Analysis and Communication of Accounting Information — FAQ

There is no universal 'good' or 'bad' value for most ratios. The interpretation depends entirely on context. You must compare the ratio to:

1. The company's own performance in previous years (trend analysis).
2. Other companies in the same industry (comparative analysis).
3. The economic environment. For example, a gearing of 60% might be normal for a stable utility company but very risky for a volatile retail business.

A good structure is essential. Start by calculating the required ratios, showing your workings. Then, for each ratio or group of related ratios, follow a 'Point, Evidence, Explain, Link' (PEEL) structure.

• Point: Make a statement (e.g., 'The company's liquidity has worsened').
• Evidence: Support it with your calculated ratio values (e.g., 'The working capital cycle has increased from 45 days to 65 days').
• Explain: Explain what this means for the business (e.g., 'This means cash is tied up in operations for 20 days longer...').
• Link: Link it to other ratios or the overall question, and conclude with a justified recommendation for the relevant stakeholder.

No. The Cambridge syllabus is very clear that candidates must use the formulae given in the appendix to the exam paper. Using a different formula, even if it is a valid alternative used in the real world, will likely result in you not being awarded the marks. Always stick to the provided formulae.