Study Notes
Accounts analysis involves calculating and analysing accounting ratios to assess a business's performance and inform decision-making.
- Gross Profit Margin — measures the gross profit on each amount of sales. Example: GPM = (Gross profit / Revenue) x 100
- Operating Profit Margin — measures the operating profit on each amount of sales. Example: OPM = (Net profit / Revenue) x 100
- Markup — shows the profit made per item sold. Example: Markup = (Profit per item / Cost per item) x 100
- Return on Capital Employed (ROCE) — indicates the profit made for each amount invested in the business. Example: ROCE = (Net profit / Capital employed) x 100
- Current Ratio — measures the ability to cover current liabilities with current assets. Example: A safe ratio is between 1.5 and 2
- Acid-Test Ratio — assesses the ability to meet short-term obligations without relying on inventory. Example: A ratio less than 1 could indicate cash-flow problems
Exam Tips
Key Definitions to Remember
- Gross Profit Margin
- Operating Profit Margin
- Markup
- Return on Capital Employed (ROCE)
- Current Ratio
- Acid-Test Ratio
Common Confusions
- Confusing profit with profitability
- Misinterpreting liquidity ratios as profitability measures
Typical Exam Questions
- What is the formula for Gross Profit Margin? GPM = (Gross profit / Revenue) x 100
- How is Return on Capital Employed calculated? ROCE = (Net profit / Capital employed) x 100
- What does a Current Ratio below 1 indicate? It indicates potential cash-flow problems
What Examiners Usually Test
- Understanding of different profitability and liquidity ratios
- Ability to interpret financial ratios and their implications
- Comparisons of financial performance over time or with other businesses