Secondary 4 Principles of Accounts Ratios Analysis Quiz

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Secondary 4 Principles of Accounts Quiz - Ratios Analysis

Name: ____________________
Class: ____________________
Date: ____________________
Score: ________ / 60

Duration: 60 Minutes
Total Marks: 60

Instructions:

• Answer all questions.
• Show all workings clearly for calculation questions.
• Round all percentage ratios to 2 decimal places and other ratios to 2 decimal places unless stated otherwise.
• Use a calculator where necessary.

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Section A: Basic Calculations (Questions 1-8)

Focus: Direct application of formulas

1. A business has Revenue of $120,000 and Gross Profit of$42,000. Calculate the Gross Profit Margin. (2m)
   
   
   Answer: ____________________

2. Given a Net Profit of $15,000 and Revenue of$80,000, calculate the Net Profit Margin. (2m)
   
   
   Answer: ____________________

3. Calculate the Current Ratio if Current Assets are $25,000 and Current Liabilities are$10,000. (2m)
   
   
   Answer: ____________________

4. A firm has Current Assets of $30,000 (including$8,000 inventory) and Current Liabilities of $12,000. Calculate the Quick Ratio (Acid Test). (2m)
   
   
   Answer: ____________________

5. Calculate the Inventory Turnover Rate if Cost of Goods Sold is $60,000 and Average Inventory is$12,000. (2m)
   
   
   Answer: ____________________

6. Trade Receivables are $15,000 and Credit Sales for the year are$180,000. Calculate the Trade Receivables Turnover Rate. (2m)
   
   
   Answer: ____________________

7. If the Gross Profit Margin is 40% and Revenue is $200,000, calculate the Cost of Goods Sold. (3m)
   
   
   Answer: ____________________

8. A business has a Current Ratio of 2.5. If Current Liabilities are $14,000, calculate the value of Current Assets. (3m)
   
   
   Answer: ____________________

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Section B: Interpretation and Analysis (Questions 9-15)

Focus: Comparing data and explaining trends

9. The Current Ratio of Shop A is 1.2:1 and Shop B is 2.8:1. Which shop is in a better position to meet its short-term obligations? Explain why. (3m)
   
   
   Answer: ______________________________________________________________________

10. A company's Inventory Turnover Rate decreased from 6 times in 2022 to 4 times in 2023. State one possible reason for this decrease. (3m)
    
    
    Answer: ______________________________________________________________________

11. Explain why a business might have a high Current Ratio but a very low Quick Ratio. (3m)
    
    
    Answer: ______________________________________________________________________

12. Compare the following:

    • Entity X: Gross Profit Margin 30%, Net Profit Margin 5%
    • Entity Y: Gross Profit Margin 25%, Net Profit Margin 12% Which entity is managing its operating expenses more efficiently? Justify your answer. (4m)
      
      
      Answer: ______________________________________________________________________

13. State two non-accounting factors that could explain a sudden increase in the Trade Receivables Turnover period. (4m)
    
    
    Answer: ______________________________________________________________________

14. A business has a high Inventory Turnover Rate. Explain one advantage and one disadvantage of this situation. (4m)
    
    
    Answer: ______________________________________________________________________

15. Why is it important for a business to compare its ratios with industry averages rather than just its own previous year's data? (3m)
    
    
    Answer: ______________________________________________________________________

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Section C: Comprehensive Application (Questions 16-20)

Focus: Synthesis and multi-step evaluation

Scenario for Q16-18: Luxe Bags provided the following data for the year ended 31 Dec 2023:

• Revenue: $400,000
• Cost of Sales: $220,000
• Operating Expenses: $70,000
• Current Assets: $90,000 (Inventory:$40,000)
• Current Liabilities: $30,000

16. Calculate the Gross Profit Margin and Net Profit Margin for Luxe Bags. (4m)
    
    
    Answer: ____________________

17. Calculate the Current Ratio and Quick Ratio for Luxe Bags. (4m)
    
    
    Answer: ____________________

18. If the industry average for Inventory Turnover is 8 times, and Luxe Bags has an average inventory of $40,000, calculate its turnover rate and comment on its efficiency relative to the industry. (4m)
    
    
    Answer: ______________________________________________________________________

19. A business owner suggests that increasing the mark-up on goods will always improve the Net Profit Margin. Discuss whether this statement is entirely correct. (4m)
    
    
    Answer: ______________________________________________________________________

20. State two limitations of using ratio analysis for decision-making. (4m)
    
    
    Answer: ______________________________________________________________________

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Answer Key - Ratios Analysis Quiz

1. Gross Profit Margin: ($42,000 /$120,000) × 100 = 35.00% (2m)
2. Net Profit Margin: ($15,000 /$80,000) × 100 = 18.75% (2m)
3. Current Ratio: $25,000 /$10,000 = 2.50:1 (2m)
4. Quick Ratio: ($30,000 -$8,000) / $12,000 = 1.83:1 (2m)
5. Inventory Turnover: $60,000 /$12,000 = 5.00 times (2m)
6. Receivables Turnover: $180,000 /$15,000 = 12.00 times (2m)
7. COGS:
   • Gross Profit = 40% of $200,000 =$80,000
   • COGS = $200,000 -$80,000 = $120,000 (3m)
8. Current Assets: 2.5 × $14,000 = **$35,000** (3m)
9. Shop B. A higher current ratio (2.8:1 vs 1.2:1) indicates a stronger ability to cover current liabilities with current assets. (3m)
10. Possible reasons: Overstocking of goods, decrease in market demand, or a change in product mix to slower-moving items. (3m)
11. This occurs when a business holds a very large amount of inventory relative to other current assets (like cash or receivables), as inventory is excluded from the quick ratio. (3m)
12. Entity Y. While Entity X has a higher Gross Profit Margin (30%), Entity Y has a significantly higher Net Profit Margin (12% vs 5%), indicating it controls its operating expenses much more effectively. (4m)
13. 1. Loosening of credit terms (giving customers more time to pay). 2. Poor debt collection efficiency/ineffective credit control. (4m)
14. Advantage: Lower storage costs and reduced risk of obsolescence. Disadvantage: Risk of stock-outs, leading to lost sales and dissatisfied customers. (4m)
15. Industry averages provide a benchmark to see if the business is competitive. Previous year data only shows internal trends, which might be "good" in isolation but "poor" compared to the market. (3m)
16. GPM: ($400k -$220k)/$400k = **45.00$400k - $220k -$70k)/$400k = 27.50% (4m)
17. Current Ratio: $90k /$30k = 3.00:1; Quick Ratio: ($90k -$40k) / $30k = 1.67:1 (4m)
18. Calculation: $220,000 /$40,000 = 5.5 times. Comment: Luxe Bags is less efficient than the industry average (5.5 < 8), suggesting it holds stock for longer. (4m)
19. Not entirely correct. While higher mark-up increases Gross Profit, it may lead to lower sales volume due to higher prices, which could decrease total Net Profit. Additionally, it doesn't address operating expenses. (4m)
20. 1. Ratios are based on historical data (past performance) and may not predict future results. 2. Different businesses use different accounting policies (e.g., FIFO vs AVCO), making comparisons difficult. (4m)