About Ratios and interpretation in A Level Accounting
Ratios and interpretation is one of the 7 main topics in our A Level Accounting (Cambridge (CAIE) 9706) question bank, and about 5% of its real questions come from it. Tayyari Karo has 23 real questions on this topic from 2021 to 2026, from Paper 1, Paper 2, Paper 3; 17 are multiple choice and marked instantly, and the rest are structured questions with a model answer. By difficulty: 14 medium, 7 hard, 2 easy.
Work through the questions below, then open the explanation for each one. Redo the ones you missed a few days later.
Try 8 real questions
These are real past-paper questions. Think of your answer first, then open the explanation.
May/June 2026 · Paper 1 · Ratios and interpretation
Which statements are correct?
1 Use of different accounting methods may affect comparison of financial statements across companies within the same sector.
2 Comparison of financial statements for companies in places with high inflation can be difficult due to the historic cost principle.
3 Published financial statements are useful as they reflect the up-to-date financial position of the company.
- A - 1, 2 and 3
- B - 1 and 2 only
- C - 1 and 3 only
- D - 2 and 3 only
Show answer and explanation
Answer: B. B - 1 and 2 only
Statements 1 and 2 are limitations; published statements are historic, not up to date.
May/June 2025 · Paper 1 · Ratios and interpretation
Which statements about ratios are correct?
1. Ratios are affected by accounting policies.
2. Ratios can be compared with industry averages.
3. Ratios generally ignore inflation.
4. Ratios include non-monetary items.
- A - 1, 2 and 3
- B - 1, 2 and 4
- C - 1, 3 and 4
- D - 2, 3 and 4
Show answer and explanation
Answer: A. A - 1, 2 and 3
Statements 1, 2 and 3 are correct. Statement 4 is incorrect: ratios primarily use monetary information.
October/November 2025 · Paper 1 · Ratios and interpretation
Profit from operations $125 000. Profit for the year $116 000. Shareholders' equity $423 000. Long-term loan $80 000. Current liabilities $45 000. What is the return on capital employed?
- A - 21.17%
- B - 22.81%
- C - 23.06%
- D - 24.85%
Show answer and explanation
Answer: D. D - 24.85%
Capital employed = $423 000 + $80 000 = $503 000. ROCE = $125 000 / $503 000 x 100 = 24.85%. Answer D.
May/June 2023 · Paper 1 · Ratios and interpretation
Gordon sells goods on credit to Sybil. Which information from Sybil's financial statements is of greatest interest to Gordon?
- A - current ratio
- B - gross profit margin
- C - mark-up
- D - return on capital employed
Show answer and explanation
Answer: A. A - current ratio
Gordon, as a trade receivable supplier, would be most interested in Sybil's liquidity position, measured by the current ratio.
October/November 2023 · Paper 1 · Ratios and interpretation
Revenue $280 000, gross profit $60 000. Closing inventory understated by $10 000. GP margin after correction?
- A - 17.9%
- B - 20.7%
- C - 21.4%
- D - 25.0%
Show answer and explanation
Answer: D. D - 25.0%
Corrected GP = $60 000 + $10 000 = $70 000. GP margin = $70 000 / $280 000 = 25%. Answer D.
October/November 2022 · Paper 1 · Ratios and interpretation
What does return on capital employed measure?
- A - efficiency to generate profit from total assets
- B - efficiency to generate profit from total liabilities
- C - efficiency to generate profit from non-current assets
- D - efficiency to generate profit from shareholders' equity and non-current liabilities
Show answer and explanation
Answer: D. D - efficiency to generate profit from shareholders' equity and non-current liabilities
ROCE measures how efficiently a business uses its capital employed (equity + non-current liabilities) to generate profit.
May/June 2024 · Paper 3 · Ratios and interpretation
(a) Explain the stewardship role of directors in a public limited company.
(b) Calculate the working capital cycle.
(c) Calculate P/E ratio, dividend yield, and interest cover.
(d) Explain why X plc has performed better than M plc in managing the working capital cycle.
Show model answer
(a) In a PLC, ownership and control are separated. Directors are accountable to shareholders. They are entrusted to manage assets and daily operations. They should act in shareholders' best interests, exercising professionalism and integrity.
(b) Sales revenue $870 000 (x1.25). Cost of sales $600 000. Purchases $609 000. Trade receivables 60 days. Inventory 51 days. Trade payables 75 days. Working capital cycle = 60 + 51 - 75 = 36 days.
(c)(i) EPS = $140 000 / 500 000 = $0.28. P/E = $2.56 / $0.28 = 9.14.
(c)(ii) Dividend per share = ($40 000/500 000) + $0.14 = $0.22. Dividend yield = $0.22/$2.56 x 100% = 8.59%.
(c)(iii) Debenture interest = $180 000 x 6% = $10 800. …
The full model answer is in the app.
May/June 2023 · Paper 3 · Ratios and interpretation
(a) State two comparisons a business may make using ratios.
(b) Calculate: (i) net assets at 31 Dec 2022, (ii) retained earnings at 31 Dec 2022, (iii) retained earnings at 1 Jan 2022.
(c) Calculate: (i) working capital cycle, (ii) gearing ratio.
(d) Advise directors whether to be concerned about the working capital cycle.
Show model answer
(a) Trend analysis; inter-company comparison; industry average (max 2).
(b)(i) Non-current assets $515 625, inventory $44 000, receivables $76 400, payables ($32 900), cash $81 000, debenture ($100 000) = $584 125.
(b)(ii) Equity $584 125, share capital ($300 000), share premium ($30 000) = retained earnings $254 125.
(b)(iii) Retained earnings at 31 Dec $254 125, profit $187 500, dividend ($90 000) = retained earnings at 1 Jan $156 625.
(c)(i) Trade receivables: ($76 400/$825 000) x 365 = 34 days. Inventory: avg inventory $56 000, cost of sales $429 000, turnover 48 days. Trade payables: ($32 900/$405 000) x 365 = 30 days. Working capital cycle = 34 + 48 - 30 = 52 days. …
The full model answer is in the app.
