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Ratio Analysis - Lesson Plan: 2 x 1 hour lessons

A series of 'off the shelf' lesson plans and resources for use in the classroom. These lessons deal with Ratio Analysis and are relevant to the following specifications:

• AQA: Module 4, 13.5
• Edexcel: Unit 4, Section 6
• OCR: Module 2875

Aim:

The aim of the lessons is to build on the work done at AS on the use of ratios and to encourage students to understand the uses and limitations of ratio analysis. The Biz/ed site has a number of resources on ratio analysis, which will increase student understanding of this often tricky area.

The lesson is designed to get students discussing what the meaning of the ratios are - getting away from the problems of the arithmetic involved - and then providing an opportunity to practice their use through an activity that involves financial data available on a range of companies through the Company Info section of the site.

The lesson is straight forward but students will need some guidance on the analysis of the ratios once they have been calculated. Specifically, students should be encouraged to look at the following aspects:
What has happened to the component parts of the ratio to cause the changes? For example, in profit margin calculations is it the costs that have changed or the revenues and at what rate has each changed?
This is an important skill in helping students to understand what the meaning of the changes they identify are.

An extension activity is provided that makes use of the major section on Biz/ed devoted to ratio analysis.

Learning Objectives:

At the end of these lessons, students should understand the following:

• The formulas for the main accounting ratios
• The meaning of the main accounting ratios in terms of what they tell the observer about liquidity, profitability, etc.
• The reason for changes in accounting ratios over time
• The use and limitations of ratio analysis in decision making as applied to a number of different businesses

Resources:

• PowerPoint Presentation - Ratio Analysis [192 KB]
• Mind Map - Ratio Analysis
• Activity - Ratio Analysis
• Printed table for recording ratio calculations (optional)
• PC, digital projector and whiteboard
• Large sheet of paper to record limitations
• PCs for student research

Lesson Structure:

Lesson 1

1. Use the Mind Map to give students an overview of the main ratios used and use the Presentation to review each ratio. Ask students to identify what the ratio will tell them about performance and get students to write down one limitation that they can think of in using the ratio concerned. (20 minutes)
2. Use the large sheets of paper to hold a collective class discussion on what the limitations identified are and how such limitations might be overcome. (15 minutes)
3. Introduce the Activity and explain the aim and learning outcomes targeted. (5 minutes)
4. Students begin the Activity. (15 minutes)
5. Close the first lesson by reviewing the main points. (5 minutes)

Lesson 2

Students will use this lesson to complete the tasks on the Activity. Task 5 can be set as a written task or one to be completed in pairs to be fedback to the group towards the end of the lesson.