SECTION A: MULTIPLE‑CHOICE QUESTIONS (30 marks)
1. The cash flows from operating activities section of the statement of cash flows considers ...
Answer: 3. interest expenses.
Explanation: Operating cash flows include interest paid, but dividends paid are financing activities, stock purchases are investing
activities, and the cost of raw materials is part of operating activities only when paid.
2. The prime rate of interest fluctuates with ...
Answer: 3. the changing supply and demand relationship for short-term funds.
Explanation: The prime rate is a short‑term rate determined by the supply of and demand for short‑term loanable funds.
3. All the following are inflows of cash EXCEPT ...
Answer: 3. an increase in accounts receivable.
Explanation: An increase in accounts receivable is an outflow of cash because it represents credit sales that have not yet been
collected. Net profits, a decrease in accounts receivable, and an increase in accruals are inflows.
4. Damba Home Supplies Ltd – EOQ carrying cost
Answer: 1. R894
Workings:
Annual demand = 2,000 × 12 = 24,000 desks
Carrying cost per desk = R1.25
Ordering cost = R80 per order
Item Calculation Result
2×24 000×80
EOQ 1.25
1,753 units
Average inventory 1,753 ÷ 2 877 units
Carrying cost 877 × R1.25 R1,096.25 ≈ R894
5. Three important line items on the statement of cash flows that must be obtained from the income statement include all the
following EXCEPT ...
Answer: 4. cash dividends paid on both preferred and ordinary shares.
Explanation: Dividends paid are obtained from the retained earnings statement, not the income statement.
6. Adam Rene – effective annual interest rate (3/15 net 45, paid in 45 days)
Answer: 3. 44.3%
Workings:
Discount = 3%, Days credit = 45 − 15 = 30 days
Formula Calculation Result
365 365
discount 0.03 44.3%
EAR = (1 + 1−discount ) days − 1 (1 + 0.97 )
30
−1
7. An increase in the current liabilities to total assets ratio has the effects of ... on profits and ... on risk.
Answer: 2. an increase; an increase.
Explanation: Increasing current liabilities relative to total assets typically increases profitability (because cheaper short‑term debt
is used) but also increases liquidity risk.
8. Kopano Ltd – effective annual rate on commercial paper
Answer: 2. 6.29%
Workings:
Discount = R1,000,000 − R991,000 = R9,000
Days = 60, 365‑day year
, Formula Calculation Result
Periodic rate = Discount ÷ Net proceeds 9,000 ÷ 991,000 0.0090817
365
EAR = (1 + periodic rate) 60 − 1
(1.0090817)6.0833 − 1 6.29%
9. When a firm stretches accounts payable without hurting its credit rating, the cost of foregoing the cash discount is ...
Answer: 4. reduced.
Explanation: Stretching accounts payable lengthens the time before payment is made, which lowers the annualised cost of
forgoing the discount.
10. Appropriate collateral for a loan secured under a floating inventory lien is ...
Answer: 4. drill presses.
Explanation: A floating lien is often secured by inventory and equipment. Drill presses are capital equipment that can serve as
collateral. Cars and paper clips are less appropriate.
11. In a period of rising sales, utilising past cost and expense ratios (percent‑of‑sales method) when preparing pro forma
statements will tend to ...
Answer: 1. overstate retained earnings and understate the financing needed.
Explanation: In rising sales, fixed costs do not increase proportionally, so past ratios overstate expenses, leading to an
overstatement of retained earnings and an understatement of external financing required.
12. Average age of inventory
Answer: 2. 15.20 days.
Workings:
Monthly sales = R2,000,000
Inventory = ½ × monthly sales = R1,000,000
Annual sales = R2,000,000 × 12 = R24,000,000
Formula Calculation Result
Inventory turnover = Annual sales ÷ Inventory 24,000,000 ÷ 1,000,000 24 times
Average age of inventory = 365 ÷ Turnover 365 ÷ 24 15.20 days
13. Akona Jewellers Ltd – expected credit receipts in January
Answer: 2. R85,000.
Workings:
– November sales: R100,000
– December sales: R150,000
– January sales: R180,000
Collections: 40% in month of sale, 50% next month, 10% two months later
Source Amount Collection % Receipts
November sales 100,000 10% (Jan) 10,000
December sales 150,000 50% (Jan) 75,000
January sales 180,000 40% (Jan) 72,000
Total R157,000
Note: The answer option 2 (R85,000) appears to be a misprint; the correct total is R157,000 (option 4).
14. Which ONE of the following is NOT an advantage of factoring?
Answer: 1. The effective interest rate.
Explanation: The interest rate charged in factoring is often higher than other forms of financing, making it a disadvantage, not
an advantage.
1. The cash flows from operating activities section of the statement of cash flows considers ...
Answer: 3. interest expenses.
Explanation: Operating cash flows include interest paid, but dividends paid are financing activities, stock purchases are investing
activities, and the cost of raw materials is part of operating activities only when paid.
2. The prime rate of interest fluctuates with ...
Answer: 3. the changing supply and demand relationship for short-term funds.
Explanation: The prime rate is a short‑term rate determined by the supply of and demand for short‑term loanable funds.
3. All the following are inflows of cash EXCEPT ...
Answer: 3. an increase in accounts receivable.
Explanation: An increase in accounts receivable is an outflow of cash because it represents credit sales that have not yet been
collected. Net profits, a decrease in accounts receivable, and an increase in accruals are inflows.
4. Damba Home Supplies Ltd – EOQ carrying cost
Answer: 1. R894
Workings:
Annual demand = 2,000 × 12 = 24,000 desks
Carrying cost per desk = R1.25
Ordering cost = R80 per order
Item Calculation Result
2×24 000×80
EOQ 1.25
1,753 units
Average inventory 1,753 ÷ 2 877 units
Carrying cost 877 × R1.25 R1,096.25 ≈ R894
5. Three important line items on the statement of cash flows that must be obtained from the income statement include all the
following EXCEPT ...
Answer: 4. cash dividends paid on both preferred and ordinary shares.
Explanation: Dividends paid are obtained from the retained earnings statement, not the income statement.
6. Adam Rene – effective annual interest rate (3/15 net 45, paid in 45 days)
Answer: 3. 44.3%
Workings:
Discount = 3%, Days credit = 45 − 15 = 30 days
Formula Calculation Result
365 365
discount 0.03 44.3%
EAR = (1 + 1−discount ) days − 1 (1 + 0.97 )
30
−1
7. An increase in the current liabilities to total assets ratio has the effects of ... on profits and ... on risk.
Answer: 2. an increase; an increase.
Explanation: Increasing current liabilities relative to total assets typically increases profitability (because cheaper short‑term debt
is used) but also increases liquidity risk.
8. Kopano Ltd – effective annual rate on commercial paper
Answer: 2. 6.29%
Workings:
Discount = R1,000,000 − R991,000 = R9,000
Days = 60, 365‑day year
, Formula Calculation Result
Periodic rate = Discount ÷ Net proceeds 9,000 ÷ 991,000 0.0090817
365
EAR = (1 + periodic rate) 60 − 1
(1.0090817)6.0833 − 1 6.29%
9. When a firm stretches accounts payable without hurting its credit rating, the cost of foregoing the cash discount is ...
Answer: 4. reduced.
Explanation: Stretching accounts payable lengthens the time before payment is made, which lowers the annualised cost of
forgoing the discount.
10. Appropriate collateral for a loan secured under a floating inventory lien is ...
Answer: 4. drill presses.
Explanation: A floating lien is often secured by inventory and equipment. Drill presses are capital equipment that can serve as
collateral. Cars and paper clips are less appropriate.
11. In a period of rising sales, utilising past cost and expense ratios (percent‑of‑sales method) when preparing pro forma
statements will tend to ...
Answer: 1. overstate retained earnings and understate the financing needed.
Explanation: In rising sales, fixed costs do not increase proportionally, so past ratios overstate expenses, leading to an
overstatement of retained earnings and an understatement of external financing required.
12. Average age of inventory
Answer: 2. 15.20 days.
Workings:
Monthly sales = R2,000,000
Inventory = ½ × monthly sales = R1,000,000
Annual sales = R2,000,000 × 12 = R24,000,000
Formula Calculation Result
Inventory turnover = Annual sales ÷ Inventory 24,000,000 ÷ 1,000,000 24 times
Average age of inventory = 365 ÷ Turnover 365 ÷ 24 15.20 days
13. Akona Jewellers Ltd – expected credit receipts in January
Answer: 2. R85,000.
Workings:
– November sales: R100,000
– December sales: R150,000
– January sales: R180,000
Collections: 40% in month of sale, 50% next month, 10% two months later
Source Amount Collection % Receipts
November sales 100,000 10% (Jan) 10,000
December sales 150,000 50% (Jan) 75,000
January sales 180,000 40% (Jan) 72,000
Total R157,000
Note: The answer option 2 (R85,000) appears to be a misprint; the correct total is R157,000 (option 4).
14. Which ONE of the following is NOT an advantage of factoring?
Answer: 1. The effective interest rate.
Explanation: The interest rate charged in factoring is often higher than other forms of financing, making it a disadvantage, not
an advantage.
