C10 - Accounting (10-20 Qs) BC

Question 1

Which of the following items would not affect the profit before taxation in a company’s income statement?
A) Preference dividend
B) Interest payable
C) Amortisation of leasehold property
D) Exceptional items

Answer 1

A - Preference Dividend

Preference dividend is deducted from the profit after tax to arrive at the profit attributable to the ordinary shareholders. All of the other options are deductions that would be made to arrive at the profit before tax.

Question 2

Calculate the operating profit given the following information:
Depreciation: 40,000
Decrease in receivables: 15,000
Decrease in payables: 10,000
Net cash flow 75,000

A) 30,000
B) 35,000
C) 75,000
D) 70,000

Answer 2

A - 30,000

Start with the cashflow (75,000), add back the decrease in payables (85,000), deduct the decrease in receivables (70,000) and deduct depreciation to get to the profit (30,000).

Question 3

If Company A is more geared than Company B, which of the following is TRUE?
A) A’s earnings more sensitive to changes in interest rates than Bs
B) A’s earning less sensitive to changes in interest rates than Bs
C) Cannot tell
D) Company B has more debt relative to equity than Company A

Answer 3

A - A’s earnings more sensitive to changes in interest rates than Bs

Question 4

Which of the following statements most closely defines a post balance sheet event?
A) An event which takes place after accounts are published
B) An event which takes place after the company’s preliminary results have been announced
C) An adjustment required by the company’s auditors
D) An event which occurs between the balance sheet date and the date on which the directors approve the accounts

Answer 4

D - An event which occurs between the balance sheet date and the date on which the dicrectors approve the accounts

A post-balance sheet event is one that occurs AFTER the dare of the balance sheet but is KNOWN BEFORE approval of the accounts.

Question 5

Which of the following are permissible uses of a company’s share premium account?
1. Issue of bonus shares
2. Writing off of preliminary expenses
3. Writing off of expenses of issue of debentures
4. Provision of premium on repayment of debentures

A) All of the above
B) 2, 3 and 4 only
C) 3 and 4
D) None of the above

Answer 5

A - All of the above
The following are the FIVE (5) circumstances where the share premium account can be reduced:
1. To issue bonus shares
2. To write off preliminary expenses
3. To write off expenses of issue of shares or debentures
4. To provide for the discount on the issue of debentures
5. To provide the premium on the repayment of debentures

A debenture is a written loan agreement between a borrower and a lender that gives the lender security over the borrower’s assets. Debentures are a type of debt instrument that are often used by large companies to borrow money over a medium to long term.

Question 6

ABC Ltd has 600 components of stock at 1 January with the value of £1.62 each during January there were the following movements:

DATE / Receipts No (£ unit price) / Issues No (£unit price)
2 January / 600 (£1.60) / —————
5 January / —————- / 200 (£1.60)
10 January / 1,000 (£1.68) / ————-
16 January / 200 (£1.55) / ————–
25 January / —————–/ 1,400 (£1.65)

What method is being used to charge issues to production?
A) FIFO
B) LIFO
C) Replacement cost
D) Average cost

Answer 6

B - LIFO

This is using the Last-in First Out method

The first sale is shown at cost of £1.60, the most recent purchase price.

The sale of 1,400 units towards the end of the month is using LIFO: 200 at £1.55 plus 1,000 at £1.68 plus 200 at £1.60, totalling 1,400 units costing £2,310, or £1.65 per unit.

Question 7

A qualified audit report implies that:
A) The company is in financial difficulty
B) The auditors cannot come to an opinion on the financial statements
C) The auditors intend to resign at the AGM
D) The financial statements may not give a true and fair view in all respects

Answer 7

D - The financial statements may not give a true and fair view in all respects

A qualified audit report implies that the “true and fair” assumption may not hold true.

Question 8

A business may make a profit in a particular year but have less cash in the bank

This could be arise because:
A) The company has made a bonus issue of shares
B) Payments are NOT made to suppliers
C) Customers are NOT paying their accounts
D) The depreciation charge has been increased

Answer 8

C - Customers are NOT paying their accounts

If customers are not paying their accounts (i.e. receiveables have grown) then cash flow will be lower than profit. Withholding payments to suppliers will increase cash flow; a bonus issue will affect neither profit nor cash flow, and depreciation will reduce profit and not affect cash flow.

Question 9

Acquiror PLC has the policy of revaluing land upwards to market value
Which of the following is TRUE when comparing with a company which shows land at historic cost?

For Acquiror PLC the:
A) Return on capital employed will be higher
B) Gearing will be higher
C) Earning per share will be higher
D) Asset turnover will be lower

Answer 9

D - Asset turnover will be lower

The effect of revaluation will be to increase assets and equity (via the revaluation reserve). The ROCE will therefore be lower, as will be gearing. EPS will be unaffected. Due to the increase in assets, asset turnover will be lower.

Question 10

Which of the following would be TRUE if the depreciation charge was lowered?
A) No change in profits
B) Increase in profits
C) Decrease in profits
D) Decrease in cashflow

Answer 10

B - Increase in profits

Depreciation is deducted from the profit and loss account

Question 11

Given:
Current ratio: -1.1
Quick ratio: -0.8
Current Liabilities: -£10m

What is the value of stocks
A) £7m
B) £3m
C) £6m
D) £10m

Answer 11

B - £3m

Current ratio = Current Assets/Current liabilities
So, Current ratio x current liabilities = Current assets
-1.1 x -10m = 11m

Quick Ratio = Current assets - Stocks/Current Liabilities
So Quick Ratio x Current Liabilities = current assets - Stock
-0.8 x -10m = 8m
Hence; Current Assets - (Current Assets - Stock) = stock
11m-8m = 3m

Question 12

Company A purchases a machine for £40,000 in January 2002. The company has a policy of depreciating assets 20% annually

What would the value of the machine stand at in the books after 4 years?
A) 8,000
B) 32,000
C) 16,384
D) £4,000

Answer 12

C - 16,384

Net book value (NBV) after 4 years = 40,000 X 0.8^4 = £16,384

Question 13

P owns 75% of the net assets of S
Which of the following is TRUE regarding the consolidated accounts?

A) S should be treated as an associate
B) Consolidated accounts are not necessary
C) The consolidated accounts would show a minority interest representing shareholders funds not acquired valuing net assets at 100% of their value
D) The consolidated accounts would should a minority interest representing shareholders funds not acquired valuing net assets at 75% of their value

Answer 13

C - The consolidated accounts would show a minority interest representing shareholders funds not acquired valuing net assets at 100% of their value

The minority interest hows the value of the net ssets acquired at their full value (100%). In this case, the minority in interest will be 25% of the net assets at their full (100%) value.

Question 14

Which of the follwing methods of calculating cost, all other things being equal, is most likely to produce the highest closing inventory during a period when the price of goods are rising and the inventory levels are rising?
A) First-in First out
B) Last-in first out
C) Average cost
D) Historic cost

Answer 14

A - First-in First-out

• FIFO method is an inventory valuation method that assumes that the oldest inventory is sold first
• LIFO) method is an inventory valuation method that assumes the most recent items added to a company’s inventory are the first to be sold. LIFO is only used in the U.S.
• The average cost method, also known as the weighted average inventory costing method, is a way to value a company’s inventory and stock. The average cost method calculates the cost of each unit of inventory by dividing the total cost of all inventory items by the total number of items. This gives a weighted average cost per unit, which is then applied to the cost of goods sold (COGS) and the cost of goods still available for sale.

Question 15

At 31 March a business had the following assets and liabilities:
Trade receivables £42,510
Provision for bad and doubtful debts £2,620
Cash on hand and at bank £18,900
Stocks £31,660
Trade payables £55,390
Sundry creditors and accruals £17,100
Short-term investments £11,600
Motor vehicles (net book value) £101,800
Land and buildings (net book value) £152,000
Fixtures and fittings (net book value) £33,420
Bank loan (repayable in five years) £150,000
Bank overdraft £53,500

What is he business’s working capital?
A) -£35,540
B) -£23,940
C) +£113,280
D) +£263,280

Answer 15

B: -£23,940

Working capital is net current assets (current assets - current liabilities)

SO:
= 42,510 - 2,620 + 18,900 + 31,660 - 55,390 - 17,100 + 11,600 - 53,500
= -23,940

Motor vehicles (£101,800), Land and buildings (£152,000), Fixtures and fittings (£33,420) and Bank loan (£150,000) are not included as they are non-current assets and liabilities (i.e. longer than a year)

Question 16

Which of the following would be affected if provisions decreased?
1. Income statement
2. Balance sheet
3. Cash flow statement

A) All of the above
B) 1 only
C) 2 only
D) 1 and 2 only

Answer 16

A - All of the above

Question 17

Which of the following is NOT a basis for the qualification of an audit report?
A) Material limitation of scope
B) Material disagreement
C) Ethical disagreement
D) Fundamental disagreement

Answer 17

C - Ethical disagreement

Audit qualifications are either material (if they affect the reader of the accounts) or fundamental (if they change the whole meaning of the accounts).

Question 18

Which of the following would you NOT expect to find on a company’s balance sheet?
A) Goodwill
B) Working Capital
C) Contingent Liabilities
D) Proposed Dividend

Answer 18

C - Contigent Liabilities

Contingent liabilities are not regarded as sufficiently predictable to warrant any specific provision being set aside for them in the balance sheet of the company - however disclosure of their existence in the notes to the accounts is required.

A contingent liability is a potential debt that a company might owe in the future if certain events occur such as: Pending lawsuits, Product warranties returns, Guarantees, and Disputed tax liabilities.

Question 19

The following information is available from a company balance sheet:
Fixed assets: £100,000
Stock: £40,000
Overdraft: £30,000
Cash: £40,000
Trade receivables: £60,000
Trade payables: £50,000
Long-term loans: £80,000

Calculate shareholders’ funds:
A) £60,000
B) £80,000
C) £20,000
D) £240,000

Answer 19

B £80,000

Rearrange the standard that assets must EQUAL liabilities as in:
Shareholder’s funds + Non-current liabilities + Current Liabilities = Non current assets + Current Assets

SHF + NCL + NCL = NCA + CA

to

SHF = NC assets + C assets - NC Liabilities + C Liabilities

Hence SHF = 100,000 + (40,000 + 40,000 + 60,000) - 80,000 - (50,000 + 30,000) = 80,000

Current = Short-term, Non-Current = Long-term

Question 20

Recipient Ltd increased its provision for doubtful debts from £120,000 in 2011 to £150,000 in 2012
What is the effect on the 2012 income statement?
A) Nil
B) Charge of £30,000
C) Credit of £30,000
D) Charge of £150,000

Answer 20

B - Charge of £30,000
The increase of a provision will be charged to the income statement. A decrease would cause a credit.

Question 21

A machine is purchased for £40,000 and has anticipated scrap value of £5,000 in 10 years time
What is its value at the end of year 5, assuming a straight depreication?
A) 22,500
B) 20,000
C) 14,146
D) 23,754

Answer 21

A - 22,500

Annual depreciation:
(£40,000 - £5,000)/10 years = £3,500 a year
Hence £40,000 - (5 x £3,500) = £22,500

Question 22

A company’s working capital comprises:
A) Cash at bank
B) Cash at bank less creditors
C) Current assets
D) Current assets less current liabilities

Answer 22

D - Current assets less current liabilities

Working capital represents the resources used in the day to day running of the business. These are current assets and liabities.

Question 23

Which of the following would NOT appear in the reconcillation between net profit and operating cash flow?
A) Depreciation
B) Movements in provision for deferred tax
C) Foreign currency exchange rate movements
D) Administration costs

Answer 23

D - Admin Costs

Question 24

A company has the following capital and reserves (to the £,000):
Called up shares, £1 each: 200
Share premium acount: 180
Profit and loss acount: 350
Total: 730

What is the maximum amount that could be used to make a bonus issue of shares?
A) £370,000
B) £410,000
C) £470,000
D) £530,000

Answer 24

D - £530k

We can use the share premium account AND the profit and loss account so £180k + £350k = £530k

Question 25

A company's income statement and its accompanying notes show all the following EXCEPT: A) Turnover B) Trade payables C) Depreciation D) Investment Income

Answer 25

**B - Trade Payables** Trade payables are short-term liabilities in the balance sheet representing monies due to suppliers.

Question 26

Which of the following is NOT an asset? A) Patent B) Trademarks C) Purchased computer software D) Goodwill

Answer 26

**C - Purchased computer software** Purchased software is an expense.

Question 27

*A manufacturer has the following assets and liabilities: trade receivables £2,400, premises £2,500, trade payables £2,500, cash £63, fixtures £500, mortgage on premises £1,500, plant £1,200, bank £987, vehicles £2,000, stock £1,750.* Is the manufacturer: A) Illiquid and solvent B) Illiquid and insolvent C) Liquid and solvent D) Liquid and insolvent

Answer 27

**C - Liquid and solvent** The company is liquid, since it has a reasonable bank balance with no overdraft. The company is solvent too, since assets far exceed liabilities. Because it refers to “bank rather than “overdraft” take it as a current asset being bank balance rather than a liability

Question 28

Given the following information, what is the debt to total capital employed gearing ratio: Loan Capital: £20,000 Overdraft: £10,000 Share Capital: £20,000 Reserves: £15,000 A) 27.0% B) 36.4% C) 31.0% D) 54.5%

Answer 28

**B - 36.4%** Long-term debt / long-term debt + share capital + reserves 20,000 / (20,000 + 20,000 + 15,000) = 0.36366 = 36.4% The debt-to-capital ratio is a financial ratio that measures a company's debt in relation to its total capital, while the gearing ratio is a general term for a variety of leverage ratios that compare a company's capital to its debt: * Debt-to-capital ratio: Calculated by dividing a company's total interest-bearing debt by its total capital, which includes shareholders' equity. * Gearing ratio: A general term for a variety of leverage ratios that compares a company's capital to its debt. The most common type of gearing ratio is the net gearing ratio, which is calculated by dividing a company's total debt by its total shareholders' equity.

Question 29

*A company's balance sheet includes the following items: fixed assets £22m; trade payables £3m; debentures £12m; inventory £6m; bank overdraft £1m; trade receivables £5m; short-term investments £3m.* What is the company's quick ratio? A) 2.0 B) 0.5 C) 1.5 D) 2.5

Answer 29

**A - 2.0** A company's quick ratio, also known as the acid-test ratio, is a liquidity metric that measures how well a company can pay its short-term liabilities with its most liquid assets. The calculation of the quick ratio is: (Current Assets - Inventory) / Current Liabilities Current Assets excluding stock = 5 (Trade receiveables) + 3 (ST investments) = 8 Current Liabilities = 3 (Creditors) + 1 (Overdraft) = 4 Quick ratio = 8/4 = 2.0 A quick ratio of 1:1 or higher is generally considered normal, and indicates that a company has enough cash to cover its short-term liabilities. A company with a quick ratio below 1 cannot currently pay back all of its current liabilities. *Note: the bank account is in overdraft and is therefore a liability. Fixed assets and debentures are long term assets and liabilities*

Question 30

Which of the following best decribes a provision? A) A charge against profits in lieu of future events/outcomes B) Depositing money in a provision account at a bank C) A deduction from liabilities D) An intangible fixed asset

Answer 30

**A - A charge against profits in lieu of future events/outcomes** Provisions are used to account for future obligations

Question 31

From the following information calculate the firms current ratio: Inventory: 30 Cash: 10 Payables: 20 Receivables: 20 Overdraft: 20 A) 0.75 B) 1.0 C) 1.5 D) 2.5

Answer 31

**C - 1.5** Current ratio = current assets / current liabilities Hence: (30 + 10 + 20) / (20 + 20) = 1.5 Current assets are resources that can be converted to cash within a year, such as cash, inventory, and accounts receivable. Current liabilities are obligations that must be paid within a year, such as accounts payable, wages, taxes, and short-term debt. Both current assets and current liabilities are listed on a company's balance sheet. *A current ratio of less than 1 could be a concern. For example, if a company has a current ratio of 1.43, it means that the company has £1.43 in assets for every £1 in liabilities. This indicates that the company can cover its upcoming liabilities.*

Question 32

All of the following involve a change in shareholder's funds EXCEPT: A) Call on partly paid shares B) Share split C) Exercise or warrants D) Rights issue

Answer 32

**B - Share split** Remember a share split does not change the amount of shareholders funds. What it will do is increase the number of shares and reduce the nominal value per share but when these are multiplied together the sterling amount of share capital will remain the same.

Question 33

The net book value of fixed assets is: A) The historic value B) The market value C) The historic value less deprication to date D) Accumulated depreciation to date

Answer 33

**C - The historic value less deprication to date** Net book value (NBV) of a fixed asset is the value of the asset as recorded in a business's accounts, which is calculated by subtracting the accumulated depreciation from the asset's original cost.

Question 34

Given the following information, calculate the net cash flow for the period: Operating Profit: £20m Stated after charging: Depreciation: £4m Loss on sale of fixed assets: £2m Other items: Increase in receivables: £5m Increase in stocks: £2m Increase in payables: £3m A) £26m B) £22m C) £36m D) £30m

Answer 34

**B - £22m** The loss on the sale of the fixed asset converts to a negative in the cash flow statement. Net Cash Flow = Total Cash Inflows – Total Cash Outflows So 20 + 4 - 2 + 5 - 2 - 3 = 22

Question 35

A company has reported the following in its annual report and accounts: Operating Cash Flows: £100,000 Depreciation: £60,000 Reduction in receivables: £30,000 Reduction in payables: £40,000 What would it have reported as its profit figure? A) £30,000 B) £50,000 C) £60,000 D) £70,000

Answer 35

**B - £50,000** Applying the rules for cashflow reconciliations we get a movement in Operating Profit of £50,000. Start with £100k net cash flow DEDUCT DEPRECIATION (-£60k) DEDUCT RECEIVABLES (-£30k) ADD PAYABLES BACK (+£40k)

Question 36

*A firm makes a 3% general provision against bad and douftful debts. At the 31 December 1996, receivables were £393,200 after writing off £6,320 of bad debts. At 1 January 1996 trade receivables before provisions were £325,600* What is the charge in income statement for the year for bad and doubtful debts? A) £2,028 B) £4,292 C) £6,320 D) £8,348

Answer 36

**D - £8,348** Current year's provision £393,200 x 3% = £11,796 Prior year's provision £325,600 x 3% = £9,768 Current year’s profit/loss change = (Movement in provision) £2,028 + (Current year's bad debt write-off) £6,320 = £8,348

Question 37

Hunter PLC purchases a company called Victim PLC for £200,000. Prior to the takeover, an extract from the balance sheet of Victim PLC showed the following: Share Capital: £100,000 Share Premium Account: £20,000 Reserves: £40,000 What is the amount of goodwill on acquisition: A) £100,000 B) £40,000 C) £80,000 D) There is no goodwill on acquisition

Answer 37

**B - £40,000** Goodwill = Purchase price - Asset Value Hence Goodwill = 200k - (100 + 20 + 40) = 40k

Question 38

A company's profit after tax is £1m. If interest was £100k, the tax paid was £300k, and the capital employed was £10m, what was the return on capital? A) 11% B) 13% C) 14% D) 10%

Answer 38

**C - 14%** The forumla for ROCE (Return on capital employed) is operating profit/capital employed. Note as the top of the equation is operating profit, and the figure given in the question is net profile, this needs to be worked back to be BEFORE interest and tax hence: Operating Profit = 1,000 + 100 + 300 = 1,400 ROCE = 1,400/10,000 = 0.14 = 14% Operating profit, also known as operating income or operating earnings, is the amount of money a business makes from its core operations before accounting for interest, taxes, or other non-operational costs. It's a key metric for evaluating a business's profitability. To calculate operating profit, you can: 1. Start with the company's revenue for a given period 2. Subtract the cost of goods sold (COGS) 3. Subtract other operating expenses, such as sales and marketing costs, depreciation, and amortization *A company's operating profit margin is a good indicator of how well it's managed. A healthy operating profit margin varies by industry, but generally, 5% is considered low, 10% is average, and 20% or above is good. *

Question 39

What is the name given to the accounting standards issues in the UK? A) Statement of Standard Accounting Practice (SSAP) B) Financial Reporting Drafts (FRD) C) Financial Reporting Standards (FRS) D) Statement of Recommended Practice (SORP)

Answer 39

**C - Financial Reporting Standards (FRS)** The accounting standards issued in the UL by yhr Financial Reporting Council (FRC) are known as Financial Reporting Standards (FRS)

Question 40

Where an auditor believes a company's accounts need to be qualified because there is an uncertain event yet to be concluded which may undermine the whole accounts, this would be classed as: A) A fundamental disagreement B) A fundamental uncertainty C) A material disagreement D) A material uncertainty

Answer 40

**B - A fundamental uncertainty** There are two types of auditor qualifications as a result of uncertain events yet to be concluded. If these uncertain events are judged to potentially affect the whole accounts, then the qualification would be that of a fundamental uncertainty.

Question 41

What is the name of the accounting standards body that sets International Financial Reporting Standards (IFRSs)? A) Accounting Standards Board (AcSB) B) International Accounting Standards Board (IASB) C) International Accounting Standards Committee (IACB) D) International Reporting Standards Board (IRSB)

Answer 41

**B - International Accounting Standards Board (IASB)** The IASB is the body responsible for setting the IFRSs. The IASB also administers the old International Accounting Standards (IASs) that were set by its precedecessor, the IASC.

Question 42

Accounting for tangible non-current assets normally involves which of the following? 1. An annual charge to the income statemment 2. An annual reduction in the net book value of the asset 3. An annual cash flow in the cash flow statement A) 1 only B) 1 and 2 C) 1 and 3 D) All of the above

Answer 42

**B - 1 (annual charge to income statement) and 2 (annual reduction in NBV of the asset)** Accounting for tangible non-current assets normally involves a charge to the income statement (depreciation) and reduction in the NBV. There is no cash flow implication.

Question 43

A company acquires a machine for £50,000, with an expected economic life of four (4) years and an expected residual value of £2,000. Using the straight-line method of depreciation, what would the net book value of the asset be after three (3) years? A) £14,000 B) £36,000 C) £40,000 D) £50,000

Answer 43

**A - £14,000** £50k - (3 x ((£50k - £2k) / 4) = £14k

Question 44

A company acquires a machine for £50,000, with an expected economic life of four (4) years and an expected residual value of £2,000. What would be the constant percentage used for the depreciation in the reducing balance method? A) 50.36% B) 40.25% C) 4.83% D) 55.28%

Answer 44

**D - 55.27%** Constant % = 1 - ^4 √ (£2k / £50k) = 0.5528 so 55.28%

Question 45

Under International Accounting Standards (IAS), how is goodwill treated in accounts? A) Written off against reserves in the year of acquisition B) No entry in the balance sheet C) Capitalised as an asset in the balance sheet and amortised D) Capitalised as an asset in the balance sheet, but subject to annual impairment tests

Answer 45

**D - Capitalised as an asset in the balance sheet, but subject to annual impairment tests**

Question 46

How are derivatives treated in financial accounts? A) They are only disclosed as notes to the accounts B) They are captured on the balance sheet when a contract arrangement is entered C) They are captured on the balance sheet when the contract is settled D) Derivative contracts are only accounted for in the balance sheets of financial companies

Answer 46

**B - They are captured on the balance sheet when a contract arrangement is entered** A company should recognise a financial asset/liability on its balance sheet when the company becomes a party to the contractual provisions of the instrument, rather than when the contract is settled. Derivatives are therefore recognised in the financial statements even though there may have been no payment/receipt.

Question 47

Operating profit is defined as: A) Sales revenue LESS cost of sales B) Sales revenues LESS cost of sales LESS overheads C) Profit AFTER interest and tax PLUS tax D) Profit AFTER interest and tax PLUS interest PLUS tax

Answer 47

**B - Sales revenues LESS cost of sales LESS overheads** Operating profit is sales revenue LESS costs of sales LESS any overheads. It is the profit figure BEFORE any deduction of Interest or tax (i.e. EBIT)

Question 47

In order to arrive a net cash flow figure for a company, which of the following is SUBTRACTED from the figure for operating profit? A) Decrease in inventories B) Decrease in trade receiveables C) Depreciation charges D) Decrease in trade payables

Answer 47

**D - Decrease in trade payables** In reconciling operating profit with net cash flow the main adjustments to be made are: * increase(decrease) in inventories: deduct from(add to) operating profit * increase(decrease) in trade receivables: deduct from(add to) operating profit * increase(decrease) in trade payables: add to(deduct from) operating profit * Depreciation charges: add to operating profit; and * increase in provisions: add to operating profit Hence in this case, a decrease in trade payables would be deducted from operating profit to arrive at net cash flow.

Question 48

Where Homer plc owns 60% of the share capital of Bart plc, the relationship of Bart plc to Homer would be classed as: A) An investment B) A minority interest C) A subsidiary D) A participating interest

Answer 48

**C - a subsidiary** Where one company owns more than 50% of the share capital of another company, the other company would then be a subsidiary.

Question 49

Dragon plc has an operating profit of £2m, issued share capital of £3m, reserves of £5m, and long-term debts of £2m. What is Dragon plc's return on capital employed (ROCE) expressed as a percentage? A) 20% B) 25% C) 60% D) 100%

Answer 49

**A - 20%** ROCE = Operating profit / capital employed Capital employed = is SHF + NC liabilities (OR total assets - current liabilities) SO ROCE = £2m / (£3m + £5m + £2m) = 0.2 = 20%

Question 50

Tangerine plc has the following balance sheet items: Non-current assets: £5.0m Current assets: £1.5m Current liabilities: £0.5m Non-current liabilities: £1.0m What is the current ratio for tangerine plc? A) 0.33 B) 0.50 C) 2.60 D) 3.00

Answer 50

**D - 3.00** Current ratio = Current assets / Current liabilities SO £1.5m / £0.5m = 3x *The quick ratio is the same calculation but invventory is deducted from current assets*