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Unit 4: Accounting - the big picture

8 dot points, in syllabus order. Each dot point has a focused answer, with exam-style questions and worked answers where available.

How can the financial statements of a business be analysed over time and in relative terms to reveal the story behind the dollar figures?

Apply horizontal, vertical and trend analysis to financial statements to identify changes and relationships, and interpret the results to support decision-making

Analysing financial statements beyond single ratios. Covers horizontal analysis of dollar and percentage changes between periods, vertical analysis expressing items as a percentage of a base, trend analysis using a base year, and interpreting the results to support business decisions.

6 min read →

What do cash flow ratios reveal about a business's liquidity and the quality of its performance?

Calculate and interpret cash flow ratios, including the operating cash flow ratio and the cash generating power ratio, to assess liquidity and performance

Cash flow ratios. Covers the operating cash flow ratio, cash flow to sales and the cash generating power ratio, how to calculate each from a Statement of Cash Flows, and what each says about liquidity, performance quality and reliance on investing and financing inflows.

7 min read →

How financially stable is a business, and how is ratio analysis used to make and justify decisions?

Calculate and interpret financial stability ratios (debt to equity, debt ratio, times interest earned) and synthesise ratio analysis to make and justify decisions about a business

Financial stability and decision-making. Covers gearing and the debt to equity ratio, the debt ratio, times interest earned, the concept of favourable and unfavourable gearing, the limitations of ratio analysis, and how to synthesise profitability, liquidity, efficiency and stability ratios to make and justify a decision.

6 min read →

Can a business meet its short-term debts, and how efficiently does it manage working capital?

Calculate and interpret liquidity ratios (current ratio, quick ratio) and efficiency ratios (inventory turnover, accounts receivable turnover) to assess short-term financial health

Liquidity and efficiency ratios. Covers the current ratio and quick (acid-test) ratio for short-term solvency, inventory turnover and accounts receivable turnover for working-capital efficiency, how each is calculated and interpreted, and how they inform decisions about cash and working capital management.

6 min read →

How profitable is a business, and what do profitability ratios reveal about its performance?

Calculate and interpret profitability ratios (gross profit margin, net profit margin, return on owner's equity, return on assets) to evaluate business performance and inform decisions

Profitability ratios. Covers gross profit margin, net profit margin, return on owner's equity and return on assets, how each is calculated from the financial statements, how to interpret trends and compare against benchmarks, and how the ratios inform business decisions.

6 min read →

What can a Statement of Cash Flows tell an owner about the business, and what should they do about it?

Interpret a Statement of Cash Flows and cash flow ratios across periods to evaluate cash management and make justified recommendations

Interpreting a Statement of Cash Flows across two years. Shows how to read the three sections together, link cash flow ratios to profit and the other ratio groups, and write a justified recommendation, with a fully worked comparison and a model response structure.

7 min read →

How does a company raise and report equity, and how does company reporting differ from a sole trader?

Apply double-entry principles to record the issue of shares and the appropriation of company profit, and prepare the equity section of a company balance sheet

Company accounting. Covers how a company raises equity through a share issue, the recording of share capital, the appropriation of profit through retained earnings and dividends, the difference between sole-trader and company equity, and the equity section of a company balance sheet.

6 min read →

Where did a sole trader's cash come from and where did it go during the year?

Prepare a fully classified Statement of Cash Flows for a sole trader trading GST business, showing operating, investing and financing activities, and reconcile it to the Statement of Financial Position

Preparing a fully classified Statement of Cash Flows for a sole trader trading GST business. Covers operating, investing and financing classifications, how GST is handled, a complete balanced example and a check that closing cash agrees with the Statement of Financial Position.

8 min read →