Interpret ratios and compare performance across years
Explain what changes in ratios suggest about profitability and liquidity, using the figures and business context rather than a single number.
Cambridge IGCSE Accounting 0452 / (9–1) 0985, 2027–2029 Version 1. These lessons follow the 2027–2029 syllabus only; the separate 2026 syllabus update is not yet mapped. Written practice is self-checked, not an official Cambridge grade. Full timed-paper practice and human subject-teacher review remain pending.
Before you begin
- No previous accounting study is assumed. Keep the business, transaction and accounting period in view, and distinguish a resource, a claim and a performance result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A business's profit margin falls. What is a sound first response?
What you will learn
- Prepare and comment on statements comparing results for different years
- Interpret profitability and liquidity ratios
- Connect changes to sales, prices, inventory and expenses
Explain a change, not just restate it
Compare the ratio direction and amount, then connect it to the business's figures. A lower gross-profit margin may reflect selling prices, purchase prices, sales quantity, product mix or inventory valuation; identify which explanation the evidence supports.
Profit for the year can change because of gross profit, other income or expenses. A rising sales figure does not by itself prove that profit or return improved.
Use relevant comparisons and limitations
Prepare a statement comparing different years with consistent periods and categories. State the ratio change and one evidence-based implication for profitability, liquidity or working capital.
Recommendations should match the problem: pricing or purchasing review for margin pressure, stock control for slow inventory, or credit-control review for long collection periods. Check service, quality and capacity before recommending an action.
Pause and explain
Revenue rises 10% and profit for the year stays unchanged. What happens to profit margin?
Worked example
Sales rise from $100,000 to $120,000. Cost of sales rises from $65,000 to $84,000. Compare gross profit and gross-profit margin, and give a possible cause to investigate.
Show the worked solution
- Year 1 gross profit = 100,000 − 65,000 = $35,000; margin = 35%.
- Year 2 gross profit = 120,000 − 84,000 = $36,000; margin = 30%.
- Gross profit rises $1,000 but margin falls 5 percentage points; investigate selling prices, purchase costs, sales mix, quantity and inventory valuation.
Answer Gross profit increases from $35,000 to $36,000, but the margin falls from 35% to 30%. Review the underlying prices, quantities, mix and inventory evidence before deciding why.
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.
Year 1 revenue $80,000 and profit $8,000; Year 2 revenue $100,000 and profit $9,000. Calculate both profit margins and compare.
Give me a hint
Calculate profit divided by revenue for each year.
Compare my reasoning
- Year 1 margin = 8,000 ÷ 80,000 × 100 = 10%.
- Year 2 margin = 9,000 ÷ 100,000 × 100 = 9%.
- Profit rises $1,000 but margin falls one percentage point.
Profit rose from $8,000 to $9,000 while margin fell from 10% to 9%; investigate costs and other income before explaining the change.
Look for these in your work
- Both ratios correct
- Direction of profit stated
- Margin movement interpreted
A retailer's gross-profit margin falls from 32% to 27% while inventory turnover improves from 4 to 6 times. Give one supported observation and two checks before recommending a change.
Give me a hint
Separate what the ratios show from the possible reasons.
Compare my reasoning
- The margin fell 5 percentage points while inventory turnover increased by 2 times.
- Check selling and purchase prices, sales quantity/mix, and whether inventory was valued consistently.
- Also consider quality and customer effects before changing prices or stock policy.
Margin declined while stock turned faster. Check price/cost, sales mix and inventory valuation, then consider customer and quality effects before acting.
Look for these in your work
- Changes calculated
- Relevant evidence checks
- Recommendation bounded
Current ratio improves from 1.1:1 to 1.7:1, but receivables days rise from 35 to 62. Explain why the higher current ratio alone may not mean better liquidity.
Give me a hint
Consider which current asset is increasing and how quickly it becomes cash.
Compare my reasoning
- Receivables may be a larger or slower-to-collect part of current assets.
- Longer collection can delay cash despite a stronger current ratio.
- Review ageing, credit terms and bad-debt risk, alongside cash and payables.
The current ratio is higher, but slower collections can weaken cash availability. Inspect receivables ageing, credit terms and collection risk before concluding liquidity improved.
Look for these in your work
- Ratios compared
- Cash timing explained
- Useful follow-up identified
Common mistakes
- Calling an increased gross profit a better margin without calculating it
- Claiming a ratio proves the cause of a change
- Ignoring a difference in period length or accounting policy
- Recommending a price change without considering customers or costs
What can you explain now?
Gross profit rises while gross-profit margin falls. Is that possible?
Compare with the explanation
Yes; revenue can rise faster than gross profit
The amount and percentage use different comparisons.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Why should a ratio change be checked against the underlying statement figures before recommending action?
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.