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Secondary 4 Principles of Accounts Ratios Analysis Quiz

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Questions

Secondary 4 Principles of Accounts Quiz - Ratios Analysis

Name: ________________________
Class: ________________________
Date: ________________________
Score: ______ / 40

Duration: 45 minutes
Total Marks: 40

Instructions

Answer all questions in the spaces provided.
Show all workings clearly. Marks are awarded for correct method even if the final answer is incorrect.
Round all ratios to two decimal places unless otherwise stated.
Use the formulas provided where applicable.

Section A: Short Answer Questions (10 marks)

Questions 1–5

1. State the formula for calculating the current ratio.

[1 mark]

2. A business has a trade receivables turnover of 8.5 times. State what this ratio measures and what a higher value generally indicates.

[2 marks]

3. Define return on equity (ROE) in your own words.

[1 mark]

4. State two limitations of using ratio analysis to assess a business's performance.

[2 marks]

5. A company's gross profit margin decreased from 35% to 28% over two years. Suggest one possible reason for this change.

[2 marks]

Section B: Calculation Questions (20 marks)

Questions 6–15

6. The following information relates to Tan Trading for the year ended 31 December 2025:

Item	$
Sales	240,000
Cost of sales	150,000
Opening inventory	28,000
Closing inventory	32,000

Calculate the inventory turnover rate (in times) for the year ended 31 December 2025.

[2 marks]

7. Using the same data from Question 6, calculate the average inventory holding period (in days).

[2 marks]

8. Lim Enterprises reported the following for the year ended 30 June 2025:

Item	$
Net profit	45,000
Sales	300,000

Calculate the net profit margin (as a percentage).

[2 marks]

9. Goh Retail provided the following information:

Item	$
Current assets	85,000
Current liabilities	50,000
Inventory	20,000

Calculate the quick ratio (acid-test ratio).

[2 marks]

10. Ng Trading reported the following:

Item	$
Credit sales	180,000
Opening trade receivables	22,000
Closing trade receivables	26,000

Calculate the trade receivables turnover (in times).

[2 marks]

11. Using the data from Question 10, calculate the average collection period (in days).

[2 marks]

12. Chua Services reported the following for the year ended 31 March 2025:

Item	$
Net profit	60,000
Capital at start of year	200,000
Capital at end of year	240,000

Calculate the return on equity (ROE) as a percentage.

[2 marks]

13. Lee Manufacturing reported:

Item	$
Sales	500,000
Cost of sales	350,000

Calculate the gross profit margin (as a percentage).

[2 marks]

14. Ong Trading reported the following:

Item	$
Credit purchases	210,000
Opening trade payables	30,000
Closing trade payables	40,000

Calculate the trade payables turnover (in times).

[2 marks]

15. Using the data from Question 14, calculate the average payment period (in days).

[2 marks]

Section C: Interpretation and Analysis (10 marks)

Questions 16–20

16. Raj Trading reported the following ratios for 2024 and 2025:

Ratio	2024	2025
Current ratio	2.5 : 1	1.8 : 1
Quick ratio	1.6 : 1	1.2 : 1

(a) Comment on the liquidity position of Raj Trading from 2024 to 2025.

[2 marks]

(b) Suggest one action the business could take to improve its liquidity.

[1 mark]

17. Siti Boutique reported a gross profit margin of 40% in 2024 and 32% in 2025. Sales increased by 15% over the same period.

(a) Explain why the gross profit margin may have decreased even though sales increased.

[2 marks]

(b) State whether the business is better or worse off in 2025 compared to 2024, and justify your answer.

[1 mark]

18. Kumar Trading has an inventory turnover rate of 4.2 times, while the industry average is 6.0 times.

(a) What does Kumar Trading's inventory turnover rate suggest about its inventory management?

[1 mark]

(b) Suggest one possible reason for Kumar Trading's lower-than-industry inventory turnover.

[1 mark]

19. Mei Ling Trading reported a trade receivables turnover of 5.0 times in 2024 and 7.5 times in 2025.

(a) State whether the collection of receivables has improved or worsened.

[1 mark]

(b) Explain one benefit to the business from this change.

[1 mark]

20. Ahmad Trading reported the following for the year ended 31 December 2025:

Item	$
Net profit	80,000
Sales	400,000
Capital employed	320,000

(a) Calculate the return on capital employed (ROCE).

[1 mark]

(b) If the industry average ROCE is 18%, comment on Ahmad Trading's profitability relative to the industry.

[1 mark]

End of Quiz

Answers

Secondary 4 Principles of Accounts Quiz - Ratios Analysis

Answer Key

Section A: Short Answer Questions

1.
Current Ratio = Current Assets ÷ Current liabilities
[1 mark]
Common mistake: Reversing the formula (dividing liabilities by assets).

This ratio measures how efficiently a business collects its credit sales from trade receivables.
A higher value indicates that the business is collecting its receivables more quickly, which improves cash flow.
[2 marks – 1 mark for what it measures, 1 mark for interpretation]

3.
Return on equity (ROE) measures the profit generated from the owner's investment in the business. It shows how effectively the business uses the owner's capital to earn profit.
[1 mark]
Accept any equivalent definition.

4.
Any two of the following:

Ratios are based on historical data and may not reflect future performance.
Different businesses may use different accounting policies, making comparisons unreliable.
Ratios do not consider non-financial factors (e.g., quality of management, market conditions).
Inflation can distort ratio comparisons over time.
A single ratio does not provide a complete picture; multiple ratios should be analysed together.
[2 marks – 1 mark per valid limitation, max 2]

5.
Any one of the following:

Cost of sales increased (e.g., higher purchase prices, increased freight costs).
Selling prices were reduced to remain competitive.
More sales were made at discounted prices.
A change in sales mix toward lower-margin products.
[2 marks – 1 mark for valid reason, 1 mark for clear explanation]

Section B: Calculation Questions

6.
Inventory Turnover Rate

Average inventory = ( $28,000 +$ 32,000) ÷ 2 = $30,000
Inventory turnover = Cost of sales ÷ Average inventory
Inventory turnover = $150,000 ÷$ 30,000 = 5.0 times
[2 marks – 1 mark for average inventory, 1 mark for final answer]
Common mistake: Using opening inventory only ($28,000) instead of average inventory.

7.
Average Inventory Holding Period

Inventory holding period = 365 days ÷ Inventory turnover
Inventory holding period = 365 ÷ 5.0 = 73 days
[2 marks – 1 mark for formula/method, 1 mark for final answer]
Alternative method: ( $30,000 ÷$ 150,000) × 365 = 73 days. Award full marks for either method.

8.
Net Profit Margin

Net profit margin = (Net profit ÷ Sales) × 100%
Net profit margin = ( $45,000 ÷$ 300,000) × 100% = 15%
[2 marks – 1 mark for formula, 1 mark for final answer]

9.
Quick Ratio (Acid-Test Ratio)

Quick assets = Current assets − Inventory = $85,000 −$ 20,000 = $65,000
Quick ratio = Quick assets ÷ Current liabilities
Quick ratio = $65,000 ÷$ 50,000 = 1.3 : 1
[2 marks – 1 mark for quick assets, 1 mark for final answer]
Common mistake: Using current assets instead of quick assets (would give 1.7 : 1).

10.
Trade Receivables Turnover

Average trade receivables = ( $22,000 +$ 26,000) ÷ 2 = $24,000
Trade receivables turnover = Credit sales ÷ Average trade receivables
Trade receivables turnover = $180,000 ÷$ 24,000 = 7.5 times
[2 marks – 1 mark for average receivables, 1 mark for final answer]

11.
Average Collection Period

Average collection period = 365 days ÷ Trade receivables turnover
Average collection period = 365 ÷ 7.5 = 48.67 days (or 49 days rounded)
[2 marks – 1 mark for formula/method, 1 mark for final answer]
Alternative method: ( $24,000 ÷$ 180,000) × 365 = 48.67 days.

12.
Return on Equity (ROE)

Average capital = ( $200,000 +$ 240,000) ÷ 2 = $220,000
ROE = (Net profit ÷ Average capital) × 100%
ROE = ( $60,000 ÷$ 220,000) × 100% = 27.27%
[2 marks – 1 mark for average capital, 1 mark for final answer]

13.
Gross Profit Margin

Gross profit = Sales − Cost of sales = $500,000 −$ 350,000 = $150,000
Gross profit margin = (Gross profit ÷ Sales) × 100%
Gross profit margin = ( $150,000 ÷$ 500,000) × 100% = 30%
[2 marks – 1 mark for gross profit, 1 mark for final answer]

14.
Trade Payables Turnover

Average trade payables = ( $30,000 +$ 40,000) ÷ 2 = $35,000
Trade payables turnover = Credit purchases ÷ Average trade payables
Trade payables turnover = $210,000 ÷$ 35,000 = 6.0 times
[2 marks – 1 mark for average payables, 1 mark for final answer]

15.
Average Payment Period

Average payment period = 365 days ÷ Trade payables turnover
Average payment period = 365 ÷ 6.0 = 60.83 days (or 61 days rounded)
[2 marks – 1 mark for formula/method, 1 mark for final answer]
Alternative method: ( $35,000 ÷$ 210,000) × 365 = 60.83 days.

Section C: Interpretation and Analysis

16.
(a)

The current ratio decreased from 2.5 : 1 to 1.8 : 1, and the quick ratio decreased from 1.6 : 1 to 1.2 : 1.
This indicates that the liquidity position of Raj Trading has worsened from 2024 to 2025.
The business has less ability to meet its short-term obligations from 2024 to 2025.
[2 marks – 1 mark for identifying the trend, 1 mark for explaining the implication]

(b)
Any one of the following:

Reduce inventory levels to free up cash.
Collect trade receivables more quickly.
Negotiate longer credit terms with trade payables.
Obtain a short-term loan to increase current assets.
Sell non-current assets for cash.
[1 mark – for any valid suggestion]

17.
(a)

The gross profit margin may have decreased because cost of sales increased at a faster rate than sales.
This could be due to higher purchase prices, increased freight costs, or selling products at lower markups.
Alternatively, the business may have shifted to selling more low-margin products.
[2 marks – 1 mark for identifying the cause, 1 mark for explanation]

(b)

The business is worse off in 2025 because the gross profit margin has decreased, meaning the business earns less profit per dollar of sales.
Even though sales increased, the lower margin suggests reduced profitability efficiency.
[1 mark – for correct conclusion with valid justification]

18.
(a)

Kumar Trading's inventory turnover of 4.2 times is lower than the industry average of 6.0 times.
This suggests that Kumar Trading is less efficient in managing its inventory — it takes longer to sell its inventory compared to the industry.
[1 mark – for correct interpretation]

(b)
Any one of the following:

The business may be holding excessive or slow-moving inventory.
The business may have over-purchased inventory.
The business may be selling products that are less in demand.
Poor inventory management or forecasting.
[1 mark – for any valid reason]

19.
(a)

The collection of receivables has improved because the trade receivables turnover increased from 5.0 times to 7.5 times, meaning the business is collecting receivables more quickly.
[1 mark – for correct conclusion]

(b)
Any one of the following:

Improved cash flow, as cash is received more quickly.
Reduced risk of bad debts.
Less need for external financing.
More cash available for reinvestment or paying obligations.
[1 mark – for any valid benefit]

20.
(a)

ROCE = (Net profit ÷ Capital employed) × 100%
ROCE = ( $80,000 ÷$ 320,000) × 100% = 25%
[1 mark – for correct calculation]

(b)

Ahmad Trading's ROCE of 25% is higher than the industry average of 18%.
This indicates that Ahmad Trading is more profitable relative to its capital employed compared to the industry average.
The business is using its capital more efficiently to generate profit.
[1 mark – for correct comparison and comment]

End of Answer Key