Use accounts and ratios for different users
Explain how internal and external users use financial information and account for limitations of ratio analysis.
Section 5 · Financial information and decisions
Cambridge IGCSE Business 0264, 2027–2029 syllabus, Topic 5. Use the supplied data and show calculation steps. Candidates are not assessed on constructing cash-flow forecasts or financial statements. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous finance study is assumed. Identify the time period, whether a figure is a stock or a flow, and the units before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which is an external user of accounts?
What you will learn
- Identify internal and external users
- Connect information to decisions
- Explain limits of accounts and ratios
Users ask different questions
Internal users include owners, shareholders, managers and employees. Managers may use costs and ratios to plan; owners may assess returns and investment; employees may consider job security or business performance.
External users include suppliers, government and lenders such as banks. A supplier may assess whether the business can pay for trade credit; a bank may assess whether loan repayments appear affordable; government may use information for oversight or taxation.
Accounts are evidence, not a complete forecast
Accounts describe reported results and balances for particular periods or dates. Ratios allow comparisons, but businesses may use different accounting choices, face seasonal patterns or operate in different markets.
A limitation of using accounts and ratio analysis is that they rely on reported historical figures and can conceal differences in timing, accounting methods or one-off events. Past figures do not guarantee future results. Users should consider data age, non-financial evidence, business plans and their own decision; a ratio is a signal to investigate, not a decision by itself.
Pause and explain
Why do ratios not prove what will happen next year?
Worked example
A bank is deciding whether to lend to a small retailer. Name two financial indicators it could review and one limitation of relying on last year's accounts.
Show the worked solution
- The bank could review profit or cash-flow information and liquidity ratios.
- These may help assess repayment ability.
- Last year's figures may not reflect current sales, costs or risks.
Answer The bank could review profit, cash-flow information and liquidity ratios to assess repayment ability. Last year's accounts may be out of date or fail to reflect new trading conditions, so the bank should also examine current forecasts and risks.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A supplier is deciding whether to offer a 60-day payment term. Explain which account information may help and one limitation.
Give me a hint
The supplier is interested in the customer's ability to pay its bill.
Compare my reasoning
- Review liquidity and recent cash-flow information.
- Past financial statements can provide evidence of financial position.
- Check whether the accounts are current and compare them with recent trading.
The supplier may review liquidity ratios, cash-flow information and recent accounts to assess whether the retailer can pay in 60 days. The data may be dated and do not guarantee future receipts, so current trading and payment history also matter.
Look for these in your work
- User decision connected
- Relevant indicators named
- Limitation included
Managers, employees and a bank review the same profit-margin change. Explain one different question each user may ask.
Give me a hint
Connect each user's role to a distinct decision.
Compare my reasoning
- Managers may ask which costs or products changed.
- Employees may ask whether performance affects job security or pay.
- A bank may ask whether profit supports future loan repayments.
Managers may investigate operating costs and product decisions; employees may consider job security or pay prospects; a bank may ask whether the business can meet loan repayments. The same ratio informs different decisions and does not answer them alone.
Look for these in your work
- Three users addressed
- Questions fit user roles
- Ratio treated as partial evidence
A company has a higher ROCE than a competitor, but it uses older machinery and reports different year-end dates. Explain two limits on the comparison.
Give me a hint
A single ratio may be affected by asset values, periods and business conditions.
Compare my reasoning
- Older assets may have lower recorded values, changing capital employed.
- Different year ends may capture different trading conditions.
- Compare accounting basis, investment needs and non-financial context.
The older machinery may have a lower recorded value, making the capital-employed denominator smaller and ROCE higher without proving better current performance. Different year ends may reflect different seasonal conditions; the companies should be compared on consistent dates and with their investment needs and accounting basis considered.
Look for these in your work
- Asset-value effect explained
- Period difference explained
- Comparable basis requested
Common mistakes
- Treating all users as interested in the same question
- Assuming accounts are forward-looking guarantees
- Comparing ratios without checking dates and accounting basis
What can you explain now?
Which is an external user of accounts?
Compare with the explanation
A supplier considering trade credit
Suppliers are listed external users.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Name one internal user and one external user of accounts, and a decision each may make.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.