Ratio analysis

Topic 22: Accounting Ratios and Interpretation — 50 Hard MCQs

1. A business has revenue of $480 000, sales returns of $20 000 and cost of sales of $276 000.

What is the gross profit margin?

A 38%
B 40%
C 42.5%
D 57.5%

2. A business has revenue of $360 000 and cost of sales of $225 000.

What is the mark-up?

A 37.5%
B 40%
C 60%
D 62.5%

3. A business has a gross profit margin of 25%. Revenue is $240 000.

What is cost of sales?

A $60 000
B $120 000
C $180 000
D $300 000

4. A business applies a mark-up of 331/3% on cost. Revenue is $200 000.

What is gross profit?

A $50 000
B $66 667
C $150 000
D $266 667

5. A business has gross profit of $96 000 and cost of sales of $144 000.

What is the gross profit margin?

A 40%
B 50%
C 60%
D 66.67%

6. A business has gross profit of $72 000 and revenue of $300 000.

What is the mark-up?

A 24%
B 31.58%
C 76%
D 416.67%

7. A business has profit for the year of $48 000 and revenue of $400 000.

What is the profit margin?

A 8.33%
B 12%
C 48%
D 83.33%

8. A business has revenue of $600 000, gross profit of $210 000 and expenses of $144 000.

What is the profit margin?

A 11%
B 24%
C 35%
D 59%

9. A company has profit from operations of $90 000, finance costs of $10 000, tax of $16 000 and capital employed of $400 000.

What is ROCE if calculated using profit from operations?

A 16%
B 20%
C 22.5%
D 26.5%

10. A business has profit for the year of $55 000, finance costs of $5000 and capital employed of $300 000.

What is ROCE using profit before interest?

A 16.67%
B 18.33%
C 20%
D 21.67%

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A business has non-current assets of $260 000, current assets of $90 000, current liabilities of $50 000 and non-current liabilities of $80 000.

What is capital employed?

A $170 000
B $220 000
C $300 000
D $350 000

12. A company has ordinary share capital $200 000, share premium $40 000, retained earnings $75 000, revaluation reserve $25 000 and 8% debentures $60 000.

What is capital employed?

A $315 000
B $340 000
C $375 000
D $400 000

13. A business has current assets of $96 000 and current liabilities of $64 000.

What is the current ratio?

A 0.67:1
B 1.5:1
C 2:1
D 3:2

14. A business has inventory $28 000, trade receivables $42 000, bank $10 000, prepaid expenses $4000 and current liabilities $40 000.

What is the liquid ratio?

A 1.3:1
B 1.4:1
C 2:1
D 2.1:1

15. A business has current ratio 2.4:1 and current liabilities $75 000.

What are current assets?

A $31 250
B $75 000
C $180 000
D $255 000

16. A business has current assets $150 000, inventory $45 000 and liquid ratio 1.5:1.

What are current liabilities?

A $70 000
B $100 000
C $105 000
D $130 000

17. A business has opening inventory $36 000, closing inventory $44 000 and cost of sales $320 000.

What is the rate of inventory turnover?

A 7.27 times
B 8 times
C 8.89 times
D 10 times

18. A business has cost of sales $450 000 and average inventory $50 000.

What is the inventory holding period?

A 9 days
B 40.6 days
C 45 days
D 50 days

19. A business has revenue $730 000. Opening trade receivables are $70 000 and closing trade receivables are $90 000.

What is the trade receivables collection period?

A 35 days
B 40 days
C 45 days
D 50 days

20. A business has credit sales $500 000, opening trade receivables $44 000 and closing trade receivables $56 000.

What is the trade receivables turnover?

A 8.93 times
B 10 times
C 11.36 times
D 12.5 times

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. A business has credit purchases $360 000. Opening trade payables are $36 000 and closing trade payables are $54 000.

What is the trade payables payment period?

A 36.5 days
B 45.6 days
C 54.8 days
D 60.8 days

22. A business has purchases $240 000, purchases returns $12 000, opening trade payables $30 000 and closing trade payables $45 000.

What is the trade payables payment period?

A 48 days
B 55 days
C 60 days
D 66 days

23. A business has revenue $800 000, cost of sales $520 000, expenses $160 000 and capital employed $500 000.

What is ROCE using profit from operations?

A 15%
B 20%
C 24%
D 35%

24. A business has profit for the year $72 000, drawings $18 000, opening capital $240 000 and closing capital $294 000.

What is the return on opening capital?

A 18.37%
B 24.49%
C 30%
D 37.5%

25. A business has revenue $900 000 and profit margin 8%.

What is profit for the year?

A $72 000
B $82 800
C $112 500
D $828 000

26. A business has gross profit $180 000 and gross profit margin 45%.

What is revenue?

A $81 000
B $220 000
C $400 000
D $580 000

27. A business has cost of sales $330 000 and mark-up 20%.

What is revenue?

A $66 000
B $264 000
C $396 000
D $412 500

28. A business has sales revenue $560 000 and mark-up 40%.

What is cost of sales?

A $224 000
B $336 000
C $400 000
D $784 000

29. A business has gross profit margin 30% and expenses are 18% of revenue. Revenue is $700 000.

What is profit for the year?

A $84 000
B $126 000
C $210 000
D $336 000

30. A business has gross profit $150 000. Expenses are 40% of gross profit. Revenue is $500 000.

What is the profit margin?

A 12%
B 18%
C 30%
D 60%

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. A business has current assets $180 000 including inventory $70 000. Current liabilities are $90 000. The business uses $30 000 cash to repay a trade payable.

What happens to the current ratio?

A decreases
B increases
C remains unchanged
D becomes negative

32. A business has current assets $100 000 and current liabilities $50 000. It buys inventory for $20 000 on credit.

What is the new current ratio?

A 1.43:1
B 1.71:1
C 2:1
D 2.4:1

33. A business has current assets $120 000 including inventory $50 000. Current liabilities are $60 000. It sells inventory costing $20 000 for $30 000 on credit.

What is the immediate effect on the liquid ratio?

A decreases from 1.17:1 to 1.33:1
B increases from 1.17:1 to 1.67:1
C remains 1.17:1
D decreases from 2:1 to 1.67:1

34. A business has current assets $150 000 including inventory $60 000. Current liabilities are $75 000. It writes off inventory costing $10 000 as obsolete.

What is the effect on the liquid ratio?

A increases
B decreases
C remains unchanged
D becomes 2:1

35. A business has cost of sales $600 000. Inventory turnover is 12 times.

What is average inventory?

A $36 500
B $50 000
C $72 000
D $7 200 000

36. A business has average inventory $32 000 and inventory holding period of 40 days.

What is cost of sales, using 365 days?

A $292 000
B $300 000
C $320 000
D $365 000

37. A business has revenue $600 000 and trade receivables collection period of 45 days.

What are average trade receivables?

A $36 986
B $45 000
C $73 973
D $135 000

38. A business has average trade receivables $60 000 and collection period 36.5 days.

What are credit sales?

A $219 000
B $300 000
C $600 000
D $730 000

39. A business has average trade payables $48 000 and payment period 60 days.

What are credit purchases, using 360 days?

A $288 000
B $292 000
C $360 000
D $800 000

40. A business has credit purchases $480 000 and payment period 54.75 days.

What are average trade payables?

A $54 750
B $72 000
C $80 000
D $96 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A business has gross profit margin falling from 36% to 28%, while revenue is unchanged.

Which is the most likely explanation?

A cost of sales has increased as a percentage of revenue
B expenses have decreased
C trade receivables are collected faster
D current liabilities have decreased

42. A business has mark-up increasing but gross profit margin unchanged.

Which statement is correct?

A this is impossible if both are calculated correctly from the same figures
B this always means revenue has fallen
C this always means expenses have risen
D this means inventory turnover must have increased

43. A business has current ratio 3.5:1 and liquid ratio 0.8:1.

What is the most likely issue?

A too much inventory in current assets
B too many non-current liabilities
C too much share premium
D profit margin too high

44. A business has trade receivables collection period increasing from 35 days to 70 days.

What is the most likely effect?

A cash flow may worsen
B gross profit must increase
C cost of sales must decrease
D inventory turnover must double

45. A business has trade payables payment period increasing from 40 days to 85 days.

Which interpretation is most reasonable?

A the business may be delaying payments to suppliers
B customers are paying faster
C gross profit margin is improving
D ordinary share capital has increased

46. A business has ROCE rising while profit margin is falling.

Which situation could explain this?

A capital employed has fallen proportionately more than operating profit
B capital employed has increased faster than profit
C cost of sales has increased but capital employed is unchanged
D finance costs have doubled only

47. A business has inventory turnover slowing significantly.

What is the most likely risk?

A obsolete inventory and higher storage costs
B lower trade payables
C higher share premium
D lower depreciation automatically

48. A business has high gross profit margin but low profit margin.

What is the most likely problem?

A operating expenses are high
B selling prices are too low compared with cost of sales only
C current assets are too high
D trade payables are too low

49. A business has high profit but poor current ratio.

Which user is most likely to be concerned?

A supplier
B ordinary customer paying cash
C competitor only
D petty cashier only

50. Which ratio is most useful for assessing long-term profitability from resources invested?

A ROCE
B current ratio
C trade receivables collection period
D inventory turnover

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. B — 40%

• Net revenue = 480 000 – 20 000 = $460 000

• Gross profit = 460 000 – 276 000 = $184 000

• Gross profit margin = 184 000 / 460 000 × 100

• = 40%

2. C — 60%

• Gross profit = 360 000 – 225 000 = $135 000

• Mark-up = gross profit / cost of sales × 100

• = 135 000 / 225 000 × 100

• = 60%

3. C — $180 000

• Gross profit margin = 25%

• Gross profit = 25% × 240 000 = $60 000

• Cost of sales = 240 000 – 60 000

• = $180 000

4. A — $50 000

• Mark-up = 331/3% on cost

• This means gross profit is 1/4 of revenue.

• Gross profit = 200 000 × 1/4

• = $50 000

5. A — 40%

• Revenue = gross profit + cost of sales

• = 96 000 + 144 000 = $240 000

• Gross profit margin = 96 000 / 240 000 × 100

• = 40%

6. B — 31.58%

• Cost of sales = 300 000 – 72 000 = $228 000

• Mark-up = 72 000 / 228 000 × 100

• = 31.58%

7. B — 12%

• Profit margin = profit for the year / revenue × 100

• = 48 000 / 400 000 × 100

• = 12%

8. A — 11%

• Profit for the year = gross profit – expenses

• = 210 000 – 144 000 = $66 000

• Profit margin = 66 000 / 600 000 × 100

• = 11%

9. C — 22.5%

• ROCE = profit from operations / capital employed × 100

• = 90 000 / 400 000 × 100

• = 22.5%

• Finance costs and tax are ignored when profit from operations is used.

10. C — 20%

• Profit before interest = profit for the year + finance costs

• = 55 000 + 5000 = $60 000

• ROCE = 60 000 / 300 000 × 100

• = 20%

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. C — $300 000

• Capital employed = non-current assets + current assets – current liabilities

• = 260 000 + 90 000 – 50 000

• = $300 000

12. D — $400 000

• Equity = share capital + share premium + retained earnings + revaluation reserve

• = 200 000 + 40 000 + 75 000 + 25 000

• = $340 000

• Capital employed = equity + non-current liabilities

• = 340 000 + 60 000

• = $400 000

13. B — 1.5:1

• Current ratio = current assets / current liabilities

• = 96 000 / 64 000

• = 1.5:1

• Option D, 3:2, is mathematically the same as 1.5:1, so B is the standard accounting format.

14. A — 1.3:1

• Liquid assets exclude inventory and prepayments.

• Liquid assets = trade receivables + bank

• = 42 000 + 10 000 = $52 000

• Liquid ratio = 52 000 / 40 000

• = 1.3:1

15. C — $180 000

• Current ratio = current assets / current liabilities

• 2.4 = current assets / 75 000

• Current assets = 75 000 × 2.4

• = $180 000

16. A — $70 000

• Liquid assets = current assets – inventory

• = 150 000 – 45 000 = $105 000

• Liquid ratio = liquid assets / current liabilities

• 1.5 = 105 000 / current liabilities

• Current liabilities = 105 000 / 1.5

• = $70 000

17. B — 8 times

• Average inventory = (36 000 + 44 000) / 2

• = $40 000

• Inventory turnover = cost of sales / average inventory

• = 320 000 / 40 000

• = 8 times

18. B — 40.6 days

• Inventory holding period = average inventory / cost of sales × 365

• = 50 000 / 450 000 × 365

• = 40.6 days

19. B — 40 days

• Average trade receivables = (70 000 + 90 000) / 2

• = $80 000

• Collection period = 80 000 / 730 000 × 365

• = 40 days

20. B — 10 times

• Average trade receivables = (44 000 + 56 000) / 2

• = $50 000

• Trade receivables turnover = 500 000 / 50 000

• = 10 times

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. B — 45.6 days

• Average trade payables = (36 000 + 54 000) / 2

• = $45 000

• Payment period = 45 000 / 360 000 × 365

• = 45.6 days

22. C — 60 days

• Net credit purchases = 240 000 – 12 000

• = $228 000

• Average trade payables = (30 000 + 45 000) / 2

• = $37 500

• Payment period = 37 500 / 228 000 × 365

• = 60 days

23. C — 24%

• Gross profit = 800 000 – 520 000 = $280 000

• Profit from operations = 280 000 – 160 000 = $120 000

• ROCE = 120 000 / 500 000 × 100

• = 24%

24. C — 30%

• Return on opening capital = profit / opening capital × 100

• = 72 000 / 240 000 × 100

• = 30%

• Drawings do not affect this ratio directly.

25. A — $72 000

• Profit = 8% × 900 000

• = $72 000

26. C — $400 000

• Gross profit margin = gross profit / revenue × 100

• 45% = 180 000 / revenue

• Revenue = 180 000 / 0.45

• = $400 000

27. C — $396 000

• Mark-up = 20%

• Revenue = cost of sales × 120%

• = 330 000 × 1.20

• = $396 000

28. C — $400 000

• Mark-up = 40%, so revenue = 140% of cost

• Cost of sales = 560 000 / 1.4

• = $400 000

29. A — $84 000

• Gross profit = 30% × 700 000 = $210 000

• Expenses = 18% × 700 000 = $126 000

• Profit = 210 000 – 126 000

• = $84 000

30. B — 18%

• Expenses = 40% × 150 000 = $60 000

• Profit = 150 000 – 60 000 = $90 000

• Profit margin = 90 000 / 500 000 × 100

• = 18%

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. B — increases

• Before repayment:

  • current ratio = 180 000 / 90 000 = 2:1

• After paying $30 000 to trade payable:

  • current assets = 150 000

  • current liabilities = 60 000

  • new current ratio = 150 000 / 60 000 = 2.5:1

• Current ratio increases.

32. B — 1.71:1

• Inventory bought on credit increases current assets and current liabilities.

• New current assets = 100 000 + 20 000 = $120 000

• New current liabilities = 50 000 + 20 000 = $70 000

• Current ratio = 120 000 / 70 000

• = 1.71:1

33. B — increases from 1.17:1 to 1.67:1

• Original liquid assets = 120 000 – 50 000 = $70 000

• Original liquid ratio = 70 000 / 60 000 = 1.17:1

• Inventory costing $20 000 is sold on credit for $30 000:

  • inventory decreases by $20 000

  • receivables increase by $30 000

• New liquid assets = 70 000 + 30 000 = $100 000

• New liquid ratio = 100 000 / 60 000

• = 1.67:1

34. C — remains unchanged

• Inventory is excluded from liquid assets.

• Writing off inventory reduces current assets and inventory by the same amount.

• Liquid assets remain unchanged.

• Therefore, liquid ratio remains unchanged.

35. B — $50 000

• Inventory turnover = cost of sales / average inventory

• 12 = 600 000 / average inventory

• Average inventory = 600 000 / 12

• = $50 000

36. A — $292 000

• Inventory holding period = average inventory / cost of sales × 365

• 40 = 32 000 / cost of sales × 365

• Cost of sales = 32 000 × 365 / 40

• = $292 000

37. C — $73 973

• Collection period = average trade receivables / revenue × 365

• Average trade receivables = 600 000 × 45 / 365

• = $73 973

38. C — $600 000

• Collection period = average trade receivables / credit sales × 365

• 36.5 = 60 000 / credit sales × 365

• Credit sales = 60 000 × 365 / 36.5

• = $600 000

39. A — $288 000

• Payment period = average trade payables / credit purchases × 360

• 60 = 48 000 / credit purchases × 360

• Credit purchases = 48 000 × 360 / 60

• = $288 000

40. B — $72 000

• Average trade payables = credit purchases × payment period / 365

• = 480 000 × 54.75 / 365

• = $72 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A — cost of sales has increased as a percentage of revenue

• Gross profit margin fell while revenue stayed the same.

• This means cost of sales took a larger percentage of revenue.

• Either purchase costs increased, selling prices fell, or discounts/returns affected trading.

42. A — this is impossible if both are calculated correctly from the same figures

• Mark-up and gross profit margin are mathematically linked.

• If mark-up increases, gross profit margin should also increase.

• If one changes and the other does not, one has likely been calculated incorrectly.

43. A — too much inventory in current assets

• Current ratio is strong at 3.5:1.

• Liquid ratio is weak at 0.8:1.

• This means a large amount of current assets is tied up in inventory.

• Inventory is the “looks rich but can’t pay rent” asset here.

44. A — cash flow may worsen

• Customers are taking longer to pay.

• This delays cash inflows.

• The business may struggle to pay suppliers and expenses on time.

45. A — the business may be delaying payments to suppliers

• A longer trade payables payment period means suppliers are being paid more slowly.

• It may improve short-term cash flow but can damage supplier relationships.

46. A — capital employed has fallen proportionately more than operating profit

• ROCE can rise even if profit margin falls.

• This happens if capital employed falls faster than operating profit.

• The business may be using fewer resources more intensively.

47. A — obsolete inventory and higher storage costs

• Slower inventory turnover means inventory is held for longer.

• This increases storage costs and risk of damage, theft or obsolescence.

48. A — operating expenses are high

• High gross profit margin means trading profit is strong.

• Low profit margin means much of the gross profit is being eaten by expenses.

• The problem is likely operating expenses.

49. A — supplier

• Suppliers care about short-term payment ability.

• A poor current ratio suggests the business may struggle to pay current liabilities.

• High profit does not always mean strong liquidity.

50. A — ROCE

• ROCE measures profit from resources invested in the business.

• It is the key ratio for long-term profitability and efficiency of capital employed.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.