BAFS – Accounting Ratios / Financial analysis HKDSE Questions - Answers

P1B: Paper 1B of HKDSE BAFS (Short Questions of Compulsory Part)

P2A: Paper 2A of HKDSE BAFS (Accounting Elective)

1. 2013.Q7
(a)

(14)
(b)(i)
Profitability of 2012 was worsen than 2011 1
Other comments: Max:
- net profit ratio dropped substantially from 10% to 4.96%. 2
- this might be the result of poor control over the operating expenses
- earnings per share, which is a yardstick for the performance of the company, was decreased by $0.45
(1 mark for each relevant comment, max. 2 marks)
(3)
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BAFS – Accounting Ratios / Financial analysis HKDSE Questions - Answers

(ii) Out-of DSE syllabus, for reference only.

2. 2015.Q9
(a)

(3)
(b)(i)

(b)(ii)

(c)(i)

(c)(ii)

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BAFS – Accounting Ratios / Financial analysis HKDSE Questions - Answers
(c)(iii)

(c)(iv)

(13)
(d)
- Pearl Ltd should invest in Lily Ltd. 1
Lily Ltd is a better investment because it has
- higher return on capital employed: it has higher profitability with more efficient use of its capital to generate 1
profits.
- Lower gearing ratio: It has lower degree of leverage and hence lower risk and financial burden. 1
- Higher earnings per share: it has higher profitability and the amount of profits earned for each outstanding share 1
is higher.

(4)

3. SP.P1B.Q6
(a) Reasons:
- relatively low selling price
- relatively high production cost
- operating costs are high / control on operating costs is ineffective
(2 marks for each relevant reason, max. 4 marks)

(b) Words in this format are from the marking scheme, words in italics are explanations.
- The liquidity of the business is worse than the industry average as shown by a lower liquid ratio
- There are not sufficient liquid assets to meet its immediate debts as the liquid ratio is lower than 1:1
- Too much capital is tied up in stock as shown by a significant difference between the current ratio (2.8:1) and the
liquid ratio (0.8:1)
(2 marks for each relevant comment, max. 4 marks)

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BAFS – Accounting Ratios / Financial analysis HKDSE Questions - Answers
4. SP.P2A.Q8(b)(c)(d) (modified)
(b)
Gearing ratio:
Alternative 1
1500/ (5100 + 1800) = 21.74% 1

Alternative 2
(1500 + 1800) / (5100 + 1800) = 47.83% 1

Alternative 3
(1500 + 1440) / (5100 + 1440) = 44.95% 1
(3)

(c)
Earnings per share:
Alternative 1
(3600 – 180)/300 = $11.4 per share 1

Alternative 2
(3600 – 144 – 180)/200 = $16.38 per share 1

Alternative 3
(3600 – 120 – 180) / 200 = $16.5 per share 1
(3)
(d)
Gearing position: Max. 3
- Capital gearing depicts the relationship between equity capital and fixed-interest loan capital (including
preference share capital).
- Among the three alternatives, Alternative 1 is less geared (only 21.74% capital was loan capital) than that of
Alternatives 2 and 3 (more than 40% capital was loan capital)
- Interest has to be paid half-yearly under Alternative 3 and Alternative 3 requires an annual repayment of
20% of the liability.
- Overall, shareholders bear lower risk under Alternative 1.

Return to shareholders: Max.

3
- Under all three alternatives, the return to long-term capital employed included preference dividend and
ordinary dividend.
- Both Alternative 2 and 3 impost interest burden on the company and can weaken the company’s profitability
and liquidity position. Shareholders may suffer if the estimated profit is not attained.
- Based on the earnings per share, ordinary shareholders will benefit from the highly geared position under
Alternatives 2 and 3.

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BAFS – Accounting Ratios / Financial analysis HKDSE Questions - Answers
5. PP.P1B.Q2
Current ratio of Glassy Ltd is higher than that of Pearl Ltd which indicates its greater ability to meet short-term (1)
obligations.
Quick ratio of Glassy Ltd is lower than that of Pearl Ltd which means it is less able to pay its immediate debt. (1)
However, as the current ratio of Pearl Ltd is more comparable to the industrial average, the higher current ratio of (2)
Glassy Ltd might imply its inability of using available resources to grasp investment opportunity.
Besides, the significant difference between the quick ratio and current ratio of Glassy Ltd as compared with Pearl (2)
Ltd might imply Glassy Ltd is tied up with excessive inventories or other repayments.

6. PP.P2A.Q3(a)

7. 2014.P2A.Q6(b)
- Accounting ratios are calculated based on historical cost and hence may not fairly reflect current performance.
- Accounting ratios are calculated based on past financial information. Past performance of a company does not
necessarily indicate its future performance.
- Accounting ratios are affected by accounting estimates. Differences in accounting policies will hinder inter-company
comparisons.
- Accounting ratios can only identify the symptoms, but not the cause. They are not able to provide any suggestions or
advice to solve the existing or future problems.
- Non-monetary but significant items, such as the quality of the products, leadership of the management and the
business environment, are ignored.
(1 mark for each relevant limitation, max. 2 marks)

8. 2016.P1B.Q4(a)(b)

(a)(i) Gross profit ratio = $40 000 / $100 000 x 100% = 40% 1
(ii) Net profit ratio = $10 000 / $100 000 x 100% = 10% 1
(iii) Return on capital employed = $10 000 / [($30 000 + $37 000)/2] x 100% = 29.85% 1
(b) John’s supermarket:
- Has higher gross profit ratio but lower net profit ratio 1
- Is poor in controlling expenses / administrative arrangements 1

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BAFS – Accounting Ratios / Financial analysis HKDSE Questions - Answers
9. 2016.P1B.Q5(a)(b)

(a)(i) Working capital = $40 000 - $30 000 = $10 000 1

(ii) Current ratio = $40 000 / $30 000 = 1.33:1 1
(iii) Liquid ratio = $6000/$30 000 = 0.20:1 1
(b) The liquidity of John’s supermarket is poor due to the low current ratio and liquid ratio 1
- It has difficulty meeting its immediate debts
Max. 1
- Its current assets are tied up in inventory
(1 mark for each relevant point, max. 1 mark)

10. 2018.P2A.Q5
(a) (i) Working capital ratio
ria c d ‵ ii
2017: = 2.17:1 2
r d

(ii) Inventory turnover

ri dd‵ c ria
2017: = 2.20 times 2
ri ria

(iii) Average trade receivables collection period

c d a
2017: ri ri = 67.69 days 2
d‵ c d dir

(iv) Average trade payables repayment period

‵ r
2017: ri ri = 76.23 days 2
dd‵ ‵ i aa
(8)

(b) (i) Gearing ratio

‵ ‵
2017: = 17.63% 1
‵ d ‵ c d
d r‵ d r‵
2016: = 75.70% 1
d r‵ a ‵

(b)(ii) Comment:
- The solvency has improved in 2017 1
- The company issued ordinary share capital during 2017 1
- The company repaid a large portion of long-term loan during 2017 2
(1 mark for each relevant comment, max. 2 marks) (3)
13 marks

Marking notes for 2018Q5:

 General comment (1) + Rationale (2)
 General comment
General comment – accepted (1 mark) General comment – not accepted
(no mark)
The solvency has improved in 2017 Good solvency in 2017
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BAFS – Accounting Ratios / Financial analysis HKDSE Questions - Answers
The solvency position was good in 2017 with that of 2016’s Low geared
The business has become less risky in paying non-current liabilities

 Rationale
 Complete answer: The company issued ordinary share capital (1) to repay long term loan in 2017 (1)
 The following answers are incomplete -> 1 mark
Incomplete rationale, 1 mark Rationale – not accepted (no mark)
The company had more shareholders’ fund in 2017 The company had large amount of capital in 2017
The company had less portion of non-current The company had small amount of non-current
liabilities in 2017 liabilities in 2017

11. 2019.P1B.Q4(a)(b)
(a)(i) Gross profit ratio = $1 495 000 / $2 300 000 x 100% = 65.00% or 65% or 0.65 1

(ii) Net profit ratio = $345 000 / $2 300 000 x 100% = 15.00% or 15% or 0.15 1

(iii) Capital as at 31 December 2018 = $1 827 500 + $345 000 = $2 172 500 2
Average capital = ($1 827 500 + $2 172 500) / 2 = $2 000 000
Return on capital employed = $345 000 / $2 000 000 = 17.25%
or 0.1725 or 0.1725:1 or 17% (1.5)

or 345,000 x 100% 0.5

2,172,500 0.5

(b) As compared with 2017, Au’s firm was relatively less efficient in using its owners’ 1
capital to generate profits in 2018.

Marking notes – Q4(b)

 Answer should include the following 3 parts:
 In using its owners’ capital 運用東主資本
 To generate profit 產生利潤
 Relatively less efficient 效率相對較低

Answers not accepted:

× poor expense management 費用管理不善/ too much expenses 費用過多
× lower profit 盈利下降, lowered/reduced/decreased profitability 盈利能力下降
× lower Return on Capital Employed 較低運用資金報酬率

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BAFS – Accounting Ratios / Financial analysis HKDSE Questions - Answers
12. 2019.P1B.Q5(a)(b)

Au’s firm
Statement of financial position as at 31 December 2018
$ $ $
Non-current assets
Machinery 2 182 500 0.5

Current assets
Inventory 100 000 0.5
Cash at bank 140 000 0.5
240 000
Less: Current liabilities
Trade payables 250 000 (10 000) 0.5
2 172 500

Financed by:
Capital, as at 1 January 2018 1 827 500 0.5
Add: Net profit 345 000 0.5
2 172 500 (3)

(b) Current ratio = $240 000 / $250 000 = 0.96:1 1

Comments:
- the current ratio is lower than 1:1; the firm may have difficulty in repaying its short-term 1
debts.
- as compared with 2017, the liquidity of the firm was poorer due to its lower current ratio
(1 mark for each relevant comment, max. 1 mark)

Marking notes – Q5

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BAFS – Accounting Ratios / Financial analysis HKDSE Questions - Answers

13. 2019.P2A.Q1
(a) Inventory turnover:
存貨周轉率（次）

$210 700 (0.5) = $210 700 = 1.76 times 次

($153 500 + $86 400) / 2 (1) $119 950 2

(b) Trade receivables turnover (in times)

應收貨款周轉率（次）
$298 200 - $11 600 (0.5) = $286 600 = 3.73 times 次
($95 300 + $58 200) / 2 (1) $76 750 2

(c) Total assets turnover (in times)

總資產周轉率（次）
$298 200 (0.5) = $298 200 = 0.72 times 次
$144 800 + $153 500 + $95 300 + $22 100 $415 700 2
0.5 mark for any 2 correct figures
任何 2 個正確數字得 0.5 分 (1)

(d) Gearing ratio 槓桿比率：

$95 000 (0.5) = $95 000 = 32.78% / 0.33
$95 000 (0.5) + ($70 000 + $124 800 (0.5)) $289 800 2

8 marks
Supplementary marking notes for 2019.P2A.Q1(a)
 Answer correct, no need to trace workings
 Missing unit, e.g. days, times, %
if given in the question, no mark deducted
 Wrong unit used
no mark for the answer, check workings

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BAFS – Accounting Ratios / Financial analysis HKDSE Questions - Answers
14. 2020.P2A.Q5
(a)
Statement to calculate the shareholders’ funds as at 31 December 2019
$ $

Ordinary share Capital 900 000 0.5

4% Preference Share Capital 200 000 0.5
1 100 000
General reserves 100 000 0.5
1 200 000
Retained profits as at 1 January 2019 210 000
Add: Net profit after tax 80 200
290 200
Less: Dividend for 2019 ($13 500 + $8 000) 21 500
Retained profits as at 31 December 2019 268 700 2
Shareholders’ funds as at 31 December 2019 1 468 700 0.5
(4)

(b)(i) Gearing ratio:

(Non-current liabilities + Preference share capital) / (Non-current liabilities +
=
Shareholders’ funds) x 100%
($280 000 + $200 000)
= x 100% 2
($280 000 + $1 468 700)
= 27.45%

(ii) earnings per share:

= (Net profit after tax - Preference Dividend) / Number of ordinary shares issued
($80 200 - $8 000)
=
45 000
= $1.60 2

Dividend cover for ordinary shares:

= (Net profit after tax - Preference Dividend) / Ordinary dividend
($80 200 - $8 000)
=
13 500
= 5.35 times 2
(6)

(c) Financing method:

- issue of ordinary share 1

Explanation:
- this will lower the gearing ratio and the solvency of the company will be enhanced 1
- as there is no need to repay the issued ordinary share capital, the solvency of the company will
not deteriorate
(1 mark for each relevant explanation, max. 1 mark)
(2)
12 marks

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