IB Biz - Ratios & Decision Trees

If a business has debtors of $35 000, cash of $50 000, stock of $15 000, and current liabilities of $13 000, what is its current ratio? 

• 13%

• $92.31

• 7.69

• .87

Gross profit margin measures a company’s: 

• Efficiency

• Liquidity

• Profitability

• Gearing

Answer explanation

The gross profit margin is a percentage which measures the proportion of gross profit earned in relation to sales revenue.

Crown Incorporated had annual sales of $750 000. Their gross profit was $450 000.

Therefore, Crown Incorporated’s gross profit margin is __.

• 20%

• 40%

• 60%

• 1.67

Answer explanation

Gross profit margin = gross profit ÷ sales revenue × 100

Gross profit margin = $450 000 ÷ $750 000 × 100

Gross profit margin = 0.6 × 100

Therefore, the gross profit margin for Crown Incorporated is 60%.

Which of the following is a strategy to improve the gross profit margin?

• Reducing the credit period for customers

• Lowering expenses

• Reducing non-current liabilities

• Lowering the cost of goods sold

Answer explanation

As the gross profit margin considers gross profit as a percentage of sales revenue, an effective strategy to improve the result is to lower the cost of goods sold. This would lead to the percentage of sales revenue that becomes gross profit to be higher. As the gross profit margin considers the cost of goods sold and not expenses, lowering the expenses would have no effect on the result. It would instead improve the profit margin. As the gross profit margin does not consider non-current liabilities or whether trade receivables have paid, these strategies would have no impact on the result either. 

Which of the following is the recommended ratio range for the current ratio?

• 1.5 to 2:1

• 3 to 4:1

• 1:1

• 1:1.5 to 2.1

Answer explanation

To ensure that a business has sufficient current assets (that will be converted into cash) to cover their current liabilities, the ideal current ratio range is 1.5 to 2:1. This means that the business will have 1.5 to 2 current assets for every 1 current liability. 

What is the recommended range for the Current ratio for a company?

• 0.5 to 1

• 2 to 3

• 2:1

• 1.5 to 2

In a decision tree diagram, this is shown as a circle representing the probable outcome (or expected outcome) of a particular decision.

• Decision Node

• Chance Node

• Probabilities

• Strike out lines

In a decision tree diagram, this is shown as a square representing a decision that needs to be made.

• Decision Node

• Chance Node

• Probabilities

• Strike out lines

-True or False-

The acid test ratio is an efficiency ratio.

• True

• False

Answer explanation

False, it is a liquidity ratio

• - True or False -

  A supermarket is likely to have a high stock turnover ratio (based on the "number of times" calculation).

• True

• False