Q: A company has the following information: Net profit after tax = R500,000; Average shareholders’ equity = R2,500,000. Calculate the Return on Shareholders’ Equity (ROSHE).

$$ ROSHE = \frac{500,000}{2,500,000} \times 100 = 20\% $$

Q: A company’s dividend pay-out ratio is calculated as:

$$ Dividend\ Pay\text{-}out\ Ratio = \frac{Dividends\ per\ Share}{Earnings\ per\ Share} \times 100 $$

Question 1

Which of the following best describes the purpose of analysis and interpretation of financial statements?

Accepted Answer

To extract and interpret relevant information for decision-making at a particular point in time.

Question 2

A company’s Return on Shareholders’ Equity (ROSHE) is calculated as follows:

Accepted Answer

$$ ROSHE = \frac{Net\ Profit\ after\ Tax}{Average\ Shareholders'\ Equity} 	imes 100 $$

Question 3

If a company’s current ratio increases from 1.5:1 to 2.5:1, what does this most likely indicate?

Accepted Answer

The company’s liquidity position has improved, possibly due to increased current assets.

Question 4

Which financial indicator would be most relevant for a supplier considering offering short-term credit to a business?

Accepted Answer

Current ratio

Question 5

A company has the following information: Net profit after tax = R500,000; Average shareholders’ equity = R2,500,000. Calculate the Return on Shareholders’ Equity (ROSHE).

Accepted Answer

$$ ROSHE = \frac{500,000}{2,500,000} 	imes 100 = 20\% $$

Question 6

Which of the following is a possible consequence of a company consistently paying out more than 100% of its earnings as dividends?

Accepted Answer

The company may face liquidity problems and reduce future growth opportunities.

Question 7

If the average debtors’ collection period increases from 30 days to 45 days, what does this suggest about the company’s credit control?

Accepted Answer

Credit control has weakened, and the company is taking longer to collect debts.

Question 8

Which formula correctly calculates Earnings Per Share (EPS)?

Accepted Answer

$$ EPS = \frac{Net\ Profit\ after\ Tax}{Number\ of\ Issued\ Shares} $$

Question 9

A company’s dividend pay-out ratio is calculated as:

Accepted Answer

$$ Dividend\ Pay	ext{-}out\ Ratio = \frac{Dividends\ per\ Share}{Earnings\ per\ Share} 	imes 100 $$

Question 10

Which of the following is NOT a reason why management (directors) would use financial statement analysis?

Accepted Answer

To ensure all employees receive bonuses.

Question 11

A company’s solvency ratio is calculated as:

Accepted Answer

$$ Solvency\ Ratio = \frac{Total\ Assets}{Total\ Liabilities} $$

Question 12

If a company’s Net Asset Value (NAV) per share is lower than the market price per share, what does this suggest?

Accepted Answer

The market expects higher future earnings or growth.

Question 13

Which of the following would most likely concern shareholders after reading the financial statements?

Accepted Answer

Whether the business will be profitable now and in the future.

Question 14

A company’s directors decide to increase the dividend pay-out ratio. Which of the following is a possible reason for this decision?

Accepted Answer

To attract new investors by offering higher returns.

Question 15

If a company’s gearing ratio increases, what does this indicate?

Accepted Answer

The company is relying more on borrowed funds relative to equity.

Question 16

Which of the following is a correct interpretation if the company’s average creditors’ payment period increases from 30 days to 60 days?

Accepted Answer

The company is taking longer to pay creditors, possibly to conserve cash.

Question 17

A company has 1,000,000 issued shares and declares total dividends of R500,000. What is the dividends per share (DPS)?

Accepted Answer

$$ DPS = \frac{500,000}{1,000,000} = R0.50 $$

Question 18

Which of the following is NOT a financial indicator used in the analysis and interpretation of financial statements?

Accepted Answer

Number of employees

Question 19

A company’s directors are considering a change in dividend pay-out policy. Which of the following is a possible consequence of decreasing the dividend pay-out ratio?

Accepted Answer

Shareholders may be dissatisfied due to lower returns.

Analysis and Interpretation of Financial Information: Study Guide for Financial Accounting

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