Sample Quizzes For Preparation: Analysis of Accounts
Q1.
What does profitability measure in a business?
A) The ability to pay short-term debts
B) The number of products sold
C) The efficiency of converting revenue into profit
D) The total amount of assets owned
Q2.
Which of the following is a profitability ratio?
A) Acid test ratio
B) Gross profit margin
C) Current ratio
D) Inventory turnover
Q3.
What is the formula for Gross Profit Margin?
A) (Net Profit / Revenue) × 100
B) (Revenue / Gross Profit) × 100
C) (Gross Profit / Revenue) × 100
D) (Gross Profit / Cost of Sales) × 100
Q4.
Which of the following best describes the Current Ratio?
A) It shows the percentage of revenue kept as net profit
B) It compares current assets to current liabilities
C) It calculates how much profit is earned from capital employed
D) It excludes inventory from current assets
Q5.
Why is liquidity important for a business?
A) To attract more employees
B) To ensure long-term asset value
C) To pay short-term obligations as they fall due
D) To increase fixed costs
Q6.
Which ratio is more conservative because it excludes inventory?
A) Gross profit margin
B) Return on Capital Employed
C) Acid test ratio
D) Current ratio
Q7.
What is the formula for Return on Capital Employed (ROCE)?
A) Net Profit / Revenue
B) Net Profit / Capital Employed
C) Gross Profit / Capital Employed
D) Operating Profit / Net Assets
Q8.
A business has a high gross profit margin but a low net profit margin. What does this indicate?
A) The business has high production efficiency
B) The business is not selling enough products
C) Operating expenses are too high
D) The company lacks liquidity
Q9.
Which of the following would increase the gross profit margin?
A) Higher rent expenses
B) Reduced cost of goods sold
C) Increased dividend payments
D) Higher tax rate
Q10.
What does the acid test ratio assess?
A) Profitability from core operations
B) Long-term debt-paying ability
C) Liquidity excluding stock
D) Marketing effectiveness
Q11.
What is typically considered a healthy current ratio for most businesses?
A) 0.5 to 1
B) 1.5 to 2
C) 2.5 to 4
D) Above 5
Q12.
Which financial statement provides data for calculating profitability ratios?
A) Statement of financial position
B) Cash flow forecast
C) Income statement
D) Sales budget
Q13.
If Net Profit = Rs. 200,000 and Revenue = Rs. 1,000,000, what is the Net Profit Margin?
A) 5%
B) 10%
C) 20%
D) 25%
Q14.
Which user is most interested in ROCE?
A) Employees
B) Suppliers
C) Investors
D) Customers
Q15.
Which ratio would a bank look at before giving a short-term loan?
A) Return on Capital Employed
B) Gross Profit Margin
C) Current Ratio
D) Capital Turnover
Q16.
A very high current ratio may suggest that a business is:
A) Understocked
B) Not profitable
C) Holding too much cash or inventory
D) Highly efficient
Q17.
Which of the following is not included in Capital Employed?
A) Owner’s equity
B) Retained earnings
C) Long-term liabilities
D) Short-term creditors
Q18.
Why would a business use ratio analysis?
A) To produce more goods
B) To predict inflation
C) To evaluate financial performance
D) To calculate exchange rates
Q19.
Who would most likely use liquidity ratios to make decisions?
A) Customers
B) Competitors
C) Creditors and lenders
D) Media analysts
Q20.
Which of the following is likely to decrease ROCE?
A) Increasing net profit while keeping capital the same
B) Decreasing net profit while capital stays constant
C) Selling non-current assets at a profit
D) Reducing expenses across departments
Q21.
If inventory is difficult to sell, which liquidity ratio gives a more accurate picture?
A) Net Profit Margin
B) Acid Test Ratio
C) Current Ratio
D) Gross Profit Margin
Q22.
How could a business improve its Net Profit Margin without changing sales?
A) Increase advertising spend
B) Decrease operating expenses
C) Raise cost of raw materials
D) Offer more discounts
Q23.
If Gross Profit = Rs. 300,000 and Revenue = Rs. 600,000, what is the Gross Profit Margin?
A) 30%
B) 40%
C) 50%
D) 60%
Q24.
What would be the most useful ratio for an employee concerned about job security?
A) Net Profit Margin
B) Return on Capital Employed
C) Liquidity Ratios
D) Revenue Growth Rate
Q25.
A company has Current Assets = Rs. 600,000, Inventory = Rs. 200,000, Current Liabilities = Rs. 300,000. What is its Acid Test Ratio?
A) 1.0
B) 1.33
C) 2.0
D) 1.5
Q26.
What is a limitation of ratio analysis?
A) It always gives real-time data
B) It considers non-financial factors
C) It uses historical data which may not reflect current conditions
D) It is useful for predicting exchange rates
Q27.
Which of these would be an example of using accounts to make an investment decision?
A) A customer checking product quality
B) A supplier deciding whether to discount prices
C) An investor comparing ROCE with other companies
D) An employee choosing holiday leave dates
Q28.
What do profitability ratios help stakeholders assess?
A) The company’s stock turnover
B) The ability to repay short-term loans
C) How efficiently the business makes profits
D) The company’s market share
Q29.
If a company has low liquidity ratios, it may face problems with:
A) Export restrictions
B) Paying its short-term debts
C) Reducing inventory
D) Increasing fixed assets
Q30.
Which user of accounts is interested in profit sharing and bonuses?
A) Suppliers
B) Employees
C) Government
D) Lenders
Answers and Explanations
Q1 – C
Profitability measures how well a business turns revenue into profit. A and B refer to liquidity and sales; D refers to assets, not profitability.
Q2 – B
Gross profit margin is a profitability ratio. Acid test and current ratio measure liquidity.
Q3 – C
Gross Profit Margin = (Gross Profit ÷ Revenue) × 100.
Q4 – B
The current ratio compares current assets with current liabilities to assess liquidity.
Q5 – C
Liquidity is vital to meet short-term obligations like paying suppliers or wages.
Q6 – C
The acid test ratio excludes inventory, making it more conservative than the current ratio.
Q7 – B
ROCE = Net Profit ÷ Capital Employed × 100. It measures returns generated from total capital.
Q8 – C
A high gross margin but low net margin means the business has high overheads or operating costs.
Q9 – B
Reducing cost of goods sold increases gross profit, which raises the gross margin.
Q10 – C
Acid test ratio measures liquidity without including stock, which may not be quickly converted into cash.
Q11 – B
A healthy current ratio is generally between 1.5 and 2. Below 1 is risky.
Q12 – C
Income statements provide profit-related data needed for profitability ratio calculations.
Q13 – C
Net Profit Margin = (200,000 / 1,000,000) × 100 = 20%.
Q14 – C
Investors are most interested in ROCE to assess how efficiently the business uses capital.
Q15 – C
Banks check liquidity ratios like current and acid test ratio before lending short-term funds.
Q16 – C
A very high current ratio may mean the company is inefficiently holding too much cash or inventory.
Q17 – D
Short-term creditors (current liabilities) are excluded from capital employed.
Q18 – C
Ratio analysis is used to evaluate a firm’s financial performance, not to produce or predict inflation.
Q19 – C
Creditors and lenders use liquidity ratios to assess a firm’s ability to repay debt.
Q20 – B
If net profit falls and capital remains constant, ROCE will decrease.
Q21 – B
Acid test ratio provides a better liquidity picture when inventory is hard to sell.
Q22 – B
Reducing expenses increases net profit, raising the net profit margin if sales remain unchanged.
Q23 – C
Gross Profit Margin = (300,000 / 600,000) × 100 = 50%.
Q24 – A
Net profit margin affects profit-related bonuses and company survival, which impacts job security.
Q25 – A
Acid Test Ratio = (600,000 – 200,000) ÷ 300,000 = 400,000 ÷ 300,000 = 1.33
Q26 – C
Ratio analysis uses historical data, which might not reflect the present market conditions.
Q27 – C
Investors use ROCE to compare how well a business performs compared to others before investing.
Q28 – C
Profitability ratios show how efficiently the business earns profits from sales and capital.
Q29 – B
Low liquidity means difficulty in paying short-term debts like wages and supplier bills.
Q30 – B
Employees are concerned with profits since these affect wages, bonuses, and job security.