3.5 Accounts analysis

Calculate and analyse gross profit margin, operating profit margin, markup, return on capital employed (ROCE), current ratio and acid test ratio. Use gross profit = revenue − cost of sales; operating profit = gross profit − other operating expenses; gross profit margin = gross profit ÷ revenue × 100; operating profit margin = operating profit ÷ revenue × 100; markup = profit per item ÷ cost per item × 100; ROCE = operating profit ÷ capital employed × 100; current ratio = current assets ÷ current liabilities; acid test ratio = (current assets − inventory) ÷ current liabilities. The examination provides these formulae.

Liquidity:

• the concept and importance of liquidity
• comparisons with previous years and/or with other business organisations.

The use of financial documents:

• assess the performance of the business
• inform decision making.