Business Performance Measures Revision Questions

Business Performance Measures Revision Questions

1)  Which one of the following is a measure of Return on Investment (ROI)?

1. The Current Ratio
2. The Quick Ratio
3. Profit Margin
4. Return on Capital Employed

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2)  Which one of the following defines Capital Employed?

1. Owners Funds
2. Capital
3. Capital and Long Term Liabilities
4. Assets and Liabilities

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3)  Capital is £10,000, Assets are £5,000, Long Term Loans are £10,000 and Net Profit is £5,000.  Which one of the following is the Return on Capital Employed?

1. 25%
2. 33%
3. 50%
4. None of these

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4)  Profit indicates that a business can pay its bills on time.

1. True
2. False

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5)  Gross Profit is divided by one of the following to calculate Gross Profit Margin  Which one?

1. Total Assets
2. Revenue
3. Capital
4. Reserves

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6)  Which one of the following is used in the Current Ratio calculation?

1. Debtors
2. Long Term Loans
3. Net Profit
4. Revenue

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7)  Current Assets are £10,000, Capital is £10,000, Stock is £5,000 and Current Liabilities are £5,000.  Which one of the following expresses the Current Ratio?

1. 1:1
2. 3:1
3. 0.5:1
4. 2:1

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8)  Current Assets are £10,000, Capital is £10,000, Stock is £5,000 and Current Liabilities are £5,000.  Which one of the following expresses the Quick Ratio (Acid Test Ratio)?

1. 1:1
2. 2:1
3. 3:1
4. 4:1

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9)  If the business has a Quick Ratio of 1:1 it can probably pay bills as they fall due.

1. True
2. False

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10)  A business has a Current Ratio of 1.5:1.  Current Assets are; Debtors £10,000, Stock £5,000 and Cash.  Current Liabilities are £12,000.  Which one of the following represents the Cash in the business?

1. £8,000
2. £5,000
3. £3,000
4. £13,000

Answer

Business Performance Measures Revision Answers

1)  Option (d) is correct.  The Current Ratio and the Quick Ratio measure liquidity  The Profit Margin is a measure of profit, and does not allude to the level of investment.

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2)  Option (c) is correct.  Captial Employed is a measure of all the long term funds at the disposal of the business.

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3)  Option (a) is correct.

      Return on Capital Employed (ROCE) =
            (Net Profit ÷ (Capital + Long Term Loans)) x 100.

In this example the formula equates to (£5,000 ÷ (£10,000 + £10,000)) x 100 = 25%

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4)  Option (b) is correct.  This is false.  Liquidity measures indicate whether a business can pay its bills on time.  A business can make a profit but still not have enough money to pay its bills.

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5)  Option (b) is correct.  The Gross Profit Margin shows the relationship between Gross Profit and Revenue (Sales).

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6)  Option (a) is correct.  The Current Ratio relates current assets to current liabilities.  Since debtors are listed as a current asset, it is used in the current ratio calculation.  None of the other options are current assets or current liabilities and are, therefore, incorrect.

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7)  Option (d) is correct.

      The Current Ratio = Current Assets ÷ Current Liabilities

      10,000 ÷ 5,000 = 2:1

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8)  Option (a) is correct.

      The Acid Test Ratio = (Current Assets - Stock) ÷ Current Liabilities

      (10,000 - 5,000) ÷ 5,000 = 1:1

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9)  Option (a) is correct.  This is true.  However, it maybe that some of the assets are not easily turned into cash, e.g. debtors.

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10)  Option (c) is correct.

      Current Ratio = Current Assets ÷ Current Liabilities.

      Current Assets ÷ Current Liabilities = 1.5:1

      Therefore, Current Assets = Current Liabilities x 1.5 = £18,000.

      Debtors + Stock = £15,000.  Therefore, Cash = £3,000.

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