A Level Accounting: Analysis and communication of accounting information (Cambridge 9706) – Revision Notes

Quick-recall notes for section 3.5 Analysis and communication of accounting information (A Level) in the Cambridge International AS & A Level Accounting 9706 syllabus for 2026, 2027 and 2028, examined on Paper 3 (Financial Accounting). For explanations and a full worked company, read the study guide, then test yourself with the practice questions. See also the course hub, the printable checklist and the free diagnostics.

Formulae to know exactly

The syllabus says the appendix formulae are the only ones accepted in answers and that ratios are not given in the question paper. Use year-end balances unless the question specifies average figures, and the number of decimal places the question asks for.

Ratio	Formula	Shown as
Working capital cycle	Receivables days + inventory days − payables days	days
Receivables days	Trade receivables ÷ credit sales × 365	days
Inventory days	Average inventory ÷ cost of sales × 365	days
Payables days	Trade payables ÷ credit purchases × 365	days
Net working assets to revenue	(Inventories + trade receivables − trade payables) ÷ revenue × 100	%
Interest cover	Profit from operations ÷ interest payable	times
Gearing	Non-current liabilities ÷ (issued ordinary share capital + all reserves + non-current liabilities) × 100	%
Earnings per share	Profit for the year ÷ number of issued ordinary shares	cents or dollars
Price/earnings	Market price per share ÷ earnings per share	no unit printed
Dividend per share	(Interim dividend paid + final dividend proposed) ÷ number of issued ordinary shares	cents or dollars
Dividend yield	Dividend per share ÷ market price per share	no multiplier or unit printed
Dividend cover	Profit for the year available to pay ordinary dividend ÷ annual ordinary dividend	times

Method in six steps

1. Write the formula from memory before touching the figures.
2. Pick the right inputs: credit sales for receivables, credit purchases for payables, cost of sales for inventory, profit from operations (before interest) for interest cover.
3. Keep share numbers and money in the same units (thousands with thousands).
4. Calculate, then round only at the end, to the decimal places asked.
5. Calculate the same ratio for the comparison year or business.
6. State the change, the likely cause, who is affected and your judgement.

Worked reminder: Saltwick Tools plc

Invented figures in $000: revenue 5,000; credit sales 4,000; cost of sales 3,000; credit purchases 2,400; inventories 500; trade receivables 400; trade payables 300; profit from operations 600; interest payable 150; profit for the year 360; 1,500 thousand ordinary shares; non-current liabilities 1,250; share capital 1,500; reserves 1,900; interim dividend 45; final dividend proposed 75; market price 4.80 dollars.

Ratio	Working	Result
Receivables days	400 ÷ 4,000 × 365	36.5
Inventory days	500 ÷ 3,000 × 365	60.8
Payables days	300 ÷ 2,400 × 365	45.6
Working capital cycle	36.5 + 60.8 − 45.6	51.7 days
Net working assets to revenue	(500 + 400 − 300) ÷ 5,000 × 100	12.0%
Interest cover	600 ÷ 150	4.0 times
Gearing	1,250 ÷ (1,500 + 1,900 + 1,250) × 100	26.9%
Earnings per share	360 ÷ 1,500	24.0 cents
Price/earnings	4.80 ÷ 0.24	20.0
Dividend per share	(45 + 75) ÷ 1,500	8.0 cents
Dividend yield	0.08 ÷ 4.80	0.0167 (1.67%)
Dividend cover	360 ÷ 120	3.0 times

Must-know distinctions

• Working capital cycle versus net working assets to revenue. One is in days and measures time; the other is a percentage and measures the amount invested per dollar of sales.
• Interest cover versus gearing. Interest cover tests whether profit pays the interest now. Gearing tests how much of the long-term capital is borrowed. A business can have low gearing and weak cover if profit is small.
• Earnings per share versus dividend per share. Earnings belong to shareholders whether paid or kept. Dividend per share is what is declared, interim plus final.
• Dividend cover versus dividend yield. Cover looks at the company’s side (how safely it can pay). Yield looks at the investor’s side (return on today’s price).
• Price/earnings versus yield. P/E compares price with profit; yield compares price with dividend. A high P/E with a low yield suggests investors expect growth.
• Profit from operations versus profit for the year. Interest cover uses the first; earnings per share and the dividend ratios use profit for the year.

Reading the movement

If this happens	The usual consequence
Customers pay more slowly	Cycle lengthens, more finance needed, possible overdraft cost
Inventory builds up	Cycle lengthens, more storage and obsolescence risk
Suppliers are paid sooner	Cycle lengthens; suppliers happier but cash lower
New loan notes issued	Gearing up, interest payable up, cover down
Profit falls but dividend is held	Dividend cover falls, so the dividend is less safe
Share price falls, dividend steady	Yield rises, P/E falls

How ratios interrelate: a longer cycle leads to more borrowing, which raises interest and lowers interest cover and earnings per share. Higher gearing makes earnings per share more sensitive to changes in profit from operations. Dividend cover equals earnings per share divided by dividend per share when there are only ordinary shares.

What high and low figures suggest

Ratio	Higher figure	Lower figure
Working capital cycle	Cash tied up longer, more finance needed	Cash recovered faster, but check for late payment of suppliers
Net working assets to revenue	Heavy working investment for each dollar of sales	Lean working investment, possibly tight stock
Interest cover	Comfortable safety margin for lenders	Profit barely covers interest, risky
Gearing	More borrowing and more fixed commitments	More owner finance, safer but returns may be lower
Earnings per share	More profit for each share	Less profit for each share
Price/earnings	Market expects growth or low risk	Market doubts future earnings
Dividend yield	Larger return on today’s price	Smaller cash return, growth may be expected
Dividend cover	Dividend is safe, more profit retained	Dividend may not be sustained

The syllabus says an incorrect formula is not credited, although the figure is credited as your own when used in following calculations, so learn the formulae before practising judgement.

Stakeholders and what each looks at

Stakeholder	Ratios that matter most
Investor or shareholder	Earnings per share, P/E, dividend per share, yield, cover
Lender	Interest cover, gearing, working capital cycle
Supplier	Payables days, cycle, interest cover
Manager	Cycle, net working assets to revenue, gearing

Recommendation template

Name the user, state the recommendation, give one reason for and one against, quote at least two ratios, then reach a justified decision. The syllabus asks for a balance of reasons, so a one-sided answer is incomplete.

Measures to improve

• Shorten the cycle: chase receivables, offer a prompt-payment discount, cut slow-moving inventory, negotiate longer credit from suppliers.
• Improve interest cover: lift profit from operations, repay or refinance expensive debt.
• Lower gearing: issue shares, retain profit, repay loan notes.
• Support the share price and dividend: raise earnings per share, keep a comfortable dividend cover.

Quick self-test

1. Trade receivables 270 and credit sales 2,190. Find receivables days.
2. Inventory days 58, receivables days 42, payables days 61. Find the working capital cycle.
3. Inventories 410, trade receivables 250, trade payables 190, revenue 3,200. Find net working assets to revenue to 1 decimal place.
4. Profit from operations 840, interest payable 210. Find interest cover.
5. Non-current liabilities 600, issued ordinary share capital 1,000, reserves 1,400. Find gearing.
6. Profit for the year 450 and 1,800 thousand ordinary shares. Find earnings per share in cents.
7. Market price 3.50 dollars and earnings per share 25 cents. Find price/earnings.
8. Interim dividend 30, final dividend proposed 60, 1,800 thousand shares. Find dividend per share in cents.
9. Dividend per share 5 cents, market price 1.25 dollars. Find dividend yield as a decimal.
10. Profit available to pay ordinary dividend 450, annual ordinary dividend 90. Find dividend cover.
11. Earnings fall 10% and the dividend falls 25%. Does dividend cover rise or fall?

Answers

1. 270 ÷ 2,190 × 365 = 45.0 days.
2. 42 + 58 − 61 = 39 days.
3. (410 + 250 − 190) = 470; 470 ÷ 3,200 × 100 = 14.7%.
4. 840 ÷ 210 = 4.0 times.
5. 600 ÷ (1,000 + 1,400 + 600) × 100 = 20.0%.
6. 450 ÷ 1,800 = 0.25 dollars = 25.0 cents.
7. 3.50 ÷ 0.25 = 14.0.
8. 90 ÷ 1,800 = 0.05 dollars = 5.0 cents.
9. 0.05 ÷ 1.25 = 0.04 (4%).
10. 450 ÷ 90 = 5.0 times.
11. Cover rises, because the dividend fell by more than earnings. For example, from 5.0 to 405 ÷ 67.5 = 6.0.

Where marks are usually lost

• Using revenue instead of credit sales or credit purchases in the days ratios.
• Subtracting the wrong item in the working capital cycle.
• Using profit for the year, not profit from operations, for interest cover.
• Leaving non-current liabilities out of the gearing denominator.
• Using only the final dividend for dividend per share.
• Mixing thousands of shares with whole-dollar profit.
• Quoting ratios without comment, or commenting without naming a stakeholder.
• Recommending without a reason against, or ignoring what else the data shows.

Frequently asked questions

How do you calculate dividend per share? Dividend per share = annual ordinary dividend ÷ number of issued ordinary shares, where the annual dividend is the interim plus the final dividend. Using only the final dividend is a common mistake.

Which section of Cambridge 9706 covers A Level ratio analysis? Section 3.5 Analysis and communication of accounting information (A Level) covers the working capital cycle, gearing, interest cover and the investor ratios: earnings per share, price/earnings, dividend per share, dividend yield and dividend cover.

How do gearing and interest cover move together? New borrowing raises gearing and, unless operating profit rises enough, adds interest that lowers interest cover, so the two usually move in opposite directions as debt increases.

Why must I name a stakeholder when commenting on ratios? Whether a change is good or bad depends on who is being advised, such as a shareholder, lender or manager. Quoting ratios without comment, or commenting without naming a stakeholder, loses marks.

Official syllabus

Cambridge International AS & A Level Accounting 9706 syllabus for 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International Education): section 3.5 Analysis and communication of accounting information, and the appendix to section 3.