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

These are condensed notes for section 1.6, Analysis and communication of accounting information, in the Cambridge International AS & A Level Accounting 9706 syllabus for exams in 2026, 2027 and 2028 (AS Level, Financial accounting). Full explanations and a long worked example are in the study guide. Test yourself with the practice questions, then use the Cambridge A Level Accounting hub, the checklist and the free diagnostics.

1.6.1 Users: who wants what

Stakeholder	Main interest	Most useful figures
Owners	Return on their investment, growth	Profit for the year, profit margin, return on capital employed
Managers	Control of costs, cash and performance	All ratios, trends, expense detail
Employees	Job security, pay, bonuses	Profit trend, liquidity, revenue growth
Investors	Return and risk of buying shares	Return on capital employed, profit trend, comparison with similar companies
Lenders	Repayment of loan and interest	Liquidity, profit from operations, assets
Suppliers	Prompt payment	Current ratio, acid test ratio, trade payables days
Customers	Continuity of supply and service	Stability, liquidity, profit
Government	Tax, employment, compliance	Profit, revenue, wages
Public and environmental bodies	Effect on the community and surroundings	Spending on pollution control, jobs, local contribution

Communicating: pick the figures the reader needs, show the formula, add a comparison (last year, similar business, benchmark), and state a short judgement in plain words.

1.6.2 Formulae (appendix formulae only)

Measure	Calculation
Gross profit margin (%)	Gross profit ÷ Revenue × 100
Profit margin (%)	Profit for the year ÷ Revenue × 100
Mark-up (%)	Gross profit ÷ Cost of sales × 100
Expenses to revenue (%)	Expenses ÷ Revenue × 100
Operating expenses to revenue (%)	Operating expenses ÷ Revenue × 100
Return on capital employed (%)	Profit from operations ÷ Capital employed × 100
Current ratio	Current assets : Current liabilities, shown as x : 1
Acid test ratio	(Current assets - inventory) : Current liabilities, shown as x : 1
Non-current asset turnover (times)	Net revenue ÷ Total net book value of non-current assets
Trade receivables turnover (days)	Trade receivables ÷ Credit sales × 365
Trade payables turnover (days)	Trade payables ÷ Credit purchases × 365
Inventory turnover (days)	Average inventory ÷ Cost of sales × 365
Rate of inventory turnover (times)	Cost of sales ÷ Average inventory held

Capital employed: add issued shares, reserves and non-current liabilities. Average inventory: add opening and closing inventory, then halve. The syllabus says the question paper does not give you the ratios.

Method in steps

1. Write the formula. Then substitute figures from the statements.
2. Choose the right base: revenue for margins, cost of sales for mark-up, credit sales or credit purchases for days.
3. Calculate, then state the unit: %, : 1, days or times.
4. Compare with something: last year, a similar business or a benchmark.
5. Explain the cause, the effect and what the stakeholder should do.

Small worked reminder: Ashgrove Pottery Ltd

Revenue 480,000; cost of sales 288,000; operating expenses 120,000; shares 150,000; reserves 84,000; non-current liabilities 90,000 (all in dollars).

Step	Working	Result
Gross profit	480,000 - 288,000	192,000
Gross profit margin	192,000 ÷ 480,000 × 100	40.0%
Mark-up	192,000 ÷ 288,000 × 100	66.7%
Profit from operations	192,000 - 120,000	72,000
Capital employed	150,000 + 84,000 + 90,000	324,000
Return on capital employed	72,000 ÷ 324,000 × 100	22.2%
Operating expenses to revenue	120,000 ÷ 480,000 × 100	25.0%

Must-know distinctions

• Gross profit margin or mark-up: margin divides by revenue, mark-up divides by cost of sales. Mark-up is always the larger percentage when gross profit is positive.
• Current ratio or acid test ratio: the acid test removes inventory because inventory is the slowest current asset to turn into cash.
• Profit from operations or profit for the year: return on capital employed uses profit from operations; profit margin uses profit for the year.
• Receivables days or payables days: low receivables days is good (cash arrives soon); high payables days helps cash but may upset suppliers.
• Inventory days or rate of inventory turnover: days is how long stock stays; times is how often it is sold and replaced. Both use average inventory and cost of sales.
• Expenses or operating expenses to revenue: use the group of costs the question names.

Interpreting results

Result	Possible meaning	Possible causes
Gross profit margin falls	Lower profit on each sale	Dearer materials, discounts, change in product mix
Operating expenses to revenue rises	Overheads growing faster than sales	Higher wages, rent, advertising
Return on capital employed falls	Less profit per dollar invested	Lower profit, or more capital employed
Current ratio low	Risk of failing to pay short-term debts	Too little cash, overdraft, heavy payables
Current ratio very high	Cash or inventory may be idle	Excess stock, slow collection
Receivables days rise	Customers pay later	Weak credit control, generous terms
Inventory days rise	Stock moves slowly	Over-ordering, falling demand
Non-current asset turnover falls	Assets generate less revenue	New assets not yet productive, idle capacity

Improvement measures

• Profitability: raise prices, buy materials more cheaply, cut waste, trim overheads, sell more high-margin items. Each can hurt demand, quality or morale.
• Liquidity: collect from customers faster, reduce inventory, negotiate longer payment terms, replace short-term borrowing with long-term finance, reduce owner or investor payouts.
• Efficiency: credit control and early settlement discounts, just in time inventory, use assets more fully, sell idle assets.

Always add the drawback. Improvement measures are judged on how well they are justified.

Limitations of accounting information

• Historic cost and past data, not current value or the future.
• Estimates and judgements (depreciation, inventory value) affect profit.
• Non-financial factors are left out: skills, reputation, environmental effects.
• A year-end snapshot may be unrepresentative, for example in seasonal trade.
• Businesses differ in policies, size, products, finance and year end, so comparison is limited.
• A single ratio has little meaning on its own; use trends and comparisons.

Quick self-test

Amounts are in dollars. Round percentages and days to 1 decimal place.

1. Gross profit is 150,000 and revenue is 600,000. Find the gross profit margin and the cost of sales.
2. Revenue is 420,000 and cost of sales is 273,000. Find the gross profit margin and the mark-up.
3. Profit from operations is 56,000, issued shares 120,000, reserves 76,000 and non-current liabilities 84,000. Find the return on capital employed.
4. Current assets are 96,000 (inventory 40,000) and current liabilities 56,000. Find the current ratio and the acid test ratio.
5. Trade receivables are 45,000 and credit sales 438,000. Find trade receivables turnover in days.
6. Opening inventory is 30,000, closing inventory 42,000 and cost of sales 216,000. Find inventory turnover in days and the rate of inventory turnover.
7. Revenue is 720,000 and the net book value of non-current assets is 240,000. Find non-current asset turnover.
8. Trade payables are 38,000 and credit purchases 253,000. Find trade payables turnover in days.
9. Name two ratios a supplier would check before granting credit.
10. State two limitations of accounting information when comparing two businesses.

Answers

1. Gross profit margin 150,000 ÷ 600,000 × 100 = 25.0%. Cost of sales = 600,000 - 150,000 = 450,000.
2. Gross profit = 147,000. Gross profit margin = 147,000 ÷ 420,000 × 100 = 35.0%. Mark-up = 147,000 ÷ 273,000 × 100 = 53.8%.
3. Capital employed = 120,000 + 76,000 + 84,000 = 280,000. Return on capital employed = 56,000 ÷ 280,000 × 100 = 20.0%.
4. Current ratio = 96,000 : 56,000 = 1.7 : 1. Acid test = (96,000 - 40,000) : 56,000 = 1.0 : 1.
5. 45,000 ÷ 438,000 × 365 = 37.5 days.
6. Average inventory = 36,000. Days = 36,000 ÷ 216,000 × 365 = 60.8 days. Rate = 216,000 ÷ 36,000 = 6.0 times.
7. 720,000 ÷ 240,000 = 3.0 times.
8. 38,000 ÷ 253,000 × 365 = 54.8 days.
9. Any two of: current ratio, acid test ratio, trade payables turnover (days).
10. Any two of: different accounting policies, different size or product range, different year ends, historic cost values, different finance structure, non-financial factors ignored.

Where marks are usually lost

• Writing a ratio with no formula shown, or with a formula that is not the appendix one.
• Using total sales or total purchases in the days ratios when credit figures are given.
• Using closing inventory instead of average inventory in inventory turnover.
• Leaving non-current liabilities out of capital employed, or using profit for the year in return on capital employed.
• Confusing gross profit margin with mark-up and dividing by the wrong base.
• Giving the ratio but no unit, such as days, times or %.
• Reporting only that a figure rose or fell, with no cause, comparison or consequence for the named stakeholder.
• Suggesting an improvement without its drawback.
• Ignoring the stakeholder in the question and giving generic points.

Frequently asked questions

What is the difference between gross profit margin and mark-up? Both use gross profit as the numerator, but gross profit margin divides by revenue and mark-up divides by cost of sales. Dividing by the wrong base is a common mistake.

Which inventory figure is used for inventory turnover? Inventory turnover uses average inventory, (opening + closing) ÷ 2, not closing inventory alone.

Why must I include units with ratio answers? Each ratio has a unit, such as %, : 1, days or times, and giving the ratio with no unit is a common way to lose marks.

What should an improvement measure include? Suggest a measure that fits the ratio in question and state its drawback. Suggesting an improvement without its drawback is a common mistake.

Official syllabus

Cambridge International AS & A Level Accounting 9706 syllabus for exams in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International): section 1.6 Analysis and communication of accounting information, and the appendix of commonly used ratios.