Ratio

2
1 Razia, a sole trader, started her business on 1 July 2015 selling ladies’ clothing. Razia did not
keep proper books of account, but was able to provide the following information.
Summary of bank account for the year ended 30 June 2016
$ $
Capital introduced 36 340 Payments to trade payables 80 690
Cash banked 78 780 Shop rental 25 200
Balance c/d 4 330 Shop fixtures and fittings 3 600
Purchase of motor vehicle 5 800
Motor expenses 3 140
Light and heat 1 020
119 450 119 450
Additional information
1 Total revenue for the year was $92 600. All sales were made for cash.
2 Razia kept no record of her cash drawings.
3 The following expenses were paid from cash takings before the money was banked:
$
General expenses 950
Assistants’ wages 2870
4 Cash in hand at 30 June 2016 was $1250.
REQUIRED
(a) Prepare the cash account, showing clearly the value of Razia’s drawings for the year.
[4]
© UCLES 2017 9706/22/F/M/17

3
1 All sales made a gross margin of 40%.
2 During the year, Razia had taken goods, $640 at cost price, for her own use.
3 Inventory at 30 June 2016 had been counted and was valued at cost price $31 900. Razia
was aware that some goods had been stolen during the year.
4 Razia owed $8940 to trade suppliers at 30 June 2016.
REQUIRED
(b) Calculate the value of inventory stolen during the year ended 30 June 2016 at cost price.
[4]
1 At 30 June 2016, the following expenses were accrued:
$
Assistants’ wages 120
Light and heat 150
2 Non-current assets should be depreciated as follows:
Shop fixtures and fittings at 15% per annum using the reducing balance method
Motor vehicle using the straight-line method over five years. The estimated residual
value of the motor vehicle after five years is $400.
3 The annual charge for shop rental is $21 600.
© UCLES 2017 9706/22/F/M/17 [Turn over

4
REQUIRED
(c) Prepare the income statement for the year ended 30 June 2016.
[8]
© UCLES 2017 9706/22/F/M/17

5
(d) Calculate, to two decimal places, the following ratios at 30 June 2016. State the formula
used in each case.
(i) Current ratio
Formula
Calculation
[2]
(ii) Liquid (acid test) ratio
Formula
Calculation
[2]
(e) (i) Name two other ratios a business could calculate to explain its liquidity position.
2 [2]
(ii) State two limitations of using ratio analysis.
[2]
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Razia’s brother has suggested that Razia should increase the mark-up on her goods.
REQUIRED
(f) Advise Razia whether or not she should increase the mark-up on her goods. Justify your
answer by discussing advantages and disadvantages of doing this.
[6]
[Total: 30]
© UCLES 2017 9706/22/F/M/17

5
2 The following is an extract of Chikkadea’s financial statements (final accounts) for the year For
ended 30 April 2010. Examiner’s
Use
Income Statement (Trading and Profit and Loss account)

for the year ended 30 April 2010
$ $
Revenue (Sales) 375 000
Less cost of sales:
Inventory (Stock) at 1 May 2009 32 000
Ordinary goods purchased (Purchases) 281 250
313 250
Inventory (Stock) at 30 April 2010 28 000 285 250
Gross profit 89 750
Less expenses 44 750
Profit for the year (Net Profit) 45 000
Balance Sheet at 30 April 2010

Assets $ $
Non-current (Fixed) assets 428 000
Current assets
Inventory (Stock) 28 000
Trade receivables (Debtors) 22 500
Cash and cash equivalents (Bank) 1 500 52 000
Total assets 480 000
Equity and liabilities

Equity:
Capital 450 000
Current Liabilities
Trade payables (Creditors) 30 000
480 000
The following have been calculated for Dakeeri, a competitor in the same type of business.
(i) Gross profit ratio 20.2%
(ii) Net profit ratio 10%
(iii) Return on capital employed 9%
(iv) Return on total assets 8%
(v) Current (working capital) ratio 1.5 : 1
(vi) Liquid (acid test) ratio 0.7 : 1
(vii) Receivable days (Debtors’ turnover) 28 days
(viii) Payable days (Creditors’ turnover) 35 days
(ix) Inventory turnover (Rate of stockturn) 8 times

© UCLES 2010 9706/21/M/J/10 [Turn over
6
REQUIRED For
Examiner’s
(a) Calculate the same ratios for Chikkadea’s business. In order to gain full marks you must Use
show the formula or your workings for each calculation.
Where possible show your answers to one decimal place.

The first answer has been given as an example.
Gross Profit 89 750 × 100

(i) × 100 = = 23.9%
Sales 375 000
(ii) ..................................................................................................................................
(iii) ..................................................................................................................................
(iv) ..................................................................................................................................
(v) ..................................................................................................................................
(vi) ..................................................................................................................................
(vii) ..................................................................................................................................
(viii) ..................................................................................................................................
(ix) ..................................................................................................................................
[16]
© UCLES 2010 9706/21/M/J/10

7
(b) (i) Name the business which performed better during the year ended For
30 April 2010. Examiner’s
Use
............................................................................................................................ [2]
(ii) Justify your answer to (b) (i) by comparing four of the ratios which you have
calculated with the same four ratios given for Dakeeri.
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
.......................................................................................................................... [12]
[Total: 30]

2
1 The following information relates to two businesses, one of which manufactures computers For
whilst the other is a food wholesaler. All sales and purchases are on credit. Examiner's
Use
Business X Business Y
Gross profit ratio 54% 30%

Net profit ratio 18% 6%
Current ratio 1.6:1 0.5:1
Trade receivables turnover 40 days 3 days
Return on capital employed 5.4% 12%
Cost of sales $248 400 $1 050 000
Closing inventory $38 000 $48 000
Cash and cash equivalents $30 000 $14 000
Long-term loan $1 000 000 $50 000
For calculations, assume a 360-day year.
REQUIRED
(a) State and explain which business is the computer manufacturer and which is the food
wholesaler.
[3]
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3
(b) Prepare, as fully as the given information allows, income statements for both businesses. For
Examiner's
Use
Income Statements
$ $
Revenue
Less Cost of sales
Gross profit
Expenses
Profit for the year [8]
(c) Prepare, as fully as the given information allows, statements of financial position for
both businesses.
Statements of Financial Position
$ $ $ $
Non-current assets
Current assets
Inventory
Trade receivables
Cash and cash

equivalents
Total assets
Current liabilities
Trade payables
Net assets
Capital
Non-current liabilities
Loan
Capital employed [12]

4
(d) (i) Define the term liquidity. For

Examiner's
Use
[2]
(ii) State which business is more likely to have liquidity problems.
[1]
(iii) State which ratio gives most concern and why it does so.
[4]
[Total: 30]
© UCLES 2013 9706/22/M/J/13

6
2 B M Reid’s books of account showed the following figures for the year ended 31 December 2012: For
Examiner's
Use
$
Revenue 200 000
Ordinary goods purchased 145 000
Profit from operations 22 500
Reid’s balances at 31 December 2012 were:

Inventory 12 500
Trade receivables 40 000
Cash and cash equivalents 10 000
Trade payables 25 000
Finance costs (interest owing) 12 500
Non-current assets at net book value 60 000
Additional information:
1 80% of revenue was on credit

2 Inventory at 1 January 2012 was $17 500
3 Trade payables and trade receivables balances were unchanged since
1 January 2012.
REQUIRED
(a) Calculate the following ratios, correct to two decimal places, in each case stating the
formula used.
(i) Mark-up
[3]
(ii) Inventory turnover
[3]
(iii) Trade receivables turnover
[3]
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(iv) Operating expenses to revenue ratio For

Examiner's
Use
[3]
(v) Current ratio
[3]
(vi) Acid test/liquid ratio
[3]
(vii) Non-current asset turnover.
[3]

8
For the year ended 31 December 2011 the following ratios were: For
Examiner's
Use
Inventory turnover 13 times
Trade receivables turnover 70 days
REQUIRED
(b) Use the above ratios to compare B M Reid’s performance with the year ended
31 December 2012. State possible reasons for the changes.
[5]
(c) State two limitations of the uses of ratios.
[4]
[Total: 30]
© UCLES 2013 9706/23/M/J/13

6
2 Bradley, a sole trader, provided the following information for the year ended 31 March 2014.
$
Revenue 420 000
Opening inventory 40 000
The rate of mark up is 40%.
The rate of inventory turnover is 5 times per annum.
REQUIRED
(a) Explain what is meant by mark up.
[2]
(b) Prepare the trading section of the income statement for the year ended 31 March 2014.
© UCLES 2015 9706/21/M/J/15

7
Workings:
[9]
(c) State the formula for calculating margin.
[2]
At 31 March 2014, the net book value of the non-current assets was $550 000.
REQUIRED
(d) (i) Explain what the non-current asset turnover measures.
[4]

8
(ii) State the formula to calculate the non-current asset turnover ratio. Calculate the non-current
asset turnover ratio correct to two decimal places.
Ratio Formula Calculation
non-current asset turnover
[3]
(e) Explain why a provision for doubtful debts may be necessary.
[3]
Bradley provides for doubtful debts at the rate of 4%.
The provision for doubtful debts at 1 April 2013 was $1650.
Trade receivables at 31 March 2014 were $35 000.
REQUIRED
(f) Prepare Bradley’s provision for doubtful debts account for the year ended 31 March 2014.
[3]
© UCLES 2015 9706/21/M/J/15

9
(g) State how the provision for doubtful debts is shown in:
(i) income statement
[2]
(ii) statement of financial position
[2]
[Total: 30]

6
2 Alberto is a retailer and has provided the following statement of financial position at 31 August 2014.
$
Assets
Non-current assets 350 000
Current assets
Inventory 65 000
110 000
Total assets 460 000
Capital and liabilities

Owner’s capital 420 000
Current liabilities
Bank overdraft 18 000
40 000
Total capital and liabilities 460 000
The following additional information is also available for the year ended 31 August 2014.
$
Inventory at 1 September 2013 50 000
Purchases (all on credit) 280 000
Revenue (all on credit) 425 000
REQUIRED
(a) Complete the following table.
Ratio Formula Calculation
Inventory turnover (in days)
Trade receivables turnover

(in days)
Trade payables turnover

(in days)
Non-current asset turnover
Current ratio
[13]
© UCLES 2015 9706/23/M/J/15

7
Credit terms negotiated with both customers and suppliers are 30 days net. Last year Alberto’s
inventory turnover was 60 days.
REQUIRED
(b) Evaluate Alberto’s performance in respect of the following ratios.
(i) Inventory turnover
[3]
(ii) Trade receivables turnover
[3]
(iii) Trade payables turnover
[3]

8
Alberto is considering expanding his business by forming either a partnership or a private limited
company.
REQUIRED
(c) State two advantages and two disadvantages of each option.
Partnership
Advantages:
Disadvantages:
Private limited company
Advantages:
Disadvantages:
[8]
[Total: 30]
© UCLES 2015 9706/23/M/J/15

8
2 The following information has been extracted from the financial statements of Thaw Limited at
31 December 2015.
$
Revenue 156 000
Purchases 88 000
Inventory at 31 December 2015 42 000
Operating expenses 48 000
Other receivables 2 000
Cash in hand 1 000
Other payables 8 000
Bank overdraft 10 000
8% debenture (2019 – 2021) 6 000
1 Inventory at 1 January 2015 was valued at $34 000.
2 All sales and purchases were on credit.
REQUIRED
(a) Calculate the following ratios for Thaw Limited.
(i) Current ratio to two decimal places.
[1]
(ii) Liquid (acid test) ratio to two decimal places.
[1]
© UCLES 2016 9706/23/M/J/16

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(iii) Trade receivables turnover (days)
[1]
(iv) Trade payables turnover (days)
[1]
(v) Inventory turnover (days)
[1]
(b) Discuss the ratios calculated in part (a) in respect of Thaw Limited’s liquidity and comment
on the overall position.
[4]

10
(c) Explain three limitations of ratio analysis.
[6]
[Total: 15]
© UCLES 2016 9706/23/M/J/16

8
3 Stapleton provided the following information for the year ended 30 April 2016:
$
Gross profit 37 150
1 All goods were sold to achieve a 20% gross margin.
2 Cash sales were $18 575. All other sales were on a credit basis.
3 All purchases were on a credit basis.
4 Trade receivables at 30 April 2016 were $16 500.
5 Trade payables at 30 April 2016 were $9500.
6 Inventory turnover was 5 times per annum.
REQUIRED
(a) Calculate the trade receivables turnover (days). State the formula used.
Formula
Calculation
[4]
(b) Calculate closing inventory.
[4]
© UCLES 2017 9706/23/M/J/17

9
(c) Calculate the trade payables turnover (days). State the formula used.
Formula
Calculation
[4]
(d) State three uses of ratio analysis to a trader.
[3]
[Total: 15]

12
3 Anna has obtained the following data at 31 December 2016 in respect of Ravi, a possible new
customer.
$
Cash and cash equivalents 4 840 debit
Inventory 38 100
Other figures obtained are:
Sales for the year 331 750

Inventory at 1 January 2016 46 200
Ravi has a mark-up of 25%.
REQUIRED
(a) Calculate the following ratios for Ravi’s business to two decimal places:
(i) Current ratio
[2]
(ii) Liquid (acid test) ratio
[2]
(iii) Rate of inventory turnover
[3]
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13
Anna has also obtained the following data in respect of Yuan, another possible customer.
Current ratio 3.82 : 1

Liquid (acid test) ratio 1.63 : 1
Rate of inventory turnover 6.69 times per year
Anna’s main concern when choosing the customer is that they should pay her promptly.
REQUIRED
(b) Advise Anna which customer she should choose. Justify your answer.
[5]
(c) State three limitations to a business of using ratio analysis.
[3]
[Total: 15]

6
2 (a) Complete the following table stating the formula used to calculate the ratio, what the
ratio measures and reasons why it may change. For
Examiner's
Use
Ratio Formula What the ratio Why the ratio may
measures change
Gross profit ratio
Inventory turnover
Quick (acid test)

ratio
Return on capital
employed
Trade receivables
turnover
[20]
© UCLES 2013 9706/21/O/N/13

7
(b) State and explain five limitations of using ratio analysis as an indicator of business For
performance. Examiner's
Use
[10]
[Total: 30]
© UCLES 2013 9706/21/O/N/13 [Turn over

6
2 Luing Limited’s financial information for the year ended 31 December 2012 revealed the
following: For
Examiner's
Use
Gross profit ratio 35%
Net profit ratio 14%
Rate of inventory turnover 10 times
Trade payables turnover 42 days
Trade receivables turnover 58 days
Current ratio 3:1
Inventory at 1 January 2012 $7 800 000
Total revenue (all on credit) for 2012 $85 000 000
All purchases were on credit.
REQUIRED
(a) For the year ended 31 December 2012, calculate
(i) Gross profit
[2]
(ii) Cost of sales
[2]
(iii) Closing inventory
[4]
(iv) Ordinary goods purchased
[3]
© UCLES 2013 9706/23/O/N/13

7
(v) Profit for the year For

Examiner's
Use
[2]
(vi) Expenses
[2]
(vii) Trade payables
[3]
(viii) Trade receivables
[3]

8
(b) Identify three possible users of accounting ratios other than the directors of the
company. State what information the users would obtain from the ratios. For
Examiner's
Use
1
[9]
[Total: 30]
© UCLES 2013 9706/23/O/N/13

8
2 Nibali has provided the following information for the year ended 31 July 2019.
$
Closing inventory 50 000
Revenue 750 000
Cash sales are 10% of total revenue.
Cash purchases are 25% of total purchases.
Gross margin is 20%.
Nibali’s standard credit terms with both customers and suppliers are 30 days.
Industry average inventory turnover is 15 days.
REQUIRED
(a) Calculate:
(i) inventory turnover in days
[2]
(ii) trade receivables turnover in days
[2]
© UCLES 2019 9706/22/O/N/19

9
(iii) trade payables turnover in days.
[3]
(b) Discuss the liquidity of Nibali’s business based on the available information.
[5]
(c) Identify three drawbacks for a business of holding too much inventory.
[3]
[Total: 15]

12
3 Maria is a sole trader. Her financial statements for the year ended 31 December 2018 included
the following:
$
Revenue 163 000
Gross profit 42 700
Profit for the year 16 500
Inventory 1 January 2018 17 800
Inventory 31 December 2018 19 600
Cash and cash equivalents 2 700
Capital 130 000
REQUIRED
(a) Calculate the following ratios to two decimal places:
(i) gross margin
[1]
(ii) profit margin
[1]
(iii) rate of inventory turnover (in times)
[2]
© UCLES 2019 9706/23/O/N/19

13
(iv) current ratio
[1]
(v) liquid (acid test) ratio
[1]
(vi) return on capital employed (ROCE).
[1]

14
Maria’s ratios for 2017 were as follows:

1 Gross margin 23.63%
2 Profit margin 12.05%
3 Rate of inventory turnover 7.36 times
4 Current ratio 3.85 : 1
5 Liquid (acid test) ratio 2.04 : 1
6 ROCE 14.65%
REQUIRED
(b) Suggest possible reasons for the changes in Maria’s business between 2017 and 2018 in
respect of:
(i) profitability
[2]
(ii) liquidity.
[2]
© UCLES 2019 9706/23/O/N/19

15
(c) Identify two external stakeholders.
Explain why they may be interested in the financial statements of a business.
Stakeholder 1
Interest
Stakeholder 2
Interest
[4]
[Total: 15]

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2

Summary of bank account for the year ended 30 June 2016

2 Razia kept no record of her cash drawings.

4 Cash in hand at 30 June 2016 was $1250.

© UCLES 2017 9706/22/F/M/17

1 All sales made a gross margin of 40%.

4 Razia owed $8940 to trade suppliers at 30 June 2016.

1 At 30 June 2016, the following expenses were accrued:

2 Non-current assets should be depreciated as follows:

3 The annual charge for shop rental is $21 600.

© UCLES 2017 9706/22/F/M/17 [Turn over

© UCLES 2017 9706/22/F/M/17

(i) Current ratio

(ii) Liquid (acid test) ratio

(ii) State two limitations of using ratio analysis.

© UCLES 2017 9706/22/F/M/17 [Turn over

© UCLES 2017 9706/22/F/M/17

Income Statement (Trading and Profit and Loss account)

Balance Sheet at 30 April 2010

Equity and liabilities

(i) Gross profit ratio 20.2%

(ii) Net profit ratio 10%

(iii) Return on capital employed 9%

(iv) Return on total assets 8%

(v) Current (working capital) ratio 1.5 : 1

(vi) Liquid (acid test) ratio 0.7 : 1

(vii) Receivable days (Debtors’ turnover) 28 days

(viii) Payable days (Creditors’ turnover) 35 days

(ix) Inventory turnover (Rate of stockturn) 8 times

show the formula or your workings for each calculation.

Where possible show your answers to one decimal place.

Gross Profit 89 750 × 100

© UCLES 2010 9706/21/M/J/10

© UCLES 2010 9706/21/M/J/10 [Turn over

Gross profit ratio 54% 30%

For calculations, assume a 360-day year.

© UCLES 2013 9706/22/M/J/13

Less Cost of sales

Profit for the year [8]

Statements of Financial Position

Cash and cash

Capital employed [12]

© UCLES 2013 9706/22/M/J/13 [Turn over

(d) (i) Define the term liquidity. For

(ii) State which business is more likely to have liquidity problems.

© UCLES 2013 9706/22/M/J/13

Reid’s balances at 31 December 2012 were:

1 80% of revenue was on credit

(ii) Inventory turnover

(iii) Trade receivables turnover

© UCLES 2013 9706/23/M/J/13

(iv) Operating expenses to revenue ratio For

(v) Current ratio

(vi) Acid test/liquid ratio

(vii) Non-current asset turnover.

© UCLES 2013 9706/23/M/J/13 [Turn over

Trade receivables turnover 70 days

(c) State two limitations of the uses of ratios.

© UCLES 2013 9706/23/M/J/13

The rate of mark up is 40%.

The rate of inventory turnover is 5 times per annum.

(a) Explain what is meant by mark up.

© UCLES 2015 9706/21/M/J/15

(c) State the formula for calculating margin.