IGCSE Cambridge (CIE) Business 1 hour 15 questions
Exam Questions
5.5 Analysing the
Accounts
Profitability & Liquidity / Using Profitability Ratios To Analyse Performance / Using
Liquidity Ratios To Analyse Performance / How Stakeholders Use the Accounts
Easy (7 questions) /16 Scan here to return to the course
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Medium (6 questions) /36
Hard (2 questions) /24
Total Marks /76
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Easy Questions
Case Study
AHG is an established business as it has been operating for a long time. It sells
garden products including plants and flowers. AHG uses competitive pricing. The
business has 4 managers and 30 other employees. All AHG’s managers use
delegation. The Finance Manager is analysing AHG’s statement of financial
position as she is interested in its liquidity. An extract is shown below
Extract from AHG’s statement of financial position at 30 March 2022
($000)
Non-current assets 800
Current assets 660
Current liabilities 600
Outline two possible reasons why liquidity is important to AHG.
(4 marks)
2 Identify two financial statements a public limited company is legally required to publish
each year.
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(2 marks)
3 Identify two external users of accounts.
(2 marks)
4 Define ‘Return on Capital Employed’.
(2 marks)
5 Identify two profitability ratios.
(2 marks)
Case Study
Kemala makes high-quality beauty products. Demand for her best-selling hand
cream is price inelastic. She advertises her products in specialist beauty
magazines. Kemala is analysing her income statement. An extract is shown in the
below table. She said: ‘When I started my business, I did not understand why
cash is important’.
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Extract from Kemala’s income statement 2021 ($000)
Revenue 480
Gross profit 192
Profit for the year 72
Calculate Kemala's gross profit margin in 2021.
Show your workings.
(2 marks)
7 Define 'profitability'.
(2 marks)
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Medium Questions
Case Study
Elton is a sole trader. He sells specialist clothing and equipment for sports,
including baseball and hockey. It is a niche market. Elton started his business 5
years ago and it has remained small. A wide range of inventory is important.
Elton has been looking at the financial performance of his business. The profit
margin for 2018 was 35%. An extract of the accounts is shown in the below table.
Revenue and cost information for Elton’s business for 2018 and 2019 ($)
2018 2019
Revenue ($) 24 000 25 000
Cost of sales ($) 7 200 Y
Gross profit ($) 16 800 18 000
Expenses ($) 8 400 10 000
Profit ($) X 8 000
Do you think Elton should be pleased with the financial performance of his business?
Justify your answer using appropriate ratios.
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(6 marks)
Case Study
PJA make fashion clothing for 16-25 year olds. Many of its competitors are
multinational companies. PJA produce new products every 3 weeks. All PJA’s
products are made in a local factory because 2 of import quotas. The Managing
Director is reviewing PJA’s financial statements using ratio analysis. An extract is
shown in Table 2.1.
Table 2.1 Extract from PJA’s financial statements for 2020
Revenue ($m) 7,400
Gross profit ($m) 3,330
Profit ($m) 1, 100
Current ratio 1.5
Return on Capital Employed (ROCE) 8%
Explain two ways PJA’s managers can use ratio analysis.
(6 marks)
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3
Case Study
VCG manufactures high-quality briefcases and travel bags. VCG has 50 skilled
production workers in its factory. VCG is planning to expand by building a second
factory. Different locations are being considered. The Managing Director is
reviewing VCG’s financial statements. An extract is shown in the below table.
Both internal and external stakeholder groups of VCG are interested in this
information.
Extract from VCG’s 2021 financial statements ($)
Revenue 2 000 000
Current assets 300 000
Current liabilities 250 000
Shareholders’ equity (funds) 800 000
Explain one way each of the following stakeholder groups might use VCG’s accounts:
Shareholders
Suppliers
(6 marks)
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4
Case Study
CPK operates 5 sports clubs. Each club offers a range of activities including gym
and yoga classes. CPK uses job enrichment to keep its 60 employees well-
motivated. Having the right marketing mix is important to CPK’s success. The
Finance Director is analysing CPK’s financial statements. An extract is shown in
the below table. He wants to know how an increase in taxation might affect CPK’s
business.
Extract from CPK’s financial statements
2020 2021
Current ratio 1.6 1.3
Profit margin 12% 10%
Non-current assets $2m $2m
Explain one possible effect on CPK of the change in each of the following ratios as shown
in the above table.
Current ratio
Profit margin
(6 marks)
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5 Using the data in Appendix 3, calculate the following ratios for CC:
Gross profit margin
Profit margin
Current ratio
Acid test ratio
Show your workings.
Refer to the following insert when answering the question
(6 marks)
Case Study
Izaak owns a small fish restaurant. He employs two chefs (cooks) and three
workers who serve in the restaurant.
Izaak has been trying to increase added value to improve profits. Izaak has been
looking at the financial performance of his business. An extract is shown in the
table below. Izaak has received a number of complaints about food and service.
He knows he must improve quality but cannot decide on the best way to do this.
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Last year Current year
Revenue X 300
Cost of sales 180 150
Gross profit 120 150
Expenses 90 Y
Profit 30 15
Do you think the profitability of Izaak’s fish restaurant has improved since last year?
Justify your answer using appropriate ratios.
(6 marks)
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Hard Questions
1 Using Appendix 3 and other information, consider how the financial statements might be
useful to the following three stakeholder groups.
NM’s shareholders
CC’s managers
CC’s bank manager
Which stakeholder group will find the financial information most useful? Justify your
answer.
Refer to the following insert when answering the question
(12 marks)
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2 Consider the weekly forecasts in Appendix 2 for the two additional services Bethany
could choose:
hair cuts
steam room.
Which additional service should Bethany choose to offer? Include a calculation of profit
for the two services to justify your answer.
Refer to the following insert when answering the question
(12 marks)
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