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 in the spaces provided.
• 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.

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Section A: Profitability Ratios (Questions 1-7)

1. Define "Gross Profit Margin" and state its formula. [2]
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2. A business has Revenue of $150,000 and Cost of Goods Sold of$90,000. Calculate the Gross Profit Margin. [3]
   
   
   Answer: ____________________

3. If a company's Net Profit Margin is 12% and its Revenue is $200,000, calculate the Net Profit. [3]
   
   
   Answer: ____________________

4. Explain why a business might have a high Gross Profit Margin but a very low Net Profit Margin. [4]
   
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5. Calculate the Net Profit Margin for the following data:

   • Revenue: $80,000
   • Gross Profit: $30,000
   • Operating Expenses: $12,000 [3]
     
     
     Answer: ____________________

6. A firm's Gross Profit Margin increased from 25% in 2023 to 30% in 2024. Suggest two possible reasons for this increase. [4]
   
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7. Compare the following two businesses:

   • Business A: Net Profit Margin 15%, Revenue $100,000
   • Business B: Net Profit Margin 5%, Revenue $500,000 Which business is more efficient at controlling its expenses relative to its sales? Justify your answer. [4]
     
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Section B: Liquidity Ratios (Questions 8-14)

8. State the formula for the Current Ratio and the Quick Ratio (Acid Test). [2]
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9. Given: Current Assets = $25,000; Current Liabilities =$10,000. Calculate the Current Ratio. [3]
   
   
   Answer: ____________________

10. Using the data from Question 9, if Inventory is valued at $8,000, calculate the Quick Ratio. [3]
    
    
    Answer: ____________________

11. Explain the significance of a Quick Ratio of 0.5:1. Is this generally considered a healthy position? [4]
    
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12. A business has a Current Ratio of 3:1 but a Quick Ratio of 0.8:1. What does this specific gap imply about the business's asset composition? [4]
    
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13. State two ways a business can improve its Current Ratio. [4]
    
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14. If a business pays off a current liability using cash, explain the effect on the Current Ratio (assuming the ratio was initially greater than 1:1). [4]
    
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Section C: Efficiency Ratios & Interpretation (Questions 15-20)

15. State the formula for the Inventory Turnover Rate (in times). [2]
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16. Calculate the Inventory Turnover Rate given:

    • Cost of Goods Sold: $120,000
    • Opening Inventory: $15,000
    • Closing Inventory: $25,000 [4]
      
      
      Answer: ____________________

17. A business has an Inventory Turnover Rate of 4 times per year. Calculate the average number of days inventory is held. [3]
    
    
    Answer: ____________________

18. Compare the following Inventory Turnover Rates:

    • Fresh Produce Store: 24 times per year
    • Luxury Watch Boutique: 2 times per year Explain why these differences are expected based on the nature of the businesses. [4]
      
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19. State two limitations of using financial ratios alone to evaluate a business's performance. [4]
    
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20. A manager notices that the Trade Receivables turnover period has increased from 30 days to 60 days. Suggest one internal reason and one external reason for this trend. [4]
    
    
    Internal: _________________________________________________________________ External: _________________________________________________________________

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Answer Key - Secondary 4 Principles of Accounts Quiz (Ratios Analysis)

Section A: Profitability Ratios

1. Definition: The percentage of revenue that remains after deducting the cost of goods sold. Formula: (Gross Profit / Revenue) × 100% [2 marks]

2. Gross Profit = $150,000 -$90,000 = $60,000. Margin = ($60,000 / $150,000) × 100 = 40% [3 marks: 1 for GP, 1 for formula, 1 for answer]

3. Net Profit = 12% of $200,000 = 0.12 × 200,000 =$24,000 [3 marks: 1 for formula, 2 for answer]

4. High GP margin means the cost of sales is low relative to revenue. However, a low NP margin suggests that the business has very high operating expenses (e.g., high rent, salaries, or marketing costs) which consume most of the gross profit. [4 marks]

5. Net Profit = $30,000 -$12,000 = $18,000. NP Margin = ($18,000 / $80,000) × 100 = 22.50% [3 marks]

6. (Any two):

   • Increased selling prices of goods.
   • Negotiated lower purchase prices from suppliers.
   • Reduced wastage/shrinkage of inventory.
   • Change in product mix towards higher-margin items. [4 marks]

7. Business A is more efficient. [1] Justification: Business A has a higher Net Profit Margin (15% vs 5%), meaning it retains a larger portion of every dollar of revenue as profit after all expenses are paid, regardless of the total volume of sales. [3 marks]

Section B: Liquidity Ratios

8. Current Ratio = Current Assets / Current Liabilities [1] Quick Ratio = (Current Assets - Inventory) / Current Liabilities [1]

9. $25,000 /$10,000 = 2.5:1 [3 marks]

10. ($25,000 -$8,000) / $10,000 =$17,000 / $10,000 = 1.7:1 [3 marks]

11. Significance: The business only has $0.50 of liquid assets to cover every$1.00 of current liabilities. [2] Health: Not healthy; the business may struggle to meet immediate obligations without selling inventory. [2 marks]

12. The large gap (2.2 difference) implies that a very significant portion of the business's current assets is tied up in inventory. [4 marks]

13. (Any two):

    • Increase current assets (e.g., take a long-term loan to increase cash).
    • Decrease current liabilities (e.g., pay off trade payables using non-current assets).
    • Convert current liabilities to non-current liabilities. [4 marks]

14. Both Current Assets (Cash) and Current Liabilities decrease by the same amount. Since the ratio was > 1, the ratio will increase. (Example: 20/10 = 2.0 $\rightarrow$ 10/0 = $\infty$ or 15/5 = 3.0). [4 marks]

Section C: Efficiency Ratios & Interpretation

15. Inventory Turnover = Cost of Goods Sold / Average Inventory [2 marks]

16. Average Inventory = ($15,000 +$25,000) / 2 = $20,000. Turnover =$120,000 / $20,000 = 6 times [4 marks: 1 for average, 1 for formula, 2 for answer]

17. 365 days / 4 times = 91.25 days [3 marks]

18. Fresh Produce: High turnover (24x) because goods are perishable and must be sold quickly. [2] Luxury Watches: Low turnover (2x) because items are high-value, sold infrequently, and do not perish. [2 marks]

19. (Any two):

    • Ratios are based on historical data (past performance), not future trends.
    • They ignore non-financial factors (e.g., staff morale, management quality).
    • Different businesses use different accounting policies (e.g., FIFO vs AVCO).
    • Ratios can be manipulated by "window dressing." [4 marks]

20. Internal: Poor credit control/inefficient debt collection processes. [2] External: Economic downturn causing customers to face cash flow problems. [2 marks]