Chapter 8 Multiple-choice questions

1. The return on capital employed ratio is:

the margin that a business makes between the buying price and selling price of goods.

a measure of operating profit compared to capital employed.

a comparison of operating profit to sales.

a measure of expense compared to sales.

2. Tom Ltd generated sales of £55,000. He made a gross profit of £22,000, and his operating profit was £8,000. His capital employed was £80,000. Calculate Tom's return on capital employed.

10%

27.5%

68.8%

14.6%

3. Williams Ltd has current assets of £55,000, which includes inventory worth £15,000. Current liabilities are £35,000 and overall net assets are £120,000. What is the acid test ratio for Williams Ltd?

1.14:1

1.57:1

2:1

1:1

4. Corn is a computer manufacturer who supplies large electrical superstores on credit. Bean is a food retailer who makes cash sales. Which of the following is true?

Corn is likely to have a higher current and acid test ratio than Bean.

Bean is likely to have a higher current ratio than Corn.

The inventory days of Corn are likely to be shorter than for Bean.

Corn and Bean are likely to have very similar trade receivable days.

5. Ned Ltd's trade receivable days have been getting shorter in recent years. Which of the following actions is likely to result in trade receivables days getting longer?

Offering a discount for prompt payment.

Sending reminder letters as soon as the debt is due.

Decreasing inventory levels.

Negotiating longer credit terms with the company's main customer.

6. Ayrton Ltd's trading account for the year ended 31 December 2024 was as follows:

All sales and purchases were made on credit and at 31 December 2024, trade receivables were £22,000 and trade payables were £19,000. Which of the following statements is true?

On average, debts are collected in 36 days and on average, Ayrton Ltd pays suppliers in 87 days.

On average, debts are collected in 50 days and on average, Ayrton Ltd pays suppliers in 36 days.

On average, debts are collected in 36 days and on average, Ayrton Ltd pays suppliers in 50 days.

On average, debts are collected in 87 days and on average, Ayrton Ltd pays suppliers in 36 days.

7. Which one of the following ratios is not a working capital management ratio?

Inventory days.

Trade receivable days.

Trade payable days.

Return on capital employed.

8. Which one of the following is not true of the current ratio?

It is a measure of the liquidity of a business.

You would expect the current ratio of a cash business to be lower than that for a credit business.

The acid test ratio will always be greater than the current ratio.

The higher the current ratio the better the liquidity of the business.

9. Claudia Ltd had the following ratios at 31 December 2022 and 31 December 2021:

Which one of the following statements is true?

The operating profit margin made by Claudia Ltd has deteriorated from 2021 to 2022.

Claudia Ltd is paying its trade payables 4 days more quickly in 2022 than in 2021.

Claudia Ltd is collecting in its debts from customers more quickly in 2022 than in 2021.

The average length of time between goods being purchased and Claudia Ltd paying for those goods, is 74 days in 2022.

10. If trade receivable days are 42 days, trade payables days 28 and inventory days 16, what is the working capital cycle in days?

54 days

86 days

2 days

30 days

Quiz Content