IGCS03: Updated Accounting Ratios & 2027–2029 Assessment Revision.
A focused supplementary guide to the updated accounting-ratio requirements and assessment structure for Cambridge IGCSE Accounting examinations from 2027 to 2029
Learning Objectives
By the end of this supplementary topic, students should be able to:
- understand the purpose of accounting ratios;
- calculate the ratios required by the 2027–2029 syllabus;
- interpret ratio results in an appropriate business context;
- distinguish between profitability, liquidity and efficiency measures;
- understand how ratios can be used to compare business performance;
- recognise limitations of ratio analysis;
- understand the revised 2027–2029 assessment structure; and
- adapt revision and examination practice to the updated assessment requirements.
Concept Framework
Accounting Ratios
Why Are Accounting Ratios Used?
Accounting ratios convert accounting information into measures that can be used to analyse financial performance and position.
Ratios can help users:
- assess profitability;
- assess liquidity;
- examine efficiency;
- compare performance over time;
- compare businesses where appropriate; and
- identify areas requiring further investigation.
A ratio should not normally be considered in isolation.
Profitability Ratios
Gross Profit Margin
Gross Profit Margin =
Gross Profit ÷ Revenue × 100
It measures gross profit as a percentage of revenue.
Interpretation
A higher gross profit margin may indicate that a business is retaining more gross profit from each unit of revenue.
However, the result should be considered alongside factors such as:
- selling prices;
- purchase costs;
- inventory costs; and
- changes in the product mix.
Profit Margin
Profit Margin =
Profit for the Year ÷ Revenue × 100
It measures profit for the year as a percentage of revenue.
Interpretation
A higher profit margin indicates that a greater proportion of revenue is retained as profit for the year.
A change in profit margin may result from changes in:
- gross profit;
- operating expenses;
- finance costs;
- revenue; or
- other income and expenses.
Liquidity Ratios
Current Ratio
Current Ratio =
Current Assets ÷ Current Liabilities
It provides an indication of the business’s ability to meet short-term obligations using current assets.
Acid Test Ratio
Acid Test Ratio =
Current Assets − Inventory ÷ Current Liabilities
It provides an indication of short-term liquidity without relying on the sale of inventory.
Important
Students should show clearly that inventory is excluded from the numerator.
Efficiency Ratio
Trade Receivables Collection Period
Trade Receivables Collection Period =
Trade Receivables ÷ Credit Revenue × 365 days
It estimates the average time taken to collect amounts owed by credit customers.
Interpretation
A longer collection period may indicate that customers are taking longer to pay.
Possible consequences include:
- reduced cash availability;
- increased risk of bad debts; and
- greater working-capital pressure.
Trade Payables Payment Period
Trade Payables Payment Period =
Trade Payables ÷ Credit Purchases × 365 days
It estimates the average time taken by the business to pay its suppliers.
Interpretation
A longer payment period may improve short-term cash flow, but excessive delays may damage relationships with suppliers.
Return on Capital Employed
ROCE
ROCE =
Profit from Operations ÷ Capital Employed × 100
ROCE measures the return generated from the capital employed in the business.
Interpretation
A higher ROCE generally indicates that the business is generating a higher return from the capital employed.
Students should interpret changes rather than simply stating that one percentage is “good” or “bad”.
Working with Ratios
A Ratio Is Not the Final Answer
Calculating a ratio is only the first stage.
A strong examination response should normally follow:
Calculate → Compare → Explain → Conclude
Example
A business’s current ratio changes from:
2.0 : 1 → 1.4 : 1
The calculation alone does not explain the reason for the change.
Students should consider possible changes in:
- current assets;
- inventory;
- trade receivables;
- cash;
- current liabilities; and
- short-term borrowing.
Worked Example
A business has:
Revenue = £200,000
Gross profit = £60,000
Profit from operations = £30,000
Current assets = £50,000
Inventory = £20,000
Current liabilities = £25,000
Gross Profit Margin
£60,000 ÷ £200,000 × 100
= 30%
Profit Margin
£30,000 ÷ £200,000 × 100
= 15%
Current Ratio
£50,000 ÷ £25,000
= 2.0 : 1
Acid Test Ratio
(£50,000 − £20,000) ÷ £25,000
= 1.2 : 1
Interpretation
The business generates a gross profit margin of 30% and a profit margin of 15%.
Its current ratio is 2.0 : 1, while its acid test ratio is 1.2 : 1.
Further information would be required before making a complete judgement about the business’s performance or liquidity.
Comparing Ratio Results
Ratios can be compared with:
Previous Years
This helps identify trends.
Budgets or Targets
This helps assess whether planned performance has been achieved.
Other Businesses
This may provide a benchmark, but differences between businesses must be considered.
Industry Information
Industry comparisons may provide useful context where reliable information is available.
Limitations of Ratio Analysis
Ratio analysis has limitations.
Different Accounting Policies
Businesses may use different accounting policies, affecting comparability.
Different Business Structures
Businesses may operate in different industries or at different scales.
Historical Information
Ratios are usually based on accounting information relating to past periods.
Inflation and Changing Prices
Changes in prices can affect comparisons over time.
Non-Financial Factors
Ratios do not measure every factor affecting business performance.
Therefore, ratio analysis should be used alongside other financial and non-financial information.
2027–2029 Assessment Structure
Paper 1 — Multiple Choice
Paper 1 — Multiple Choice
For examinations from 2027, Paper 1 is:
40 marks
1 hour 30 minutes
40 multiple-choice questions
All questions are compulsory and are based on the full subject content. Calculations may be required.
The paper assesses:
- AO1 — Knowledge and understanding
- AO2 — Analysis
What This Means for Students
Students should be prepared to:
- recall accounting concepts quickly;
- identify appropriate formulas;
- perform calculations accurately;
- interpret accounting information; and
- make analytical judgements within a multiple-choice format.
Paper 2: Structured Written Paper
For examinations from 2027, Paper 2 is:
100 marks
1 hour 45 minutes
5 questions × 20 marks
All questions are compulsory and are based on the full subject content.
Questions use stimulus material and may require candidates to:
- perform calculations;
- complete accounting records;
- complete statements;
- prepare accounts;
- prepare suspense accounts;
- prepare journal entries; and
- analyse and evaluate financial information.
The paper assesses:
- AO1 — Knowledge and understanding
- AO2 — Analysis
- AO3 — Evaluation
Examination Strategy
Paper 1
Focus on:
Accuracy + Speed + Analysis
Before selecting an answer:
- identify what the question is asking;
- select the appropriate accounting principle or formula;
- calculate carefully where required;
- check units, percentages and ratios;
- eliminate clearly incorrect alternatives; and
- select the answer supported by the information given.
Paper 2
Focus on:
Knowledge + Calculation + Application + Evaluation
Students should:
- read the stimulus material carefully;
- identify the required task;
- show appropriate workings;
- use correct accounting terminology;
- apply information to the scenario; and
- provide explanations or evaluation where required.
Structured Practice
Level 1 — Ratio Calculation
Question 1
Revenue = £300,000
Gross profit = £90,000
Calculate the gross profit margin.
(2 marks)
Question 2
Current assets = £72,000
Inventory = £24,000
Current liabilities = £36,000
Calculate:
a) Current ratio
b) Acid test ratio
(4 marks)
Level 2 — Interpretation
Question 3
A business’s trade receivables collection period increases from 35 days to 52 days.
Explain two possible consequences for the business.
(4 marks)
Level 3 – Examination Style Questions
Question 4
A business has experienced the following changes:
- gross profit margin has increased;
- profit margin has decreased;
- current ratio has decreased.
Explain what these changes might indicate about the business.
(6 marks)
📌 Additional ratio-analysis and assessment-focused questions are available through the Question Papers + YouTube Explanation section.
Proficiency Check
Learn → Unlearn → Relearn
Attempt the following without referring to your notes.
Learn
- State the formula for gross profit margin.
- State the formula for profit margin.
- State the formula for current ratio.
- State the formula for acid test ratio.
- State the formula for ROCE.
Unlearn
- Does a higher current ratio always mean better business performance?
- Does a higher trade receivables collection period necessarily mean that the business is performing better?
- Can one ratio provide a complete assessment of a business?
Relearn
- A business has a high current ratio but a low acid test ratio.
Explain what this may indicate.
- A business’s gross profit margin increases while its profit margin decreases.
Explain how both changes could occur.
Detailed Activity Solutions
Level 1
Question 1
£90,000 ÷ £300,000 × 100 = 30%
Gross profit margin = 30%
Question 2
Current ratio:
£72,000 ÷ £36,000 = 2 : 1
Acid test ratio:
(£72,000 − £24,000) ÷ £36,000
= 1.33 : 1
Level 2
Question 3
A longer collection period may mean that customers are taking longer to pay.
This could:
- reduce cash available to the business;
- increase working-capital pressure; or
- increase the risk of bad debts.
Level 3
Question 4
An increase in gross profit margin may indicate that the business is retaining more gross profit from its revenue.
However, a decrease in profit margin may indicate that operating expenses or other costs have increased sufficiently to reduce profit from operations relative to revenue.
A decrease in current ratio may indicate a reduction in current assets, an increase in current liabilities, or both.
Further information would be required to determine the precise causes.
Proficiency Check
Question 6
No. A high current ratio may indicate stronger short-term liquidity, but an excessively high ratio could also indicate that resources are not being used efficiently.
Question 7
No. A longer collection period may create cash-flow difficulties and may indicate slower collection from customers.
Question 8
No. Ratios provide specific information and should be considered together with other financial and non-financial information.
Question 9
The business may have a significant proportion of current assets held as inventory.
Although total current assets are relatively high compared with current liabilities, excluding inventory produces a weaker liquidity position.
Question 10
The gross profit margin could increase because selling prices increased or cost of sales decreased.
At the same time, operating expenses or other costs could increase enough to reduce the profit margin.
How This Topic Appears in the Examination
Accounting ratios may be assessed through:
- formula recall;
- ratio calculations;
- interpretation of ratio results;
- comparison of ratios;
- analysis of changes;
- limitations of ratio analysis;
- stimulus-based questions; and
- evaluation of financial performance.
The revised assessment structure also means students should prepare for both:
Rapid calculation and analysis in Paper 1
and
Detailed application and evaluation in Paper 2.
Cambridge states that both papers cover the full subject content.
Self-Assessment Checklist
- I can explain the purpose of accounting ratios.
- I can calculate the required profitability ratios.
- I can calculate the required liquidity ratios.
- I can calculate the relevant efficiency ratios.
- I can calculate ROCE.
- I can interpret ratio results in context.
- I can compare ratios between periods.
- I understand the limitations of ratio analysis.
- I understand the 2027–2029 Paper 1 structure.
- I understand the 2027–2029 Paper 2 structure.
- I can adapt my revision to both calculation-based and structured examination questions.
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.