Which of the following best defines profitability?
Show model answer
B. The amount of profit a business makes as a percentage of its capital employed Profitability measures how well a business generates profit relative to its investments. Distractor D refers to gross profit, not profitability.
A business has revenue of £200,000 and cost of sales of £120,000. What is its gross profit margin?
Show model answer
C. 60% Gross profit margin is calculated as (Revenue - Cost of Sales) / Revenue x 100. (200,000 - 120,000) / 200,000 x 100 = 60%.
Which ratio measures a business's liquidity?
Show model answer
B. Current ratio The current ratio measures a business's ability to pay its short-term debts with its short-term assets, indicating liquidity.
What is the main purpose of the acid test ratio?
Show model answer
B. To assess a business's liquidity without relying on inventory The acid test ratio is a stricter measure of liquidity that excludes inventory, providing a more conservative view of a business's short-term financial health.
Which of the following is a key user of financial accounts?
Show model answer
D. All of the above Financial accounts are used by various stakeholders, including government for taxation, employees for performance evaluation, and suppliers for credit decisions.
A business has current assets of £50,000 and current liabilities of £30,000. What is its current ratio?
Show model answer
C. 1.7 The current ratio is calculated as Current Assets / Current Liabilities. 50,000 / 30,000 = 1.7.
Why might a business prefer to have a higher gross profit margin?
Show model answer
B. It shows the business is more profitable relative to its sales A higher gross profit margin indicates that a business retains more profit from each unit of revenue, reflecting better cost management and pricing strategy.
What does the Return on Capital Employed (ROCE) ratio measure?
Show model answer
B. The profitability of a business relative to its capital invested ROCE measures how effectively a business generates profit from its capital investments, indicating overall profitability.
Which of the following is an example of an internal source of finance?
Show model answer
C. Retained profit Retained profit is an internal source of finance, as it comes from the business's own profits that are reinvested rather than distributed to shareholders.
How can a business improve its liquidity?
Show model answer
B. By reducing its inventory levels Reducing inventory levels can improve liquidity by freeing up cash that is tied up in unsold stock, making it available for short-term obligations.
What is the main difference between the current ratio and the acid test ratio?
Show model answer
A. The current ratio includes inventory, while the acid test ratio does not The acid test ratio excludes inventory, providing a more conservative measure of liquidity by focusing on assets that can be quickly converted to cash.
Which of the following best describes the concept of liquidity?
Show model answer
B. The ease with which a business can convert assets into cash Liquidity refers to a business's ability to meet its short-term financial obligations by converting assets into cash quickly.
A business has a profit margin of 20%. If its revenue is £150,000, what is its profit?
Show model answer
B. £30,000 Profit margin is calculated as (Profit / Revenue) x 100. Rearranging the formula, Profit = Revenue x (Profit Margin / 100). 150,000 x (20 / 100) = £30,000.
Why is profitability important for a business?
Show model answer
C. It shows the business's ability to meet its long-term financial obligations Profitability is crucial as it determines a business's ability to reinvest in growth, attract investors, and ensure long-term sustainability.
Which of the following is a limitation of using financial ratios to analyse a business?
Show model answer
D. All of the above Financial ratios have limitations, including providing only a snapshot, not accounting for external factors, and potential manipulation, which can affect their reliability.