Chapter 8

Mona’s business has the following results for 20X6 and 20X7:

20X7 20X6
£ £
Revenue 218 250 209 955
Cost of sales (167 921) (162 523)
Gross profit 50 329 47 432

A recent survey of businesses which are similar to Mona’s shows that between 20X6 and 20X7 revenue increased on average by 4.2% and gross profits by 5.7%.

A horizontal analysis of Mona’s revenue and gross profit figures for 20X6 and 20X7 shows:
1. A higher than average increase in revenue and a lower than average increase in gross profit
2. A lower than average increase in revenue and a higher than average increase in gross profit
3. A lower than average increase in revenue and a lower than average increase in gross profit
4. A higher than average increase in revenue and a higher than average increase in gross profit
Which of the following statements is correct?

Horizontal analysis is:
1. analysis of the revenue and gross profit figures of a business
2. comparison between two companies of a similar size
3. analysis of comparable accounting figures over a period of time
4. comparison of all accounting figures in relation to a single key figure, e.g. revenue
The income statement of Nathan and Norman Limited for 20X8 shows total revenue of £983 760. Revenue increased between 20X7 and 20X8 by 2.9%. Revenue increased between 20X6 and 20X7 by 2.6%. Operating profit in 20X6 was 18.7% of revenue.

What was the operating profit of Nathan and Norman Limited for 20X6 (to the nearest £)?
1. £194 220
2. £174 248
3. £183 963
4. £178 779
Which of the following statements is correct?

Common size analysis:
1. involves the calculation of year-on-year percentage increases or decreases
2. uses the results of one accounting period only
3. extends vertical analysis over more than one accounting period
4. compares the results of several businesses of similar size
Brisket Limited and Casket Limited are both car retailers. Their trading accounts for 20X6 contain the following information:

Brisket Ltd Casket Ltd
£ £
Revenue 1 693 970 1 825 250
Cost of sales (1 190 861) (1 301 403)
Gross profit 503 109 523 847

Brisket’s business comprises the sale of new and second hand cars. The majority of Casket’s business comprises the sale of new and second hand cars. However, Casket also sells a range of car parts and accessories. Included in the revenue figure of £1 825 250 above is revenue of parts and accessories totalling £107 720. The cost of sales of parts and accessories was 79.2% of revenue.

Which of the following statements is true?
1. Brisket’s gross profit margin on sales of new and second hand cars is higher than Casket’s and its sales are higher
2. Brisket’s gross profit margin on sales of new and second hand cars is higher than Casket’s and its sales are lower
3. Brisket’s gross profit margin on sales of new and second hand cars is lower than Casket’s and its sales are lower
4. Brisket’s gross profit margin on sales of new and second hand cars is lower and it sales are higher
Which of the following statements is not true?
1. Potential investors can obtain information about private companies in the UK from Companies House
2. The financial statements of a limited company are required to include information for the benefit of investors about the current state of the company’s order book
3. Investors in shares do not have any right to privileged access to company financial information, beyond that which is generally available through Companies House
4. The financial statements of limited companies tend to be oriented towards the information needs of investors in their shares
The key characteristics of financial information identified by the International Accounting Standards Board are:
1. Reliability, simplicity, comparability and relevance
2. Relevance, reliability, comparability and understandability
3. Understandability, correctness, comparability and reliability
4. Conciseness, comparability, relevance and reliability
Hindley Benjamin Limited has revenue for 20X6 of £1 531 103; the comparable figure for 20X5 was £1 496 679. The company’s gross profit margins were: 20X6 – 26.2%; 20X5 – 26.1%.

The company’s directors expect revenue in 20X7 to increase by the same percentage as between 20X5 and 20X6. Gross profit margin, however, is expected to decline because of increased competition, to 25.8%.

What is the company’s expected gross profit for 20X7 (to the nearest £)?
1. £404 110
2. £385 939
3. £408 809
4. £395 025
Extracts from Hanif’s summarised income statements show the following for 20X2 to 20X5 inclusive:

20X5 20X4 20X3 20X2/td>
£ £ £ £
Revenue 318 026 311 114 303 882 296 181
Cost of sales (219 951) (214 762) (209 375) (203 592)
Gross profit 98 075 96 352 94 507 92 589

Analysed horizontally, these figures show:
1. a gradually increasing percentage of revenue growth and a gradually decreasing percentage of gross profit growth
2. a gradually increasing percentage of revenue growth and a gradually increasing percentage of gross profit growth
3. a gradually decreasing percentage of revenue growth and a gradually increasing percentage of gross profit growth
4. a gradually decreasing percentage of revenue growth and a gradually decreasing percentage of gross profit growth
Extracts from the common size analysis for Dhaniya Cements Limited are as follows:

20X9 20X8 20X7
% % %
Finance costs 13.2% 4.8% 2.4%
Long-term liabilities 20.4% 19.7% 16.2%

In the common size analysis, income statement items are expressed in relation to revenue, and statement of financial position items are expressed in relation to total assets.

Revenue for 20X9 was £2 380 479. Total assets for 20X8 were £3 870 448.

Which one of the following statements is true?
1. Long-term liabilities at the year-end date in 20X7 were £636 991
2. The effective interest rate payable on long-term loans in 20X9 was 13.2%
3. Long-term liabilities at the year-end date in 20X8 were £762 478
4. Interest payable in 20X8 was £185 782

	20X7	20X6
	£	£
Revenue	218 250	209 955
Cost of sales	(167 921)	(162 523)
Gross profit	50 329	47 432

	Brisket Ltd	Casket Ltd
	£	£
Revenue	1 693 970	1 825 250
Cost of sales	(1 190 861)	(1 301 403)
Gross profit	503 109	523 847

	20X5	20X4	20X3	20X2/td>
	£	£	£	£
Revenue	318 026	311 114	303 882	296 181
Cost of sales	(219 951)	(214 762)	(209 375)	(203 592)
Gross profit	98 075	96 352	94 507	92 589

	20X9	20X8	20X7
	%	%	%
Finance costs	13.2%	4.8%	2.4%
Long-term liabilities	20.4%	19.7%	16.2%