Page 293 - Cambridge IGCSE Business Studies

23: Analysis of accounts

1 Calculate the gross profit margin and profit margin for both years.
2 Calculate the return on capital employed for both years.
3 Using your results to questions 1 and 2, comment on the company’s performance in 2012 compared to 2011.
4 Calculate the current ratio for both years.
5 Using your results to question 4, comment on the company’s liquidity in both years.

TEST YOURSELF
1 State the formula used for calculating gross profit margin.
2 State the formula used to calculate profit margin.
3 State the formula used for calculating return on capital employed.
4 State the formula used for calculating the current ratio.
5 State the formula used for calculating the acid test ratio.
6 Is profitability more important than liquidity? If not, why not?
7 Explain two limitations of accounting ratios.

Why and how accounts are used

Both internal and external stakeholders are interested in the fi nancial statements
of a business, although they may not need to calculate any of the performance 291

or liquidity ratios. The main uses of financial statements by business stakeholder
groups are summarised below:
■ Owners/shareholders – they will want to know how well the business is performing
and whether they are getting a good return on their investment. They will compare
the profits of the business with previous years and with similar businesses.
Shareholders will compare the dividends they receive with previous years and with
the returns they could get if their money was invested elsewhere.
■ Potential investors – before investing in a business they will also be interested in
the profits of the business and the return that they might expect to receive from
their investment.

■ Managers – they are responsible for the efficient running of the business. They
will want to know if financial objectives have been achieved, for example: has
the company met its revenue targets? How well have costs been controlled? Are
profits rising? The level of retained profits is an important source of finance for
businesses and managers will want to know how much has been retained in the
business and is available to finance business activities such as the purchase of
new technology.
■ Employees – they will be interested in the profitability of the business. A business
which continues to make good levels of profit offers greater job security. Also, the

employees or their trade union might use profit figures to support their claim for
higher wages.