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

This guide covers section 1.6, Analysis and communication of accounting information, of the Cambridge International AS & A Level Accounting 9706 syllabus for exams in 2026, 2027 and 2028. It is AS Level content (1.6.1 Users of accounting information and 1.6.2 Calculation and evaluation of ratios) and sits within Financial accounting. For the matching condensed page see the revision notes, and for exam-style questions the practice set. The wider course is at the Cambridge A Level Accounting hub, with a printable checklist and the free diagnostics. Non-current asset values used below come from Accounting for Non-Current Assets.

What you must be able to do

Syllabus point	What it asks of you
1.6.1	Explain the differing information needs of owners, managers, employees, investors, lenders, suppliers, customers, government, and public and environmental bodies
1.6.1	Communicate and analyse the information each group requires
1.6.2	Calculate profitability, liquidity and efficiency ratios
1.6.2	Evaluate profitability, liquidity and efficiency by interpreting ratios
1.6.2	Suggest measures to improve profitability, liquidity and efficiency
1.6.2	Explain the limitations of accounting information

The syllabus also expects you to compare a business with similar businesses and industry benchmarks, and to appreciate problems that limit such a comparison. The notes say candidates must use the formulae in the appendix to section 3 of the syllabus, and that these are the only formulae accepted in responses.

1.6.1 Users of accounting information

Different readers use the same statements to answer different questions. Your task is to match the information to the question.

Stakeholder	Typical question	Information that answers it
Owners	Is my business earning a fair return?	Profit for the year, profit margin, return on capital employed
Managers	Where are costs and cash tied up?	Detailed ratios, trends, expense and working capital figures
Employees	Is my job secure and is pay affordable?	Profit trend, liquidity, revenue growth
Investors	Is this worth buying into or holding?	Return on capital employed, profit trend, comparison with other companies
Lenders	Will I be repaid, with interest?	Liquidity, profit from operations, assets available
Suppliers	Will I be paid on time?	Current ratio, acid test ratio, trade payables days
Customers	Will this business still be trading next year?	Overall stability, liquidity
Government	Is the right tax paid and are rules followed?	Profit, revenue, employment cost
Public and environmental bodies	What is the effect on the community and surroundings?	Spending on pollution control, jobs provided, local contribution

Communication matters as much as calculation. Give each reader only what they need, name the ratio and its formula, show the comparison (last year, a similar business or a benchmark), and finish with a one-sentence judgement. A supplier wants one line on payment risk; an owner wants profit and return. Sending a supplier a long profit analysis hides the answer they want.

1.6.2 The ratios

Use the appendix formulae exactly. Ratios are not given in the question paper, so learn them.

Area	Measure	Calculation
Profitability	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
Liquidity	Current ratio	Current assets : Current liabilities, shown as x : 1
	Acid test ratio	(Current assets - inventory) : Current liabilities, shown as x : 1
Efficiency	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 (the reverse fraction)

Capital employed adds together issued shares, reserves and non-current liabilities. The appendix gives profit margin with profit for the year, and also as profit for the year (after interest). Use the profit figure the question names. Liquidity ratios are presented as ratios, such as 1.7 : 1.

Worked example: Hollin Fold Joinery Ltd

Hollin Fold Joinery Ltd makes fitted kitchens. All amounts are in dollars and cover the twelve months to 31 March 2026.

Statement of profit or loss (extract)

	$
Revenue (credit sales 720,000)	960,000
Opening inventory	70,000
Purchases (credit purchases 468,000)	638,000
Closing inventory	(84,000)
Cost of sales	(624,000)
Gross profit	336,000
Operating expenses	(252,000)
Profit from operations	84,000
Finance costs	(12,000)
Income tax	(14,000)
Profit for the year	58,000

Statement of financial position (extract)

	$
Non-current assets (net book value)	340,000
Inventory	84,000
Trade receivables	118,000
Bank	9,000
Current assets	211,000
Trade payables	92,000
Tax payable and accruals	34,000
Current liabilities	126,000
Bank loan (non-current liability)	150,000
Issued shares	180,000
Reserves	95,000

Net assets are 340,000 + 211,000 - 126,000 - 150,000 = 275,000, which equals shares plus reserves. Capital employed = 180,000 + 95,000 + 150,000 = 425,000.

Ratio	Working	2026	2025
Gross profit margin	336,000 ÷ 960,000 × 100	35.0%	36.0%
Mark-up	336,000 ÷ 624,000 × 100	53.8%	56.3%
Profit margin	58,000 ÷ 960,000 × 100	6.0%	7.8%
Return on capital employed	84,000 ÷ 425,000 × 100	19.8%	24.8%
Operating expenses to revenue	252,000 ÷ 960,000 × 100	26.3%	25.0%
Current ratio	211,000 : 126,000	1.7 : 1	1.9 : 1
Acid test ratio	(211,000 - 84,000) : 126,000	1.0 : 1	1.2 : 1
Non-current asset turnover	960,000 ÷ 340,000	2.8 times	2.7 times
Trade receivables turnover	118,000 ÷ 720,000 × 365	59.8 days	51.3 days
Trade payables turnover	92,000 ÷ 468,000 × 365	71.8 days	64.9 days
Inventory turnover	77,000 ÷ 624,000 × 365	45.0 days	43.1 days
Rate of inventory turnover	624,000 ÷ 77,000	8.1 times	8.5 times

Average inventory for 2026 is (70,000 + 84,000) ÷ 2 = 77,000. The 2025 column is given to you as prior-year information.

Evaluating performance

One ratio on its own tells you little. Set it beside last year, a comparable firm or an industry benchmark, then say what it means and why it may have changed.

Profitability. Revenue grew by 6.7% (from 900,000 in 2025) yet gross profit margin fell from 36.0% to 35.0%, so cost of sales rose faster than revenue: higher material prices or discounting are possible causes. Operating expenses took a larger share of revenue (26.3% against 25.0%). The two effects explain why profit margin and return on capital employed both fell.

Liquidity. The current ratio and acid test ratio fell, but the acid test ratio is still about 1 : 1, so liquid assets roughly cover current liabilities. Bank is only 9,000, so the company relies on collecting receivables.

Efficiency. Customers take longer to pay (59.8 days against 51.3), while the company pays suppliers more slowly too (71.8 against 64.9). Slower payment to suppliers is funding slower collection, which is a warning if suppliers tighten terms. Inventory moves at a similar speed.

Comparing with a benchmark

Suppose a trade body reports these averages for kitchen makers.

Ratio	Hollin Fold	Benchmark	Comment
Gross profit margin	35.0%	33.0%	Better
Operating expenses to revenue	26.3%	24.0%	Worse
Return on capital employed	19.8%	18.0%	Better
Acid test ratio	1.0 : 1	0.8 : 1	Better
Trade receivables turnover	59.8 days	45 days	Worse
Inventory turnover	45.0 days	55 days	Better

Hollin Fold earns a good gross margin but controls overheads and debt collection less well than the benchmark. Comparison has problems: businesses may use different accounting policies, such as depreciation methods, may have different year ends, sizes and products, and may finance themselves differently. A benchmark is an average, not a target to copy.

Measures to improve

Area	Possible measure	Possible drawback
Profitability	Raise selling prices	Customers may buy elsewhere
	Negotiate cheaper materials	Quality or reliability may fall
	Cut operating expenses	Staff morale or service may suffer
	Sell more higher-margin products	Needs marketing spend
Liquidity	Collect receivables faster	Customers may be lost
	Reduce inventory	Risk of stockouts
	Raise long-term finance to replace short-term	Interest costs rise
	Reduce drawings or dividends	Owners and investors may object
Efficiency	Tighter credit control, settlement discounts	Discount cost
	Just in time ordering	Depends on reliable suppliers
	Sell idle non-current assets	Capacity lost for later growth

Worked example: testing a measure

Hollin Fold proposes a 2% discount for early payment, hoping to cut receivables to 45 days of credit sales.

Receivables at 45 days = 720,000 × 45 ÷ 365 = 88,767 (to the nearest dollar). Cash released = 118,000 - 88,767 = 29,233.

If customers owing half of credit sales take the discount, it costs 720,000 × 50% × 2% = 7,200 a year. The company must judge whether 29,233 of released cash is worth 7,200 of lost revenue, perhaps because it would let the company repay overdraft-type borrowing or hold more bank. A balanced answer gives both sides and a justified decision.

Limitations of accounting information

• It records the past at historic cost, so it may not show current values or predict the future.
• Figures rest on estimates and judgements, for example depreciation and inventory valuation, so they can be managed.
• It leaves out non-financial matters: staff skill, reputation, customer satisfaction and environmental effects.
• A year-end snapshot may not be typical, for instance in a seasonal business.
• Ratios depend on how profit, capital employed and other terms are defined, so use the appendix formulae.
• Comparison with other businesses is weakened by different policies, size, products and finance.

Common errors

• Using profit before tax or profit for the year in return on capital employed instead of profit from operations.
• Leaving out non-current liabilities when finding capital employed.
• Using total sales rather than credit sales or credit purchases for days ratios.
• Using closing inventory for inventory days when the formula uses average inventory.
• Subtracting inventory from current liabilities rather than current assets in the acid test.
• Describing a ratio without a reason, a comparison or a consequence.

Frequently asked questions

Are ratio formulae given in the Cambridge 9706 exam? No. Ratios are not given in the question paper, so learn the appendix formulae and use them exactly. Section 1.6 Analysis and communication of accounting information is AS Level content.

How is capital employed calculated for return on capital employed? Capital employed adds together issued shares, reserves and non-current liabilities, and return on capital employed uses profit from operations. Leaving out non-current liabilities or using profit for the year are common errors.

How do you calculate the acid test ratio? Acid test ratio = (current assets − inventory) : current liabilities. Inventory is subtracted from current assets, not from current liabilities, and the answer is written as x : 1.

What are the limitations of accounting information? It records the past at historic cost, rests on estimates such as depreciation, leaves out non-financial matters such as staff skill and reputation, may reflect an untypical year-end, and comparisons are weakened by different policies, size, products and finance.

How should I evaluate a ratio in an AS Accounting answer? Set it beside last year, a comparable firm or an industry benchmark, and give a cause and a consequence. Describing a ratio without a reason, a comparison or a consequence earns little.

Check your skills with the practice questions.

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 and the appendix of ratios.