Learn: Comparing Accounts Over Time

Welcome!You've already learned how to interpret key financial statements like balance sheets and income statements. Today, we'll build on that by exploring how to compare accounts over time to assess business performance and trends.

Why Compare Accounts Over Time?Comparing accounts over time helps businesses identify trends, spot potential issues, and measure performance improvements. For example, tracking revenue growth or changes in expenses can show whether a business is becoming more efficient or facing challenges.

Key Metrics for ComparisonWhen comparing accounts, focus on metrics like profit margins, liquidity ratios (e.g., current ratio), and return on capital employed (ROCE). These provide insights into profitability, financial stability, and efficiency over time.

Comparing Revenue and ExpensesOne common comparison involves looking at revenue and expenses over different periods. Analysing these figures helps businesses assess whether they are growing or overspending relative to their income.

Analysing Profit MarginsProfit margins show what percentage of revenue remains as profit after expenses. Comparing profit margins over time reveals whether a business is becoming more efficient or facing higher costs.

Using Ratios for ComparisonsRatios like current ratio, acid test ratio, and gearing are useful for comparing financial health over time. For example, a declining current ratio might suggest liquidity issues.

Tracking Trends with ROCEReturn on Capital Employed (ROCE) measures profitability relative to the capital invested in the business. Comparing ROCE over time shows whether the business is using its capital more effectively.

Review Time!Great work! You've learned about comparing accounts over time using metrics like profit margins, liquidity ratios, and ROCE. Now let's test your understanding.