Who this is for: Cambridge IGCSE Business Studies (0450) students who can read financial statements but lose marks when questions ask them to analyse performance using ratios and trends.
What query it owns: how to analyse accounts and interpret ratio results in Cambridge IGCSE Business Studies.
Why this is safe: this page owns the analysis-of-accounts revision-guide angle, while Tutopiya’s Analysis of Accounts subtopic page owns the learning resource and the free Analysis of Accounts quiz owns the practice.

Analysis of accounts is the process of using financial statements and ratios to judge how well a business is performing. Cambridge IGCSE Business Studies (0450) expects you to calculate key ratios, interpret what they show, and link results to business decisions — not just plug numbers into a formula. This guide connects each ratio to what examiners reward when they ask you to analyse, interpret or evaluate.

Key takeaways

• Profitability ratios (gross profit margin, net profit margin, return on capital employed) show how efficiently a business turns revenue into profit.
• Liquidity ratios (current ratio, acid test ratio) show whether a business can pay short-term debts.
• Efficiency ratios (rate of inventory turnover, trade receivables days, trade payables days) show how quickly assets and liabilities move.
• Always state the ratio, interpret the result, and suggest a business implication — that three-step pattern wins analysis marks.
• Ratio results are meaningless without comparison — to previous years, competitors or industry benchmarks.

What is analysis of accounts in Cambridge IGCSE Business Studies?

Analysis of accounts means using figures from the income statement and statement of financial position to assess profitability, liquidity and efficiency. A ratio alone earns calculation marks; the analysis marks come when you explain what the number tells a manager or investor. Tutopiya’s Analysis of Accounts subtopic page walks through every formula with worked examples before you attempt past-paper stems.

Core ratios you must know

Ratio	Formula	What it measures
Gross profit margin	(Gross profit ÷ Revenue) × 100	Profit after direct costs, as % of sales
Net profit margin	(Net profit ÷ Revenue) × 100	Final profit as % of sales
Return on capital employed (ROCE)	(Operating profit ÷ Capital employed) × 100	Return generated on all long-term finance
Current ratio	Current assets ÷ Current liabilities	Ability to pay short-term debts
Acid test ratio	(Current assets − Inventory) ÷ Current liabilities	Liquidity without relying on stock
Rate of inventory turnover	Cost of sales ÷ Average inventory	How quickly stock is sold
Trade receivables days	(Trade receivables ÷ Credit sales) × 365	Average days to collect debts
Trade payables days	(Trade payables ÷ Credit purchases) × 365	Average days to pay suppliers

Profitability vs liquidity — what examiners compare

Aspect	Profitability	Liquidity
Question focus	”Is the business making enough profit?"	"Can the business pay its bills?”
Key ratios	Gross/net profit margin, ROCE	Current ratio, acid test ratio
High value means	Efficient cost control, strong returns	Comfortable short-term cash position
Risk if weak	Insufficient reward for owners/investors	Cash-flow crisis, inability to pay suppliers
Typical stem	”Analyse the profitability of the business."	"Comment on the liquidity position.”

Analysis of accounts in past-paper wording: command words that matter

Command word / phrase	What the question wants	Typical analysis stem
Calculate	Apply the correct formula	”Calculate the current ratio for 2024.”
Analyse	Interpret trends and implications	”Analyse the profitability of the business over the two years.”
Interpret	Explain what a ratio result means	”Interpret the change in the acid test ratio.”
Suggest	Recommend action based on analysis	”Suggest two ways the business could improve liquidity.”
Evaluate	Weigh strengths and weaknesses	”Evaluate whether the business is in a strong financial position.”

Worked exam-style stems (how to answer the wording)

1. “Calculate the gross profit margin for Year 2.” (Gross profit ÷ Revenue) × 100. Show the calculation clearly. Mark-scheme reward: correct formula, correct substitution, answer to 1–2 decimal places with % sign.

2. “Analyse the profitability of the business over the two years.” Calculate gross and net profit margins for both years, state whether each has risen or fallen, then explain what this means (e.g. rising net margin suggests better cost control). Reward: data + interpretation + business implication.

3. “The current ratio has fallen from 2.1 to 1.4. Interpret this change.” The business has fewer current assets relative to liabilities — liquidity has weakened. It may struggle to pay short-term debts if the trend continues. Reward: direction of change + consequence for the business.

4. “Suggest two ways the business could improve its rate of inventory turnover.” Reduce slow-moving stock, offer discounts, improve marketing, or negotiate faster supplier delivery. Reward: two distinct, realistic suggestions linked to inventory management.

Test yourself with the free Analysis of Accounts quiz once you can calculate and interpret without notes.

How to analyse accounts — step by step

1. Identify which ratio the question requires — check whether it asks about profitability, liquidity or efficiency.
2. Select figures from the income statement or statement of financial position — use the correct line items.
3. Calculate showing formula and working — one arithmetic error can cost both calculation and analysis marks.
4. Compare the result to a previous year, budget or competitor if data is provided.
5. Interpret what the trend means for the business — link to cash flow, competitiveness or risk.
6. Confirm your understanding with the Analysis of Accounts quiz.

How analysis of accounts connects to the rest of Business Studies

Analysis builds on Income Statements and the Statement of Financial Position — you cannot analyse accounts without reading those statements first. The Cambridge IGCSE Business Studies resource hub links every Financial Information and Decisions subtopic.

Common mistakes students make

• Calculating the ratio but not interpreting it — analysis questions need both.
• Using revenue instead of cost of sales in the inventory turnover formula.
• Confusing current ratio (includes inventory) with acid test ratio (excludes inventory).
• Stating a ratio is “good” or “bad” without comparing to another period or benchmark.
• Forgetting the % sign on margin and ROCE answers.

When you need more support

If ratio questions keep costing marks, work through the Analysis of Accounts quiz, then get focused help from a Cambridge IGCSE Business Studies tutor.

Frequently asked questions

What ratios are in Cambridge IGCSE Business Studies (0450)? Profitability (gross/net margin, ROCE), liquidity (current ratio, acid test) and efficiency (inventory turnover, receivables days, payables days).

What is a good current ratio? Around 1.5–2.0 is often considered healthy, but always compare to previous years and explain the implication in context.

How do I earn analysis marks? Calculate the ratio, state the trend, and explain what it means for the business — the three-step pattern examiners reward.

Is analysis of accounts hard? The formulas are straightforward; the challenge is interpreting results and linking them to business decisions under time pressure.

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