ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements
Orion Co's profit before interest and tax was $450,000 last year and interest was $90,000. This year profit before interest and tax fell to $360,000 after loan notes were increased, and interest rose to $144,000. What is the change in interest cover from last year to this year?
Interest cover fell from 5.0 times to 2.5 times. Last year profit before interest and tax of $450,000 covered interest of $90,000 five times. This year $360,000 divided by $144,000 gives 2.5 times, showing higher financial risk from more borrowing and lower profit.
- AFell from 5.0 times to 2.5 timesCorrect
- BFell from 5.0 times to 2.0 times
- CFell from 4.0 times to 2.5 times
- DFell from 5.0 times to 3.0 times
Explanation
Last year 450,000 / 90,000 = 5.0 times. This year 360,000 / 144,000 = 2.5 times. The 4.0 option wrongly uses profit after interest (360,000) over interest of 90,000 for last year.
Did you get it right without looking?
One question tells you little. A timed set on Analysis of financial statements shows your real accuracy, how long you take and where you lose marks.
More Analysis of financial statements questions
- Corvo Co reports revenue of $4,500,000 and profit from operations of $540,000. Total assets less current liabilities (capital employed) were…
- Kestrel Co paid an ordinary dividend of $120,000 in the year. Profit after tax and preference dividends was $300,000. The market price per s…
- When writing a report interpreting a company's financial ratios for a user, which approach is most appropriate?
- Which of the following is a limitation of using ratio analysis to compare two companies' performance?
- A company's gross profit margin rose from 30% to 36% over the year, but its operating profit margin fell from 12% to 10%. Which of the follo…
- Between two years, a company's non-current asset turnover rose sharply although revenue was unchanged. Which is the most likely explanation?