Practice Questions • 20 Questions
State the formula for return on capital employed (ROCE) and define "capital employed". (2 marks)
When interpreting ratios, state: (a) The correct language to use when comparing ratios for the same business over two years. (1 mark) (b) The correct language to use when comparing ratios for two different businesses. (1 mark)
State the formula for each of the following ratios: (a) Gross profit margin (1 mark) (b) Current ratio (1 mark) (c) Trade receivable days (1 mark)
Explain why inventory is excluded from the liquid capital ratio. (3 marks)
Explain two possible consequences for a business of having excessively high trade payable days. (3 marks)
A business has a gross profit margin of 25%. Explain what this means and distinguish it from a mark-up of 25%. (3 marks)
The following balances are extracted from the statement of financial position of Wentworth Ltd at 31 March 2024. £ Inventory 42 000 Trade receivables 31 500 Bank 8 200 Trade payables 27 600 Accruals 4 400 Tax payable 6 000 (a) Calculate the current ratio. (1 mark) (b) Calculate the liquid capital ratio. (1 mark) (c) Comment on the liquidity position of Wentworth Ltd. (2 marks)
Explain two limitations of using ratio analysis to compare the performance of two businesses. (4 marks)
Explain why a business can report a profit for the year but still experience a decrease in its bank balance. Use two examples of transactions in your answer. (4 marks)
Kestrel Ltd has trade receivable days of 68 days. Explain two ways the business could reduce this figure, and for each method state one possible drawback. (4 marks)
The following information is given for Halston Trading for the year ended 30 September 2024. £ Revenue (all credit) 320 000 Cost of sales 192 000 Gross profit 128 000 Expenses 54 000 Profit for the year 74 000 Capital as at 1 October 2023 185 000 Drawings during the year 28 000 Calculate the following ratios. Show your formula and workings. (a) Gross profit margin (1 mark) (b) Mark-up (1 mark) (c) Profit in relation to revenue (1 mark) (d) Expenses in relation to revenue (1 mark) (e) Return on capital employed (2 marks)
The following information is given for Selby Supplies for the year ended 31 May 2024. £ Revenue (80% credit sales) 480 000 Purchases (all on credit) 290 000 Opening inventory 34 000 Closing inventory 38 000 Trade receivables 52 800 Trade payables 43 500 Calculate the following ratios. Show your formula and workings. (a) Trade receivable days (2 marks) (b) Trade payable days (1 mark) (c) Rate of inventory turnover (2 marks) (d) Inventory turnover in days (1 mark)
The following information is available for Thornton plc for the year ended 30 June 2024. £ Issued ordinary share capital (£0.25 each) 1 500 000 Current market price per share £2.40 Profit after tax 1 080 000 Ordinary share dividends paid 360 000 Profit from operations 1 620 000 Interest payable 180 000 Calculate the following ratios. Show your formula and workings. (a) Earnings per share (EPS) (2 marks) (b) Dividend yield (2 marks) (c) Dividend cover (1 mark) (d) Interest cover (1 mark)
Samir runs a business and is confused. He has made a profit of £45 000 for the year but his bank balance has decreased by £18 000. Explain how this is possible. In your answer, refer to at least three specific transactions that could explain the difference between profit and cash. (6 marks)
The following ratio data is available for Fenwick Retail and Gateshead Goods for the year ended 31 December 2024. Fenwick Retail Gateshead Goods Gross profit margin 40% 30% Profit in relation to revenue 24% 18% ROCE 28% 24% Current ratio 2.55:1 1.56:1 Liquid capital ratio 1.66:1 1.02:1 Trade receivable days 45.6 days 36.5 days Trade payable days 45.1 days 61.3 days Rate of inventory turnover 6.72 times 8.4 times Both businesses operate in the same retail industry. Analyse the financial performance of Fenwick Retail and Gateshead Goods. In your answer, consider both profitability and liquidity. (8 marks)
Branton Ltd has the following ratios at 31 March 2024: - Gross profit margin: 35% - Current ratio: 1.9:1 - Liquid capital ratio: 1.2:1 State and explain the effect each of the following transactions would have on Branton Ltd's gross profit margin, current ratio, and liquid capital ratio. Treat each transaction independently. (a) Branton Ltd purchases £20 000 of inventory on credit. (3 marks) (b) Branton Ltd writes off an irrecoverable debt of £5 000. (3 marks) (c) Branton Ltd sells inventory that cost £8 000 for £12 000 cash. (2 marks)
Evaluate the extent to which ratio analysis is a reliable method of assessing the financial performance of a business. (10 marks)
The following ratio data is available for Caldwell Trading for the years ended 31 December 2023 and 2024. 2023 2024 Gross profit margin 38% 31% Profit in relation to revenue 15% 10% Expenses in relation to rev 23% 21% ROCE 22% 17% Current ratio 2.1:1 1.4:1 Liquid capital ratio 1.3:1 0.9:1 Trade receivable days 34 days 52 days Trade payable days 41 days 38 days Rate of inventory turnover 5.8 times 4.2 times Evaluate the extent to which Caldwell Trading's financial performance has improved between 2023 and 2024. (10 marks)