A-Level Business: Financial Statements and Ratio Analysis

This material trains the ratio analysis that A level Business uses to judge a company's internal position. For example, AQA A-level Business section 3.7.2 asks students to assess financial performance using balance sheets, income statements and ratios: return on capital employed, the current ratio, gearing, and the efficiency ratios payables days, receivables days and inventory turnover. Pearson Edexcel covers gross, operating and net profit margins, the current and acid test ratios (topics 2.3.1 and 2.3.2), and ROCE and gearing with the interpretation of financial statements (topics 3.5.1 and 3.5.2).

The quiz follows one invented firm through its accounts. From an income statement you find gross profit, operating profit and the two margins; from a statement of financial position you build capital employed and calculate ROCE, the current ratio, the acid test and gearing; from the trading figures you calculate receivables days, payables days and inventory turnover. Each wrong option is the result of a real slip: profit for the year used in place of operating profit, gearing divided by equity instead of capital employed, receivables divided by cost of sales, a ratio turned upside down.

The second half is about what the numbers mean. You will read a falling ROCE after a new factory, compare two rival hotel groups on return and risk, locate a squeeze between gross and operating profit, see why a firm that collects cash more slowly than it pays can run short of cash while profitable, and meet the limits of ratio analysis: a year-end snapshot taken on an untypical date, and a ratio that shows a change without its cause.

There are twelve quiz questions with full working in the explanations. The flashcards hold every formula and the definitions of the two financial statements; the formulae are not provided in the exam, so the cards are there to be learned. The written work has eight longer tasks: four calculate-and-comment questions built on invented accounts, and four that ask you to analyse or explain, covering changes in ROCE and gearing, ways to raise ROCE, the limitations of ratios, and what each stakeholder looks for in the accounts.

All firms and figures are invented. The material is practice written by Zestly and is independent of any exam board.

• Calculate gross profit, operating profit and profit for the year, and the gross and operating profit margins
• Calculate capital employed and return on capital employed from a statement of financial position
• Calculate the current ratio, acid test ratio and gearing, and interpret them
• Calculate receivables days, payables days and inventory turnover, and explain their effect on cash flow
• Interpret ratios over time and against a rival to reach a supported judgement
• Explain the limitations of ratio analysis

Practice material written by Zestly, based on the A level Business specifications, for example AQA A-level Business (7132) section 3.7.2 and Pearson Edexcel A level Business (9BS0) topics 2.3.1, 2.3.2, 3.5.1 and 3.5.2.