Accounting Paper 2 Topic 12: Ratio Analysis
Practice Cambridge exam questions on profitability, liquidity, efficiency, and gearing ratios.
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About Ratio Analysis
Ratio Analysis covers the calculation, interpretation, and critical evaluation of financial ratios measuring profitability, liquidity, efficiency, and gearing, enabling stakeholders to assess organizational performance and financial health.
Why Is Ratio Analysis Important?
Skills Tested In This Topic
How This Topical Paper Helps
Exam Preparation Tips
Why Practice Past Paper Questions?
Quick Answer
How To Revise Using This Paper
- Memorize standard Cambridge formulas and their precise units of measurement (%, days, :1).
- Practice extracting necessary figures from Statements of Profit or Loss and Financial Position.
- Learn how year-end transactions (e.g. inventory write-off, debt repayment) impact specific ratios.
- Solve all structured calculation and discussion questions in this topical PDF under exam conditions.
- Check your calculations and written justifications against the official Cambridge mark schemes.
- Re-attempt evaluation questions, focusing on balanced arguments with justified conclusions.
Summary
Frequently Asked Questions
The main categories are profitability ratios (Gross Margin, Profit Margin, ROCE), liquidity ratios (Current, Liquid), efficiency ratios (Inventory, Receivables, Payables turnover), and gearing ratios.
ROCE is calculated as (Operating Profit / Capital Employed) * 100, where Capital Employed equals Total Equity plus Non-Current Liabilities (or Total Assets minus Current Liabilities).
The Current Ratio compares total current assets to current liabilities (Current Assets / Current Liabilities), while the Liquid Ratio excludes inventory ((Current Assets - Inventory) / Current Liabilities) to measure immediate liquidity.
Inventory is the least liquid current asset because it must first be sold (often on credit) and cash collected, which takes time and carries the risk of obsolescence or non-sale.
It can be expressed in days as (Trade Receivables / Credit Sales) * 365 days or in times per year as Credit Sales / Trade Receivables.
A company can improve liquidity by selling surplus non-current assets for cash, introducing long-term equity or debenture capital, negotiating extended supplier credit terms, or offering cash discounts for faster debtor collections.
Common errors include using total sales instead of credit sales for receivables days, omitting units (%, days, :1), and giving generic non-contextualized advice in narrative sub-questions.
A high gearing ratio (typically over 50%) indicates high reliance on long-term debt financing, leading to high fixed finance costs and higher financial risk for ordinary shareholders.
Dedicate four to five structured revision sessions to ensure formula recall and practice drafting full 8-to-12 mark evaluation answers.
Yes. The topical PDF compiles official Cambridge 9706 Paper 2 questions with complete mark scheme answers to facilitate self-evaluation.