Lesson 3.7.2

3.7.2 Analysing internal position: financial ratio analysis Quiz: AQA Business, Unit 7

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 3.7.2, Analysing internal position: financial ratio analysis: 20 multiple choice questions for the AQA Business (7132), Unit 7: Analysing the strategic position of a business, written with Revision Ninja.

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The 20 questions

  1. Which ratio relates operating profit to the long-term capital invested in the business?

    • Return on capital employed (ROCE), which measures how well long-term capital is used to generate operating profit
    • Gearing, which compares long-term borrowing with the total capital employed to show the level of financial risk
    • Current ratio, which compares current assets with current liabilities to show the short-term liquidity position of the firm
    • Payables days, which estimates the average time a business takes to pay its suppliers after receiving their invoices

  2. Which ratio measures the short-term liquidity of a business?

    • Inventory turnover, which divides cost of sales by the average value of stock held during the year
    • Current ratio, which divides current assets by current liabilities
    • Gearing ratio, which divides non-current liabilities by total capital employed for the business
    • Return on capital employed, which divides operating profit by the total capital employed in the firm

  3. What does the gearing ratio measure?

    • The percentage of operating profit that is paid out to shareholders as a dividend each year
    • The speed at which stock is sold and replaced over the course of a financial year in the firm
    • The proportion of long-term finance that comes from borrowing rather than from owners' equity
    • The average number of days a business takes to collect money owed by its customers after each sale

  4. What does receivables days measure?

    • The average number of days taken to collect money owed by customers after a credit sale
    • The average number of days taken to pay suppliers for goods and services purchased on credit by the business
    • The number of days a business takes to repay its long-term loans in full under the agreed schedule
    • The number of days stock is held in the warehouse before it is sold to a customer each financial year

  5. What does payables days measure?

    • The average number of days a business takes to pay its suppliers for goods bought on credit
    • The average number of days customers take to pay the business after receiving goods on credit terms
    • The number of days a business holds cash reserves before investing them in new projects each year
    • The number of days in a financial year on which the business records any sales at all to customers

  6. Which ratio shows how many times a business sells and replaces its stock in a year?

    • Inventory turnover, which divides cost of sales by average inventory
    • Gearing ratio, which divides long-term debt by the total capital employed in the business
    • Return on capital employed, which divides operating profit by total capital employed in the business
    • Current ratio, which divides current assets by current liabilities at the balance sheet date

  7. A business has operating profit of 180,000 pounds and capital employed of 1,200,000 pounds. What is its ROCE?

    • 15%
    • 6.7%
    • 150%
    • 22%

  8. A business has current assets of 450,000 pounds and current liabilities of 300,000 pounds. What is its current ratio?

    • 150
    • 2.5
    • 1.5
    • 0.67

  9. Revenue is 900,000 pounds and trade receivables are 60,000 pounds. What are the receivables days?

    • 24.3 days
    • 54 days
    • 365 days
    • 6.7 days

  10. Cost of sales is 540,000 pounds and trade payables are 45,000 pounds. What are the payables days?

    • 30.4 days
    • 12 days
    • 540 days
    • 83.3 days

  11. Cost of sales is 600,000 pounds and average inventory is 75,000 pounds. What is the inventory turnover?

    • 525,000 times
    • 0.125 times
    • 12 times
    • 8 times

  12. Long-term loans are 400,000 pounds and capital employed is 1,600,000 pounds. What is the gearing ratio?

    • 400%
    • 25%
    • 40%
    • 4%

  13. A firm's current ratio falls from 2.0 to 0.8 over two years. What is the most important implication?

    • The firm's shareholders have received a larger dividend than in previous years, reducing reserves
    • The firm may struggle to pay its short-term debts as they fall due, so liquidity risk has increased
    • The firm must have repaid all of its long-term borrowing, leaving no debts to be settled by it
    • The firm has become much more profitable because it holds less cash and fewer stocks than before

  14. A firm's receivables days rise from 30 to 55. What is the most likely consequence?

    • The firm's gearing falls automatically because it has less debt to repay to its lenders in the period
    • Cash flow improves because customers now pay for their goods earlier than they did in the past
    • Cash flow comes under pressure because customers are taking longer to pay and bad debts may increase
    • The firm's stock turnover must increase, because the business is selling its products much faster now

  15. A firm has high gearing. Which is the most accurate evaluation of this position?

    • High gearing always guarantees higher profits because debt costs nothing to service in any economic conditions
    • Interest and repayment obligations rise, raising downturn risk, though cheap debt can lift shareholder returns in good years
    • Gearing has no effect on risk because lenders never demand repayment from businesses in financial difficulty
    • High gearing means the firm has no long-term liabilities and therefore no interest costs to meet each year

  16. Which is a key limitation of ratio analysis when assessing a business's performance?

    • Ratios cannot be calculated from balance sheets or income statements that have been audited properly
    • Ratios need comparison over time or with other firms, and accounting policies can differ, so results may mislead
    • Ratios measure only the non-financial position of a business and cannot be linked to financial results
    • Ratios always give an exact prediction of future profits, so no other evidence is needed by managers

  17. ROCE falls from 12% to 9% while operating profit rises by 5%. Which is the most likely explanation?

    • Capital employed has fallen, so the business has less capital to use and is therefore less profitable overall
    • The current ratio has risen, which means that the business is using its long-term capital less efficiently
    • Operating profit has fallen sharply, so the ratio has dropped because profit is lower than in the previous year
    • Capital employed has grown substantially, roughly 40%, through new borrowing or investment that has not yet produced matching profit

  18. A current ratio of 4.0 may not indicate a strong position. Why might this be the case?

    • The business is certain to make losses in the coming year because liquidity is excessively high
    • The business may be holding too much cash or stock, which means working capital is not used efficiently
    • The business must have a large long-term debt that is about to be repaid in full immediately
    • The business cannot pay its suppliers because its current assets are too low to cover them

  19. A firm has ROCE of 15% and can borrow at 8%. What effect does gearing with this borrowing have on returns to shareholders?

    • There is no effect, because borrowing costs and returns are always equal in every financial year
    • Returns to shareholders must fall, because any borrowing reduces the return on every pound of capital
    • Returns to shareholders can rise, because the business earns 15% on capital that costs 8% in interest
    • Returns are guaranteed to double, because the interest cost is always lower than the total amount borrowed

  20. A business's inventory turnover falls from 8 times a year to 4 times a year. What is the most likely risk?

    • Stock is held for longer, which raises storage costs, increases the risk of obsolescence and ties up cash that could be used elsewhere
    • Stock is sold more quickly, which means the business needs to hold larger reserves of cash to replace it promptly
    • Stock turnover has no effect on cash because inventory is always recorded at its original purchase price
    • Stock is no longer needed, so the business can close its warehouse and reduce its gearing ratio to zero

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