Edexcel IGCSE Accounting: Accounting ratios (4AC1) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover Topic 4, section 4.4 “The calculation and interpretation of accounting ratios” in the Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016: points (a) to (c). Use the study guide and revision notes first if you need them. Course links: the 4AC1 Accounting hub, the printable checklist and the free diagnostics. Every business named here is invented, and amounts are in dollars. Give percentages to 2 decimal places where needed and liquidity ratios as x : 1 to 2 decimal places.

Questions

1. Explain the difference between profitability and liquidity. [3]

2. Sotherby Pet Supplies had revenue of 96,000, cost of sales of 62,400 and profit for the year of 9,600.

(a) Calculate the gross profit percentage. [2] (b) Calculate profit for the year as a percentage of revenue. [2]

3. Kinlochard Print has non-current assets of 110,000, current assets of 38,000, current liabilities of 23,000 and non-current liabilities of 25,000. Profit for the year was 22,500.

(a) Calculate capital employed. [2] (b) Calculate return on capital employed. [2] (c) State one comparison that would help the owner interpret the result. [1]

4. At the year end Dornfield Bikes had inventory of 27,000, trade receivables of 15,000, bank of 6,000, trade payables of 30,000 and other payables of 6,000.

(a) Calculate the current (working capital) ratio. [3] (b) Calculate the liquid (acid test) ratio. [2] (c) Explain why the acid test ratio is lower than the current ratio. [1]

5. A trader’s gross profit percentage rose this year, but profit for the year as a percentage of revenue fell. Suggest two different expenses that may have increased. [2]

6. Ferrantine Bakery has a current ratio of 2.5 : 1 and current liabilities of 24,000. Its inventory is 18,000.

(a) Calculate current assets. [1] (b) Calculate the liquid (acid test) ratio. [3]

7. Mertonby Frames has current assets of 40,000, including inventory of 16,000, and current liabilities of 25,000. It pays 8,000 to trade payables from the bank.

(a) Calculate the current ratio before and after the payment. [4] (b) Calculate the liquid (acid test) ratio before and after, and comment on the result. [3]

8. Norcliffe Gifts had these results.

	Year 1	Year 2
Revenue	150,000	180,000
Gross profit	60,000	64,800
Profit for the year	21,000	18,000

(a) Calculate the gross profit percentage and the profit for the year as a percentage of revenue for both years. [4] (b) Revenue rose but profit for the year fell. Using your answers and the expenses in each year, explain why. [4]

9. Zelmont Cafe has these Year 2 figures: revenue 210,000; cost of sales 126,000; profit for the year 25,200; capital employed 168,000; inventory 9,000; trade receivables 2,000; bank 16,000; current liabilities 18,000. The Year 1 ratios were: gross profit 38%, profit for the year 13% of revenue, ROCE 17%, current ratio 1.4 : 1, acid test 0.9 : 1.

(a) Calculate the five Year 2 ratios. [5] (b) Comment on profitability in Year 2 compared with Year 1. [4] (c) Comment on liquidity in Year 2 compared with Year 1. [3]

10. A supplier must decide which of two customers to offer 60 days’ credit. Both ask for the same amount of goods.

Ratio	Wickersham	Brandvik
Gross profit percentage	26%	30%
Profit for the year as a percentage of revenue	11%	8%
ROCE	19%	12%
Current ratio	2.1 : 1	1.1 : 1
Acid test ratio	1.2 : 1	0.4 : 1

Evaluate which customer is the safer choice for the supplier. [8]

11. Tosswick Rugs started the year with equity of 80,000. Profit for the year was 24,000, drawings were 14,000 and non-current liabilities were 30,000. Revenue was 200,000.

(a) Calculate closing equity. [2] (b) Calculate capital employed. [1] (c) Calculate ROCE. [2] (d) Calculate profit for the year as a percentage of revenue. [2]

Answers

1. Profitability is whether the business earns a profit, and how large it is compared with revenue or capital [1]. Liquidity is whether it can pay its short-term debts as they fall due, using cash and near-cash assets [1]. A business can be profitable yet short of cash, for example if its profit is tied up in inventory [1]. [3] Examiner insight: Define both terms separately and add the link between them; two definitions alone leave the question of how they differ unanswered.

2. (a) Gross profit = 96,000 − 62,400 = 33,600 [1]. 33,600 ÷ 96,000 × 100 = 35% [1]. (b) 9,600 ÷ 96,000 × 100 [1] = 10% [1]. Examiner insight: Gross profit has to be worked out first here; writing it down shows the method even if the final division slips.

3. (a) 110,000 + 38,000 − 23,000 [1] = 125,000 [1]. (Check: equity of 100,000 + 25,000.) (b) 22,500 ÷ 125,000 × 100 [1] = 18% [1]. (c) Compare with the previous year’s ROCE, with a similar business, or with what the money could earn elsewhere [1]. Examiner insight: Naming a comparison alone is enough for (c); an answer that only repeats 18% adds nothing.

4. (a) Current assets = 27,000 + 15,000 + 6,000 = 48,000 [1]. Current liabilities = 30,000 + 6,000 = 36,000 [1]. 48,000 ÷ 36,000 = 1.33 : 1 [1]. (b) (48,000 − 27,000) = 21,000 [1]; 21,000 ÷ 36,000 = 0.58 : 1 [1]. (c) Inventory is excluded from the acid test and is over half of the current assets [1]. Examiner insight: Both liabilities must be added into the denominator; leaving out other payables is a common slip and changes both ratios.

5. Any two different expenses, such as wages [1] and rent, advertising, depreciation or interest [1]. [2] Examiner insight: Two named expenses are needed, so repeating “expenses went up” in different words earns nothing extra.

6. (a) 2.5 × 24,000 = 60,000 [1]. (b) 60,000 − 18,000 = 42,000 [1]; 42,000 ÷ 24,000 [1] = 1.75 : 1 [1]. Examiner insight: Work back from a ratio by multiplying by the denominator, then show each step clearly.

7. (a) Before: 40,000 ÷ 25,000 = 1.6 : 1 [1]. After: current assets 32,000 [1] and current liabilities 17,000 [1]; 32,000 ÷ 17,000 = 1.88 : 1 [1]. (b) Before: (40,000 − 16,000) ÷ 25,000 = 0.96 : 1 [1]. After: 16,000 ÷ 17,000 = 0.94 : 1 [1]. The current ratio improved but the acid test fell slightly, because the ratio is below 1 : 1 and the same amount comes off both parts [1]. Examiner insight: The cash and the liability both reduce by 8,000, so adjust both parts; changing only one is the usual error.

8. (a) Year 1: 60,000 ÷ 150,000 × 100 = 40% [1] and 21,000 ÷ 150,000 × 100 = 14% [1]. Year 2: 64,800 ÷ 180,000 × 100 = 36% [1] and 18,000 ÷ 180,000 × 100 = 10% [1]. (b) Expenses = gross profit − profit: 39,000 in Year 1 and 46,800 in Year 2 [1]. As a percentage of revenue both are 26% [1], so expenses did not grow faster than sales. The fall comes from gross profit percentage, down from 40% to 36% [1], which may be due to lower selling prices or higher supplier costs [1]. Examiner insight: Use figures from the question and give the cause the figures support; a generic “expenses rose” does not fit data in which expenses were steady.

9. (a) Gross profit percentage: 84,000 ÷ 210,000 × 100 = 40% [1]. Profit percentage: 25,200 ÷ 210,000 × 100 = 12% [1]. ROCE: 25,200 ÷ 168,000 × 100 = 15% [1]. Current ratio: (9,000 + 2,000 + 16,000) = 27,000; 27,000 ÷ 18,000 = 1.5 : 1 [1]. Acid test: 18,000 ÷ 18,000 = 1.0 : 1 [1]. (b) Gross profit percentage improved from 38% to 40% [1], but profit as a percentage of revenue fell from 13% to 12% [1], so expenses took a larger share of revenue [1]. ROCE fell from 17% to 15%, so each dollar of capital earned less [1]. (c) Liquidity improved: current ratio from 1.4 to 1.5 and acid test from 0.9 to 1.0 [1]. Liquid assets now just cover current liabilities [1], mainly because of the 16,000 in the bank [1]. Examiner insight: A comment scores when it gives both figures and the direction of change; “profit is better” with no numbers is too vague.

10. Liquidity matters most to a supplier waiting for payment [1]. Wickersham’s current ratio is 2.1 : 1 and acid test 1.2 : 1 [1], so it can cover its current liabilities without selling inventory [1]. Brandvik’s acid test is 0.4 : 1 [1], so it would struggle to pay quickly and may pay late [1]. Wickersham also has better profit as a percentage of revenue (11% against 8%) and ROCE (19% against 12%) [1], suggesting good control of expenses even though its gross profit percentage is lower (26% against 30%) [1]. Conclusion: Wickersham is the safer choice; trends over several years would give more confidence [1]. [8] Examiner insight: An evaluation needs a decision supported by the ratios that matter for the stated purpose; listing all ten figures without weighing them does not reach a conclusion.

11. (a) 80,000 + 24,000 − 14,000 [1] = 90,000 [1]. (b) 90,000 + 30,000 = 120,000 [1]. (c) 24,000 ÷ 120,000 × 100 [1] = 20% [1]. (d) 24,000 ÷ 200,000 × 100 [1] = 12% [1]. Examiner insight: Drawings reduce equity, so subtract them before finding capital employed, and say which capital employed formula you used.

Where marks are usually lost

• Using revenue instead of capital employed as the base for ROCE.
• Mixing up gross profit and profit for the year.
• Leaving out other payables when adding current liabilities.
• Leaving inventory in the acid test.
• Writing liquidity ratios as percentages.
• Forgetting drawings when finding closing equity.
• Commenting without figures from the question.
• Giving reasons that conflict with the data.

Next steps

• Recap with the revision notes and the study guide.
• Course hub: 4AC1 Accounting and the printable checklist.
• Take the free diagnostics.
• Book a free trial class.

Frequently asked questions

What base is used for return on capital employed? ROCE uses capital employed as the base, so it measures how efficiently the money invested is used. Using revenue as the base is a common error, because revenue is the base for the gross profit and profit for the year percentages instead.

Which current liabilities are included in the current ratio? Include all current liabilities, such as trade payables, other payables and any bank overdraft. Leaving out other payables, or adding non-current liabilities, gives the wrong ratio.

How is the acid test ratio different from the current ratio? The acid test, or liquid ratio, takes inventory out of current assets before dividing by current liabilities, so it is the stricter measure. Leaving inventory in, or also removing trade receivables, loses marks in Edexcel IGCSE Accounting (4AC1).

How do you get full marks for commenting on ratios? Use figures from the question to support each comment and give reasons that fit the data. Comments without figures, or reasons that conflict with the information given, are common ways to lose marks.

Official syllabus

Pearson Edexcel International GCSE in Accounting (4AC1), Specification, Issue 1, October 2016, published by Pearson Education Limited. Topic 4: The preparation of financial statements, section 4 “The calculation and interpretation of accounting ratios”, points (a) to (c).