IGCSEAccountingCambridge (CIE)Revision Notes6. Analysis & InterpretationAccounting RatiosEfficiency Ratios

Syllabus Edition

First teaching 2025

First exams 2027

Efficiency Ratios (Cambridge (CIE) IGCSE Accounting): Revision Note

Exam code: 0452 & 0985

Dan Finlay

Written by: Dan Finlay

Reviewed by: Lucy Kirkham

Updated on

Cambridge (CIE) AccountingCambridge (CIE) Accounting

What are efficiency ratios?

  • Efficiency ratios are ways to measure how efficient a business is at managing processes linked to buying and selling goods

  • They compare trade receivables, trade payables and inventory with credit sales and purchases and the cost of sales

    • They indicate how efficient a business is at

      • Receiving payments from customers

      • Making payments to suppliers

      • Selling its inventory

  • The efficiency ratios are:

    • Rate of inventory turnover

    • Inventory turnover

    • Trade receivables turnover

    • Trade payables turnover

Rate of inventory turnover

What is the rate of inventory turnover?

What is the formula?

fraction numerator Cost space of space sales over denominator Average space inventory end fraction

How should the value be written?

Write as the number of times per year (X times)

How should the value be rounded?

Round to two decimal places

What does the value mean?

The value represents the number of times a business is able to fully sell and replace its inventory in a year

How can the ratio be improved?

  • Increase the volume of sales

  • Reduce the amount of inventory that is held by the business

  • It can be easier to think of the rate in terms of how long it takes for a business to fully sell its inventory without replacing it

    • If the rate of inventory is 2 then this means it takes the business half a year to fully sell its inventory without replacing it

    • You can divide 365 days by the rate to find the number of days it takes to fully sell the inventory without replacing it

  • A business aims to sell its inventory quickly

    • This prevents the inventory from going out of date or out of season

Worked Example

Omatola runs a small business by herself. She provides the following information for the year ended 29 February 2024.

$

Sales

40 000

Purchases

25 000

Inventory at 1 March 2023

7 000

Inventory at 29 February 2024

9 000

Calculate the rate of inventory turnover for the year ended 29 February 2024. The calculation should be correct to two decimal places.

Answer:

  • Calculate the cost of sales

    • Opening inventory + Purchases - Closing inventory

$7 000 + $25 000 - $9 000 = $23 000

  • Calculate the average inventory

    • fraction numerator Opening space inventory space plus space Closing space inventory over denominator 2 end fraction

fraction numerator $ 7 space 000 space plus space $ 9 space 000 over denominator 2 end fraction equals $ 8 space 000

  • Calculate the rate of inventory turnover

    • fraction numerator Cost space of space sales over denominator Average space inventory end fraction

fraction numerator 23 space 000 over denominator 8 space 000 end fraction equals 2.875

  • Round to two decimal places

Rate of inventory turnover = 2.88 times

Inventory turnover

What is the inventory turnover?

What is the formula?

fraction numerator Average space inventory over denominator Cost space of space sales end fraction cross times 365

How should the value be written?

Write as the number of days (X days)

How should the value be rounded?

Round up to the next whole day

What does the value mean?

The value represents the average number of days it takes a business to sell its inventory

How can the ratio be improved?

  • Increase the volume of sales

  • Reduce the amount of inventory that is held by the business

  • This is just another way of measuring the rate of inventory turnover

    • This ratio calculates the average number of days taken to sell the inventory

    • Rather than the number of times it sells its inventory in a year

Examiner Tips and Tricks

You can easily convert between the inventory turnover and the rate of inventory turnover.

Just divide 365 by one ratio to calculate the other one.

Worked Example

Omatola runs a small business by herself. She provides the following information for the year ended 29 February 2024.

$

Sales

40 000

Purchases

25 000

Inventory at 1 March 2023

7 000

Inventory at 29 February 2024

9 000

Calculate the inventory turnover for the year ended 29 February 2024. Round up your answer to the next whole day.

Answer:

  • Calculate the average inventory

    • fraction numerator Opening space inventory space plus space Closing space inventory over denominator 2 end fraction

fraction numerator $ 7 space 000 space plus space $ 9 space 000 over denominator 2 end fraction equals $ 8 space 000

  • Calculate the cost of sales

    • Opening inventory + Purchases - Closing inventory

$7 000 + $25 000 - $9 000 = $23 000

  • Calculate the inventory turnover

    • fraction numerator Average space inventory over denominator Cost space of space sales end fraction cross times 365

fraction numerator 8 space 000 over denominator 23 space 000 end fraction cross times 365 equals 126.95...

  • Round up to the next whole day

Inventory turnover = 127 days

Trade receivables turnover

What is the trade receivables turnover?

What is the formula?

fraction numerator Trade space receivables over denominator Credit space sales end fraction cross times 365

How should the value be written?

Write as the number of days (X days)

How should the value be rounded?

Round up to the next whole day

What does the value mean?

The value represents the average number of days it takes a business to receive full payment for goods sold to credit customers

How can the ratio be improved?

  • Encourage credit customers to pay quickly

    • Offer cash discounts

    • Charge interest for late payments

  • Reduce the amount owed by customers

    • Enforce a credit limit

    • Require a cash deposit

  • A business will aim to receive payment from customers as quickly as possible

  • A business might offer credit to customers:

    • To get ahead of the competitors

    • To potentially receive larger orders from customers

Worked Example

Omatola runs a small business by herself. She provides the following information for the year ended 29 February 2024.

$

Sales

40 000

Trade receivables

11 000

All sales were made on a credit basis.

Calculate the trade receivables turnover for the year ended 29 February 2024. Round up your answer to the next whole day.

Answer:

  • Calculate the trade receivables turnover

    • fraction numerator Trade space receivables over denominator Credit space sales end fraction cross times 365

fraction numerator 11 space 000 over denominator 40 space 000 end fraction cross times 365 equals 100.375

  • Round up to the next whole day

Trade receivables turnover = 101 days

Trade payables turnover

What is the trade payables turnover?

What is the formula?

fraction numerator Trade space payables over denominator Credit space purchases end fraction cross times 365

How should the value be written?

Write as the number of days (X days)

How should the value be rounded?

Round up to the next whole day

What does the value mean?

The value represents the average number of days it takes a business to fully pay for goods purchased from credit suppliers

How can the ratio be increased?

  • Take advantage of any interest-free periods

    • This helps the business keep their cash for as long as possible in case of emergencies

How can the ratio be decreased?

  • Pay for goods using cash when possible

  • Pay invoices quicker

  • There are benefits to paying for goods using credit:

    • The business can keep its cash for as long as possible in case of emergencies

    • The business can wait until it receives payment from customers before paying its suppliers

  • There is no optimal value for the trade payables turnover

    • The value should not be too high otherwise the business might be charged interest or late fees

    • The value should not be too low otherwise the business will have a low working capital

Worked Example

Omatola runs a small business by herself. She provides the following information for the year ended 29 February 2024.

$

Purchases

25 000

Trade payables

4 000

All purchases were made on a credit basis.

Calculate the trade payables turnover for the year ended 29 February 2024. round up your answer to the next whole day.

Answer:

  • Calculate the trade payables turnover

    • fraction numerator Trade space payables over denominator Credit space purchases end fraction cross times 365

fraction numerator 4 space 000 over denominator 25 space 000 end fraction cross times 365 equals 58.4

  • Round up to the next whole day

Trade payables turnover = 59 days

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    Author
    Reviewer
    Dan Finlay

    Author: Dan Finlay

    Expertise: Maths Subject Lead

    Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.

    Lucy Kirkham

    Reviewer: Lucy Kirkham

    Expertise: Head of Content Creation

    Lucy has been a passionate Maths teacher for over 12 years, teaching maths across the UK and abroad helping to engage, interest and develop confidence in the subject at all levels.Working as a Head of Department and then Director of Maths, Lucy has advised schools and academy trusts in both Scotland and the East Midlands, where her role was to support and coach teachers to improve Maths teaching for all.