Analysing financial statements: ratio analysis - Worksheets, Questions and Revision

8 original exam-style questions - 4 pages of questions with a full mark scheme - free printable PDF.

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This topic is chapter 6 of GCSE Business: Finance Practice Book.

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3.6 Analysing financial statements: ratio analysis

AQA 8132 · Calculator allowed · about 50 minutes

Total Marks

Name: _______________________________ Date: ____ / ____ / ______

Answer ALL questions in the spaces provided. Show your working for every calculation: method marks are available even if your final answer is wrong. Foxglove Fitness Studio, used throughout this pack, is a fictional business.

Foxglove Fitness Studio's current assets and current liabilities were: Year 1 - current assets £20,000, current liabilities £16,000; Year 2 - current assets £21,000, current liabilities £21,000.

(a)Calculate Foxglove Fitness Studio's current ratio for Year 1. Give your answer to 2 decimal places. Show your working.(2)

(b)Calculate Foxglove Fitness Studio's current ratio for Year 2. Give your answer to 2 decimal places. Show your working.(2)

(Total for Question 1 is 4 marks)

In Year 1, Foxglove Fitness Studio, a fictional gym, had revenue of £150,000, cost of sales of £60,000 and expenses of £66,000.

(a)Calculate Foxglove Fitness Studio's gross profit for Year 1. Show your working.(2)

(b)Using your answer to part a, calculate Foxglove Fitness Studio's gross profit margin for Year 1, as a percentage of revenue. Give your answer to 1 decimal place.(2)

(c)Calculate Foxglove Fitness Studio's net profit for Year 1. Show your working.(2)

(d)Using your answer to part c, calculate Foxglove Fitness Studio's net profit margin for Year 1, as a percentage of revenue. Give your answer to 1 decimal place.(2)

(Total for Question 2 is 8 marks)

In Year 2, Foxglove Fitness Studio's revenue was £180,000, cost of sales was £81,000 and expenses were £72,000.

(a)Calculate Foxglove Fitness Studio's gross profit margin for Year 2, as a percentage of revenue. Give your answer to 1 decimal place. Show your working.(2)

(b)Calculate Foxglove Fitness Studio's net profit margin for Year 2, as a percentage of revenue. Give your answer to 1 decimal place. Show your working.(2)

(Total for Question 3 is 4 marks)

State what a current ratio tells us about a business, and comment on whether Foxglove Fitness Studio's liquidity position improved or worsened between Year 1 and Year 2 (question 1).

(Total for Question 4 is 2 marks)

Using your answers to questions 2b and 3a, state whether Foxglove Fitness Studio's gross profit margin improved or declined between Year 1 and Year 2, and calculate by how many percentage points. Show your working.

(Total for Question 5 is 3 marks)

Using your answers to questions 2d and 3b, state whether Foxglove Fitness Studio's net profit margin improved or declined between Year 1 and Year 2, and calculate by how many percentage points. Show your working.

(Total for Question 6 is 3 marks)

Explain one possible reason why Foxglove Fitness Studio's gross profit margin fell between Year 1 and Year 2, even though its revenue increased.

(Total for Question 7 is 3 marks)

Foxglove Fitness Studio's Year 2 results show revenue and gross profit both grew compared with Year 1, but its gross profit margin fell from 60.0% to 55.0%, its net profit margin fell from 16.0% to 15.0%, and its current ratio fell from 1.25 to 1.00 (questions 1, 2, 3, 5, 6 and 7). Callum, the owner, is deciding whether to describe Year 2 as a successful year for the business.
Recommend whether Callum should view Year 2 as a success. Justify your answer using the figures given in this pack.

(Total for Question 8 is 12 marks)

Mark scheme · 3.6 Analysing financial statements: ratio analysis

Question 1

(a) M1 20,000 / 16,000 seen
(a) A1 1.25 (or 1.25:1) cao
(a) Answer: 1.25 (or 1.25:1).
(b) M1 21,000 / 21,000 seen
(b) A1 1.00 (or 1.00:1) cao
(b) Answer: 1.00 (or 1.00:1).

Question 2

(a) M1 150,000 - 60,000 seen
(a) A1 £90,000 cao
(a) Answer: £90,000.
(b) M1 90,000 / 150,000 x 100 seen (ft from part a)
(b) A1 60.0% cao
(b) Answer: 60.0%.
(c) M1 90,000 - 66,000 seen (ft from part a)
(c) A1 £24,000 cao
(c) Answer: £24,000.
(d) M1 24,000 / 150,000 x 100 seen (ft from part c)
(d) A1 16.0% cao
(d) Answer: 16.0%.

Question 3

(a) M1 (180,000 - 81,000) / 180,000 x 100 seen (= 99,000 / 180,000 x 100)
(a) A1 55.0% cao
(a) Answer: 55.0%.
(b) M1 (99,000 - 72,000) / 180,000 x 100 seen (= 27,000 / 180,000 x 100)
(b) A1 15.0% cao
(b) Answer: 15.0%.

Question 4

B1 the current ratio shows whether a business has enough current (short-term) assets to cover its current (short-term) liabilities
B1 Foxglove Fitness Studio's liquidity worsened, since the ratio fell from 1.25 in Year 1 to 1.00 in Year 2, leaving no safety margin
Answer: The current ratio measures short-term liquidity; Foxglove Fitness Studio's worsened, falling from 1.25 to 1.00.

Question 5

B1 declined (fell)
M1 60.0% - 55.0% seen (ft from questions 5b and 6a)
A1 5.0 percentage points cao
Answer: Declined by 5.0 percentage points.

Question 6

B1 declined (fell)
M1 16.0% - 15.0% seen (ft from questions 5d and 6b)
A1 1.0 percentage point cao
Answer: Declined by 1.0 percentage point.

Question 7

B1 identifies that cost of sales may have risen faster, as a proportion of revenue, than revenue itself, e.g. through higher supplier prices
B1 develops the point with figures, e.g. cost of sales rose from 60,000 to £81,000 (a 35% increase), while revenue rose from 150,000 to £180,000 (only a 20% increase)
B1 links clearly to an outcome, e.g. this squeezed the gross profit kept from each pound of revenue, lowering the margin even though total gross profit in pounds rose (from 90,000 to 99,000)
Answer: Cost of sales grew faster (35%) than revenue (20%), squeezing the gross margin even though total gross profit rose in pounds.

Question 8

Level 1 (1-4): Makes simple, undeveloped comments about Year 2, with little or no use of the pack's figures and no clear recommendation.
Level 2 (5-8): Gives a developed argument for or against viewing Year 2 as a success, using some of the pack's figures, but does not fully weigh both sides or reach a clearly justified recommendation.
Level 3 (9-12): Weighs the evidence for and against viewing Year 2 as a success, using the margin, current ratio and absolute profit figures from this pack, and reaches a justified recommendation supported by that analysis.
Indicative content:
- For success: total revenue grew by £30,000 (20%), from 150,000 to £180,000, and both gross profit (90,000 to 99,000) and net profit (24,000 to 27,000) increased in absolute pound terms, so the business generated more profit overall than in Year 1.
- For success: growth in scale, such as more members or sales, is often taken as a sign of a successful, expanding business.
- Against success: profitability, measured by margins, actually declined: gross profit margin fell 5.0 percentage points (60.0% to 55.0%) and net profit margin fell 1.0 percentage point (16.0% to 15.0%), meaning Foxglove Fitness Studio kept a smaller share of every pound of revenue as profit in Year 2.
- Against success: liquidity also worsened, with the current ratio falling from 1.25 to 1.00 (question 10), leaving no margin of safety to cover short-term debts, which increases financial risk even while the business is growing.
- A top-level answer weighs the positive absolute growth in profit against the negative trend in margins and liquidity, recognising that Year 2 cannot be judged a simple success or failure - it depends on which measure (scale, efficiency, or risk) Callum prioritises.
- Judgement: a reasonable recommendation is that Year 2 should NOT be viewed as an unqualified success: although the business grew in size and total profit, the falling margins and current ratio are early warning signs that, if the trend continues into Year 3, could threaten both profitability and Foxglove Fitness Studio's ability to pay its short-term debts, so Callum should investigate why costs and current liabilities grew faster than revenue before treating Year 2 as a straightforward success.

Analysing financial statements: ratio analysis - Worksheets, Questions and Revision

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