5.5 Analysis of Accounts | IGCSE Business

Success criteria - by the end of this topic you can:

calculate and interpret gross profit margin, profit margin and ROCE
calculate and interpret current and acid test ratios
explain how different users use accounts, and the limitations of ratio analysis

Ratio	Formula	Shows
Gross profit margin	gross profit / revenue x 100	How well the business controls cost of sales
Profit margin	profit / revenue x 100	How well it controls all costs
ROCE	profit / capital employed x 100	Profit made from the capital invested

Ratio	Formula	Guide
Current ratio	current assets : current liabilities	Around 1.5-2 : 1 is often seen as healthy
Acid test ratio	(current assets - inventory) : current liabilities	Around 1 : 1 is often seen as healthy

Worked example: Ratios

Revenue $800 000, gross profit $360 000, profit $96 000, capital employed $640 000.
Gross profit margin = 360 000 / 800 000 x 100 = 45%; ROCE = 96 000 / 640 000 x 100 = 15%.
Current assets $300 000 (inventory $250 000), current liabilities $150 000: current ratio = 2 : 1; acid test = 50 000 / 150 000 = 0.33 : 1.

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Case Study 1 (Paper 1 style, 20 marks): Questions · Mark scheme 🔒 · A* answers 🔒

Case Study 2 (Paper 2 style, 20 marks): Questions · Mark scheme 🔒 · A* answers 🔒

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