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

This guide covers section 3.5 Analysis and communication of accounting information (A Level), from topic 3, Financial accounting, in the Cambridge International AS & A Level Accounting 9706 syllabus for 2026, 2027 and 2028. It is A Level content, examined on Paper 3 (Financial Accounting), where each structured question comes with source material on a separate insert. AS Level content, including the ratios in section 1.6, is assumed knowledge. Use it with the course hub, the printable checklist, the revision notes, the practice questions, the exam preparation guide and the free diagnostics.

What section 3.5 asks you to do

Outcome in the syllabus	Where this guide teaches it
Calculate working capital cycle (days) and net working assets to revenue (sales)	Working capital ratios
Calculate interest cover and gearing	Financing ratios
Calculate earnings per share, price/earnings, dividend per share, dividend yield and dividend cover	Investor ratios
Analyse and evaluate the results and draw conclusions	Turning figures into analysis
Make appropriate recommendations to stakeholders	Recommendations and improvement measures
Understand the interrelationships between ratios	How the ratios connect

Rules the syllabus sets for ratio work

• The formulae in the appendix to section 3 are the only ones accepted in answers, and ratios are not given in the question paper. Learn each formula exactly.
• The syllabus says an incorrect formula is not credited, but the figure it produces is credited as your own figure when used in later calculations. A wrong formula costs that calculation only if you carry on sensibly.
• Use year-end balances unless the question specifies average figures, and give the number of decimal places the question asks for.
• Where you are asked for a recommendation or decision, support it with a balance of reasons and justify it.
• Calculators are essential for every paper.

The data used in this guide

Ardenmoor Textiles plc (an invented company) weaves curtain fabric. Amounts are in $000 unless shown per share. Interest is 12% on loan notes: the loan notes stood at 1,000 in 2025, a further 1,000 was issued on the first day of 2026, and 2026 interest also includes 40 of overdraft interest.

	2025	2026
Revenue	8,400	9,600
Credit sales	7,560	8,640
Cost of sales	5,040	6,048
Credit purchases	4,200	5,400
Year-end inventories	840	1,260
Trade receivables	840	1,296
Trade payables	560	600
Profit from operations	1,260	1,344
Interest payable	120	280
Profit for the year (after tax)	855	798
Issued ordinary shares (thousands)	3,000	3,000
Non-current liabilities (loan notes)	1,000	2,000
Issued ordinary share capital	3,000	3,000
Reserves	2,400	2,928
Interim dividend paid	90	90
Final dividend proposed	180	120
Market price per share (dollars)	3.99	3.20

Working capital ratios

Working capital cycle (days) = trade receivables turnover (days) + inventory turnover (days) − trade payables turnover (days). It measures how long cash is tied up between paying suppliers and collecting from customers. Each part comes from the appendix:

• Trade receivables turnover = trade receivables ÷ credit sales × 365
• Inventory turnover = average inventory ÷ cost of sales × 365 (year-end inventory here, as no average is specified)
• Trade payables turnover = trade payables ÷ credit purchases × 365

2026	Working	Days
Receivables	1,296 ÷ 8,640 × 365	54.8
Inventory	1,260 ÷ 6,048 × 365	76.0
Payables	600 ÷ 5,400 × 365	40.6
Working capital cycle	54.8 + 76.0 − 40.6	90.2

For 2025 the same method gives 40.6 + 60.8 − 48.7 = 52.7 days.

Net working assets to revenue (%) = net working assets ÷ revenue × 100, where net working assets = inventories + trade receivables − trade payables. For 2026: (1,260 + 1,296 − 600) = 1,956; 1,956 ÷ 9,600 × 100 = 20.4%. For 2025: 1,120 ÷ 8,400 × 100 = 13.3%. This shows how much working investment each dollar of sales needs.

Financing ratios

Interest cover (times) = profit from operations ÷ interest payable. 2026: 1,344 ÷ 280 = 4.8 times. 2025: 1,260 ÷ 120 = 10.5 times.

Gearing (%) = non-current liabilities ÷ (issued ordinary share capital + all reserves + non-current liabilities) × 100. 2026: 2,000 ÷ (3,000 + 2,928 + 2,000) × 100 = 2,000 ÷ 7,928 × 100 = 25.2%. 2025: 1,000 ÷ 6,400 × 100 = 15.6%.

Investor ratios

These are the stock exchange ratios in the appendix, labelled A Level only.

• Earnings per share = profit for the year ÷ number of issued ordinary shares. 2026: 798 ÷ 3,000 = $0.266, which is 26.6 cents. 2025: 855 ÷ 3,000 = 28.5 cents.
• Price/earnings = market price per share ÷ earnings per share. 2026: 3.20 ÷ 0.266 = 12.0. 2025: 3.99 ÷ 0.285 = 14.0. It is the number of years of current earnings the price represents.
• Dividend per share = annual ordinary dividend ÷ number of issued ordinary shares, where annual ordinary dividend = interim dividend paid + final dividend proposed. 2026: (90 + 120) ÷ 3,000 = 7.0 cents. 2025: (90 + 180) ÷ 3,000 = 9.0 cents.
• Dividend yield = dividend per share ÷ market price per share. 2026: 0.07 ÷ 3.20 = 0.0219, or 2.19% when written as a percentage. 2025: 0.09 ÷ 3.99 = 0.0226 (2.26%). The appendix prints no multiplier or unit for this ratio, so give the form the question asks for.
• Dividend cover = profit for the year available to pay ordinary dividend ÷ annual ordinary dividend. 2026: 798 ÷ 210 = 3.8 times. 2025: 855 ÷ 270 = 3.2 times. Ardenmoor has only ordinary shares, so all of the profit is available. If a question gives another prior claim on profit, deduct it before dividing.

Turning figures into analysis

A calculation alone earns little here, because Paper 3 assesses analysis and evaluation as well as knowledge. For each ratio, write a four-part point: state the change with both figures, give a likely cause, explain the effect on a named stakeholder, then judge how serious it is.

Ratio	A rise usually suggests	Look out for
Working capital cycle	Cash is tied up longer; more finance needed	A fall can come from stretching payables
Net working assets to revenue	More working investment per dollar of sales	Growth, or slack control of inventory and receivables
Interest cover	A bigger safety margin for lenders	A low figure means profit could be wiped out by a small fall
Gearing	More fixed-cost finance, so more risk	Borrowing can lift returns when the business earns more than it pays
Earnings per share	More profit for each share	Only comparable if share numbers are unchanged
Price/earnings	The market expects growth or low risk	A fall can signal lost confidence
Dividend per share	A larger cash reward	May be paid out of profits that are falling
Dividend yield	A higher return on the current price	A high yield can come from a fallen price
Dividend cover	A safer dividend and more retained profit	Very high cover may mean cash is held back

Ardenmoor conclusions. Revenue rose 14.3% but profit for the year fell 6.7%. The working capital cycle lengthened from 52.7 to 90.2 days because customers took longer to pay (40.6 to 54.8 days), inventory was held longer (60.8 to 76.0 days) and suppliers were paid sooner (48.7 to 40.6 days). Net working assets rose by 836, financed partly by loan notes and overdraft, so interest payable more than doubled and interest cover halved to 4.8. Gearing rose to 25.2%, which is still moderate, yet the borrowing costs 12% while ROCE (profit from operations ÷ capital employed × 100, from section 1.6) fell from 19.7% to 17.0%, so the margin of benefit from borrowing is narrowing.

How the ratios connect

1. Working capital to profit. A longer cycle needs more finance. Borrowing adds interest, which lowers interest cover and profit for the year, so earnings per share falls.
2. Gearing and interest cover. They move together: new loan notes raise gearing and, unless operating profit grows by enough, lower cover. A highly geared business has a larger fall in earnings when profit from operations drops.
3. Earnings, price and dividends. With only ordinary shares, dividend cover equals earnings per share ÷ dividend per share. Ardenmoor’s cover rose from 3.2 to 3.8 only because the dividend was cut harder (22.2%) than earnings fell (6.7%). Price/earnings fell from 14.0 to 12.0 because the price fell by 19.8%, more than the earnings.
4. Yield and price. Yield = dividend per share ÷ price, so a lower dividend and a lower price pull in opposite directions; Ardenmoor’s yield barely moved.
5. Efficiency and return. Slower inventory and receivables turnover tie up capital, which depresses ROCE even when sales grow.

Recommendations and improvement measures

A model point on Ardenmoor: “Interest cover fell from 10.5 to 4.8 times because interest payable rose from 120 to 280 while profit from operations rose only 6.7%. A lender has a thinner safety margin, although 4.8 times is still adequate, so the lender should watch the next set of accounts.”

State who you are advising, give the recommendation, then a reason for and a reason against, then your decision.

• Shareholder: hold rather than buy. For: earnings per share is still positive, cover of 3.8 means the dividend is safe. Against: earnings are falling and the dividend has been cut, so the price may fall further.
• Lender: do not lend more without conditions. For: interest cover of 4.8 still covers payments. Against: it has halved and the cycle is the cause, so extra lending may only fund slow collection.
• Manager: target the cycle. Cutting receivables to 45 days releases about 231 (1,296 less 1,065). Cutting inventory to 70 days releases about 100 (1,260 less 1,160). Using 300 of the cash to repay loan notes would save interest of 36, lift interest cover to 5.5 and cut gearing to 22.3%, but pressing customers may cost sales if they value credit.

Other measures: negotiate longer supplier credit without losing discounts, reduce slow-moving inventory, fund growth with share capital rather than debt, and hold dividends until earnings recover.

Common errors

• Using total revenue instead of credit sales or credit purchases in the days ratios.
• Adding the payables days to the cycle instead of subtracting them.
• Using profit for the year in interest cover instead of profit from operations.
• Leaving non-current liabilities out of the denominator of gearing.
• Using only the final dividend in dividend per share, rather than interim plus final.
• Describing a ratio without saying whether the change is good or bad for a stated user.

Frequently asked questions

How do you calculate the working capital cycle? Working capital cycle (days) = trade receivables turnover (days) + inventory turnover (days) − trade payables turnover (days). A longer cycle needs more finance.

How is gearing calculated in Cambridge 9706? Gearing (%) = non-current liabilities ÷ (issued ordinary share capital + all reserves + non-current liabilities) × 100. Leaving non-current liabilities out of the denominator is a common error.

Which profit figure is used for interest cover? Interest cover = profit from operations ÷ interest payable. Using profit for the year instead of profit from operations is a common mistake.

Can I use any ratio formula in a Cambridge 9706 answer? No. Only the formulae in the appendix to section 3 of the syllabus are accepted. An incorrect formula is not credited, although the figure it produces can be credited as your own figure in later work.

How should a recommendation be structured in ratio analysis? State who you are advising, give the recommendation, then a reason for and a reason against, and finish with a justified decision. A recommendation without a reason against is judged incomplete.

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.