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Financial Statement Analysis and Ratios

4 dot points across 4 inquiry questions. Click any dot point for a focused answer with worked past exam questions where available.

How do the turnover and collection-period ratios show how efficiently a business uses its inventory, receivables and payables?

Calculate and interpret efficiency ratios: inventory turnover and the receivables and payables periods
A focused answer to the O-Level Principles of Accounts outcome on efficiency ratios. Inventory turnover, the trade receivables and payables collection periods, and what they reveal about working-capital management.
9 min answer →

How do we use ratios together to advise a business, and what are the limitations of relying on ratio analysis?

Interpret financial statements using ratios to advise users, and explain the limitations of ratio analysis
A focused answer to the O-Level Principles of Accounts outcome on interpretation. Using profitability, liquidity and efficiency ratios together to advise users, comparing year on year, and the limitations of ratio analysis.
9 min answer →

How do the current ratio and the quick ratio measure whether a business can pay its short-term debts?

Calculate and interpret the liquidity ratios: the current ratio and the quick (acid-test) ratio
A focused answer to the O-Level Principles of Accounts outcome on liquidity ratios. The current ratio and the quick (acid-test) ratio, what they reveal about paying short-term debts, and how to interpret them.
8 min answer →

How do the gross profit margin, profit margin and return on capital measure how profitable a business is?

Calculate and interpret the profitability ratios: gross profit margin, profit margin and return on capital
A focused answer to the O-Level Principles of Accounts outcome on profitability ratios. The gross profit margin, mark-up, profit margin and return on capital employed, with worked calculations and interpretation.
9 min answer →