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

This study guide teaches section 3.1.8, Analysis and evaluation of financial information, from 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. The specification lists 3.1.8 in what is assessed by both Paper 1: Introduction to Financial Accounting and Paper 2: Financial & Management Accounting. Every business and figure below is invented, and amounts are in dollars.

Ratios start from finished statements, so revise how sole trader statements are prepared first if needed, and see the accountant’s role and the users of accounts for who reads them. Everything for this course is gathered at /boards/oxfordaqa/a-level/accounting/, with a topic-by-topic tick list at /checklists/oxfordaqa/a-level/accounting/. A free diagnostic finds your gaps.

What section 3.1.8 covers

Specification statement	Your task
Calculation and interpretation of financial measures and ratios	Work out every ratio and measure in the formula table below, then say what each result tells a user
Appraising business performance by using financial statements and ratios	Weigh up how the business is doing, heading by heading, with evidence
The difference between cash and profits, and how transactions affect profitability and liquidity	Show why profit and the bank balance move differently; trace one transaction through to profit and the liquidity ratios
The limitations of financial statements and ratio analysis when assessing business performance	Qualify conclusions with weaknesses of the data, money-based and otherwise

Section 3.2.9 (International A-level only) returns to this material and adds investors’ ratios such as earnings per share and interest cover. They are not part of 3.1.8.

The formulae

OxfordAQA publishes a guide called Formulae for accounting ratios, which states that students will be required to know the formulae. Learn them in its wording.

Ratio	Heading	Answer as	Formula
Gross profit margin	Profitability	per cent	Gross profit / Revenue × 100
Markup	Profitability	per cent	Gross profit / Cost of sales × 100
Profit in relation to revenue	Profitability	per cent	Profit for year / Revenue × 100
Expenses in relation to revenue	Profitability	per cent	Expenses / Revenue × 100
Return on capital employed (sole trader)	Profitability	per cent	Profit for year / (Capital + non-current liabilities) × 100
Return on capital employed (limited company)	Profitability	per cent	Profit from operations / (Equity + non-current liabilities) × 100
Current ratio	Liquidity	x : 1	Current assets / Current liabilities : 1
Liquid capital ratio (acid test ratio)	Liquidity	x : 1	(Current assets − closing inventory) / Current liabilities : 1
Rate of inventory turnover (days)	Efficiency	days	Average inventory / Cost of sales × 365
Trade receivable days	Efficiency	days	Trade receivables / Credit sales × 365
Trade payable days	Efficiency	days	Trade payables / Credit purchases × 365
Capital gearing	Capital structure	per cent	Non-current liabilities / total of (Issued share capital + Reserves + Non-current liabilities) × 100

Points to notice:

• Average inventory is normally (opening inventory + closing inventory) / 2.
• Rate of inventory turnover (times) uses the same figures inverted: cost of sales / average inventory.
• Sole trader ROCE uses profit for the year as it stands. The OxfordAQA formula does not add back loan interest.
• For ROCE, the OxfordAQA guide allows either the opening or the closing figure for capital. State which one you used.
• Gearing is defined in company terms. A sole trader has no share capital or reserves, so use the owner’s capital instead.

Worked example: Varrow Tiles

Varrow Tiles is a sole trader selling tiles to builders on credit and to the public for cash. Years ended 31 March:

Item	2026	2025
Revenue	625,000	560,000
of which credit sales	500,000	448,000
Opening inventory	46,000	34,000
Purchases (all on credit)	408,000	359,200
Closing inventory	54,000	46,000
Cost of sales	400,000	347,200
Gross profit	225,000	212,800
Expenses	165,000	151,200
Profit for the year	60,000	61,600
Trade receivables	48,000	38,000
Other receivables	3,000	2,000
Bank	5,000	14,000
Total current assets	110,000	100,000
Trade payables	45,000	47,000
Other payables	5,000	6,000
Total current liabilities	50,000	53,000
Bank loan (non-current)	80,000	90,000
Closing capital	300,000	282,000

Closing capital for 2026 is 282,000 + 60,000 profit − 42,000 drawings = 300,000. Closing capital is used below.

Profitability (2026)

Gross profit margin = 225,000 / 625,000 × 100 = 36.00%
Markup              = 225,000 / 400,000 × 100 = 56.25%
Profit to revenue   =  60,000 / 625,000 × 100 =  9.60%
Expenses to revenue = 165,000 / 625,000 × 100 = 26.40%
ROCE = 60,000 / (300,000 + 80,000) × 100 = 15.79%

Check: gross margin less expenses to revenue equals profit to revenue (36.00 − 26.40 = 9.60).

Liquidity (2026)

Current ratio        = 110,000 / 50,000 = 2.20 : 1
Liquid capital ratio = (110,000 − 54,000) / 50,000 = 1.12 : 1

Efficiency (2026)

Average inventory  = (46,000 + 54,000) / 2 = 50,000
Inventory turnover = 400,000 / 50,000 = 8.00 times
Inventory days     = 50,000 / 400,000 × 365 = 45.6 days
Receivable days    = 48,000 / 500,000 × 365 = 35.0 days
Payable days       = 45,000 / 408,000 × 365 = 40.3 days

Receivable days use the 500,000 credit sales: the 125,000 of cash sales never created a receivable.

Capital structure (2026)

Capital gearing = 80,000 / (300,000 + 80,000) × 100 = 21.05%

Appraising performance

Appraisal here means judging four areas: profitability, liquidity, efficiency and capital structure. Set this year against last year and explain what caused each change.

Ratio	2025	2026
Gross profit margin	38.00%	36.00%
Markup	61.29%	56.25%
Profit to revenue	11.00%	9.60%
Expenses to revenue	27.00%	26.40%
ROCE	16.56%	15.79%
Current ratio	1.89 : 1	2.20 : 1
Liquid capital ratio	1.02 : 1	1.12 : 1
Inventory turnover	8.68 times	8.00 times
Inventory days	42.1	45.6
Receivable days	31.0	35.0
Payable days	47.8	40.3
Capital gearing	24.19%	21.05%

Revenue grew by 11.61%, yet profit for the year fell by 1,600.

• Profitability. Each dollar of sales earns less gross profit, perhaps from discounts to builders or supplier price rises not passed on. Overheads are not the problem: expenses to revenue improved slightly. ROCE slipped because profit fell while capital employed rose.
• Liquidity. Both ratios rose, yet the bank balance fell from 14,000 to 5,000. The rise comes from more inventory and receivables, which cannot pay a supplier today.
• Efficiency. Inventory sits three and a half days longer, customers take four days longer to pay, and Varrow pays suppliers seven and a half days faster. All three drain cash.
• Capital structure. Gearing fell as 10,000 of the loan was repaid and capital grew. With barely a fifth of long-term funds borrowed, Varrow has spare borrowing capacity.

Conclusion: Varrow is selling more but keeping less, and its working capital is being managed less tightly. The owner should review discounts and chase builders’ debts.

A limited company: Ravensholt Kilnworks Ltd

For a company, ROCE uses profit from operations (before interest and tax) and capital employed is equity plus non-current liabilities. Ravensholt Kilnworks Ltd has profit from operations of 84,000. Its equity is issued share capital 350,000, share premium 50,000 and retained earnings 120,000, and it has a long-term loan of 130,000.

Equity           = 350,000 + 50,000 + 120,000 = 520,000
Capital employed = 520,000 + 130,000 = 650,000
ROCE             = 84,000 / 650,000 × 100 = 12.92%
Capital gearing  = 130,000 / 650,000 × 100 = 20.00%

A rival, Sefton Glass Ltd, reports ROCE of 15.50% with gearing of 46.00%. Sefton earns more on its long-term funds, but almost half are borrowed, so its interest burden and risk are higher. A lender would favour Ravensholt.

Cash and profit are different

Profit is revenue earned less expenses incurred, under the accruals concept. The bank balance moves only when money is received or paid. They drift apart because of:

• Timing. Credit sales count as revenue before the customer pays; credit purchases count before the supplier is paid.
• Inventory. Cash spent on goods still unsold is not yet an expense.
• Non-cash expenses. Depreciation and the provision for doubtful debts reduce profit but move no money.
• Capital items. Buying a non-current asset uses cash, but only depreciation reaches the income statement.
• Owner and finance flows. Money the owner puts in or takes out, and loans raised or repaid, change the bank balance but sit outside the income statement.

Worked example: where Varrow’s profit went

Varrow made 60,000 profit in 2026, yet its bank fell by 9,000. Depreciation for the year was 21,000, and new display racking cost 16,000.

Profit for the year                          60,000
Depreciation (no cash moved)                +21,000
More inventory (54,000 − 46,000)             −8,000
More trade receivables (48,000 − 38,000)    −10,000
More other receivables (3,000 − 2,000)       −1,000
Fewer trade payables (45,000 − 47,000)       −2,000
Fewer other payables (5,000 − 6,000)         −1,000
Drawings                                    −42,000
Loan repaid (90,000 − 80,000)               −10,000
Racking bought                              −16,000
Change in bank                               −9,000

14,000 − 9,000 = 5,000, matching the statement of financial position.

Effect of single transactions

Take Varrow’s 2026 position (current assets 110,000 including inventory 54,000; current liabilities 50,000). Treat each line on its own.

Transaction	Profit	Current ratio	Liquid capital ratio
A builder pays 8,000 owed	No effect	2.20 : 1, unchanged	1.12 : 1, unchanged
A 30,000 five-year loan is paid into the bank	No effect	140/50 = 2.80 : 1	86/50 = 1.72 : 1
A debt of 2,000 is written off as irrecoverable	Falls by 2,000	108/50 = 2.16 : 1	54/50 = 1.08 : 1
Tiles costing 6,000 are sold on credit for 9,000	Rises by 3,000	113/50 = 2.26 : 1	65/50 = 1.30 : 1
A van costing 12,000 is bought, payable to the dealer in three months	No effect	110/62 = 1.77 : 1	56/62 = 0.90 : 1

The first row swaps one current asset for another. The second improves liquidity with no change in profit, so a better current ratio is not proof of better trading.

Limitations of financial statements and ratio analysis

The specification expects limitations relating to both financial and non-financial factors.

Financial factors

• The figures are historic and may not predict next year.
• Historic cost ignores inflation, so older assets are understated and ROCE flattered.
• Different depreciation methods or provision rates make ratios less comparable.
• The statement of financial position is a one-day snapshot that may not be typical.
• Depreciation and doubtful debt provisions are estimates.
• Data may be missing, such as the split of credit and cash sales.

Non-financial factors

• Staff skill, management quality, customer loyalty and reputation are not recorded.
• Changes in the market, new competitors and technology are outside the statements.
• Environmental and social impact are not measured.

Common errors

• Working out markup on revenue rather than on cost of sales.
• Using total revenue for receivable days, or total purchases when some purchases were for cash.
• Using closing inventory when the inventory turnover formula needs the average.
• Adding interest back for sole trader ROCE, which this specification’s formula does not do.
• Taking profit for the year, not profit from operations, as the numerator for company ROCE.
• Writing the current ratio as a percentage. It is expressed as x : 1.

Then move on to the revision notes and the practice questions. The exam preparation guide outlines the papers.

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. Ratio formulae from the OxfordAQA guide Formulae for accounting ratios.