IGCSE Business: Analysis of accounts (Cambridge 0264) – 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.

This set covers section 5.5 (Analysis of accounts) of the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029. Both papers are based on all the subject content. Revise first with the study guide and the revision notes. See also the course hub, the printable checklist and the free diagnostics.

The syllabus gives no formulas, so answers use the standard forms. All businesses are invented and money is in dollars. Give margins and ROCE as percentages and liquidity ratios in the form x:1.

Questions

1. Define the term profitability. [2]

2. Fennimore Garden Tools had revenue of 180,000 and cost of sales of 117,000 last year. Calculate its gross profit margin. [3]

3. Sabine Bay Kayaks had revenue of 420,000, cost of sales of 252,000 and expenses of 126,000. Its non-current assets are 350,000, its current assets 150,000 and its current liabilities 100,000.

(a) Calculate the profit margin. [3] (b) Calculate capital employed and the return on capital employed (ROCE). [3]

4. (a) Define the term liquidity. [2] (b) Identify two ratios used to measure liquidity. [2]

5. Pemberby Spices has inventory of 54,000, trade receivables of 36,000 and cash of 18,000. It owes trade payables of 48,000 and has an overdraft of 24,000.

(a) Calculate the current ratio. [3] (b) Calculate the acid test ratio. [2]

6. Explain why inventory is left out when the acid test ratio is calculated. [3]

7. Identify two internal users and two external users of a business’s accounts. [4]

8. Wystan Joinery has applied to a bank for a loan. Its profit is 45,000 and its capital employed is 360,000. Its current assets are 96,000, of which inventory is 30,000, and its current liabilities are 64,000.

(a) Calculate ROCE. [2] (b) Calculate the current ratio and the acid test ratio (to two decimal places). [3] (c) Explain how the bank might use these ratios when deciding whether to lend. [3]

9. Cressida’s Toys Ltd has the following figures.

	Year 1	Year 2
Revenue	800,000	900,000
Gross profit	320,000	360,000
Profit	80,000	54,000

(a) Calculate the gross profit margin and the profit margin for both years. [4] (b) Explain what these results suggest about the way the business’s costs changed. [3]

10. Explain two limitations of using ratio analysis to judge a business. [4]

11. Marwell Pottery Ltd is considering whether to invite an outside investor to buy shares. The owner has prepared these figures.

	Year 1	Year 2
Profit	36,000	49,500
Capital employed	300,000	330,000
Current assets	144,000	121,000
of which inventory	54,000	66,000
Current liabilities	90,000	110,000

(a) Calculate ROCE for both years. [2] (b) Calculate the current ratio and the acid test ratio for both years. [4] (c) Justify whether an investor should buy shares in Marwell Pottery Ltd. [5]

12. Hawksley Paper Supplies is asked to sell goods on credit to Penrith Stationers. Penrith Stationers has revenue of 360,000, profit of 18,000, current assets of 70,000 (of which inventory is 42,000) and current liabilities of 78,000.

(a) Calculate the current ratio and the acid test ratio to two decimal places. [3] (b) Consider whether Hawksley Paper Supplies should agree to supply on credit. [4]

Answers

1. Profitability is how well a business turns its sales or capital into profit [1], shown by comparing profit with revenue or with capital employed [1]. [2] Examiner insight: A definition earns credit when it includes the idea of proportion. Saying only “how much profit a business makes” describes profit, not profitability.

2. Gross profit = 180,000 − 117,000 = 63,000 [1]. Gross profit margin = (63,000 / 180,000) × 100 [1] = 35% [1]. [3] Examiner insight: Show the gross profit step before the division. If the division is wrong, the working still shows what you intended. Include the percentage sign.

3. (a) Gross profit = 420,000 − 252,000 = 168,000 [1]. Profit = 168,000 − 126,000 = 42,000 [1]. Profit margin = (42,000 / 420,000) × 100 = 10% [1]. [3] (b) Total assets = 350,000 + 150,000 = 500,000, so capital employed = 500,000 − 100,000 = 400,000 [1]. ROCE = (42,000 / 400,000) × 100 [1] = 10.5% [1]. [3] Examiner insight: Both margin and ROCE use the same profit, but different divisors. Stating the divisor in your working shows which ratio you are calculating.

4. (a) Liquidity is a business’s capacity to meet its short-term debts [1] when payment is due, using cash or assets that can be turned into cash fast [1]. [2] (b) The current ratio [1] and the acid test ratio [1]. [2] Examiner insight: Gross profit margin and ROCE measure profitability, so naming them in part (b) gains nothing.

5. (a) Current assets = 54,000 + 36,000 + 18,000 = 108,000 [1]. Current liabilities = 48,000 + 24,000 = 72,000 [1]. Current ratio = 108,000 / 72,000 = 1.5:1 [1]. [3] (b) Acid test = (108,000 − 54,000) / 72,000 [1] = 54,000 / 72,000 = 0.75:1 [1]. [2] Examiner insight: An overdraft is a current liability, so it belongs in the bottom line. Leaving it out is a common slip that changes both ratios.

6. Inventory is the least liquid current asset [1] because it must first be sold, and it may take time to sell or have to be sold at a discount [1]. The acid test therefore gives a stricter picture of whether the business can pay its short-term bills from cash and amounts owed by customers [1]. [3] Examiner insight: The strongest answers give a reason (stock must be sold before it is cash) and then say what that does to the ratio’s usefulness. Repeating “it is not liquid” scores once.

7. Internal users, any two: owners (sole traders, partners or shareholders) [1], managers [1], employees. External users, any two: suppliers, government, lenders/banks [1] [1]. [4] Examiner insight: The syllabus names owners, managers, employees, suppliers, government and lenders/banks, so choosing from these is the safest route. Check each user sits in the right group.

8. (a) ROCE = (45,000 / 360,000) × 100 [1] = 12.5% [1]. [2] (b) Current ratio = 96,000 / 64,000 = 1.5:1 [1]. Acid test = (96,000 − 30,000) / 64,000 [1] = 66,000 / 64,000 = 1.03:1 [1]. [3] (c) The bank can use ROCE to judge whether the business earns enough to pay interest on a loan [1]. It can use the two liquidity ratios to see whether short-term bills are covered, as the acid test is just over 1:1 [1]. Taken together, this suggests the bank may be willing to lend, though it would also consider the size and purpose of the loan and security [1]. [3] Examiner insight: Link each ratio to the lender’s question. “ROCE is 12.5%” is a result. “ROCE of 12.5% suggests a return from which interest can be paid” is an explanation.

9. (a) Gross profit margin: Year 1 = 320,000 / 800,000 × 100 = 40% [1]. Year 2 = 360,000 / 900,000 × 100 = 40% [1]. Profit margin: Year 1 = 80,000 / 800,000 × 100 = 10% [1]. Year 2 = 54,000 / 900,000 × 100 = 6% [1]. [4] (b) The gross profit margin stayed at 40%, so cost of sales rose in line with revenue [1]. The profit margin fell, so expenses must have grown faster than revenue [1]. Expenses (gross profit − profit) rose from 240,000 to 306,000, up 27.5%, against revenue growth of 12.5% [1]. [3] Examiner insight: Use the figures to separate cost of sales (unchanged in proportion) from expenses (the cause of the problem). Quote the growth rates to support the point.

10. Any two limitations, each with a development. For example: ratios use historical figures [1], so they may not show what will happen if the market or costs change [1]. The statement of financial position is a snapshot on one date [1], so liquidity may look quite different a few weeks later [1]. Other acceptable points: non-financial factors are ignored; one ratio alone means little. [4] Examiner insight: Each limitation needs a development to score twice. Listing four limitations with no explanation earns less than two limitations explained well.

11. (a) Year 1 = 36,000 / 300,000 × 100 = 12% [1]. Year 2 = 49,500 / 330,000 × 100 = 15% [1]. [2] (b) Current ratio: Year 1 = 144,000 / 90,000 = 1.6:1 [1]. Year 2 = 121,000 / 110,000 = 1.1:1 [1]. Acid test: Year 1 = (144,000 − 54,000) / 90,000 = 1.0:1 [1]. Year 2 = (121,000 − 66,000) / 110,000 = 0.5:1 [1]. [4] (c) ROCE rose from 12% to 15%, so the business earns a stronger return on the money invested, which favours an investor [1]. However, liquidity weakened: the current ratio fell from 1.6:1 to 1.1:1 and the acid test halved from 1.0:1 to 0.5:1 [1]. Inventory rose while current assets fell overall, so more of the business’s resources are tied up in unsold pots and less is available as cash [1]. On balance, the rise in ROCE makes the shares attractive, and the liquidity problem seems manageable if the investment improves cash, so a cautious yes seems reasonable [1]. The decision would be stronger with information on future sales, the price of the shares and results from more years, because two years do not show a trend [1]. [5] Examiner insight: A “justify” answer needs a decision backed by figures and a view of the other side. Quoting ROCE and the acid test before and after is stronger than saying “profit is up but liquidity is down”.

12. (a) Current ratio = 70,000 / 78,000 = 0.90:1 [1]. Acid test = (70,000 − 42,000) / 78,000 [1] = 28,000 / 78,000 = 0.36:1 [1]. [3] (b) Penrith Stationers has less in current assets than current liabilities, and only 0.36 of liquid assets for each 1 owed, so it may struggle to pay Hawksley on time [1]. Its profit margin is 5% (18,000 / 360,000), so it makes a profit, which gives some chance of paying over time [1]. Hawksley could still agree to supply, but on cautious terms such as a low credit limit, a short payment period or part-payment first [1]. On balance, as the liquidity is weak, I would not give unlimited credit, but would continue to sell with those limits to keep a customer, since selling at all brings in revenue [1]. [4] Examiner insight: Take a position and support it with figures from the case. A bare “yes, because they are profitable” or “no, because liquidity is low” ignores the other side of the evidence.

Where marks are usually lost

• Dividing ROCE by revenue instead of capital employed.
• Forgetting to subtract current liabilities when finding capital employed.
• Leaving out an overdraft from current liabilities.
• Forgetting to remove inventory in the acid test, or removing it from the wrong side of the ratio.
• Writing liquidity ratios as percentages, or margins as ratios.
• Giving a figure with no comment on what it means for the business or user concerned.
• Giving a limitation without developing it.
• Making a decision in a justify question without weighing a point against it.

Next steps

• Review the study guide and the revision notes.
• Return to the course hub and the printable checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class.

Frequently asked questions

Does the Cambridge IGCSE Business 0264 syllabus give ratio formulas? No. The 0264 syllabus names the ratios in section 5.5 but gives no formulas, so answers use the standard forms, such as ROCE = profit ÷ capital employed × 100.

What are common mistakes on analysis of accounts questions? Students often divide ROCE by revenue instead of capital employed, forget to subtract current liabilities when finding capital employed, leave an overdraft out of current liabilities, and forget to remove inventory in the acid test. Giving a figure with no comment on what it means for the business also loses marks.

Should liquidity ratios be written as percentages? No. Margins and ROCE are percentages, while the current ratio and acid test ratio are shown as ratios such as 1.5:1 or as a single number. Mixing these up is a common error.

How should you answer a justify question using ratios? Use the ratios to support a decision for the user in the question, such as a bank or supplier, and weigh at least one point against it before concluding.

Official syllabus

Aligned to section 5.5 of the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029, published by Cambridge University Press & Assessment (Cambridge International Education).