the limitations of using published accounts and ratio analyses

Cambridge International Business (9609) – Complete Syllabus Notes

AS‑Level Core Topics (Units 1‑5)

1. Business and Its Environment (1.1‑1.5)

• Purpose of business – satisfy needs, create wealth, provide employment, contribute to society.
• Objectives – profit maximisation, growth, market share, survival, corporate social responsibility (CSR).
• External environment – analysed with PESTLE (Political, Economic, Social, Technological, Legal, Environmental) and industry forces (Porter’s Five Forces).
• Internal environment – resources, capabilities, culture, organisational structure.
• Stakeholders – owners, employees, customers, suppliers, government, community; their interests shape strategy.

2. Human Resource Management (2.1‑2.3)

• Recruitment & selection – job analysis, advert, short‑listing, interview, testing, offer.
• Motivation theories – Maslow’s hierarchy, Herzberg’s two‑factor, McClelland’s needs, Equity theory, Expectancy theory.
• Training & development – induction, on‑the‑job, off‑the‑job, e‑learning, career planning.
• Performance appraisal & reward – SMART objectives, 360° feedback, pay‑for‑performance, bonuses, benefits.
• Industrial relations & trade unions – collective bargaining, strikes, grievance procedures.
• Leadership & management styles – Trait, Behavioural, Contingency, Transformational, Emotional intelligence.

3. Marketing (3.1‑3.3)

• Market research – primary vs secondary data, qualitative & quantitative methods, sampling.
• Marketing mix (4 P’s) – Product, Price, Place, Promotion; extended mixes (People, Process, Physical evidence) for services.
• Product life‑cycle – introduction, growth, maturity, decline; strategies for each stage.
• Price elasticity of demand – Elastic (|%ΔQ| > |%ΔP|), inelastic (|%ΔQ| < |%ΔP|); implications for pricing decisions.
• Branding & positioning – brand equity, USP, perceptual mapping.
• Sales forecasting – trend analysis, moving averages, regression.

4. Operations Management (4.1‑4.3)

• Production methods – job, batch, flow (mass), continuous, project.
• Location decisions – factors (cost, market access, labour, infrastructure), methods (factor rating, break‑even analysis).
• Economies of scale & scope – internal vs external, diseconomies.
• Quality management – TQM, Six Sigma, ISO standards, quality circles, cost of quality.
• Lean & Just‑in‑Time (JIT) – waste reduction, pull systems, inventory turnover.
• Supply‑chain management – upstream/downstream, outsourcing, logistics.

5. Finance and Accounting (5.1‑5.5)

• Sources of finance – internal (retained earnings, asset sales), external (bank loans, equity, lease finance, bonds, venture capital).
• Cost classifications – fixed vs variable, direct vs indirect, sunk, opportunity cost.
• Budgeting & control – master budget, flexible budget, variance analysis.
• Break‑even analysis – BE = Fixed Costs ÷ (Price – Variable Cost per unit); contribution margin.
• Financial statements (basic) – income statement, balance sheet, cash‑flow statement; purpose of each.
• Simple ratio analysis – current ratio, gross profit margin, return on capital employed (ROCE).

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A‑Level Core Topics (Units 6‑10)

6. Business Environment (6.1‑6.3)

• Macro‑environmental analysis – extended PESTLE, globalisation, sustainability, ethical issues.
• Micro‑environmental analysis – customers, competitors, suppliers, intermediaries, public.
• Stakeholder mapping – power/interest grid, strategies for engagement.
• Corporate social responsibility (CSR) – triple‑bottom‑line, stakeholder theory, reporting standards (GRI).

7. Business Strategy (7.1‑7.4)

7.1 Strategic Planning Process

1. Define vision & mission.
2. Set long‑term objectives.
3. Analyse internal & external environment.
4. Generate strategic options.
5. Select the most appropriate strategy.
6. Implement and monitor.

7.2 Strategic Tools “Tool‑Box”

Tool	Purpose	Key Elements
SWOT	Identify internal strengths & weaknesses and external opportunities & threats.	Matrix 2 × 2; links to strategic options.
PEST / PESTLE	Analyse macro‑environmental forces.	Political, Economic, Social, Technological ( + Legal, Environmental).
Porter’s Five Forces	Assess industry attractiveness.	Threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, rivalry.
Ansoff Matrix	Growth strategy options.	Market penetration, market development, product development, diversification.
BCG Growth‑Share Matrix	Portfolio analysis.	Stars, Question Marks, Cash Cows, Dogs (market growth vs relative market share).
Blue‑Ocean Strategy	Create uncontested market space.	Value innovation, eliminate‑reduce‑raise‑create grid.
Scenario Planning	Prepare for uncertain futures.	Identify driving forces, develop plausible scenarios, test strategy robustness.

7.3 Organisational Structures

• Functional – specialised departments; good for efficiency, weak for cross‑functional coordination.
• Divisional – product, geographic or market divisions; fast response to market changes.
• Matrix – dual reporting (functional & project); benefits of flexibility, risk of conflict.
• Flat / Network – few hierarchical layers; encourages empowerment, may lack clear authority.

7.4 Leadership Theories (A‑Level depth)

• Trait approach – focus on inherent qualities (e.g., confidence, integrity).
• Behavioural approach – task‑oriented vs people‑oriented styles.
• Contingency / Situational – effectiveness depends on context (Fiedler’s LPC, Hersey‑Blanchard).
• Transformational – vision, inspiration, intellectual stimulation.
• Emotional Intelligence – self‑awareness, self‑regulation, empathy, social skill.

8. Advanced Marketing (8.1‑8.2)

8.1 Market Segmentation, Targeting & Positioning (STP)

1. Segmentation criteria – demographic, geographic, psychographic, behavioural.
2. Targeting strategies – undifferentiated, differentiated, concentrated, micromarketing.
3. Positioning – positioning statement, perceptual mapping, differentiation.

8.2 Marketing Planning & Control

• Marketing objectives – SMART (Specific, Measurable, Achievable, Relevant, Time‑bound).
• Research methods – exploratory, descriptive, causal; primary vs secondary.
• Marketing mix – extended 7 P’s – Product, Price, Place, Promotion, People, Process, Physical evidence.
• Budgeting & ROI – % of sales, objective‑and‑task, marketing ROI (e.g., ROI = (Incremental profit – Marketing cost) ÷ Marketing cost).
• Control tools – marketing dashboard, KPI’s (market share, brand awareness, conversion rate), post‑campaign analysis.

9. Operations Strategy (9.1‑9.3)

9.1 Capacity & Location Planning

• Capacity measurement – design capacity, effective capacity, utilisation rate.
• Location analysis – factor‑rating method, break‑even for multiple sites, agglomeration economies.

9.2 Economies of Scale & Scope

• Internal economies – technical, managerial, financial, marketing, risk‑bearing.
• External economies – industry clusters, shared services.
• Diseconomies – coordination problems, bureaucracy.

9.3 Quality & Continuous Improvement

• Cost of quality – prevention, appraisal, internal failure, external failure.
• Tools – PDCA cycle, Fishbone diagram, control charts, Six Sigma DMAIC.
• Lean principles – value stream mapping, 5S, pull production.

10. Finance & Accounting Strategy (Units 10.1‑10.4)

10.1 Financial Statements – Purpose & Inter‑relationships

1. Income Statement (Profit & Loss) – shows performance over a period; key figures: revenue, cost of sales, gross profit, operating profit, net profit.
2. Statement of Financial Position (Balance Sheet) – snapshot at a point in time; assets = liabilities + equity.
3. Cash‑Flow Statement – cash generated/used in operating, investing, financing activities; reconciles profit to cash.
4. Statement of Changes in Equity – tracks share capital, retained earnings, other reserves.
5. Notes to the Accounts – accounting policies, contingent liabilities, related‑party transactions, breakdown of line items.
6. Auditor’s Report – opinion on the fairness of the financial statements (unqualified, qualified, adverse, disclaimer).

10.2 Ratio Analysis – Categories & Key Formulas

Category	Key Ratios	Formula
Liquidity	Current Ratio, Quick Ratio, Cash Ratio	Current = Current assets ÷ Current liabilities Quick = (Cash + Receivables) ÷ Current liabilities
Profitability	Gross Profit Margin, Net Profit Margin, ROA, ROE, ROCE	Gross % = Gross profit ÷ Sales Net % = Net profit ÷ Sales ROA = Net profit ÷ Total assets ROE = Net profit ÷ Equity ROCE = EBIT ÷ (Equity + Long‑term debt)
Efficiency (Activity)	Inventory Turnover, Receivables Turnover, Asset Turnover	Inventory = Cost of sales ÷ Average inventory Receivables = Credit sales ÷ Average receivables Asset = Sales ÷ Average total assets
Leverage (Solvency)	Debt‑to‑Equity, Debt Ratio, Interest‑Cover Ratio	D/E = Total debt ÷ Equity Debt % = Total debt ÷ Total assets Interest Cover = EBIT ÷ Interest expense
Market (where applicable)	Earnings per Share (EPS), Price‑Earnings (P/E) Ratio	EPS = Net profit ÷ Number of ordinary shares P/E = Share price ÷ EPS

10.3 Investment Appraisal – Techniques & Decision Rules

• Pay‑back period – time to recover initial outlay; simple but ignores time value of money.
• Average Rate of Return (ARR) – ARR = Average annual profit ÷ Initial investment × 100%; compares with required rate of return.
• Net Present Value (NPV) – sum of discounted cash inflows minus outflows; accept if NPV > 0.
• Internal Rate of Return (IRR) – discount rate that makes NPV = 0; accept if IRR > required rate.
• Profitability Index (PI) – NPV ÷ Initial investment; accept if PI > 1.
• All techniques assume reliable cash‑flow forecasts; sensitivity analysis is recommended to test key assumptions.

10.4 Published Accounts & Ratio Analysis – Limitations

10.4.1 Limitations of Using Published Accounts

• Historical nature – figures relate to past periods; may not reflect current market conditions or future prospects.
• Different accounting policies – choices such as FIFO vs LIFO, straight‑line vs reducing‑balance depreciation, or revenue recognition affect comparability.
• Window‑dressing – management can time transactions (e.g., delay expenses, accelerate sales) to improve short‑term appearance.
• Omission of non‑financial information – brand value, employee skills, customer loyalty, macro‑economic trends are not captured.
• Currency and inflation effects – in high‑inflation economies or for multinational firms, figures may be misleading unless restated.
• One‑off or extraordinary items – gains/losses from disposals, legal settlements, natural disasters can distort profitability ratios.
• Reliance on estimates – provisions, impairments, fair‑value measurements involve judgment, introducing uncertainty.

10.4.2 Limitations of Ratio Analysis

• Data accuracy dependency – any error or manipulation in the source accounts is magnified in the ratios.
• Industry‑specific norms – a “good” current ratio in retail may be poor in construction; benchmarking must use appropriate peers.
• Static snapshot – most ratios are calculated for a single year; without trend analysis they can hide underlying changes.
• Ignores qualitative factors – leadership quality, competitive advantage, regulatory environment, market dynamics are invisible to ratios.
• Size and scale effects – larger firms often have lower turnover ratios or higher leverage simply due to economies of scale.
• Short‑term bias – liquidity ratios (current, quick) may lead managers to focus on cash at the expense of long‑term investment.
• Impact of accounting policy differences – the same policy change that affects the accounts also skews ratio interpretation.

10.4.3 Comparative Summary of Limitations

Aspect	Published Accounts	Ratio Analysis
Time perspective	Historical only; may be outdated.	Usually a single‑period snapshot; trends require separate work.
Comparability	Varies with accounting policies & estimates.	Depends on industry benchmarks, firm size and policy consistency.
Qualitative insight	Limited – narrative in MD’s statement is separate.	Even more limited – reduces data to a single figure per indicator.
Potential for manipulation	Window‑dressing, timing of transactions, discretionary estimates.	Ratios magnify any manipulation present in the source data.
External factors	Inflation, exchange‑rate changes, economic cycles may not be adjusted.	Ratios inherit these distortions; cross‑currency ratios can be misleading.
Impact of capital‑structure decisions	Not explicit; debt/equity mix visible only in balance‑sheet items.	Leverage ratios change directly, influencing profitability and liquidity ratios.

10.4.4 Practical Implications for Decision‑Making

1. Read the full annual report – MD/Chair statement, MD&A, notes – before calculating numbers.
2. Compute a core set of ratios for at least three consecutive years to identify trends.
3. Benchmark each ratio against industry averages and best‑in‑class competitors.
4. Adjust for one‑off items (e.g., remove extraordinary gains before calculating ROA).
5. Model the effect of financing choices on leverage, profitability and liquidity ratios.
6. Combine quantitative analysis with qualitative information (market conditions, regulatory changes, CSR performance).
7. Present findings in a concise report that highlights strengths, weaknesses, and the limitations that may affect the picture.

Suggested Diagram – Decision‑Making Flowchart