Interpretation of accounting ratios Exam Questions
3 past-paper questions on this unit. Three of them are below. Answer on the page: each one is marked the moment you pick, the correct option is shown whether or not you found it, and the full explanation opens either way.
CIE 0452 AccountingPaper 1 MCQsFree account
Interpretation of accounting ratios: three questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
How would current assets be listed if they are arranged in decreasing order of liquidity?
Answer: B.
Liquidity means nearness to cash, so the list starts with cash itself, then the bank balance, then trade receivables, which must be collected, and finally inventory, which must be sold before it even becomes a receivable. B is correct. A puts the bank ahead of cash, and cash is money already in hand while a bank balance still depends on the bank. C and D reverse the whole order, listing the least liquid first, which is how a statement of financial position is often set out but is not what the question asks.
Question 2
A business employs a book-keeper and an accountant. Which task would the accountant perform?
Answer: C.
Book-keeping is recording; accounting is interpreting. Analysing profitability and writing a report on it is work done with the records once they exist, so C is the accountant's task. A, B and D are all recording: extracting balances into a trial balance, making a journal entry to adjust a provision and writing invoices into the books of prime entry are each part of getting the transactions into the ledger, which is what the book-keeper is employed to do.
Question 3
How does a trader use the information provided by financial statements?
Answer: D.
Financial statements summarise a whole year, so their value to the trader is comparison: this year against last, or against another business. D is correct. A and B name figures available from the ledger at any moment, the drawings account and the sales ledger, without waiting for year end statements. C names a job done by comparing the cash book with the bank statement, which checks the bank balance rather than the performance of the business.
These questions are drawn from past CIE 0452 Accounting papers and filtered to interpretation of accounting ratios. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
These are the errors that cost marks on interpretation of accounting ratios, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
Calculating the ratio and stopping, with no comment.
Restating the ratio in words as though that were the explanation.
Giving a cause that does not fit the direction of the change.
Saying a high current ratio is always good.
Using profit figures to explain a liquidity ratio, or the reverse.
Comparing a small sole trader with a large company and drawing a conclusion.
Suggesting improvements with no mention of their cost or risk.