Answer: 1.5:1

1. Current ratio = current assets ÷ current liabilities
2. = 180,000 ÷ 120,000 = 1.5
3. Current ratio = 1.5:1. The business has $1.50 of current assets for every $1 of current liabilities, so it should be able to meet its short-term debts, although it is below the commonly used 2:1 benchmark.

Answer: 1.2:1

1. Current assets = 20,000 + 45,000 + 55,000 = $120,000
2. Current liabilities = 60,000 + 40,000 = $100,000
3. Current ratio = 120,000 ÷ 100,000 = 1.2:1
4. Comment: liquidity is adequate but tight. Nearly half of the current assets are inventory, which may be slow to convert to cash, and the overdraft could be withdrawn by the bank. The business should monitor cash flow closely and could reduce inventory or collect receivables faster.

Answer: 0.7:1 (70%)

1. Debt-to-equity ratio = total liabilities ÷ owner's equity
2. = 350,000 ÷ 500,000 = 0.7
3. Debt-to-equity = 0.7:1, or 70%. Lenders have provided 70 cents for every $1 of owners' funds, so the business is moderately geared.

Answer: 1.2:1 (120%)

1. Total liabilities = 90,000 + 210,000 = $300,000
2. Debt-to-equity = 300,000 ÷ 250,000 = 1.2:1 (120%)
3. Assessment: the business is highly geared, with $1.20 of debt for every $1 of equity. It is more exposed to interest rate rises and a downturn in sales, and lenders may be reluctant to extend further credit. Solvency risk is elevated; the business could retain more profit or issue equity to reduce gearing.

Answer: COGS $520,000; gross profit $280,000; gross profit ratio 35%

1. Cost of goods sold = opening inventory + purchases − closing inventory
2. = 60,000 + 540,000 − 80,000 = $520,000
3. Gross profit = sales − COGS = 800,000 − 520,000 = $280,000
4. Gross profit ratio = gross profit ÷ sales × 100 = 280,000 ÷ 800,000 × 100 = 35%
5. For every $1 of sales, 35 cents remain after paying for the goods sold.

Answer: Net profit $80,000; net profit ratio 10%

1. Net profit = gross profit − expenses = 280,000 − 200,000 = $80,000
2. Net profit ratio = net profit ÷ sales × 100 = 80,000 ÷ 800,000 × 100 = 10%
3. After all expenses, 10 cents in every sales dollar is profit.

Answer: 20%

1. Return on equity = net profit ÷ owner's equity × 100
2. = 80,000 ÷ 400,000 × 100 = 20%
3. The owners earn 20 cents a year for every dollar they have invested in the business. They can compare this with returns available from other investments to judge whether the business is a good use of their funds.

Answer: 22.5%

1. Expense ratio = total expenses ÷ sales × 100
2. = 144,000 ÷ 640,000 × 100 = 22.5%
3. Expenses consume 22.5 cents of every sales dollar. A falling expense ratio over time indicates improving efficiency: the business is generating each dollar of sales with lower operating costs.

Answer: 10 times; 36.5 days

1. Average accounts receivable = (68,000 + 78,000) ÷ 2 = $73,000
2. Accounts receivable turnover = credit sales ÷ average accounts receivable = 730,000 ÷ 73,000 = 10 times per year
3. Average collection period = 365 ÷ 10 = 36.5 days
4. Comment: customers are taking about a week longer than the 30-day terms to pay. The business could offer discounts for early payment, send reminders sooner, tighten credit checks or use factoring to speed up cash inflows.

Answer: Year 1: 2.0:1; Year 2: 1.25:1

1. Year 1 current ratio = 300,000 ÷ 150,000 = 2.0:1
2. Year 2 current ratio = 250,000 ÷ 200,000 = 1.25:1
3. Change: liquidity has weakened considerably. Current assets fell by $50,000 while current liabilities rose by $50,000, so the business now has only $1.25 of current assets for every $1 of short-term debt, down from $2.00. Causes could include higher short-term borrowing, slower collection of receivables or a fall in cash reserves.
4. Recommendation (any one, justified): tighten credit terms and chase overdue accounts to raise cash; convert short-term debt such as an overdraft into a long-term loan so it leaves current liabilities; lease rather than buy equipment to preserve cash; or sell and lease back an asset. Each increases current assets or reduces current liabilities and so lifts the ratio.