GCE Accounting 2024 Theory — Question 7

Model answer

1. Basis for comparing two or more entities: ratios allow meaningful comparison between companies (e.g. comparing net profit as a percentage of sales or equity across firms). 2. Measurement of financial performance: ratios such as net profit margin help assess whether improvements in sales also brought proportionate improvements in profit. 3. Tool for controlling operational performance: management can set ratio-based benchmarks (e.g. minimum gross profit margin) to control staff performance and resource use.