Practice Questions: Analysis and Interpretation of Financial Statements for Decision Making

How to Practise Effectively

• Memorise and rewrite each ratio formula before calculating, because formula errors (e.g. confusing Sales with Cost of Sales) are the main cause of lost marks.
• Always show full working: the substituted values, the operation, then the answer with the correct unit (%, times, days, or a ratio such as 2:1).
• After calculating, practise writing one or two sentences of interpretation linking the figure to the firm's real performance, because analysis questions demand interpretation as well as computation.
• Use average stock = (opening stock + closing stock) ÷ 2 and distinguish credit sales from total sales when computing efficiency ratios.

Common Mistakes to Avoid

• Markup uses Cost of Sales as the denominator while Gross Profit Margin uses Sales; do not swap these denominators.
• The Acid Test Ratio subtracts stock from current assets, i.e. (Current Assets − Stock) : Current Liabilities; many candidates forget to subtract stock.
• Debtors' and creditors' periods must be multiplied by 365 days and rounded to whole days, not left as fractions.
• For full Income Statements and Statements of Financial Position, refer to the worked-example sets; here the focus is on formulas, ratio calculation and interpretation.

Practice Questions

1. Question 1

   Question 1 (Profitability Ratios). Cahaya Murni Enterprise recorded the following for the year ended 31 December 2024: Sales RM120,000, Cost of Sales RM80,000, Total Expenses RM16,000 and Capital RM100,000. Calculate (a) Percentage of Gross Profit on Cost of Sales (Markup), (b) Gross Profit Margin, (c) Net Profit Margin and (d) Return on Capital.

   Answer

   Gross Profit = 120,000 − 80,000 = RM40,000

   Net Profit = 40,000 − 16,000 = RM24,000

   (a) Markup = 40,000 ÷ 80,000 × 100 = 50%

   (b) Gross Profit Margin = 40,000 ÷ 120,000 × 100 = 33.33%

   (c) Net Profit Margin = 24,000 ÷ 120,000 × 100 = 20%

   (d) Return on Capital = 24,000 ÷ 100,000 × 100 = 24%

   Interpretation: for every RM100 of cost the business adds RM50; every RM100 of capital earns RM24 net profit, indicating a satisfactory return.

2. Question 2

   Question 2 (Liquidity Ratios). Seri Wangi Retail Store had the following current assets on 31 December 2024: Stock RM15,000, Trade Receivables RM10,000, Bank RM5,000. Current liabilities: Trade Payables RM12,000 and Bank Overdraft RM3,000. Calculate (a) the Current Ratio and (b) the Acid Test Ratio, then comment on its liquidity position.

   Answer

   Current Assets = 15,000 + 10,000 + 5,000 = RM30,000

   Current Liabilities = 12,000 + 3,000 = RM15,000

   (a) Current Ratio = 30,000 : 15,000 = 2 : 1

   (b) Acid Test Ratio = (30,000 − 15,000) : 15,000 = 15,000 : 15,000 = 1 : 1

   Interpretation: a Current Ratio of 2:1 meets the ideal 2:1 level, so the business can settle its short-term debts. The Acid Test of 1:1 shows it can meet current liabilities without selling stock: a healthy liquidity position.

3. Question 3

   Question 3 (Efficiency Ratios). Teguh Jaya Enterprise had the following for 2024: Cost of Sales RM90,000, Opening Stock RM8,000, Closing Stock RM12,000, Credit Sales RM75,000, Credit Purchases RM60,000, Trade Receivables RM12,500 and Trade Payables RM8,000. Calculate (a) the Rate of Stock Turnover, (b) the Debtors' Collection Period and (c) the Creditors' Payment Period.

   Answer

   Average Stock = (8,000 + 12,000) ÷ 2 = RM10,000

   (a) Rate of Stock Turnover = 90,000 ÷ 10,000 = 9 times

   (b) Debtors' Collection Period = 12,500 ÷ 75,000 × 365 = 60.83 ≈ 61 days

   (c) Creditors' Payment Period = 8,000 ÷ 60,000 × 365 = 48.67 ≈ 49 days

   Interpretation: stock turns over 9 times a year, showing active sales. The business collects debts in 61 days but pays creditors in 49 days, meaning it pays faster than it collects. This can strain cash flow.

4. Question 4

   Question 4 (Comparison between periods). Indah Permai Enterprise recorded these ratios: 2023, Gross Profit Margin 30%, Net Profit Margin 15%, Current Ratio 2.5:1; 2024, Gross Profit Margin 25%, Net Profit Margin 10%, Current Ratio 1.5:1. Summarise the analysis findings and suggest TWO ways to improve performance.

   Answer

   Findings: All three ratios declined in 2024. Gross Profit Margin fell 5% (purchase costs may have risen or selling prices were cut). Net Profit Margin fell 5% (operating expenses rose). The Current Ratio dropped from 2.5:1 to 1.5:1, showing weakening liquidity.

   Suggestions:

   1. Negotiate lower purchase prices or raise selling prices prudently to restore the gross profit margin.

   2. Control operating expenses and reduce current liabilities (e.g. clear the overdraft) to strengthen liquidity.

5. Question 5

   Question 5 (Selecting a business). Two retail businesses in the same industry reported: Syarikat Alfa, Net Profit Margin 18%, Return on Capital 20%, Current Ratio 2:1; Syarikat Beta, Net Profit Margin 12%, Return on Capital 14%, Current Ratio 1.2:1. As an investor, which business would you choose? Give reasons based on the ratios.

   Answer

   Choice: Syarikat Alfa.

   Reasons:

   1. Higher profitability: a Net Profit Margin of 18% (versus 12%) means Alfa retains more profit per RM100 of sales.

   2. Return on Capital of 20% (versus 14%) shows the investor's capital is used more efficiently and earns a higher return.

   3. Stronger liquidity: a Current Ratio of 2:1 (versus 1.2:1) means Alfa can better settle short-term debts and carries lower risk.

   Conclusion: Alfa is more profitable, efficient and liquid, hence a safer investment.

6. Question 6

   Question 6 (Interpretation and recommendation). Maju Sentosa Enterprise has a Rate of Stock Turnover of 4 times (industry average 8 times) and a Debtors' Collection Period of 75 days (industry average 30 days). Interpret both ratios and suggest ways to improve each.

   Answer

   Interpretation:

   1. A stock turnover of 4 times is far below the industry average of 8 times: stock moves slowly, possibly due to overstocking, unpopular goods or overpricing. This raises storage costs and the risk of spoilage.

   2. A collection period of 75 days exceeds the 30-day average: debtors take too long to pay, which harms cash flow.

   Suggestions:

   1. Stock: hold clearance sales for old stock, reduce purchases of slow-moving goods, and increase promotion.

   2. Debtors: tighten credit terms, offer cash discounts for early payment, and send timely payment reminders.

7. Question 7

   Question 7 (Reverse calculation). Sinar Timur Enterprise has a Cost of Sales of RM50,000 with a markup of 40%. Calculate (a) Gross Profit, (b) Sales and (c) Gross Profit Margin.

   Answer

   (a) Gross Profit = 40% × 50,000 = RM20,000

   (b) Sales = Cost of Sales + Gross Profit = 50,000 + 20,000 = RM70,000

   (c) Gross Profit Margin = 20,000 ÷ 70,000 × 100 = 28.57%

   Note: markup (on cost) is always higher than margin (on sales) because its denominator is smaller.