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O Level Principles of Accounts Ratios Analysis Quiz

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Questions

O-Level Principles of Accounts Quiz - Ratios Analysis

Name: __________________________
Class: __________________________
Date: __________________________
Score: _________ / 40

Duration: 45 Minutes
Total Marks: 40

Instructions:

Answer all 20 questions.
Show all workings clearly. Marks are awarded for method.
Round all ratios to two decimal places unless otherwise stated.
Use a black or blue pen.

Section A: Knowledge and Basic Calculations (Questions 1–5)

(1 mark each)

1. State the formula for calculating the Gross Profit Margin.

2. State the formula for calculating the Current Ratio.

3. A business has a Current Ratio of 2.5:1 and Current Liabilities of $20,000. Calculate the value of Current Assets.

4. Which liquidity ratio excludes inventory from Current Assets?

5. If the Inventory Turnover rate increases from 4 times to 6 times per year, does this generally indicate that inventory is being held for a longer or shorter period?

Section B: Application and Calculation (Questions 6–15)

(2 marks each)

Use the following extract from the Statement of Financial Position of Alpha Pte Ltd as at 31 December 2024 for Questions 6–9:

	$
Non-Current Assets
Property, Plant and Equipment	150,000
Current Assets
Inventory	25,000
Trade Receivables	18,000
Bank	7,000
Current Liabilities
Trade Payables	12,000
Bank Overdraft	3,000
Capital and Reserves
Share Capital	100,000
Retained Earnings	85,000

Additional Information:

Revenue for the year: $200,000
Cost of Sales for the year: $120,000
Opening Inventory (1 Jan 2024): $15,000

6. Calculate the Working Capital of Alpha Pte Ltd as at 31 December 2024.

7. Calculate the Current Ratio as at 31 December 2024. Show your answer to two decimal places.

8. Calculate the Quick Ratio (Acid Test) as at 31 December 2024. Show your answer to two decimal places.

9. Calculate the Gross Profit Margin for the year ended 31 December 2024. Show your answer as a percentage to one decimal place.

10. Calculate the Inventory Turnover Rate (times) for the year ended 31 December 2024.

11. Calculate the Days Sales in Inventory for the year ended 31 December 2024. Assume 365 days in a year. Show your answer to the nearest whole day.

Use the following information for Questions 12–13:

Revenue: $500,000
Gross Profit: $150,000
Expenses: $80,000
Capital Employed: $400,000

12. Calculate the Net Profit Margin. Show your answer as a percentage.

13. Calculate the Return on Capital Employed (ROCE). Show your answer as a percentage.

14. A company has Trade Receivables of $40,000 and Credit Sales of$ 365,000. Calculate the Trade Receivables Collection Period in days.

15. Beta Ltd has a Gearing Ratio of 60%. Gamma Ltd has a Gearing Ratio of 20%. Which company is considered to have higher financial risk due to debt?

Section C: Analysis and Interpretation (Questions 16–20)

(4 marks each)

16. The Current Ratio of a business decreased from 2.0:1 in 2023 to 1.2:1 in 2024. (a) State whether this change indicates an improvement or deterioration in liquidity. (b) Explain one possible reason for this decrease, assuming the business is trading normally.

17. Two businesses, X and Y, operate in the same industry. * Business X: Gross Profit Margin 40%, Net Profit Margin 5% * Business Y: Gross Profit Margin 20%, Net Profit Margin 15%

Explain what these figures suggest about the **expense control** of Business X compared to Business Y.

18. A retailer decides to switch from the FIFO method of inventory valuation to the AVCO method during a period of rising prices. (a) State the effect on the value of Closing Inventory. (b) State the effect on the Gross Profit for the year.

19. "A high Inventory Turnover rate is always good for a business." Do you agree? Give one reason to support your answer.

20. A business has a Quick Ratio of 0.5:1. The owner wants to improve this ratio immediately without selling non-current assets or obtaining new long-term loans. Suggest two practical actions the owner could take to improve the Quick Ratio.

Answers

O-Level Principles of Accounts Quiz - Ratios Analysis (Answer Key)

Total Marks: 40

Section A: Knowledge and Basic Calculations

1. Formula for Gross Profit Margin: $\frac{\text{Gross Profit}}{\text{Revenue}} \times 100\%$ (1 mark for correct formula)

2. Formula for Current Ratio: $\frac{\text{Current Assets}}{\text{Current Liabilities}}$ (1 mark for correct formula)

3. Calculation of Current Assets: $\text{Current Assets} = \text{Current Ratio} \times \text{Current Liabilities}$ $\text{Current Assets} = 2.5 \times 20,000 = \$50,000$ (1 mark for correct answer)

4. Liquidity ratio excluding inventory: Quick Ratio (or Acid Test Ratio) (1 mark)

5. Interpretation of Inventory Turnover increase: Shorter period. (1 mark)

Section B: Application and Calculation

6. Working Capital: $\text{Current Assets} = 25,000 + 18,000 + 7,000 = 50,000$ $\text{Current Liabilities} = 12,000 + 3,000 = 15,000$ $\text{Working Capital} = 50,000 - 15,000 = \$35,000$ (1 mark for CA/CL identification, 1 mark for correct answer)

7. Current Ratio: $\frac{50,000}{15,000} = 3.33 : 1$ (1 mark for substitution, 1 mark for 3.33)

8. Quick Ratio: $\text{Quick Assets} = \text{Current Assets} - \text{Inventory} = 50,000 - 25,000 = 25,000$ $\text{Quick Ratio} = \frac{25,000}{15,000} = 1.67 : 1$ (1 mark for excluding inventory, 1 mark for 1.67)

9. Gross Profit Margin: $\text{Gross Profit} = \text{Revenue} - \text{Cost of Sales} = 200,000 - 120,000 = 80,000$ $\text{GPM} = \frac{80,000}{200,000} \times 100\% = 40.0\%$ (1 mark for GP calc, 1 mark for 40.0%)

10. Inventory Turnover Rate: $\text{Average Inventory} = \frac{15,000 + 25,000}{2} = 20,000$ $\text{Turnover} = \frac{\text{Cost of Sales}}{\text{Average Inventory}} = \frac{120,000}{20,000} = 6 \text{ times}$ (1 mark for Avg Inv, 1 mark for 6 times)

11. Days Sales in Inventory: $\frac{365}{6} = 60.83 \approx 61 \text{ days}$ (1 mark for formula/substitution, 1 mark for 61 days)

12. Net Profit Margin: $\text{Net Profit} = \text{Gross Profit} - \text{Expenses} = 150,000 - 80,000 = 70,000$ $\text{NPM} = \frac{70,000}{500,000} \times 100\% = 14\%$ (1 mark for NP calc, 1 mark for 14%)

13. Return on Capital Employed (ROCE): $\text{ROCE} = \frac{\text{Net Profit}}{\text{Capital Employed}} \times 100\%$ $\text{ROCE} = \frac{70,000}{400,000} \times 100\% = 17.5\%$ (1 mark for substitution, 1 mark for 17.5%)

14. Trade Receivables Collection Period: $\frac{\text{Trade Receivables}}{\text{Credit Sales}} \times 365$ $\frac{40,000}{365,000} \times 365 = 40 \text{ days}$ (1 mark for formula, 1 mark for 40 days)

15. Financial Risk: Beta Ltd (Higher gearing indicates higher reliance on debt, thus higher financial risk). (1 mark for Beta Ltd, 1 mark for reasoning)

Section C: Analysis and Interpretation

16. Current Ratio Decrease (2.0:1 to 1.2:1): (a) Deterioration in liquidity. (1 mark) (b) Possible reasons (Any one):

Increase in Current Liabilities (e.g., took short-term loan).
Decrease in Current Assets (e.g., used cash to buy non-current assets).
Inventory write-down or loss. (1 mark for valid reason)

17. Expense Control Comparison:

Business X has a high Gross Profit Margin (40%) but a low Net Profit Margin (5%). This indicates that while it makes good profit on sales, its operating expenses are very high relative to revenue. (2 marks)
Business Y has a lower Gross Profit Margin (20%) but a higher Net Profit Margin (15%). This indicates that Business Y has tighter control over its operating expenses. (2 marks)

18. Effect of Switching from FIFO to AVCO (Rising Prices): (a) Closing Inventory value will decrease (AVCO averages out the lower older costs with higher new costs, resulting in a lower value than FIFO which keeps the newest/higher costs in inventory). (2 marks) (b) Gross Profit will decrease (because Cost of Sales will be higher under AVCO in a rising price environment). (2 marks)

19. High Inventory Turnover Evaluation:

Disagree. (1 mark)
Reason: While it indicates efficient sales, it may also mean the business is holding too little stock, leading to stockouts, lost sales opportunities, and inability to meet sudden customer demand. (1 mark for valid counter-point)
(Note: Agree is also acceptable if justified by reduced holding costs/obsolescence, but Disagree is often the stronger analytical point for "always".)

20. Improving Quick Ratio (0.5:1): Suggest two actions (1 mark each, max 2 marks for suggestions, 2 marks for explanation/linkage):

Inject Capital: Owner introduces cash into the business. This increases Current Assets (Bank) without increasing Current Liabilities.
Pay off Current Liabilities: Use existing cash to pay Trade Payables. Note: This is tricky as it reduces CA and CL equally. If CR < 1, this actually improves the ratio mathematically, but reduces absolute liquidity. Better answer:
Convert Inventory to Cash: Sell inventory for cash (if sold at cost, Quick Assets increase as Inventory drops and Cash rises; Inventory is not in Quick Assets, Cash is).
Refinance Short-term Debt: Convert a bank overdraft (Current Liability) into a long-term loan (Non-Current Liability). This reduces the denominator (Current Liabilities).

(2 marks for two distinct, valid actions)