Calculation And Understanding of Accounting Ratios (Copy)
Topic 6.1: Calculation and Understanding of Accounting Ratios – Quiz
O Level and IGCSE Accounting
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
1. What does the gross margin ratio measure?
A. Net profit in relation to sales
B. Gross profit in relation to sales
C. Gross profit in relation to capital
D. Sales in relation to inventory
2. Which of the following is the correct formula for gross margin?
A. (Gross profit / Sales) × 100
B. (Sales / Gross profit) × 100
C. (Gross profit / Cost of sales) × 100
D. (Sales / Cost of sales) × 100
3. Profit margin measures:
A. Net profit as a percentage of sales
B. Gross profit as a percentage of sales
C. Return on capital employed
D. Revenue as a percentage of net profit
4. The correct formula for profit margin is:
A. (Gross profit / Sales) × 100
B. (Net profit / Capital) × 100
C. (Net profit / Sales) × 100
D. (Sales / Net profit) × 100
5. ROCE stands for:
A. Return of capital earnings
B. Return on capital employed
C. Rate of cost efficiency
D. Rate of capital equity
6. Which of the following is the formula for ROCE?
A. (Net profit / Capital) × 100
B. (Operating profit / Capital employed) × 100
C. (Gross profit / Sales) × 100
D. (Net assets / Profit) × 100
7. Capital employed is typically calculated as:
A. Total assets
B. Non-current assets – current liabilities
C. Equity + non-current liabilities
D. Working capital
8. A high ROCE indicates:
A. Slow movement of inventory
B. Efficient use of capital to generate profit
C. Overvaluation of assets
D. Higher liquidity
9. The current ratio assesses:
A. Inventory turnover
B. Profitability
C. Short-term liquidity
D. Rate of return
10. Current ratio formula is:
A. Current assets / Current liabilities
B. Current liabilities / Current assets
C. Current assets – current liabilities
D. Current assets / Non-current liabilities
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
11. A business with current assets of $40,000 and current liabilities of $20,000 has a current ratio of:
A. 0.5:1
B. 2:1
C. 1.5:1
D. 3:1
12. The liquid (acid test) ratio excludes:
A. Trade receivables
B. Inventory
C. Cash
D. Trade payables
13. Liquid ratio formula is:
A. (Current assets – inventory) / Current liabilities
B. Current assets / Current liabilities
C. Total assets / Total liabilities
D. (Cash + receivables) / Total liabilities
14. A low liquid ratio might indicate:
A. Excessive profitability
B. Inability to pay immediate debts
C. Too much inventory
D. High solvency
15. Inventory turnover (times) is calculated as:
A. Sales / Inventory
B. Gross profit / Average inventory
C. Cost of sales / Average inventory
D. Opening inventory / Closing inventory
16. Which of the following is the most desirable trait for inventory turnover?
A. Low turnover, indicating high stock
B. High turnover, indicating efficient stock movement
C. High closing inventory
D. Equal opening and closing inventory
17. Inventory turnover (times) is mainly a:
A. Liquidity ratio
B. Efficiency ratio
C. Profitability ratio
D. Solvency ratio
18. Trade receivables turnover (days) formula is:
A. (Trade receivables / Sales) × 365
B. (Trade payables / Credit sales) × 365
C. (Trade receivables / Credit sales) × 365
D. (Sales / Trade receivables) × 365
19. A lower trade receivables turnover in days suggests:
A. Customers are paying more slowly
B. Business has poor liquidity
C. Business is collecting debts faster
D. Sales are falling
20. Trade payables turnover (days) is calculated as:
A. (Trade payables / Credit purchases) × 365
B. (Trade receivables / Sales) × 365
C. (Trade payables / Sales) × 365
D. (Sales / Trade payables) × 365
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
21. Which of the following will increase the gross margin?
A. Decrease in selling price
B. Increase in cost of goods sold
C. Decrease in cost of goods sold
D. Increase in expenses
22. A high current ratio may indicate:
A. Strong profitability
B. Over-investment in working capital
C. Low asset turnover
D. Weak debt collection
23. An acid test ratio of less than 1:1 indicates:
A. Strong liquidity
B. Business may not meet short-term debts without selling inventory
C. Assets exceed liabilities
D. Equity is too low
24. What is included in capital employed?
A. Share capital + reserves + non-current liabilities
B. Only current liabilities
C. Revenue + capital
D. Trade receivables + payables
25. What would cause trade payables turnover days to decrease?
A. Paying suppliers faster
B. Buying more on credit
C. Increasing inventory
D. Delaying payments
26. A low ROCE might mean:
A. High profitability
B. Inefficient use of capital
C. Strong liquidity
D. Efficient inventory control
27. Gross margin is primarily used to assess:
A. Liquidity
B. Profitability before expenses
C. Net income
D. Tax liability
28. ROCE evaluates performance from the perspective of:
A. Shareholders
B. Lenders
C. Internal management
D. All of the above
29. What does a higher trade receivables turnover (days) ratio suggest?
A. Customers pay more quickly
B. More customers are buying in cash
C. Delays in customer payments
D. Business is earning higher margins
30. Which of the following is most useful to assess short-term solvency?
A. Net profit margin
B. ROCE
C. Current ratio
D. Trade receivables turnover
Answer key and explanations
Topic 6.1 – Calculation and Understanding of Accounting Ratios
O Level and IGCSE Accounting
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
1. Correct Answer: B
Explanation: Gross margin (or gross profit margin) measures the gross profit as a percentage of sales, showing the efficiency in producing or buying goods.
2. Correct Answer: A
Explanation: Gross margin = (Gross Profit / Sales) × 100.
3. Correct Answer: A
Explanation: Profit margin shows net profit in relation to total revenue (sales), indicating overall profitability.
4. Correct Answer: C
Explanation: Profit margin = (Net Profit / Sales) × 100.
5. Correct Answer: B
Explanation: ROCE is an abbreviation for Return on Capital Employed.
6. Correct Answer: B
Explanation: ROCE = (Operating Profit / Capital Employed) × 100.
7. Correct Answer: C
Explanation: Capital Employed = Equity (Capital + Reserves) + Non-current Liabilities.
8. Correct Answer: B
Explanation: A high ROCE shows that the business is using its capital efficiently to generate profits.
9. Correct Answer: C
Explanation: Current ratio evaluates the business’s ability to pay its short-term debts using current assets.
10. Correct Answer: A
Explanation: Current ratio = Current Assets / Current Liabilities.
11. Correct Answer: B
Explanation: $40,000 / $20,000 = 2:1 current ratio.
12. Correct Answer: B
Explanation: The acid test ratio excludes inventory because it’s not as liquid as cash or receivables.
13. Correct Answer: A
Explanation: Liquid ratio = (Current Assets – Inventory) / Current Liabilities.
14. Correct Answer: B
Explanation: A low liquid ratio may indicate inability to pay current obligations immediately without selling stock.
15. Correct Answer: C
Explanation: Inventory turnover = Cost of Sales / Average Inventory.
16. Correct Answer: B
Explanation: High inventory turnover implies efficient inventory management.
17. Correct Answer: B
Explanation: Inventory turnover is a measure of efficiency.
18. Correct Answer: C
Explanation: Trade receivables turnover (days) = (Trade Receivables / Credit Sales) × 365.
19. Correct Answer: C
Explanation: Fewer days = faster customer payment collection = healthier cash flow.
20. Correct Answer: A
Explanation: Trade payables turnover (days) = (Trade Payables / Credit Purchases) × 365.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
21. Correct Answer: C
Explanation: Lowering cost of sales increases gross profit, improving gross margin.
22. Correct Answer: B
Explanation: A very high current ratio might mean excess capital is tied up in stock or receivables.
23. Correct Answer: B
Explanation: If the acid test ratio is <1:1, the business cannot meet liabilities without selling stock.
24. Correct Answer: A
Explanation: Capital Employed = Share Capital + Reserves + Non-current Liabilities.
25. Correct Answer: A
Explanation: Faster supplier payments mean shorter payable days.
26. Correct Answer: B
Explanation: A low ROCE may reflect that capital isn’t being used efficiently to generate returns.
27. Correct Answer: B
Explanation: Gross margin measures profitability before other expenses are deducted.
28. Correct Answer: D
Explanation: ROCE is of interest to all parties who assess how well capital is used.
29. Correct Answer: C
Explanation: More days = slower collection = inefficiency or delayed customer payments.
30. Correct Answer: C
Explanation: Current ratio directly measures ability to meet short-term obligations = short-term solvency.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course