Comparing businesses Cambridge IGCSE Accounting (9–1) revision
Not started
Learn it
In plain words
Comparing your results with another business's is useful: it shows where you are doing well and where you are not. But no two businesses are quite alike, so the comparison has to be made with care.
6 things to know
- Comparing with a business of the same type and similar size shows how well a business is performing.
- The two may use different accounting policies, such as different methods of depreciation or of valuing inventory, which changes the profit.
- They may have different year-end dates, so that one includes a busy season the other does not.
- They may differ in size, in what exactly they sell, or in whether they own or rent their premises. A business that owns its premises pays no rent.
- Their assets may have been bought at different times and so at different prices. One may be funded by loans and pay interest, while the other is funded by the owner.
- The figures are for one year, which may not be typical. And the accounts say nothing about non-financial matters, such as location or the skill of the staff.
Worked example
Two shoe shops are compared. Shop A has a profit margin of 12% and Shop B has 8%. Shop A owns its premises and Shop B rents. Why may the comparison be unfair?
- Shop B has an expense, rent, that Shop A does not have.
- That makes B's expenses higher and its profit margin lower, for a reason that has nothing to do with how well it is run.
- To compare fairly, an estimate of rent could be deducted from A's profit.
Tips and tricks
- Give problems that are specific: "different depreciation methods" is a point, but "they are different" is not.
- The fairest comparison is with a business of the same type, of about the same size, over the same period.
It lands in your notebook with its questions as flashcards.
Comparing businesses: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which would make a comparison between two businesses most reliable?
Like is being compared with like.
Business X depreciates its vans by the straight-line method and business Y by the reducing balance method. Why does this matter?
A different accounting policy gives a different expense.
Shop P rents its premises and shop Q owns its premises. Which expense makes their profits hard to compare?
Only P has it.
Why might one year's figures be misleading?
An unusual event can distort a single year.
Which is not shown by accounting ratios?
Non-financial factors are not recorded in the accounts.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
2 questions, 4 marks. Write your answers on paper, then check them.
Comparing businesses
Cambridge IGCSE Accounting (9–1) 0985 · 4 marks · papermunch.org
Name ______________________________ Date ______________
State three reasons why comparing the ratios of two businesses may be misleading.[3]
Show answerHide answer
They may use different accounting policies, such as depreciation methods. Their financial years may end on different dates. One may own its premises while the other rents. (Also: different sizes, or assets bought at different times.)
State one benefit to a business of comparing its results with those of a similar business.[1]
Show answerHide answer
It shows how well the business is performing and where it could improve.
Answers: Comparing businesses
- 1. They may use different accounting policies, such as depreciation methods. Their financial years may end on different dates. One may own its premises while the other rents. (Also: different sizes, or assets bought at different times.)
- 2. It shows how well the business is performing and where it could improve.