IGCSE Accounting: Analysis and Interpretation (Cambridge 0452)

Syllabus edition note. This resource follows the Cambridge IGCSE Accounting 0452 syllabus for exams in 2027, 2028 and 2029 (version 1), first examined in the March 2027 series in India and the June 2027 series elsewhere. If you sit 0452 in November 2026, you sit the 2026 syllabus (version 2), which differs: Paper 1 has 35 multiple-choice marks in 1 hour 15 minutes, not 40 marks in 1 hour 30 minutes; Topic 7 is “Accounting principles and policies”, without 7.2 Ethical considerations or 7.3 Technology and sustainability; 4.4 is “Irrecoverable debts and provision for doubtful debts”; income statements are named instead of statements of profit or loss; three-column running balance accounts are not required; Clubs and societies is 5.4 and Manufacturing accounts 5.5; and 6.3 is “Inter-firm comparison”. For this topic, the 2026 syllabus lists eight ratios without inventory turnover in days (mark-up appears only in its ratio appendix), names ROCE’s numerator “net profit before interest”, lists interested parties as owners, managers, trade payables, banks, investors, club members and others such as governments and tax authorities, and gives the limitations of accounting statements as historic cost, difficulties of definition and non-financial aspects. If you sit in November 2026, work from the 2026 syllabus on the Cambridge International website.

This guide covers Topic 6 Analysis and interpretation, for Cambridge IGCSE Accounting 0452, syllabus for exams in 2027, 2028 and 2029 (Version 1). It is the sixth of seven topics. Topics 1 to 5 teach how to record transactions and prepare financial statements; Topic 6 asks what those statements actually say about a business, and who wants to know.

Where this fits in 0452

Every ratio in this topic is built from figures in a statement of profit or loss or a statement of financial position, so Topic 6 assumes the layouts from Topic 5’s Preparation of Financial Statements are secure. It also leans on Topic 4’s Accounting Procedures: the value placed on closing inventory, the depreciation charged and the allowance for irrecoverable debts all change the profit, the assets and therefore the ratios. The syllabus introduction to the subject content says candidates should be able to make simple decisions based on the analysis and evaluation of information provided, and this is the topic where that happens most directly.

Syllabus coverage

CAMBRIDGE IGCSE ACCOUNTING (0452) — TOPIC 6: ANALYSIS AND INTERPRETATION

• 6.1 Calculation and understanding of accounting ratios — understanding and calculating ten ratios: gross profit margin; mark-up; profit margin; return on capital employed (ROCE); current (working capital) ratio; acid test (liquid) ratio; rate of inventory turnover (times); inventory turnover (days); trade receivables turnover (days); trade payables turnover (days). The syllabus Note says: “Candidates must use the formulas given in the Accounting ratios included at the end of this section. These are the only formulas accepted in candidate responses.” All ten formulas are in the table below.
• 6.2 Interpretation of accounting ratios — preparing and commenting on statements showing comparison of results for different years; interpreting each of the ratios calculated in 6.1; making suggestions and recommendations for improving profitability, liquidity and working capital; the gross profit margin and the profit margin as indicators of a business’s profitability; how gross profit can be affected by the valuation of inventory, sales quantity and changes in selling and purchasing prices; how profit for the year can be affected by changes in gross profit, other income and expenses; and the reasons for the difference between cash and profit.
• 6.3 Inter-business comparison — the factors that may affect the ratios of two businesses, and the problems of inter-business comparison. (The syllabus’s introduction to Topic 6 calls this “inter-firm comparison”; the sub-topic title is “Inter-business comparison”.)
• 6.4 Interested parties — how accounting information may be used for decision-making by owners; managers; employees; banks; investors and lenders; suppliers; customers; governments / tax authorities; club members; and other interested parties, e.g. public and environmental bodies.
• 6.5 Limitations of accounting statements — the limitations due to historic cost; the application of accounting policies; and non-financial aspects, for example skill of the workforce, location of the business and economic climate.

The ten ratios and their formulas

These are the syllabus’s own names and formulas (p.21). Use them exactly: the 6.1 Note says they are the only formulas accepted.

Group	Ratio	Formula
Profitability	Gross profit margin (%)	Gross profit ÷ Revenue × 100
Profitability	Mark-up (%)	Gross profit ÷ Cost of sales × 100
Profitability	Profit margin (%)	Profit for the year ÷ Revenue × 100
Profitability	Return on capital employed (ROCE) (%)	Profit for the year before interest ÷ Capital employed × 100, where Capital employed = issued shares + reserves + non-current liabilities
Liquidity	Current (working capital) ratio	Current assets : Current liabilities — answer presented as a ratio
Liquidity	Acid test (liquid) ratio	(Current assets – inventory) : Current liabilities — answer presented as a ratio
Efficiency	Rate of inventory turnover (times)	Cost of sales ÷ Average inventory
Efficiency	Inventory turnover (days)	Average inventory ÷ Cost of sales × 365 days
Efficiency	Trade receivables turnover (days)	Trade receivables ÷ Credit sales × 365 days
Efficiency	Trade payables turnover (days)	Trade payables ÷ Credit purchases × 365 days

Four details to get right:

• The current ratio and the acid test are ratios, not percentages. Write the answer as, for example, 2.50 : 1.
• ROCE uses profit before interest. Add any interest on non-current liabilities (for a limited company, debenture interest) back to profit for the year. Capital employed includes the non-current liabilities, so the interest paid to those lenders must not be deducted from the return.
• Average inventory is (opening inventory + closing inventory) ÷ 2 (the average of the two figures).
• Credit sales and credit purchases, not total revenue and total purchases, go in the two turnover (days) formulas. If a question gives only one figure and says all sales (or purchases) are on credit, use it.

This guide rounds every percentage, ratio, number of times and number of days to 2 decimal places.

How to approach it

Treat every ratio question as three steps: calculate, compare, explain. A ratio on its own says little. It becomes useful when it is compared with the same ratio for an earlier year, with a budget or target, or with another business, and when the comparison is explained by something in the figures or the scenario. “The gross profit margin fell from 40.00% to 35.42%” earns a comparison; adding “because selling prices were cut while the supplier raised its prices, so each $100 of revenue now leaves less gross profit” turns it into interpretation.

Group the ratios before you interpret them. Profitability ratios (gross profit margin, mark-up, profit margin, ROCE) ask whether the business is earning enough. Liquidity ratios (current ratio, acid test) ask whether it can pay its debts as they fall due. Efficiency ratios (the four turnover ratios) explain why liquidity has changed: slow inventory, slow-paying customers or paying suppliers too quickly all tie up cash in working capital.

When a question asks you to suggest or advise, make each recommendation specific to the ratio that is weak, and say what it would change. “Chase customers who exceed the 30-day credit period” answers a rising trade receivables turnover; “cut costs” on its own rarely earns credit.

Worked example: Harbour Traders Limited, two years compared

Harbour Traders Limited is a trading company. In 2026 it reduced its selling prices to win more customers, and its main supplier raised its prices. It allows credit customers 30 days and receives 60 days’ credit from suppliers. Its summarised results are below.

Comparison of results for the years ended 31 December

                                    2025          2026        Change
                                       $             $             $
Revenue                          400,000       480,000     + 80,000
Opening inventory                 30,000        40,000
Purchases                        250,000       330,000
Closing inventory                (40,000)      (60,000)
Cost of sales                    240,000       310,000     + 70,000
Gross profit                     160,000       170,000     + 10,000
Other income (rent received)       2,000         2,000            0
Expenses                          98,000       120,000     + 22,000
Debenture interest                 4,000         4,000            0
Profit for the year               60,000        48,000     - 12,000

Extracts from the statements of financial position at 31 December

                                    2025          2026
                                       $             $
Non-current assets               300,000       320,000
Inventory                         40,000        60,000
Trade receivables                 42,000        68,000
Other receivables                  2,000         2,000
Bank                              16,000             -
Current assets                   100,000       130,000
Trade payables                    36,000        45,000
Other payables                     4,000         5,000
Bank overdraft                         -        20,000
Current liabilities               40,000        70,000
Net current assets                60,000        60,000
8% debentures (non-current)       50,000        50,000
Net assets                       310,000       330,000

Ordinary shares                  200,000       200,000
General reserve                   30,000        30,000
Retained earnings                 80,000       100,000
Equity                           310,000       330,000

Further information: credit sales were $320,000 in 2025 and $408,000 in 2026; credit purchases were $240,000 in 2025 and $324,000 in 2026. In 2026 the expenses included depreciation of $30,000, non-current assets costing $50,000 were bought, no non-current assets were sold, and dividends of $28,000 were paid (shown in the statement of changes in equity, not the statement of profit or loss: retained earnings $80,000

• $48,000 − $28,000 = $100,000).

Calculations

                                  2025                          2026
Gross profit margin    160,000/400,000 x 100 = 40.00%   170,000/480,000 x 100 = 35.42%
Mark-up                160,000/240,000 x 100 = 66.67%   170,000/310,000 x 100 = 54.84%
Profit margin           60,000/400,000 x 100 = 15.00%    48,000/480,000 x 100 = 10.00%

Profit for the year
  before interest      60,000 + 4,000 = 64,000          48,000 + 4,000 = 52,000
Capital employed       200,000 + 110,000 + 50,000       200,000 + 130,000 + 50,000
                         = 360,000                        = 380,000
ROCE                    64,000/360,000 x 100 = 17.78%    52,000/380,000 x 100 = 13.68%

Current ratio          100,000 : 40,000 = 2.50 : 1      130,000 : 70,000 = 1.86 : 1
Acid test              (100,000 - 40,000) : 40,000      (130,000 - 60,000) : 70,000
                         = 1.50 : 1                       = 1.00 : 1

Average inventory      (30,000 + 40,000)/2 = 35,000     (40,000 + 60,000)/2 = 50,000
Rate of inventory
  turnover             240,000/35,000 = 6.86 times      310,000/50,000 = 6.20 times
Inventory turnover     35,000/240,000 x 365 = 53.23 days  50,000/310,000 x 365 = 58.87 days
Trade receivables
  turnover             42,000/320,000 x 365 = 47.91 days  68,000/408,000 x 365 = 60.83 days
Trade payables
  turnover             36,000/240,000 x 365 = 54.75 days  45,000/324,000 x 365 = 50.69 days

Reserves are the general reserve plus retained earnings: $30,000 + $80,000 = $110,000 in 2025 and $30,000 + $100,000 = $130,000 in 2026.

Interpreting the ratios

• Gross profit margin and mark-up fell from 40.00% to 35.42% and from 66.67% to 54.84%. Both describe the same fall: each $100 of revenue now leaves $35.42 of gross profit instead of $40.00. This follows from the scenario — lower selling prices and higher purchase prices both squeeze gross profit on each sale. Gross profit still rose by $10,000 because sales quantity rose enough to lift revenue by $80,000.
• Profit margin fell from 15.00% to 10.00%, a bigger fall than the gross profit margin. Expenses rose by $22,000 while gross profit rose by only $10,000, and other income and debenture interest did not change, so profit for the year fell by $12,000. The business sold more but controlled its expenses less well.
• ROCE fell from 17.78% to 13.68%. Profit before interest fell by $12,000 while capital employed rose by $20,000 (the retained earnings), so each $100 of capital employed earned less. An owner or investor would compare 13.68% with the return available elsewhere.
• Current ratio fell from 2.50 : 1 to 1.86 : 1 and the acid test from 1.50 : 1 to 1.00 : 1. Net current assets stayed at $60,000, but current liabilities rose by $30,000, including a new $20,000 overdraft. At 1.00 : 1 the liquid assets only just cover the current liabilities, so any further slowdown in customer payments would leave the business relying on selling inventory or on the overdraft.
• Rate of inventory turnover fell from 6.86 times to 6.20 times, and inventory turnover rose from 53.23 days to 58.87 days: inventory is held longer before it is sold. Closing inventory rose from $40,000 to $60,000, tying up cash and increasing the risk of goods becoming damaged or out of date.
• Trade receivables turnover rose from 47.91 days to 60.83 days, against 30 days’ credit allowed. Customers were already slow and are now much slower, which is a major reason the bank balance became an overdraft.
• Trade payables turnover fell from 54.75 days to 50.69 days, although suppliers allow 60 days. The business is collecting from customers more slowly but paying suppliers more quickly — the wrong way round for its cash position.

Suggestions and recommendations

• Profitability: review the price cuts (they raised revenue but cut the gross profit margin); look for a cheaper supplier or negotiate a trade discount for larger orders; find out which expenses caused the $22,000 rise and reduce those that do not help sales.
• Liquidity: collect trade receivables within the 30 days allowed — send statements of account promptly, chase overdue accounts, and consider offering a cash discount for prompt payment; avoid new purchases of non-current assets being paid for from the overdraft.
• Working capital: reduce inventory levels by ordering smaller quantities more often; take the full 60 days’ credit from suppliers instead of paying after about 51 days; consider a lower dividend while the overdraft remains.

Why profit and cash differ

Harbour Traders made a profit for the year of $48,000 in 2026, yet its bank balance moved from $16,000 in hand to a $20,000 overdraft, a fall of $36,000. Profit is measured by matching revenue with the expenses of the year; cash moves when money is actually received and paid. The figures above explain the whole gap:

Profit for the year                                        48,000
Depreciation: an expense, but no cash is paid             +30,000
Non-current assets bought: cash paid, not an expense      -50,000
Increase in inventory ($40,000 to $60,000)                -20,000
Increase in trade receivables: sales not yet paid for     -26,000
Increase in trade payables: purchases not yet paid for     +9,000
Increase in other payables: expenses not yet paid          +1,000
Dividends paid: cash paid, not in the SoPL                -28,000
Change in bank balance                                    -36,000

This list is a check on the explanation, not a statement of cash flows, which 0452 does not require. Other common reasons profit and cash differ include: capital introduced, loans received and shares issued (cash in, not income); loan repayments and, for a sole trader, drawings (cash out, not expenses); accrued and prepaid expenses and accrued and prepaid income, which put income and expenses in a different year from the cash; and irrecoverable debts and changes in the allowance for irrecoverable debts, which change profit without any cash moving.

How gross profit and profit for the year can change

Gross profit depends on four things named in 6.2.

• Valuation of inventory. Closing inventory is deducted in cost of sales, so overvaluing it understates cost of sales and overstates gross profit (and profit for the year) by the same amount; undervaluing it does the opposite. If Harbour Traders’ 2026 closing inventory had been wrongly valued at $65,000 instead of $60,000, cost of sales would be $305,000, gross profit $175,000 and the gross profit margin 36.46% instead of 35.42%. Inventory is valued at the lower of cost and net realisable value — see Topic 4’s Accounting Procedures.
• Sales quantity. Selling more units at the same prices raises gross profit but leaves the gross profit margin unchanged.
• Selling prices. A price rise with the same costs raises both gross profit and the margin; a price cut lowers the margin (and lowers gross profit unless enough extra units are sold).
• Purchasing prices. Higher purchase prices raise cost of sales; if they are not passed on in selling prices, gross profit and the margin fall.

Profit for the year is gross profit plus other income less expenses. So it can fall even when gross profit rises, as at Harbour Traders, when expenses rise faster or other income (such as rent received or discount received) falls. The gross profit margin and the profit margin together show where profitability is being lost: a steady gross profit margin with a falling profit margin points to expenses; a falling gross profit margin points to pricing, purchase costs or inventory.

Inter-business comparison

Comparing ratios with another business can show whether a result is good for the type of business, but the two sets of ratios may differ for reasons that have nothing to do with how well each is managed.

Factors that may affect the ratios of two businesses

• The type of goods or services: a business selling fresh food turns its inventory over far faster than a furniture shop, and a business selling mainly for cash has few trade receivables.
• Size and scale: a larger business may buy in bulk at lower prices, raising its gross profit margin.
• Pricing policy: one business may choose low prices and high sales quantity, another high prices and lower quantity.
• Location: rent and wages differ between areas, and so do customers.
• How it is financed: capital employed includes non-current liabilities, so loans, debentures and share capital all affect ROCE.
• Whether premises are owned or rented, and the age of the non-current assets.
• Accounting policies: for example the depreciation method, how inventory is valued and the size of the allowance for irrecoverable debts.

Problems of inter-business comparison

• The other business’s detailed financial statements may not be available; published or summarised figures may not show credit sales, credit purchases or opening inventory.
• The businesses may use different accounting policies, so the same events produce different figures.
• Their financial years may end on different dates, so seasonal inventory and receivables differ.
• The businesses may not be truly similar in activity, size or location.
• The statements are historic and may include one unusual year.
• Ratios ignore non-financial aspects, such as the skill of each workforce or the economic climate each faces.

Interested parties

Interested party	How it may use accounting information for decision-making
Owners	Whether profit and ROCE justify the money invested; whether to keep, expand or close the business; how much they can take out
Managers	Planning and control: comparing results with earlier years and targets, deciding prices, which expenses to cut and how much inventory to hold
Employees	Whether jobs are secure and whether the business can afford pay rises
Banks	Whether to grant or continue a loan or overdraft: can the business pay interest and repay (liquidity, profit, assets available as security)
Investors and lenders	Whether to invest or lend: expected return, risk, ability to pay dividends or interest and repay the loan
Suppliers	Whether to supply on credit and how much credit to allow: liquidity and how quickly the business pays its trade payables
Customers	Whether the business will survive to keep supplying goods, spare parts and after-sales service
Governments / tax authorities	Assessing the tax due; deciding on grants and support; collecting business statistics
Club members	How subscriptions have been used, whether the club made a surplus or deficit, and whether subscriptions or activities need to change
Other interested parties, e.g. public and environmental bodies	The business’s effect on the local community and environment, and whether it can continue to provide local employment

Limitations of accounting statements

• Historic cost. Assets are recorded at what they cost when bought, not what they are worth now. Property bought many years ago may be shown far below its current value, and after years of rising prices, figures for different years (or for an older and a newer business) are not measured in comparable money, so ratios such as ROCE can mislead.
• Application of accounting policies. Statements depend on choices and estimates: the depreciation method and useful life, the net realisable value of inventory, and the size of the allowance for irrecoverable debts. Different choices give different profits and asset values, which makes comparison with other businesses difficult, and a change of policy makes comparison between years difficult.
• Non-financial aspects. Only items that can be measured in money appear in the statements. The syllabus’s examples are the skill of the workforce, the location of the business and the economic climate; none appears in a statement, yet each can decide whether the business succeeds. Statements also look backwards: they show what has happened, not what will happen.

Common mistakes

Writing the current ratio or acid test as a percentage or a single number, when the syllabus requires a ratio such as 1.86 : 1. Using profit for the year after debenture interest in ROCE, or leaving the debentures out of capital employed. Using closing inventory instead of average inventory in the two inventory turnover formulas. Using total revenue instead of credit sales in trade receivables turnover (or total purchases instead of credit purchases in trade payables turnover). Confusing gross profit margin (divide by revenue) with mark-up (divide by cost of sales). Using a formula from another source — the 6.1 Note says only the p.21 formulas are accepted. Describing a change (“the current ratio fell”) without saying why or what it means. Assuming a profit means the bank balance has risen. Treating a higher ratio as always better: a very high current ratio can mean too much inventory or idle cash, and a longer trade payables turnover can mean suppliers are waiting too long and may refuse credit.

Quick revision checklist

• Write all ten 6.1 ratios from memory with the p.21 formulas, and know that these are the only formulas accepted.
• Present the current ratio and acid test as ratios (x.xx : 1).
• Add interest back for ROCE; capital employed = issued shares + reserves + non-current liabilities.
• Prepare a comparison statement for two years and comment on each change.
• Interpret each ratio in words and link it to the scenario.
• Give specific recommendations for profitability, liquidity and working capital.
• Explain how inventory valuation, sales quantity, selling prices and purchase prices affect gross profit, and how gross profit, other income and expenses affect profit for the year.
• Explain why profit and cash differ.
• List the factors that affect two businesses’ ratios and the problems of inter-business comparison.
• State how each of the ten interested parties uses accounting information.
• Explain the limitations of historic cost, accounting policies and non-financial aspects.

Official syllabus

Cambridge IGCSE Accounting 0452 syllabus for 2027, 2028 and 2029 (Version 1, September 2024) — cambridgeinternational.org, verified 2026-09-16.