) 2.93:1 3.09:1
c) 0.76:1 0.85:1
d) 0.76:1 0.73:1

5. VCE ACCOUNTING
UNIT 4 – CONTROL AND ANALYSIS OF BUSINESS PERFORMANCE
CHAPTER 22 – ANALYSIS AND INTERPRETATION
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Page | 5
The owner of a small business provided the following information for the years ended 30 June.
2013
$
2014
$
2015
$
Current liabilities 11,400 12,700 10,500
Net cash flows from Operating Activities 62,100 67,300 73,200
11. The firm’s Cash Flows Ratio for 2014 and 2015 is:
2014 2015
a) 0.18 times 0.16 times
b) 5.59 times 6.31 times
c) 5.30 times 6.97 times
d) 5.84 times 6.35 times
12. In 2016 the firm estimates that its Cash Flows Ratio will be 4.74 times. This means that for every
$1 of current liabilities:
a) The firm will generate $4.74 of cash from buying and selling non-current assets
b) The firm will generate $4.74 of cash from borrowings and capital contributions
c) The firm will generate $4.74 of cash from the day-to-day trading of goods and services
d) The firm will generate $4.74 of cash from cash sales
The management of a small business has extracted the following information from the firm’s
financial reports for 2015:
$
Net cash flows from Operating Activities 4,600
Net increase in bank balance 26,700
Gross Profit 45,000
Net Profit 1,800
13. Which of the following is a possible explanation for the large variance between cash from
Operating Activities and the overall increase in the bank balance?
a) The firm took out a large loan from the bank
b) A high level of credit sales were recorded but cash has not been collected from debtors
c) An expensive delivery van was purchased with cash
d) The owner made a high level of cash drawings from the business

6. VCE ACCOUNTING
UNIT 4 – CONTROL AND ANALYSIS OF BUSINESS PERFORMANCE
CHAPTER 22 – ANALYSIS AND INTERPRETATION
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Page | 6
14. Which of the following is a possible explanation for the large variance between the firm’s Gross
Profit and Net Profit?
a) Supplier’s increased the prices charged for stock purchases
b) A high level of theft contributed to a large stock loss
c) Extra sales staff were hired in order to increase sales
d) All of the above
15. Which of the following is a possible explanation for the large variance between cash from
Operating Activities and the firm’s Gross Profit?
a) The firm’s advertising expense has been incurred but not yet paid
b) A profit was made on the disposal of furniture
c) A high level of credit sales were recorded but cash has not been collected from debtors
d) All of the above
The following information was provided by four small businesses:
Business A Business B Business C Business D
Debt ratio (Gearing) 34% 67% 26% 59%
16. The firm with the lowest degree of financial risk and chances of bankruptcy is:
a) Business A
b) Business B
c) Business C
d) Business D
The following information was extracted from the financial reports of two similar businesses:
Business A Business B
Total Liabilities 28,600 42,300
Owner’s Equity 48,300 39,200
Net Profit 24,000 24,000
17. The financial indicators for Business A are:
Debt Ratio Return on Assets
Return on Owner’s
Investment
a) 37.2% 49.7% 31.2%
b) 59.2% 31.2% 49.7%
c) 51.9% 29.4% 61.2%
d) 37.2% 31.2% 49.7%

7. VCE ACCOUNTING
UNIT 4 – CONTROL AND ANALYSIS OF BUSINESS PERFORMANCE
CHAPTER 22 – ANALYSIS AND INTERPRETATION
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Page | 7
18. The financial indicators for Business B are:
Debt Ratio Return on Assets
Return on Owner’s
Investment
a) 37.2% 31.2% 49.7%
b) 107.9% 29.4% 61.2%
c) 51.9% 61.2% 29.4%
d) 51.9% 29.4% 61.2%
19. Which of the following statements about the two businesses is correct?
a) Business A has less financial risk than Business B but earns a lower return on its capital
b) Business A has more financial risk than Business B but earns a higher return on its capital
c) Business A has less financial risk than Business B but earns a higher return on its capital
d) Business A has more financial risk than Business B but earns a lower return on its capital
20. While both firms have an identical Net Profit of $24,000, Business B has achieved a higher
Return on Owner’s Investment (ROI) because:
a) It has used less capital to make its profit than Business A
b) It has used a higher level of gearing to fund its Assets than Business A
c) It has taken on a greater level of debt relative to capital than Business A
d) All of the above
The owner of a small business believes the use of ratios to analyse business performance is a waste
of time because of its limitations.
21. Which of the following is not a limitation of ratio analysis?
a) Ratios are based on historical cost accounting
b) Ratios can’t be used to compare firms of different sizes
c) Ratios don’t factor in changes in accounting methods in their calculations
d) Ratios are limited when comparing firms with different reporting period lengths
The owner of a small business has been concerned about the quality of goods being purchased by
the firm.
22. The quality of goods purchased by a firm can be measured by the:
a) Sales Returns Ratio
b) Purchases Returns Ratio
c) Customer satisfaction surveys
d) All of the above

8. VCE ACCOUNTING
UNIT 4 – CONTROL AND ANALYSIS OF BUSINESS PERFORMANCE
CHAPTER 22 – ANALYSIS AND INTERPRETATION
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Page | 8
The following information has been provided by the owner of a small business for 2014 and 2015.
2014
$
2015
$
Total sales 94,500 85,200
Goods returned by customers 1,420 1,710
Total stock purchases 43,900 46,700
Goods returned to suppliers 1,340 1,690
Hours worked by the owner 640 610
Net Profit 17,600 18,300
23. The firm’s Sales Returns Ratio for the firm for 2014 and 2015 is:
2014 2015
a) 8.1% 9.3%
b) 1.5% 2.0%
c) 3.1% 3.6%
d) 7.6% 9.2%
24. The firm’s Purchases Returns Ratio for the firm for 2014 and 2015 is:
2014 2015
a) 3.1% 3.6%
b) 1.5% 2.0%
c) 8.1% 9.3%
d) 7.6% 9.2%
25. In 2016 the owner of the business plans to work 730 hours at the firm. If the Profit Per Hour
remained constant from 2015 to 2016, the owner should expect to make a Net Profit of:
a) $30
b) $20,075
c) $21,900
d) $22,750