AS-L24 — Accounting Ratios
Understanding how accounting ratios are used to analyse financial performance and financial position.
Learning Objectives
By the end of this lesson students should be able to:
• understand the purpose of accounting ratios
• calculate profitability ratios
• calculate liquidity ratios
• interpret accounting ratio results
• answer examination-style questions
Concept Framework
What are Accounting Ratios?
Accounting ratios are relationships between financial statement figures used to evaluate the performance and position of a business.
Main Categories
Profitability Ratios → measure profit performance
Liquidity Ratios → measure ability to pay short-term debts
Efficiency Ratios → measure operational performance
CORE RULES
| Ratio | Formula |
|---|---|
| Gross Profit Margin | Gross Profit ÷ Revenue × 100 |
| Profit Margin | Profit for the Year ÷ Revenue × 100 |
| Current Ratio | Current Assets ÷ Current Liabilities |
| Acid Test Ratio | (Current Assets − Inventory) ÷ Current Liabilities |
TRANSACTION LOGIC
Ratios help users compare business performance over time and against competitors.
Profitability ratios assess earning performance.
Liquidity ratios assess the ability to meet short-term obligations.
Worked Examples
Example 1 — Gross Profit Margin
Gross Profit = £20,000
Revenue = £50,000
Gross Profit Margin:
(£20,000 ÷ £50,000) × 100
= 40%
Example 2 — Current Ratio
Current Assets = £18,000
Current Liabilities = £9,000
Current Ratio:
£18,000 ÷ £9,000
= 2 : 1
Example 3 — Acid Test Ratio
Current Assets = £15,000
Inventory = £4,000
Current Liabilities = £5,500
Acid Test Ratio:
(£15,000 − £4,000) ÷ £5,500
= 2 : 1
📌 Additional questions are available in the 🎯 Question Papers + YouTube Explanation section.
Students should practise explanation questions regularly to improve examination performance.
Enrolled students may submit questions from recognised textbooks, past examination papers, or other academic material for expert clarification through the Student Doubt Support facility.
Structured Practice
Level 1 – Concept Check
Define accounting ratio
Define liquidity ratio
Level 2 – Application Practice
Explain why businesses use accounting ratios when analysing performance.
Level 3 – Examination Style Question
Gross Profit = £24,000
Revenue = £60,000Current Assets = £15,000
Current Liabilities = £5,000Calculate:
a) Gross Profit Margin
b) Current Ratio(4 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Unlearn → Relearn
1. Can you calculate profitability ratios accurately?
2. Can you calculate liquidity ratios correctly?
3. Can you interpret ratio results logically?
If unsure, revise the worked examples.
Detailed Activity Solutions
Solution to Level 3 question
Level 3 Answer:
Gross Profit Margin:
(£24,000 ÷ £60,000) × 100
= 40%
Current Ratio:
£15,000 ÷ £5,000
= 3 : 1
How This Topic Appears in the Examination
This topic commonly appears as:
• ratio calculations
• interpretation questions
• business performance analysis
Examiners assess:
• correct formula application
• accurate calculations
• quality of interpretation
Self-Assessment Checklist
I understand accounting ratios
I can calculate profitability ratios
I can calculate liquidity ratios
I can interpret ratio results
I can answer exam questions confidently
Continue Your Preparation
Go beyond the lesson with curated resources, examination practice and video learning.
PREMIUM RESOURCES
Master the topic with curated learning, revision and assessment resources
GUESS PAPERS
Prepare for the examination with complete Guess Paper packages and Mark Schemes.
VIDEO ON DEMAND
Watch, revise and strengthen your understanding with Shasha Academy videos.