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3.5 True or False Quiz

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  • Unit 3 - Finance/
  • 3.5 Profitability & liquidity ratio analysis/
  • 3.5 True or False Quiz

Unit 3.5 - True or False Quiz: Profitability and liquidity ratio analysis

To test your understanding of this topic (Profitability and liquidity ratio analysis), answer the following true or false questions.

No.StatementTrue or False?
1.Historical comparisons of a business in two different time periods can be analysed with profitability ratios.

True

2.The gross profit margin (GPM) is calculated by using the formula:
(Gross profit ÷ Sales revenue) × 100.

True

3.ROCE stands for Rate of Capital Expenditure.

False - Return on capital employed

4.The profit margin is calculated by using the formula:
(Profit ÷ Sales revenue) × 100.

True

5.Sales turnover is an example of a profitability ratio.

False

6.Raising the price of products sold in highly competitive markets does not improve the gross profit margin (GPM) for the business.

True

7.The return on financial investments can be analysed by using profitability ratio analysis.

True

8.Adopting aggressive promotional strategies that persuade more customers to buy a firm's products can help to improve its gross profit margin (GPM).

True

9.The current ratio is calculated by using the formula:
Current liabilities ÷ Current assets.

False - Current assets ÷ Current liabilities

10.A firm’s financial performance compared with its competitors can be analysed using profitability and liquidity ratios.

True

11.The current ratio measures a firm’s liquid assets compared to its current (or short-term) liabilities.

True

12.Falling raw material prices that result in lower cost of sales (COS) does not improve the gross profit margin (GPM) of a business.

False

13.Liquidity ratios calculate how easily a business can pay off its short term debts by using its current assets.

True

14.The acid test ratio differs from the current ratio as it excludes the value of stocks which cannot be quickly turned into cash.

True

15.Return on capital employed (ROCE), gross profit margin (GPM), and profit margin are all examples of profitability ratios.

True

16.The profit margin shows how efficiently a business can turn profits into cash.

False - this is a profitability, not liquidity ratio

17.Introducing new products with a higher profit margin would improve the gross profit margin (GPM) of a business.

True

18.The higher the current ratio, the more money is tied up in liquid resources.

True

19.The ROCE ratio measures the financial performance of a business compared with the amount of capital invested in the business.

True

20.The profit margin shows what proportion of profits are being distributed to shareholders.

False - some of the profit can be retained as well

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