Test Statistics: MBA PROGRAMMES

FINANCIAL ANALYSIS AND CONTROL

ONLINE TEST - AUTUMN 2015
Content

Name MBA PROGRAMMES FINANCIAL ANALYSIS AND CONTROL

ONLINE TEST - AUTUMN 2015
Attempt Score 12.52222
Attempts 180 (Total of 180 attempts for this assessment)
Marked 180
Attempts
Attempts that 0
Need Grading
Instructions ANSWER ALL QUESTIONS

TIME ALLOWED 50 MINUTES

Select the letter of the correct answer followed by submit to move forward
to the next question. If you cannot answer the question you will still need to
press submit to move forward, you can return to a question later if you need
to. The answers to the questions will be randomised each time you view a
question.

Each question counts for one mark.

The total marks available for this paper are 25.

The correct answers to each question are marked on the questions that
follow (one per page). There is then a Comments section on each page
that seeks to provide explanations to help you understand why the answer is
what it is. Please revisit this document as you prepare for the January exam,
as although you wont face a multiple choice exam, in this test we explored
a significant number of the components that the lengthier questions are
based upon.

I hope you find the document useful.

Malcolm
Question 1: Multiple Choice

Average Score 0.82222 points

Which of the following are differences between sole traders and limited liability
companies?

1. A sole traders financial statements are private; a companys financial statements

are sent to shareholders and may be publicly filed
2. Only companies have capital invested into the business
3. A sole trader is fully and personally liable for any losses that the business might
make; a limited companys shareholders are not personally liable for any losses
that the company might make.

Correct Per cent Answered

(1) and (2) only 3.333%

(2) and (3) only 6.111%

(1) and (3) only 82.222%
(1), (2) and (3) 7.778%
Unanswered 0.556%

COMMENTS

How much the owners invest in the business is always called owners
equity or capital, irrespective of the type of entity (organisation).

What is owners equity? It is how much the business OWES the owner, so
is a special type of liability. Special (i.e. different) to other types of liability
(definition of liability = what the business owes) in the sense that it is of an
undetermined amount (as the liability goes up with capital injections and
profits and down with losses and drawings) and with no fixed repayment
date. Owners equity arises from the BUSINESS ENTITY PRINCIPLE
ie that the business (the entity) is assumed to exist in its own right, as a
separate entity to the owner. It can sue and be sued.
 Question 2: Multiple Choice

Average Score 0.53889 points

The accounting concept of matching means that:

Correct Per cent Answered

The expenses and revenues that relate to a period are
recognised in that period irrespective of when the 53.889%
associated cash payments are made.
The profit and loss account shows the same items as the
6.667%
cash flow statement for the same period.
Every transaction is accounted for twice so that the
15.556%
accounting entries match.
In the Statement of Financial Position, the assets must
21.667%
match the liabilities.
Unanswered 2.222%

COMMENTS

Matching is a key concept and is the concept by which the income statement is
produced and explains why cash and profit are not the same.

KEY POINT the income statement does NOT consider receipts and
payments. It is an events-based statement, by which I mean it looks at what
we sell in the period (as determined by the realization principle cash and
credit sales are included provided invoices have been dispatched in the
accounting period) and then we match all those expenses that have helped
generate those sales. Again, it doesnt matter if we havent paid for those
expenses (in the income statement). Remember, the SOFP works with the
income statement to pick up the pieces so the whole story is told. For
example, sales made in the period on credit (therefore shown in IS) but where
cash is not collected by the period-end, are shown as receivables (future
benefit) in SOFP (current asset). Expenses incurred in earning sales but not
paid in the period are shown as liabilities in SOFP (accrued expenses).
Multiple Choice

Average Score 0.92222 points

The accounting concept of Going Concern means that:

Correct Per cent Answered

A business is solvent. 2.778%
A business is completely safe to invest in. 1.667%
A business is expected to continue in operation for the
92.222%
foreseeable future.
A business has recorded a profit in the last financial
1.111%
year.
Unanswered 2.222%

COMMENTS

Very well answered. We ASSUME the business will continue, so this means
that the business will exist into the future to be able to enjoy the benefits from
assets, as well as to pay the liabilities it owes. It is an assumption and not a
guarantee of survival.
 Question 4: Multiple Choice

Average Score 0.51111 points

The effect of the prudence concept is that

Correct Per cent Answered

Net profit is the difference between revenues and
expenses rather than the difference between receipts and 11.111%
payments.
Losses should be provided for as soon as they are
51.111%
foreseen and profit should not be anticipated.
Similar items should be treated in a consistent way from
11.111%
one accounting period to the next.
None of these options. 23.889%
Unanswered 2.778%

COMMENTS

Perhaps the reason almost of you answered none of these options was
that you were thinking prudence only applied to not over-exaggerating
asset values (ie we depreciate to be prudent). But prudence is the rule by
which inventory is valued so closing inventory is an asset, ie it will sell in
future and cash/cheques/receivables will flow in, but if evidence comes to
light that we arent going to be able to sell it for as much as we bought it
for (ie its cost) we write down inventory to what it will sell for (its net
realizable value which means well make a loss). So, we value inventory
at the lower of cost and NRV, which has the dual outcome of meaning we
dont anticipate profit (so if NRV will be larger than cost, we still value at
the lower value, ie cost) but foresee loss (so we opt for NRV valuation if
cost is going to be bigger than we can sell for, ie we are set to make a loss).
 Question 5: Multiple Choice

Average Score 0.42778 points

A companys income statement for the year ended 31 December 2014 showed a net profit
of $83,600. It was later found that $18,000 paid for the purchase of a motor van had been
recorded in the motor expenses account. It is the companys policy to depreciate motor
vans over 4 years on the straight line basis.

What should the companys net profit be for the year ending 31 December 2014?

Correct Per cent Answered

$106,100 6.111%
$70,100 31.667%
$97,100 42.778%
$101,600 15.556%
Unanswered 3.889%

COMMENTS

So basically the company has contravened the matching principle in

sharing the depreciation expense across all 4 years of its useful life, so
instead of charging $4500 each year for 4 years (ie cost scrap, then divide
by useful life) it has charged $18000 in this one year, ie $13500 too much so
profit needs to be $13500 higher than the $83600 reported.
 Question 6: Multiple Choice

Average Score 0.37778 points

Thea prepares her financial statements for the year to 30 April each year. The company
pays rent for its premises quarterly in advance on 1 January, 1 April, 1 July and 1 October
each year. The annual rent was $84,000 per year until 30 June 2014. It was increased
from that date to $96,000 per year.

What rent expense and end of year prepayment should be included in the financial
statements for the year ended 30 April 2015?

Correct Per cent Answered

Expense Prepayment
17.222%
$93,000 $ 8,000
Expense Prepayment
21.667%
$93,000 $16,000
Expense Prepayment
18.889%
$94,000 $ 8,000
Expense Prepayment
37.778%
$94,000 $16,000
Unanswered 4.444%

COMMENTS

So think about the expense first. When it was $84000 per year this equated
to $7000 per month and there are 2 months at this rate in our accounting
period they are May and June 2014, so thats $14000 of expense. Then we
need another 10 months at the higher rate of $8000 per month (being
$96000/12 months) hence $80000 expense, giving $94000 for the 12 months.

Given we have paid the most recent amount on 1 April, and our accounting
period finishes at the end of April, weve paid 2 months in advance, so the
prepayment totals $16000 (May and June 2015 at $8000 per month)
Question 7: Multiple Choice

Average Score 0.23333 points

The following information is available about Andrews business on 30 September 2015:

$
Motor Van 14,000
Loan (interest free; repayable over 4 years in 4
100,000
equal instalments starting 1 August 2016)
Bank Overdraft 3,250
Receivables 23,800
Accumulated depreciation 7,000
Trade payments 31,050
Inventory 12,560
Petty Cash 150
Rent due 1,200
Allowance for receivables 1,500

What are the correct figures for current liabilities and current assets?

Correct Per cent Answered

Current liabilities Current assets
18.333%
34,300 35,010
Current liabilities Current assets
25%
32,250 38,260
Current liabilities Current assets
25%
57,250 38,260
Current liabilities Current assets
23.333%
60,500 35,010
Unanswered 8.333%

COMMENTS

Current assets comprise receivables (less allowance), cash, inventory, so

total 35010
Current liabilities include rent due, trade payables, overdraft and of
loan, so 60500

Question 8: Multiple Choice

Average Score 0.77222 points

Which of the following headings is not a classification of cash flows in IAS 7 Statement
of Cash flows?

Correct Per cent Answered

Operating activities 3.889%
Investing activities 7.778%
Administration activities 77.222%
Financing activities 4.444%
Unanswered 6.667%

COMMENTS

Yes, well answered. The 3 sections by which cash flows are broken down
are operating activities (our day to day, regular, short-term trading),
investing activities (about long-term, non-current assets either buying or
selling) and financing activities (relates to long-term finance, be it shares or
loans)
 Question 9: Multiple Choice

Average Score 0.63333 points

The idea behind depreciation is:

Correct Per cent Answered

To spread the cost of assets which are intended for long-
63.333%
term use by a business over the period of use.
To reflect the decline in market values of second-hand
20%
assets.
To reduce a businesss tax bill. 3.333%
None of these options. 6.111%
Unanswered 7.222%

COMMENTS

Depreciation looks at matching and prudence concepts. Choose a method

of depreciation that seeks to fairly match how much an assets value
declines in earning sales each period (matching), then through net book
value, it takes away accumulated depreciation from cost, so asset values
are not over-stated (prudence).
 Question 10: Multiple Choice

Average Score 0.45556 points

Which of the following items could appear in a companys cash flow statement?

(1) Surplus on revaluation of non-current assets

(2) Proceeds of issue of shares

(3) Proposed dividend

(4) Dividends received

Correct Per cent Answered

(1) and (2) 12.222%
(3) and (4) 18.889%
(1) and (3) 16.111%
(2) and (4) 45.556%
Unanswered 7.222%

COMMENTS
Revaluing an asset does not generate cash, all that happens is that the asset
value goes up and by how much it increases that amount is added to
owners equity through something called a revaluation reserve. A share
issue proceeds means a cash inflow (financing activity). If we propose to do
something, we havent done it yet, so until you actually DO pay the
dividend, a proposed dividend is not a cash payment, but if we do receive a
dividend, it would be a cash inflow.
 Question 11: Multiple Choice

Average Score 0.67778 points

The term Inventory in a statement of financial position indicates:

Correct Per cent Answered

Goods bought by the business for selling again at a profit. 67.778%
Goods sold by the business during the year. 7.222%
Equipment, vehicles and buildings bought by the
17.222%
business to assist with running it for the long term.
The number of shares issued by the business. 0.556%
Unanswered 7.222%

COMMENTS

Goods sold by the business are SALES.

Equipment etc bought to USE in the business are NON-CURRENT

ASSETS.

A share issue relates to equity not inventory.

Inventory is what remains at the period-end of goods bought with the

intention of resale, or manufacturing into finished goods for resale (ie raw
materials) or goods bought for consumption within the business (eg
cleaning materials, lubricating materials)
 Question 12: Multiple Choice

Average Score 0.60556 points

Which of the following is not a correct statement of the Statement of Financial Position
Equation?

Correct Per cent Answered

Assets = Liabilities - Owners Equity. 60.556%
Assets - Liabilities = Owners Equity. 7.778%
Assets = Liabilities + Owners Equity. 17.778%
Assets - Owners Equity = Liabilities. 5.556%
Unanswered 8.333%

COMMENTS

So the Statement of Financial Position is presented in the form

Assets = Owners Equity + Liabilities

Basic mathematical rearrangement was needed to answer this question

 Question 13: Multiple Choice

Average Score 0.55556 points

Operating Cash Flow in a Statement of Cash Flows represents;

Correct Per cent Answered

Cash received and paid from day-to-day buying and
55.556%
selling and running the business.
Cash connected with investing in assets to assist the
9.444%
businesss operations.
Cash paid in by investors so that the business can
4.444%
operate.
The cash flows incurred in operating the assets owned by
22.222%
the business
Unanswered 8.333%

COMMENTS

Discussed in a previous answer. Investing in assets is investing activity;

cash paid in by investors is financing. The last option thinkin of things like
maintenance spending, petrol for vehicles, electricity for machine is PART
of operating activities BUT not the whole of it, which is the first answer.
 Question 14: Multiple Choice

Average Score 0.43889 points

Bloggs & Company paid a total of 12,000 rent for two years ahead when they occupied a
new building. How will this be accounted for in their Income Statement?

Correct Per cent Answered

A rent expense of 12,000 in their first years Income
24.444%
Statement.
A rent expense of 6,000 in each of their first and second
43.889%
years Income Statements.
The 12,000 is spread over the expected life of the
building (so if the building is expected to last for 20 12.778%
years, the annual expense is 600).
We would not include any of the 12,000 in the Income
10.556%
Statement.
Unanswered 8.333%

COMMENTS

Income statement is about matching the expense of using the building in

the year against the benefits in terms of sales generated. Remember, it does
not matter whether we have paid for rent or not so far as the income
statement is concerned. The key is that the building from which products
are made and sold incurs an expense of 6k each year, so that is what we
show in the income statement. The fact that we owe the rent is not relevant
in the income statement. That is what we would show as a liability in
SOFP.
 Question 15: Multiple Choice

Average Score 0.38889 points

Bloggs & Company borrowed 200,000 from the bank on 1 January 2014 to fund an
expansion programme. Interest was due to be paid at 8% a year, but in half-yearly
instalments. The first instalment of 8,000 was paid on 30 June 2014 but Mr Bloggs
mislaid his cheque book in late December 2014 and did not pay the second instalment
until 4 January 2015. Bloggs financial year ends on 31 December 2014. Which of the
following entries in their year-end accounts is wrong?

Correct Per cent Answered

Interest charges of 16,000 in the Income Statement. 12.778%
Interest paid of 16,000 in the Statement of Cash Flows. 38.889%
Accrued interest of 8,000 in the Statement of Financial
21.111%
Position.
Interest paid of 8,000 in the Statement of Cash Flows. 18.333%
Unanswered 8.889%

COMMENTS

How much should be paid in the year? - the company has finance of 200k
at 8% interest so should pay 16,000. This is the income statement expense

How much did they pay in the year? they paid 8000 on 30 June 2014
and that was all as they forgot the second payment.

How much do they owe by the end of the year? they should have paid
16k, but only paid 8k, so they still owe 8k, which is a current liability,
accrued interest.
 Question 16: Multiple Choice

Average Score 0.42222 points

Bloggs & Company has paid telephone bills of 15,000 in the year ended 31 December
2014. The last bill was received in October 2014 and the next bill (to cover the period to
31 January 2015) is not due until February 2015. When preparing its accounts for the year
ended 31 December 2014, how should Bloggs account for the telephone usage that has not
been billed?

Correct Per cent Answered

Do not adjust the accounts because the bill has not been
22.222%
received.
Wait for the bill to come in and then prepare a fresh set
3.333%
of accounts.
Adjust the accounts by including an estimated amount for
the telephone calls that have been made for the full 23.333%
period covered by the bill due in February.
Adjust the accounts by including an estimated amount for
the telephone calls that have been made for part of the 42.222%
period covered by the bill due in February.
Unanswered 8.889%

COMMENTS
The company needs to include 12 months of telephone bills as an expense
in its income statement. It has paid for the first 10 months of the year
(15k) and must accrue the final 2 months so estimate 2/3 (ie 2 months of
the 3) of the bill for the quarter ending 31 January 2015 (so it needs to
INCLUDE November and December 2014 but EXCLUDE January 2015,
as it relates to next period). This is all about matching again match 12
months revenues with all those 12 months of expenses that have helped
earn those sales, remembering that it does not matter in the income
statement whether we have paid for all these expenses or not. In this case,
at 31 December 2014, we would show that we had a closing liability of
November and December 2014s telephone.
 Question 17: Multiple Choice

Average Score 0.67778 points

Cornelius PLC has bought a packaging machine. The following details are supplied:

Estimated economic useful life 4 years

Cost 107,000
Expected scrap value 17,000
Reducing balance percentage %35

Calculate the first years depreciation charges using straight-line depreciation.

Correct Per cent Answered

26,750 11.111%
22,500 67.778%
31,000 8.889%
28,500 3.889%
Unanswered 8.333%

COMMENTS

Straight line depreciation looks at the total depreciation of an asset and

shares that loss in value equally over its economic useful life. So total
depreciation is cost less scrap value, so in this case 107,000 less 17,000, so
this gives 90,000 that is then spread equally over the EUL, so divide by 4,
to give 22,500 each year. After one year, the net book value would be:

Cost of 107,000 less accumulated depreciation of 22500 = 84,500

(This is what you would show in SOFP at the end of year 1)

 Question 18: Multiple Choice

Average Score 0.36111 points

If Cornelius PLC used the reducing balance method of depreciation to depreciate its
newly acquired packaging machine
(estimated economic useful life = 4 years; Cost = 107,000; Expected scrap value =
17,000; Reducing balance percentage = 35%);

what would the end of year 1 net book value show in the Statement of Financial Position?

Correct Per cent Answered

84,500 17.222%
37,450 22.222%
75,500 13.889%
69,550 36.111%
Unanswered 10.556%

COMMENTS
Firstly, remember if you are asked to work out reducing balance
depreciation, you WILL be given the rate (here is was 35%). What you
need to know is what to apply it to. Answer multiply the rate (as a
decimal) by the net book value of the non-current asset at the start of the
year.Net book value is cost less accumulated depreciation, so for the
packaging machine, given it is new, the accumulated depreciation is zero,
as the asset is brand new at the start of the year:

Depreciation = 0.35 x (107,000 - 0) = 37450

So, NBV at the year end, is cost less the year 1 depreciation charge

Ie, 107,000 37,450 = 69,550

 Question 19: Multiple Choice

Average Score 0.38333 points

THE DATA BELOW IS USED FOR QUESTIONS 19, 20 and 21

The following transactions occurred in the first three months after Bilbo founded his
jewellery manufacturing business. Using this information, construct an Income Statement
for the business.

o Bilbo opened a business bank account and paid in 2,000 of his own money as
capital.
o Bilbo obtained a bank loan of 5,000 at the start of the period. Interest would be
charged at 12% per year.
o Bilbo made sales for cash amounting to 2,500 and sales on credit with a value of
1,500 in the first three months. At the end of the period, 1,100 of the sales on
credit had been settled by customers.
o Bilbo paid cash of 1,100 for raw materials and bought another 200 of raw
materials on credit, which remained unpaid at the end of the period.
o At the end of the period Bilbo had unused raw materials that had cost 200.
o During the period Bilbo paid operating expenses of 400 and estimated that he
owed a further 200 for electricity and telephone usage during the period.

COMMENTS Income statement items ()

Sales 4,000
Purchases 1300
Less: closing inventory (200)
Net cost of sales (1100)
Gross profit 2900
Less:
Operating expenses (600)
Operating profit 2300
Less:
Interest payable (150)
Net profit 2150

From the options below identify the sales value

Correct Per cent Answered
2,500 12.222%
3,600 25%
4,000 38.333%
2,900 11.111%
Unanswered 13.333%
 Question 20: Multiple Choice

Average Score 0.33889 points

The following transactions occurred in the first three months after Bilbo founded his
jewellery manufacturing business. Using this information, construct an Income Statement
for the business.

You are required to calculate the below information:

Description Income statement items ()

Sales 4,000
Purchases 1300
Less: closing inventory (200)
Net cost of sales (1100)
Gross profit 2900
Less:
Operating expenses (600)
Operating profit 2300
Less:
Interest payable (150)
Net profit 2150

From the options below identify the gross profit:

Correct Per cent Answered

2,300 18.889%
2,150 13.889%
2,900 33.889%
2,500 20.556%
Unanswered 12.778%
 Question 21: Multiple Choice

Average Score 0.21667 points

The following transactions occurred in the first three months after Bilbo founded his
jewellery manufacturing business. Using this information, construct an Income Statement
for the business.

o Bilbo opened a business bank account and paid in 2,000 of his own money as
capital.
o Bilbo obtained a bank loan of 5,000 at the start of the period. Interest would be
charged at 12% per year.
o Bilbo made sales for cash amounting to 2,500 and sales on credit with a value of
1,500 in the first three months. At the end of the period, 1,100 of the sales on
credit had been settled by customers.
o Bilbo paid cash of 1,100 for raw materials and bought another 200 of raw
materials on credit, which remained unpaid at the end of the period.
o At the end of the period Bilbo had unused raw materials that had cost 200.
o During the period Bilbo paid operating expenses of 400 and estimated that he
owed a further 200 for electricity and telephone usage during the period.

From the options below identify the interest expense for the period.

Correct Per cent Answered

600 38.333%
5,000 4.444%
1,250 22.222%
150 21.667%
Unanswered 13.333%

COMMENT

Solution shown earlier but the key thing here is that we are reporting for
just 3 months so you need to work out your annual interest of 600 then
divide by 4 as we are drawing up the income statement for 3 months not
12.
 Question 22: Multiple Choice

Average Score 0.60556 points

The quick or acid test ratio is calculated by the following formula:

Correct Per cent Answered

Current assets/Current liabilities 20.556%
Non-current assets/current liabilities 3.333%
Current liabilities/Owners equity 2.778%
(Current assets inventory)/Current liabilities 60.556%
Unanswered 12.778%

COMMENTS
Acid test is the most stringent test of liquidity as it takes away from
current assets the asset which takes longest to convert to cash (this is
inventory, which has to sell, then we have to collect payment before we
have cash). For supermarkets, inventory is rapidly turned into cash.
The first choice (above) is the current ratio, where textbooks suggest we
should look for a value of 2:1, ie 2 of current assets for each 1 we owe
in the short-term (ie our current liabilities). This is only a guide. Each
sector will have different norms. Companies that can turn inventory
into cash quickly can have much lower ratios.
 Question 23: Multiple Choice

Average Score 0.50556 points

To work out the ROCE (return on capital employed) ratio, it is necessary to divide
Operating Profit by which of the following (and then express as a percentage):

Correct Per cent Answered

Non-Current Assets + Current Assets 7.778%
Share Capital + Retained Profit 18.889%
Total Equity + Non-Current Liabilities 50.556%
Non-Current Liabilities + Current Liabilities 7.778%
Unanswered 15%

COMMENTS
Roce looks at the profit we make as a business BEFORE considering how
the long-term finance is composed. So as a manager it is the operating
profit you generate from all of the long-term funding at your disposal. So
what is long term funding? It is the internal finance (EQUITY) PLUS long-
term borrowings (DEBT).
 Question 24: Multiple Choice

Average Score 0.34444 points

A companys shares were denominated at a par value of 50 pence when it formed. What
would its earnings per share be if its operating profit for the year was 1m, its profit after
tax was 500,000 and its share capital was 200,000:

Correct Per cent Answered

2.00 6.667%
5.00 10.556%
1.25 34.444%
2.50 33.333%
Unanswered 15%

COMMENTS

So we need to remember that the earnings per share is the total earnings
(which is also called profit after tax, so 500,000) divided by the number of
shares. To get the number of shares:

Number of shares = Share capital/par value of 1 share

Number of shares = 200,000/0.5

Number of shares = 400,000

So EPS = 500,000/400,000 shares so 1.25 per share

 Question 25: Multiple Choice

Average Score 0.30556 points

The correct title for the statement of financial position of

J. Burton at the end of December 2014 is Statement of
Financial Position of J. Burton

Correct Per cent Answered

for the period ended 31
23.333%
December 2014
for the year ended 31
31.667%
December 2014
as at 31 December
30.556%
2014
as at December 2014 0.556%
Unanswered 13.889%

COMMENTS

SOFP is a snapshot (ie a financial photograph captured AS AT one point in

time