Cambridge IGCSE · Accounting (0452)

Interpretation of accounting ratios: Practice Questions

3 multiple-choice questions marked as you go, and 3 written questions with worked solutions. All on Interpretation of accounting ratios.

6 questions19 marksFree, no account

Question 1

1 mark

A retail business has a gross profit margin of $40\%$ and a profit margin of $5\%$. What does the significant difference between these two ratios primarily indicate?

Question 2

1 mark

A company has a current ratio of $2.5:1$ and a liquid (acid test) ratio of $0.8:1$. What does this combination of ratios primarily suggest about the company's working capital management?

Question 3

1 mark

The following information is available for a business:

Profit for the year: $\$45,000$
Interest on bank loan: $\$5,000$
Non-current liabilities: $\$50,000$
Owner's Capital: $\$150,000$

What is the return on capital employed (ROCE)?

Question 4

3 marks

A company's current ratio is $2.0:1$, while its liquid (acid test) ratio is $0.5:1$. Explain what this significant difference between the two ratios indicates about the composition of the company's current assets.

Write your answer out first, then check it against the worked solution.

Question 5

5 marks

A company reports a gross margin of $45\%$ but a profit margin of only $4\%$. Explain what this wide discrepancy suggests about the business's operational efficiency and its control over overhead expenses.

Write your answer out first, then check it against the worked solution.

Question 6

8 marks

Bright Spark Ltd. is an electronics retailer. The following information is available for the year ended 31 March 2024:

Revenue: $ \$ $ 500,000
Gross profit: $ \$ $ 175,000
Cost of sales: $ \$ $ 325,000
Opening inventory (1 April 2023): $ \$ $ 40,000
Closing inventory (31 March 2024): $ \$ $ 60,000
Trade receivables (31 March 2024): $ \$ $ 55,000
Trade payables (31 March 2024): $ \$ $ 30,000
Credit sales: 80% of total revenue
Credit purchases: 90% of total purchases. (Total purchases can be derived from Cost of Sales and Inventory figures.)

Industry Averages for electronics retailers:

Rate of inventory turnover: 7 times
Trade receivables turnover: 45 days
Trade payables turnover: 30 days

Required:

(a) Calculate the following ratios for Bright Spark Ltd. for the year ended 31 March 2024, showing all your workings:

Average Inventory
Rate of inventory turnover (times)
Trade receivables turnover (days)
Trade payables turnover (days)

(b) Compare Bright Spark Ltd.'s performance against the industry averages for these three ratios. Suggest one specific action Bright Spark Ltd. could take to improve its inventory turnover and one action to improve its trade receivables turnover.

Write your answer out first, then check it against the worked solution.

* The content provided by thinka is generated by AI and may not always be accurate or up-to-date. Please use it as a supplementary resource and verify with official materials.

You've seen the model answer. Now get yours marked.

This page can show you how a good answer looks. It cannot tell you what your answer was missing. thinka marks your written work against the real mark scheme in about 15 seconds.

Get My Answers Marked Back to the notes

Want more questions like these? Get a fresh set on this topic, marked as you go.

Practise More