AQA A-Level Accounting: Interpretation, analysis and communication of accounting information (7127) – Revision Notes

Condensed recall notes for section 3.17, Interpretation, analysis and communication of accounting information, of the AQA A-level Accounting (7127) specification (version 1.1, October 2026, for A-level exams from June 2019 onwards). The qualification is not tiered, and the specification lists section 17 in the content assessed by both Paper 1 and Paper 2. For full explanations and worked examples, use the study guide.

Then test yourself with the practice questions. The twelve ratios that 3.17 reuses are in the 3.8 revision notes. See also the AQA A-level Accounting hub, the 7127 checklist and the free diagnostics.

The six outcomes in 3.17

1. Use ratios (the 3.8 set plus investors’ ratios) to analyse and interpret financial and management information, and know the limitations.
2. Evaluate performance internally, across periods, and externally against competitors.
3. Explain the difference between cash and profits, and the effect of transactions on profitability and liquidity.
4. Explain the interests of internal and external stakeholders, the value of published accounts and the need for clear communication.
5. Assess systems of recording data: accounting software, computerised versus manual, single entry versus double entry.
6. Critically assess recommendations and their impact on stakeholders, the local and national economy and the environment.

Investors’ ratios: formula sheet

The specification says you must know these formulae.

Ratio	Formula	Unit	Higher usually means
Earnings per share	Profit after tax in pence / Number of issued ordinary shares	pence	More profit per share (compare over time only)
Price earnings	Current market price / EPS	times	Market expects growth or sees low risk
Dividend yield	Dividend per share / Market price per share × 100	%	Bigger cash return on today’s price
Dividend cover	Profit after interest and tax / Ordinary share dividends paid	times	Safer dividend, more profit retained
Interest cover	Profit before interest and tax / Interest payable	times	Interest easier to pay; less risk for lenders

Dividend per share = ordinary dividends paid / number of issued ordinary shares. Keep EPS, dividend per share and share price all in pence.

Which profit goes where?

Profit from operations  -> interest cover (top line)
  less finance costs
Profit before tax
  less tax
Profit after tax        -> EPS and dividend cover

Worked reminder. Profit after tax £360,000; 2,400,000 ordinary shares; dividends paid £96,000; share price 225p. EPS = 36,000,000 / 2,400,000 = 15.00p. Dividend per share = 9,600,000 / 2,400,000 = 4.00p. P/E = 225 / 15 = 15.00. Yield = 4 / 225 × 100 = 1.78%. Cover = 360,000 / 96,000 = 3.75 times.

Must-know distinctions

• EPS vs P/E: EPS is a result of the company’s profit; P/E adds the market’s view through the share price.
• Dividend yield vs dividend cover: yield is what the shareholder receives on the price; cover is how safely profit supports the dividend.
• Interest cover vs capital gearing: interest cover uses the income statement (can the interest be paid this year?); gearing uses the statement of financial position (how much long-term finance is borrowed?).
• Internal vs external comparison: trend and budget comparisons use the same policies; competitor comparisons may not.
• Financial vs management information: published, historic and standardised, against internal, detailed and forward-looking.
• Single entry vs incomplete records: single entry is the recording method; incomplete records is the result you have to rebuild statements from.

Evaluating performance: method in steps

1. Calculate the ratios, showing formula and figures.
2. Group them: profitability, liquidity, efficiency, capital structure, plus investors’ ratios for a company.
3. Compare across periods (trend, budget) and with a competitor or industry average.
4. Give a cause the data supports.
5. Say which stakeholder the result matters to, and why.
6. Qualify with a limitation of the comparison.
7. Reach a judgement that answers the question set.

Limitations specific to comparison

• Competitors may use different depreciation or inventory policies.
• Year ends may differ, so seasonal effects distort liquidity.
• Size, product mix and financing differ.
• Share prices change daily, so P/E and yield depend on the date.
• EPS cannot be compared between companies with different numbers or nominal values of shares.
• Industry averages hide very different businesses.

Cash versus profit: company transactions

Transaction	Profit for the year	Cash	Main ratio effect
Share issue for cash	None	Up	EPS diluted; gearing falls
Bonus issue	None	None	EPS falls (more shares)
Rights issue	None	Up	EPS diluted
Dividend paid	None (statement of changes in equity)	Down	Cover falls; liquidity falls
Debentures issued	Interest charged later reduces profit before tax	Up	Interest cover and gearing worsen
Debentures repaid	None	Down	Interest cover improves next year
Tax paid	None when paid	Down	None
Revaluation of non-current assets	None	None	Equity up, so gearing and ROCE fall

Worked reminder. A company has profit after tax £300,000 and 2,000,000 shares, so EPS is 15.00p. A 1-for-4 bonus issue adds 500,000 shares. With profit unchanged, EPS = 30,000,000 / 2,500,000 = 12.00p. No cash moves.

Stakeholders

Internal	Wants to know
Employees	Job security, scope for pay rises
Management	Performance against plan, areas to control
Owners/shareholders	Return (EPS, dividends) and risk

External	Wants to know
Customers	Whether the business will survive to supply and support them
Suppliers	Whether they will be paid on time
Government	Tax due, jobs, compliance with law
Lenders	Ability to pay interest and repay
Local community	Jobs, local spending, environmental effects

Value of published accounts: standard format, comparable, available to outsiders. But: historic, summarised, delayed, little non-financial information.

Communicating with non-accountants: conclusion first; plain words; charts for trends; only the relevant figures; state the limitations; numerical, graphical and written forms as the specification’s skills annex lists.

Systems of recording data

Software features: automatic double entry; invoicing; sales and purchase ledgers; aged receivables and payables; bank reconciliation; payroll; inventory; instant statements, budgets and reports.

	Computerised	Manual
Speed and accuracy	Fast; arithmetic always correct	Slow; arithmetic errors possible
Information	Up to date; reports on demand	Reports take time to compile
Cost	Software, hardware, training	Low
Risks	Hacking, viruses, system failure, data loss	Loss or damage of paper books
Errors	Wrong input still posted (“garbage in, garbage out”)	Errors of principle and omission still occur

	Single entry	Double entry
Record	One side, often a cash book only	Both sides of every transaction
Check	No trial balance	Trial balance checks arithmetic
Statements	Must be reconstructed	Prepared directly
Suits	Very small trader	Any business needing full control
Drawback	Errors and fraud hard to find	Time, skill and cost

Assessing a recommendation: method in steps

1. Work out the financial effect (saving, profit, cash, payback, ratios).
2. Shareholders and management: return and control.
3. Employees: jobs, pay, morale, training.
4. Customers, suppliers and lenders: price, quality, orders, risk.
5. Local economy: jobs, local spending, local suppliers.
6. National economy: tax, unemployment, productivity, imports and exports.
7. Environment: emissions, energy, waste, transport.
8. Judge: accept, reject or modify, with a condition.

Quick self-test

1. Profit after tax £450,000; 3,000,000 ordinary shares. Calculate EPS.
2. EPS 15p; share price 240p. Calculate P/E.
3. Dividend per share 6p; share price 240p. Calculate dividend yield.
4. Profit after tax £450,000; ordinary dividends paid £180,000. Calculate dividend cover.
5. Profit before interest and tax £360,000; interest payable £45,000. Calculate interest cover.
6. A 1-for-2 bonus issue is made on 3,000,000 shares. Profit after tax stays at £450,000. New EPS?
7. Name the five external stakeholders the specification lists.
8. Give one reason EPS should not be compared between two companies.
9. Give one advantage of single entry for a small trader.
10. Give two features of accounting software.
11. State the effect of paying a dividend on profit for the year and on cash.
12. A company’s P/E rises while its EPS is unchanged. What has happened?

Answers

1. 45,000,000 / 3,000,000 = 15.00p
2. 240 / 15 = 16.00 times
3. 6 / 240 × 100 = 2.50%
4. 450,000 / 180,000 = 2.50 times
5. 360,000 / 45,000 = 8.00 times
6. 4,500,000 shares; 45,000,000 / 4,500,000 = 10.00p
7. Customers, suppliers, government, lenders, local community.
8. The companies have different numbers (and nominal values) of shares, so EPS sizes are not comparable.
9. Any one: simple, cheap, quick, needs little skill.
10. Any two: automatic posting, invoicing, ledgers, bank reconciliation, payroll, inventory, instant reports.
11. No effect on profit (it goes through the statement of changes in equity); cash falls.
12. The share price has risen: the market expects more growth or sees less risk.

Where marks are usually lost

• Mixing pounds and pence in P/E or dividend yield.
• Using profit before tax in dividend cover, or profit after interest in interest cover.
• Comparing EPS between companies of different share structures.
• Calling a high dividend yield good without checking cover or why the price fell.
• Treating dividends as an expense in the income statement.
• Naming stakeholders without linking each to a ratio or need.
• Listing software advantages with no link to the business in the question.
• Assessing a recommendation with no figures, or with figures and no wider impacts.
• Ignoring the environment or the national economy when the question names them.
• Giving no final judgement on “evaluate” or “assess”.

Official syllabus

AQA A-level Accounting (7127) specification, version 1.1, October 2026, for A-level exams June 2019 onwards, published by AQA – section 3.17, Interpretation, analysis and communication of accounting information.