O Level Business: Analysis of accounts (Cambridge 7115) – 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 section 5.5, Analysis of accounts, in the Cambridge O Level Business Studies 7115 syllabus for examination in 2026. They use the standard forms of the ratios: the syllabus names the ratios but does not print formulas. Read the study guide and revision notes first. For the wider topic, see Financial information and decisions practice. Course links: Cambridge O Level Business hub and printable checklist. All businesses and figures are invented.

Questions

1. (a) Define profitability. [2] (b) Define liquidity. [2]

2. Marren Stationers had revenue of 310 000, cost of sales of 217 000 and profit of 46 500 last year. (a) Calculate its gross profit margin. [3] (b) Calculate its profit margin. [2] (c) Explain why the profit margin is lower than the gross profit margin. [2]

3. Verity Pastas made a profit of 39 000 and had capital employed of 260 000. The owner could instead put the same money in a savings account paying 4% a year. (a) Calculate the return on capital employed (ROCE). [2] (b) Justify whether the owner should regard this ROCE as satisfactory. [3]

4. At the year end Verity Pastas had inventories of 48 000, receivables of 21 000 and cash of 11 000. Its current liabilities were 64 000. (a) Calculate the current ratio. [2] (b) Calculate the acid test ratio. [2]

5. Explain why the acid test ratio can give a better picture of liquidity than the current ratio for a business that holds large inventories. [3]

6. Identify two users of a business’s accounts and outline one decision each might make using ratio results. [4]

7. A supplier and an investor are each looking at two businesses.

Ratio	Elmstead Joinery	Dovecote Textiles
Current ratio	1.5	1.65
Acid test ratio	0.5	1.1
ROCE	12%	8%

(a) The supplier must choose which business to offer 60 days’ credit. Justify the choice. [4] (b) The investor wants the best return on money invested. Justify the choice. [3]

8. Ravenscar Outfitters wants a bank loan of 100 000 to open a second shop. Figures are in thousands (000). The bank has asked for a comparison of the last two years.

Item (000)	Year 1	Year 2
Revenue	800	880
Cost of sales	520	598.4
Profit	80	61.6
Capital employed	500	616
Inventories	120	160
Receivables	30	34
Cash	50	10
Current liabilities	125	170

Year 1 ratios were: gross profit margin 35%, profit margin 10%, ROCE 16%, current ratio 1.6 and acid test ratio 0.64.

(a) Calculate the gross profit margin and ROCE for Year 2. [4] (b) Calculate the current ratio and acid test ratio for Year 2. Give the acid test ratio to two decimal places. [4] (c) Justify whether the bank should lend the 100 000. [6]

9. Explain why a profitable business may still have liquidity problems. [4]

10. Sorrel Textiles had a gross profit margin of 40% last year. This year its revenue was 560 000 and its cost of sales was 364 000. (a) Calculate this year’s gross profit margin. [3] (b) Explain two possible reasons why the gross profit margin has fallen. [4]

11. Explain two ways in which a manager might use ratio analysis of the business’s own accounts. [4]

Answers

1. (a) Profitability is how well a business earns profit [1] compared with its revenue or the capital invested in it [1]. [2] (b) Liquidity is the ability of a business to pay its short-term debts [1] when they fall due [1]. [2] Examiner insight: A define answer gains credit for a precise meaning, so say what is being compared (profit with revenue or capital; cash with debts due), not just that profit is good.

2. (a) Gross profit = 310 000 − 217 000 = 93 000 [1]. Gross profit margin = 93 000 ÷ 310 000 × 100 [1] = 30% [1]. [3] (b) Profit margin = 46 500 ÷ 310 000 × 100 [1] = 15% [1]. [2] (c) Profit margin allows for all costs, including overheads such as rent and wages [1], while gross profit margin allows only for cost of sales, so less is left after all costs [1]. [2] Examiner insight: Divide by revenue, not cost of sales, and show the gross profit step; in part (c) name the extra costs rather than just saying “more costs”.

3. (a) ROCE = 39 000 ÷ 260 000 × 100 [1] = 15% [1]. [2] (b) 15% is well above the 4% the savings account would pay [1], which suggests the business rewards the owner for the extra risk of running a business [1]. A fuller judgement would compare with last year and similar businesses, but on these figures the return is satisfactory [1]. [3] Examiner insight: For a justify question, answers do best when they reach a clear judgement supported by the numbers, and say what extra comparison would strengthen it.

4. (a) Current assets = 48 000 + 21 000 + 11 000 = 80 000 [1]. Current ratio = 80 000 ÷ 64 000 = 1.25 [1]. [2] (b) Acid test = (80 000 − 48 000) ÷ 64 000 = 32 000 ÷ 64 000 [1] = 0.5 [1]. [2] Examiner insight: Show the subtraction of inventories as a separate line; showing the method lets a reader see where a slip happened, and these two ratios are not percentages.

5. Inventories are the current asset that is slowest to turn into cash [1], and they may not sell at full value [1]. The acid test ratio leaves them out, so it shows whether the business could pay its short-term debts from more liquid assets [1]. [3] Examiner insight: Explain answers need the reason (inventories are slow to convert) and the effect (the acid test is stricter), not only “it excludes inventories”.

6. Any two users with a decision each. A bank [1] may use liquidity and profit ratios to decide whether to lend [1]. A supplier [1] may use the current ratio and acid test ratio to decide whether to give credit [1]. (Shareholders, managers, employees or government also gain credit if the decision fits.) [4] Examiner insight: Naming a user earns the identify mark only; the decision must link to a result from the accounts, such as ROCE or the acid test ratio.

7. (a) Dovecote has the higher current ratio, 1.65 against 1.5 [1]. Its acid test ratio of 1.1 means liquid assets exceed current liabilities without selling inventories [1], whereas Elmstead’s 0.5 means only half the debts are covered [1]. The supplier should offer credit to Dovecote Textiles, because payment is more likely [1]. [4] (b) Elmstead’s ROCE of 12% is higher than Dovecote’s 8% [1], so each dollar invested earns more [1]. The investor should choose Elmstead Joinery on return, though its weaker liquidity is a risk to check [1]. [3] Examiner insight: Using different ratios for different users shows application; one answer that treats both users the same usually misses the point.

8. (a) Gross profit = 880 000 − 598 400 = 281 600 [1]. Gross profit margin = 281.6 ÷ 880 × 100 = 32% [1]. ROCE = 61.6 ÷ 616 × 100 [1] = 10% [1]. [4] (b) Current assets = 160 + 34 + 10 = 204 [1]. Current ratio = 204 ÷ 170 = 1.2 [1]. Acid test = (204 − 160) ÷ 170 = 44 ÷ 170 [1] = 0.26 [1]. [4] (c) Profitability fell: gross profit margin from 35% to 32% and ROCE from 16% to 10% [1]. Capital employed rose by 116 (000) while profit fell [1]. Liquidity weakened: current ratio from 1.6 to 1.2 and acid test from 0.64 to 0.26 [1]. Cash fell from 50 to 10 while inventories rose [1]. For the bank, this suggests that the business may find it harder to meet loan repayments [1]. On balance the bank should not lend now, or should lend only with security or after a plan to reduce inventories; revenue growth of 10% is a positive but does not outweigh falling profit and weak liquidity [1]. [6] Examiner insight: Strong answers connect two or three ratios to the lender’s concern, which is repayment, and then give a decision; listing every ratio without a conclusion usually gains less.

9. Profit is earned over a period, but liquidity depends on cash available when bills are due [1]. Sales may be made on credit, so profit is recorded while customers have not yet paid [1]. Money may be tied up in inventories or new equipment [1]. The business may then be unable to pay wages or suppliers on time, even though it is profitable [1]. [4] Examiner insight: Distinguishing profit from cash is the central idea; answers that only repeat that liquidity is “important” do not explain the link.

10. (a) Gross profit = 560 000 − 364 000 = 196 000 [1]. Margin = 196 000 ÷ 560 000 × 100 [1] = 35% [1]. [3] (b) Any two. Suppliers raised the cost of materials [1], so the cost of sales rose compared with revenue [1]. Prices were cut or discounts given to attract customers [1], so less was earned on each sale [1]. (Wastage or more costly production methods are also acceptable if explained.) [4] Examiner insight: Giving ways to increase sales does not explain a fall in margin; the cause must change either selling prices or cost of sales.

11. Any two. Compare ratios with earlier years [1] to spot problems such as falling profit margin before they become serious [1]. Compare with targets or competitors [1] to decide whether prices, costs or inventories need changing [1]. (Using liquidity ratios to plan borrowing or collect money from customers is also acceptable.) [4] Examiner insight: A manager’s use of ratios should be internal and practical (control, targets, planning); answers about lending decisions belong to external users.

Where marks are usually lost

• Using cost of sales instead of revenue as the divisor for gross profit margin.
• Using revenue instead of profit in ROCE.
• Leaving inventories in the acid test calculation.
• Writing a % sign after the current ratio, or omitting it on margins and ROCE.
• Describing a result without saying what it means for the business or user.
• Giving ways to increase sales when the question is about a fall in margin.
• Naming a user without linking a ratio to a decision.
• Reaching no judgement in a justify question.

Frequently asked questions

Does the Cambridge O Level Business Studies 7115 syllabus give the ratio formulas? No. The syllabus names the ratios but does not print their formulas, so these questions use the standard textbook forms, such as gross profit margin = (gross profit ÷ revenue) × 100.

Which ratios are shown as percentages and which are not? Gross profit margin, profit margin and return on capital employed are percentages. The current ratio and acid test ratio are not, so writing a % sign after them, or leaving it off the margins and ROCE, loses marks.

What is the most common divisor mistake in ratio questions? Dividing gross profit by cost of sales instead of revenue, and using revenue instead of profit in ROCE. Show the gross profit step and each division so that a slip can be seen.

How do you answer a “justify” question on ratio analysis? Reach a clear judgement supported by two or three relevant ratios, linked to the user’s concern, and say what extra comparison would strengthen it. Listing every ratio without a conclusion usually gains less.

Next steps

• Re-read the study guide and revision notes.
• Practise past-paper style work with exam preparation.
• Check your coverage on the printable checklist and the course hub.
• Try the free 10-minute diagnostics.
• Book a free trial class: /trial/.

Official syllabus

Cambridge O Level Business Studies 7115 syllabus for examination in 2026, Cambridge International, section 5.5.