Edexcel A-Level Accounting: Analysis of accounting statements (YAC11)

This guide covers topic 1.5, Analysis of accounting statements, in Unit 1 (The Accounting System and Costing) of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018 (first teaching September 2015). It teaches outcomes 1.5.1 to 1.5.3. This is Unit 1 (International AS) content, so it counts towards both the International AS and the full International A Level. All figures are invented and are in dollars.

Use it with the revision notes and the practice questions. The course hub is Edexcel A-Level Accounting, and the printable checklist lists every outcome. To find your weak spots first, try a free 10-minute diagnostic.

What topic 1.5 covers

Outcome	What you must be able to do
1.5.1 Ratios	Calculate the ten listed ratios: gross profit as a percentage of revenue, percentage mark-up, profit for the year as a percentage of revenue, return on capital employed, non-current assets to revenue, inventory turnover, current ratio, liquid (acid test) ratio, trade payables payment period, trade receivables collection period
1.5.2 Appraisal	Use profitability, liquidity and use of asset ratios to appraise the financial statements of sole traders and partnerships
1.5.3 Projections	Use ratios to make future financial projections

You need the statements from topic 1.1 and the double entry system before you start: every ratio takes its figures from a statement of profit or loss or a statement of financial position.

The formulae (1.5.1)

The specification’s Appendix 7 states that the formulae will not be supplied in the examinations, so learn them. The table follows the specification’s three groups.

Group	Ratio	Formula	Expressed as
Profitability	Gross profit as a percentage of revenue (sales margin)	Gross profit / Revenue × 100	%
Profitability	Percentage mark-up	Gross profit / Cost of sales × 100	%
Profitability	Profit for the year as a percentage of revenue	Profit for the year / Revenue × 100	%
Profitability	Return on capital employed (ROCE)	Net profit before interest (NPBI) / Capital employed × 100	%
Liquidity	Current ratio	Current assets / Current liabilities	x : 1
Liquidity	Liquid (acid test) ratio	(Current assets − Inventory) / Current liabilities	x : 1
Liquidity	Rate of inventory turnover	Cost of sales / Average inventory	times per period
Liquidity	Trade payables payment period	Trade payables / Credit purchases × 365	days
Liquidity	Trade receivables collection period	Trade receivables / Credit sales × 365	days
Use of assets	Non-current assets to revenue	Revenue / Non-current assets	times

Points to fix in your head:

• Capital employed for a sole trader or partnership = capital + non-current liabilities. For a partnership, take the partners’ capital accounts and current accounts together as capital.
• NPBI = profit for the year + loan interest charged in the statement of profit or loss. Interest is added back because capital employed includes the loan that earns it.
• Average inventory = (opening inventory + closing inventory) / 2.
• Use credit sales and credit purchases for the two period ratios. If a question gives only revenue and says all sales are on credit, use revenue.
• The ROCE for corporate bodies (capital employed = issued shares + reserves + non-current liabilities) is Unit 2 (A2) only, as are the investment ratios.

Worked example 1: calculating every ratio

Sanaa Okonjo runs Brindlewood Ceramics as a sole trader. Extracts for the year ended 31 March 2026:

Statement of profit or loss	$
Revenue (credit sales 400,000)	480,000
Opening inventory	38,000
Purchases (all on credit)	316,000
Closing inventory	42,000
Expenses, including loan interest 3,600	110,400

Statement of financial position at 31 March 2026	$
Non-current assets (carrying value)	240,000
Inventory	42,000
Trade receivables	46,000
Bank	7,000
Trade payables	36,000
Accrued expenses	2,000
Bank loan (repayable 2031)	60,000
Capital at 31 March 2026	237,000

Step 1: build the totals.

Cost of sales    = 38,000 + 316,000 - 42,000 = 312,000
Gross profit     = 480,000 - 312,000         = 168,000
Profit for year  = 168,000 - 110,400         = 57,600
NPBI             = 57,600 + 3,600            = 61,200
Current assets   = 42,000 + 46,000 + 7,000   = 95,000
Current liabs    = 36,000 + 2,000            = 38,000
Capital employed = 237,000 + 60,000          = 297,000

Check: 240,000 + 95,000 − 38,000 − 60,000 = 237,000, which agrees with capital.

Step 2: the ratios.

GP % of revenue   = 168,000 / 480,000 x 100   = 35.00%
Mark-up           = 168,000 / 312,000 x 100   = 53.85%
Profit for year % = 57,600 / 480,000 x 100    = 12.00%
ROCE              = 61,200 / 297,000 x 100    = 20.61%
Revenue to NCA    = 480,000 / 240,000         = 2.00 times
Inventory turnover= 312,000 / 40,000          = 7.80 times
Current ratio     = 95,000 / 38,000           = 2.50 : 1
Liquid ratio      = 53,000 / 38,000           = 1.39 : 1
Payables period   = 36,000 / 316,000 x 365    = 41.58 days
Receivables period= 46,000 / 400,000 x 365    = 41.98 days

Average inventory is (38,000 + 42,000) / 2 = 40,000. The liquid assets are 95,000 − 42,000 = 53,000.

Margin and mark-up describe the same gross profit from two bases. Converting: margin = mark-up / (100 + mark-up) × 100, so 53.85 / 153.85 × 100 = 35.00%.

Appraising a sole trader (1.5.2)

A ratio on its own says little. Compare it with the previous year, with a similar business, or with a target, then give a reason for the difference and its effect. Brindlewood’s ratios for 2025 were:

Ratio	2025	2026
GP % of revenue	38.00%	35.00%
Mark-up	61.29%	53.85%
Profit for the year %	14.00%	12.00%
ROCE	23.50%	20.61%
Revenue to NCA	2.40 times	2.00 times
Inventory turnover	9.10 times	7.80 times
Current ratio	2.10 : 1	2.50 : 1
Liquid ratio	1.25 : 1	1.39 : 1
Payables period	34 days	41.58 days
Receivables period	31 days	41.98 days

A good appraisal groups the ratios and links them.

Profitability. The gross margin fell by 3 percentage points. Possible reasons: lower selling prices to win trade, or higher purchase prices not passed on. The profit for the year percentage fell by only 2 points, so expenses fell slightly as a share of revenue. ROCE fell from 23.50% to 20.61%: each dollar of long-term finance earns less. Sanaa would compare this with the return she could get by investing elsewhere.

Use of assets. Revenue to non-current assets fell from 2.40 to 2.00 times. Either revenue fell or non-current assets grew (for example, a new kiln) without a matching rise in sales yet. New assets often take time to raise revenue.

Liquidity. Both liquidity ratios rose, which looks safer, but the causes matter. Inventory now turns over 7.80 times rather than 9.10, so goods sit longer and risk breakage or going out of fashion. Customers take almost 42 days instead of 31, so more cash is tied up and the risk of irrecoverable debts rises. The higher current ratio is partly made of slower inventory and slower receivables, which is not a sign of strength. Paying suppliers later (41.58 days) helps cash flow but may cost cash discounts or goodwill.

Overall judgement. Brindlewood is still profitable and can meet its short-term debts, but profitability and asset use both weakened. Sanaa should review pricing and credit control and chase overdue customers.

Limits to keep in mind when you evaluate: the statement of financial position shows one day only, so year-end balances may not be typical; another business may use different inventory or depreciation methods; inflation distorts comparisons over time; and ratios ignore non-financial factors such as staff skill or customer loyalty.

Appraising a partnership (1.5.2)

The ratios are the same. Two points change.

1. Profit for ROCE and the profit percentage is the profit for the year before the appropriation account. Partners’ salaries, interest on capital and shares of profit are divisions of profit between the partners, not expenses.
2. Capital is the total of the capital accounts plus the current accounts. A debit balance on a current account reduces it.

Worked example 2. Tomasz Feld and Rhea Vantorre are in partnership. Capital accounts: Feld 75,000, Vantorre 55,000. Current accounts: Feld 6,500 credit, Vantorre 2,500 debit. A bank loan of 40,000 is a non-current liability, and its interest of 2,400 was charged in arriving at a profit for the year of 26,400. The appropriation account then gives Vantorre a salary of 10,000 and both partners interest on capital at 5%.

Capital          = 75,000 + 55,000 + 6,500 - 2,500 = 134,000
Capital employed = 134,000 + 40,000                = 174,000
NPBI             = 26,400 + 2,400                  = 28,800
ROCE             = 28,800 / 174,000 x 100          = 16.55%

The salary and the interest on capital (6,500) are ignored. Deducting them would understate the return the business earns on the funds in it. When appraising a partnership, also comment on drawings: heavy drawings reduce capital and can weaken liquidity.

Using ratios to make projections (1.5.3)

A projection runs the ratio formulae backwards. You are given a forecast figure and a target ratio, and you rearrange to find the missing figure. Work in this order: revenue, then gross profit and cost of sales, then inventory, then purchases, then receivables and payables.

Worked example 3. Sanaa plans the year ending 31 March 2027 for Brindlewood:

• revenue up 15% to 552,000, with credit sales of 438,000
• gross profit at 33% of revenue (she will cut prices to win volume)
• inventory turnover of 8 times
• trade receivables collection period of 30 days
• trade payables payment period of 42 days
• expenses of 115,000 plus unchanged loan interest of 3,600

Gross profit       = 552,000 x 33%                 = 182,160
Cost of sales      = 552,000 - 182,160             = 369,840
Average inventory  = 369,840 / 8                   = 46,230
Closing inventory  = (46,230 x 2) - 42,000         = 50,460
Credit purchases   = 369,840 + 50,460 - 42,000     = 378,300
Trade receivables  = 438,000 x 30 / 365            = 36,000
Trade payables     = 378,300 x 42 / 365            = 43,530 (nearest $)
Profit for year    = 182,160 - 115,000 - 3,600     = 63,560
Profit for year %  = 63,560 / 552,000 x 100        = 11.51%

The opening inventory for 2027 is the closing inventory for 2026 (42,000). Purchases come from rearranging cost of sales: purchases = cost of sales + closing inventory − opening inventory.

Comment on what the projection shows. Profit for the year rises in dollars, but the profit percentage dips below 2026’s 12.00% because the margin is lower. A projection is only as good as its assumptions: if the price cut does not lift volume by 15%, gross profit falls.

Common errors

• Using revenue instead of cost of sales for mark-up or inventory turnover.
• Using closing inventory instead of average inventory.
• Forgetting to add back loan interest when finding NPBI.
• Leaving the loan out of capital employed, or adding current liabilities to it.
• Deducting partners’ salaries or interest on capital before calculating ROCE.
• Using total revenue for the collection period when credit sales are given.
• Writing a current ratio as a percentage instead of x : 1.
• Describing a change (“ROCE fell”) without a reason and an effect.
• In projections, using the new year’s closing inventory as the opening figure.

Where to go next

Condense this into recall with the revision notes, then test yourself with the practice questions. For the wider exam routine, see the Edexcel IAL Accounting exam preparation guide. Errors in the underlying records distort every ratio, so link this topic to control accounts and correction of errors.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018, first teaching September 2015, published by Pearson Education Limited. Unit 1, topic 1.5 Analysis of accounting statements, and Appendix 7: Formulae.