FA Section B · 15 marks · suggested: 18 min

Interpreting financial statements (Finch Co)

Questions are in English, the exam language. Companies and figures are invented for practice.

Extracts from the financial statements of Finch Co are shown below. Capital employed is equity plus non-current liabilities.

	20X8 ($)	20X7 ($)
Revenue	500,000	400,000
Gross profit	150,000	140,000
Profit from operations	60,000	64,000
Capital employed	400,000	320,000
Current assets (including inventory)	120,000	100,000
Inventory	50,000	30,000
Current liabilities	80,000	50,000

(a) Gross profit margin for 20X8 (%)2 marks
(b) Operating profit margin for 20X8 (%)2 marks
(c) Return on capital employed for 20X8 (%)2 marks
(d) Current ratio for 20X8 (times, to 2 decimals)2 marks
(e) Quick (acid test) ratio for 20X8 (times, to 2 decimals)2 marks
(f) Revenue rose by 25% but the gross margin fell. Which is the most likely explanation?2 marks
Revenue rose by 25% but the gross margin fell. Which is the most likely explanation?Selling prices were cut to win extra volumeAdministrative costs roseInterest rates increasedMore shares were issued
(g) Which statement best explains the fall in ROCE?3 marks
Which statement best explains the fall in ROCE?Asset turnover fell while margin was unchangedBoth margin and asset turnover roseCapital employed fellOperating margin fell while asset turnover stayed at 1.25 times

15 marks