IGC-L27 — Inter-firm Comparison
Comparing financial performance between businesses using accounting ratios.
Learning Objectives
- define inter-firm comparison
- compare financial performance using ratios
- interpret differences between businesses
- identify strengths and weaknesses of businesses
- understand limitations of comparison
Concept Framework
What is Inter-firm Comparison?
Inter-firm comparison involves comparing the financial performance of one business with another using accounting ratios.
It helps stakeholders evaluate:
• profitability
• liquidity
• efficiency
Purpose of Comparison
Inter-firm comparison helps to:
• identify better-performing businesses
• analyse strengths and weaknesses
• support decision-making
• evaluate competitiveness
Comparison Framework
When comparing two businesses:
Step 2 → Compare values
Step 3 → Interpret differences
Step 4 → Conclude which business performs better
Key Interpretation Points
When comparing businesses, students should:
• identify which ratio is higher or lower
• explain what the ratio indicates
• provide a clear conclusion
Example Answer Structure
Business A also has a higher current ratio, showing stronger liquidity.
Therefore, Business A is financially stronger than Business B.
Limitations of Inter-firm Comparison
Inter-firm comparison may be misleading due to:
• different accounting policies
• different business sizes
• different industries
• different time periods
Worked Examples
Example Comparison
| Ratio | Business A | Business B |
|---|---|---|
| Gross Profit Margin | 40% | 30% |
| Net Profit Margin | 20% | 18% |
| Current Ratio | 2.5 : 1 | 1.5 : 1 |
Interpretation
• Business A has higher profitability
• Business A has stronger liquidity
• Business B has lower margins, indicating higher costs
Conclusion:
Business A is performing better overall
📌 Additional comparison questions are available in the
🎯 Question Papers + YouTube Explanation section.
Students should practise comparison-based questions regularly.
Structured Practice
Level 1 – Concept Check
Define inter-firm comparison.
State one purpose of comparison.
Level 2 – Application Practice
| Ratio | A | B |
|---|---|---|
| Net Profit Margin | 25% | 20% |
Which business is more profitable?
Level 3 – Examination Style Question
Compare the performance of two businesses using given ratios.
(6 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
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
Students who believe they understand this topic should attempt:
- Explain why inter-firm comparison is useful.
- Business A has a higher current ratio than Business B.
What does this indicate? - State one limitation of inter-firm comparison.
If unsure, review the lesson.
Detailed Activity Solutions
Solution to Level 2 question
Business A has a higher net profit margin.
Therefore, Business A is more profitable.
How This Topic Appears in the Examination
This topic commonly appears through:
• comparison questions (4–6 marks)
• interpretation of ratios
• written evaluation questions
Examiners frequently assess:
• correct comparison
• logical interpretation
• clear conclusion
Students should practise regularly and review video explanations.
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.
Self-Assessment Checklist
- I understand inter-firm comparison
- I can compare ratios
- I can interpret results
- I can identify limitations
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