OxfordAQA A-Level Accounting: Analysis and evaluation of financial information (9615) – Revision Notes

The study guide has the full teaching and worked statements; start there if any of this is new.

These notes cover section 3.1.8, Analysis and evaluation of financial information, of the OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards. It is International AS content, and the specification lists it in what is assessed by Paper 1 and by Paper 2. All figures are invented.

When these feel secure, attempt the practice questions. The full course page is /boards/oxfordaqa/a-level/accounting/ and the tick list is /checklists/oxfordaqa/a-level/accounting/. A free diagnostic shows where to focus. For who uses accounts, see the accountant’s role.

Section 3.1.8 at a glance

1. Calculate and interpret each financial ratio and measure the specification names.
2. Appraise performance under four headings: profitability, liquidity, efficiency, capital structure.
3. Explain cash versus profit, and the effect of a transaction on profitability and liquidity.
4. State limitations of financial statements and ratio analysis, financial and non-financial.

Formula table

OxfordAQA’s guide Formulae for accounting ratios says students will be required to know these formulae.

Ratio	Answer as	Formula	A rise usually means
Gross profit margin	per cent	Gross profit / Revenue × 100	Better pricing or cheaper buying
Markup	per cent	Gross profit / Cost of sales × 100	Higher price added to cost
Profit in relation to revenue	per cent	Profit for year / Revenue × 100	More of each sale kept as profit
Expenses in relation to revenue	per cent	Expenses / Revenue × 100	Weaker overhead control (a rise is bad)
ROCE (sole trader)	per cent	Profit for year / (Capital + non-current liabilities) × 100	Long-term funds working harder
ROCE (limited company)	per cent	Profit from operations / (Equity + non-current liabilities) × 100	As above
Current ratio	x : 1	Current assets / Current liabilities	More short-term cover, or idle resources
Liquid capital ratio	x : 1	(Current assets − closing inventory) / Current liabilities	Better cover without selling inventory
Rate of inventory turnover	times per year	Cost of sales / Average inventory	Goods sold more quickly
Rate of inventory turnover (days)	days	Average inventory / Cost of sales × 365	Inventory held longer (a rise is bad)
Trade receivable days	days	Trade receivables / Credit sales × 365	Customers paying more slowly
Trade payable days	days	Trade payables / Credit purchases × 365	Taking longer to pay suppliers
Capital gearing	per cent	Non-current liabilities / total of (Issued share capital + Reserves + Non-current liabilities) × 100	More reliance on borrowing

The OxfordAQA guide lists the days version of inventory turnover; the times version above is the same pair of figures inverted. Average inventory = (opening + closing) / 2. For ROCE, either the opening or the closing capital figure may be used. A sole trader has no share capital, so gearing uses the owner’s capital as the equity figure.

Method in steps

Calculating a ratio

1. State the formula.
2. Put in the figures, choosing credit sales or credit purchases where the formula needs them.
3. Give the answer in the right form: %, x : 1, times or days.
4. Round sensibly (two decimal places for % and ratios, one for days) and keep the same rounding for both years.

Writing an appraisal

1. Group the ratios under profitability, liquidity, efficiency and capital structure.
2. For each group, state the direction of change with the figures.
3. Suggest a reason, using clues given in the scenario.
4. Say what it means for the business or for a named user.
5. Link groups (slow customers explain falling liquidity).
6. Finish with a judgement, qualified by a limitation.

Which ratios matter to whom

Aim your appraisal at the reader named in the question.

User	Ratios they watch most	Why
Owner	Profit in relation to revenue, ROCE	Is the money tied up in the business earning enough?
Bank or other lender	Capital gearing, current ratio, liquid capital ratio	Can the business repay, and how much does it already owe?
Trade supplier	Liquid capital ratio, trade payable days	Will invoices be paid, and how quickly?
Manager	Expenses in relation to revenue, inventory and receivable days	Where can costs or working capital be tightened?

A good answer picks the two or three ratios that fit the user, rather than discussing every one.

Small worked reminders

Margin and markup convert. Markup = margin / (100 − margin) × 100. A margin of 45% is a markup of 45 / 55 × 100 = 81.82%. A markup of 20% is a margin of 20 / 120 × 100 = 16.67%.

Times to days. Days = 365 / times. Turnover of 12 times is 30.4 days.

Profit ratios link. Gross profit margin − expenses in relation to revenue = profit in relation to revenue.

Opening or closing capital. Either is allowed for ROCE. Say which and use the same choice for both years.

Cash versus profit

Profit follows the accruals concept; the bank balance follows money in and out. They differ because of:

• credit sales and credit purchases (counted before cash moves);
• changes in inventory (cash spent on unsold goods);
• depreciation and doubtful debt provisions (expenses with no cash);
• buying or selling non-current assets;
• capital introduced, drawings, loans received and repaid.

Effect of a transaction: quick rules

• Swapping one current asset for another (a customer settles a debt) changes neither total, so the current ratio stays put.
• Buying inventory with cash keeps total current assets the same but cuts the liquid capital ratio.
• Paying a current liability from cash raises a ratio that was above 1 : 1 and lowers one that was below 1 : 1.
• Selling inventory at a profit raises profit and both liquidity ratios.
• Depreciation lowers profit and leaves both liquidity ratios unchanged.
• A long-term loan received raises both liquidity ratios with no effect on profit.

Limitations

Financial: historic figures; no inflation adjustment; different accounting policies between firms; year-end snapshot may be untypical; estimates such as depreciation; missing data such as the credit sales split.

Non-financial: staff skills and morale; management quality; reputation and customer loyalty; market and competitor changes; environmental and social impact.

Must-know distinctions

• Margin vs markup: margin divides by revenue; markup divides by cost of sales.
• Current vs liquid capital ratio: the liquid ratio removes closing inventory.
• Sole trader vs company ROCE: profit for year with capital, against profit from operations with equity.
• Profit vs cash: profit is earned and incurred; cash is received and paid.
• Receivable vs payable days: credit sales against credit purchases.
• Liquidity vs efficiency: liquidity is the ability to pay short-term debts; efficiency is how quickly inventory, receivables and payables turn over.

Quick self-test

1. Gross profit is 45,000 and cost of sales is 150,000. Calculate markup and gross profit margin.
2. Convert a markup of 35% to a gross profit margin.
3. Current assets 48,000 (inventory 20,000), current liabilities 32,000. Calculate both liquidity ratios.
4. Average inventory 15,000, cost of sales 135,000. Find inventory turnover as times, then as days.
5. Gross profit margin is 32% and profit in relation to revenue is 7%. Find expenses in relation to revenue.
6. Does a depreciation charge reduce the bank balance?
7. Which profit figure is used for a limited company’s ROCE?
8. Non-current liabilities 60,000, issued share capital 150,000, reserves 90,000. Calculate capital gearing.
9. Trade payables 16,200, credit purchases 197,100. Calculate trade payable days.
10. Name two non-financial limitations of ratio analysis.
11. Profit for the year 27,000; owner’s capital 165,000; long-term loan 15,000. Find ROCE for this sole trader.

Answers

1. Markup = 45,000 / 150,000 × 100 = 30.00%. Revenue = 195,000, so margin = 45,000 / 195,000 × 100 = 23.08%.
2. 35 / 135 × 100 = 25.93%.
3. Current = 48,000 / 32,000 = 1.5 : 1. Liquid = 28,000 / 32,000 = 0.88 : 1.
4. 135,000 / 15,000 = 9 times; 15,000 / 135,000 × 365 = 40.6 days.
5. 32 − 7 = 25%.
6. No. It reduces profit; no money leaves the business.
7. Profit from operations.
8. 60,000 / 300,000 × 100 = 20.00%.
9. 16,200 / 197,100 × 365 = 30.0 days.
10. Any two, for example staff morale and reputation with customers.
11. 27,000 / 180,000 × 100 = 15.00%.

Where marks are usually lost

• Dividing by revenue for markup, or by cost of sales for margin.
• Using total revenue for receivable days when a credit sales figure is given.
• Using closing inventory instead of average inventory for turnover.
• Adding loan interest back to sole trader profit, which the OxfordAQA formula does not do.
• Using profit for the year, rather than profit from operations, in company ROCE.
• Expressing the current ratio as a percentage, or leaving off “: 1”.
• Describing a change (“it fell”) without a cause or a consequence.
• Treating a higher current ratio as automatically good when inventory or receivables have swollen.
• Listing limitations without linking them to the business in the question.
• Saying depreciation or a provision for doubtful debts uses cash.

Official syllabus

OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards, published by OxfordAQA – section 3.1.8, Analysis and evaluation of financial information. Formulae from the OxfordAQA guide Formulae for accounting ratios.