June 2026
The 2025 VCE Accounting exam made one thing clear: ratios and indicators only matter when students can explain what they reveal about business performance.
A figure by itself is not analysis. A trend by itself is not analysis. Even a correct calculation is only the beginning.
Across the 2025 paper, students were asked to interpret inventory turnover, inventory loss, accounts payable turnover, return on assets, asset turnover, net profit, budgeted cash flow and ethical business decisions. These questions rewarded students who could move from the accounting data to the business consequence.
That is the real skill.
In VCE Accounting, performance analysis is not about naming a ratio. It is about explaining what the ratio means for liquidity, profitability, efficiency, stability, customer satisfaction, supplier relationships and decision-making.
Non-financial indicators still measure performance
Question 1b asked students to explain how credit notes can be used as a non-financial indicator of business performance.
This was a small question, but it carried an important assessment lesson.
Credit notes are not only accounting documents. The number of credit notes issued can reveal something about customer satisfaction and business processes. A higher number of credit notes may suggest more sales returns, possibly due to damaged goods, poor product quality, incorrect orders, dispatch problems or delivery issues. A lower number may suggest fewer customer complaints and stronger product or service performance.
The key was that the indicator was non-financial.
The question was not asking students to discuss the dollar value of sales returns. It was asking how the number of credit notes could be used as evidence about business performance.
That distinction matters because Accounting is not only concerned with profit. A business may appear financially successful in the short term while developing problems with customer satisfaction, inventory handling or product quality.
High-scoring responses understood that non-financial indicators can provide early warning signs.
Inventory turnover needed business context
Question 2c asked students to analyse the likely effects on business performance of Yumm Petfoods having an inventory turnover much slower than the industry average.
The data was clear:
- Yumm Petfoods inventory turnover: 90 days
- Industry average: 49 days
- Inventory on hand: $240,000
- Industry average inventory on hand: $160,000
- Inventory loss: $12,000
- Industry average inventory loss: $4,000
- Net profit: $63,000
- Industry average net profit: $111,000
The question was not asking students to define inventory turnover. It was asking them to analyse the effect of a much slower turnover on business performance.
A slower inventory turnover means inventory is being held for longer before being sold. For a pet food business, this can create several problems.
First, cash is tied up in inventory for longer. If the business has to pay suppliers before customers purchase the inventory, liquidity may weaken. The business may find it harder to meet short-term obligations such as wages, rent and accounts payable.
Second, holding pet food for longer increases the risk of inventory loss or inventory write-down. Pet food may approach its use-by date, become damaged, require extra storage, or become harder to sell. This can increase expenses and reduce net profit.
Third, a slower turnover may indicate weaker sales compared with competitors. If the business is not converting inventory into sales quickly enough, it may be less efficient and less profitable than similar businesses.
The strongest responses used the data together. The slow inventory turnover, high inventory on hand, higher inventory loss and lower net profit all pointed towards weaker performance.
That is how performance analysis should work.
One indicator leads to another.
A ratio needs consequences
The 2025 report’s comments on inventory turnover are especially useful because they show what VCAA rewards in analysis questions.
A basic response might say:
Inventory turnover is slower than the industry average, so the business is less efficient.
That is true, but it is not enough for a strong answer.
A stronger response explains the consequences:
Because Yumm Petfoods takes 90 days to sell inventory compared with the industry average of 49 days, cash is tied up in inventory for longer. This may worsen liquidity because the business may need to pay suppliers before receiving cash from customers. As the inventory is pet food, holding it for longer also increases the risk of expiry, damage, inventory write-downs or wastage, which may increase expenses and reduce profitability.
That is analysis.
It connects the indicator to business performance through a clear accounting mechanism.
Inventory loss needed more than theft
Question 2a asked students to identify two possible reasons for inventory loss other than theft.
The wording mattered. Theft was excluded.
Possible reasons included undersupply by suppliers, oversupply to customers, unrecorded damage, unrecorded wastage, or recording errors in the inventory system.
This question shows how performance analysis often depends on understanding business processes. Inventory loss does not occur only because someone steals inventory. It may arise from weak recording systems, poor dispatch procedures, supplier errors, wastage or damage that is not properly recorded.
That matters for decision-making.
If inventory loss is caused by theft, the business may need stronger security controls. If it is caused by recording errors, the business may need better inventory management systems. If it is caused by damage or wastage, the business may need better storage or handling procedures.
The correct diagnosis affects the recommendation.
That is why performance analysis must be specific.
Internal controls had to match the problem
Question 2b asked students to describe one internal control procedure to reduce inventory theft, other than security cameras and bag checks already used by the business.
A strong answer needed to identify and describe a different control, such as security tags, locked display cabinets for high-value items, or security guards.
The important word was describe.
A student could not simply name “security tags”. They needed to explain how the procedure would work and how it would reduce theft. For example, security tags on high-value inventory could trigger an alarm if items are removed without being paid for, increasing the chance of detection and discouraging theft.
This matters because internal controls are not theoretical labels. They are business procedures designed to reduce risk.
High-scoring responses connected the control to the performance issue.
FIFO was about efficiency, not physical movement
Question 2d asked students to justify the accountant’s suggestion that changing from the Identified Cost inventory cost assignment method to FIFO would improve efficiency.
This was a subtle performance question.
The business sold pet food. Under the Identified Cost method, individual items need to be tracked by their specific cost. For low-cost, high-volume inventory such as pet food, this can be time-consuming and inefficient.
FIFO would likely improve efficiency because it is simpler to operate. Inventory records can be updated using barcode readers and standard product information rather than individually identifying the cost of each item.
The report highlighted a common error: students treated FIFO as if it referred to the physical movement of inventory. They argued that FIFO would ensure the oldest pet food was sold first and reduce expiry issues.
That misunderstands the method.
FIFO is a cost assignment assumption. It does not necessarily describe the actual physical flow of inventory.
The performance benefit in this question was efficiency in record-keeping, not automatic improvement in inventory handling.
This distinction is exactly the kind of accounting precision high-scoring students need.
Accounts payable turnover revealed supplier risk
Question 3c provided a chart showing Top Sportz’s accounts payable turnover becoming slower across July, August and September, while suppliers’ credit terms remained constant.
The chart showed that the business was increasingly paying outside the allowed credit terms.
This was not just a liquidity statistic. It had direct consequences for business relationships.
If the trend continued, suppliers may withdraw credit facilities, require cash payments, restrict future supply or stop supplying inventory. The business’s credit rating could also worsen, making it harder to negotiate favourable credit terms in future.
These consequences could then affect profitability. If Top Sportz cannot access inventory, it may lose sales. If it must pay suppliers immediately, cash outflows may increase and liquidity may worsen. If supplier relationships deteriorate, the business may need to source inventory from less favourable suppliers.
This is what strong performance analysis does.
It follows the ratio into the business reality.
Budgeted cash flow and budgeted profit were not the same
Question 4 asked students to work with Dizzies Metalworks’ Budgeted Income Statement, balance sheet extracts and Budgeted Cash Flow Statement information.
One part of the question asked students to explain why Budgeted Net Cash Flow from Operating Activities may be higher than Budgeted Net Profit for the same period.
This distinction is central to Accounting.
Profit is determined using accrual accounting. It includes revenue earned and expenses incurred, regardless of when cash is received or paid. Cash flow records actual cash inflows and outflows.
A business may have a higher net cash flow from operating activities than net profit because some expenses in the income statement are non-cash expenses. For example, depreciation and bad debts reduce profit but do not involve cash outflows in the period.
Timing differences also matter. A business may collect cash from Accounts Receivable relating to previous periods, or pay for expenses that were not fully incurred in the current period.
This question tested whether students understood the difference between profitability and liquidity.
A profitable business can still have cash flow problems.
A positive cash flow does not automatically mean high profit.
High-scoring students keep these concepts separate.
Monthly budgeting was about better control
Question 4e asked students to explain one potential advantage of changing from quarterly budgeting to monthly budgeting.
This was a business management question.
Monthly budgeting can improve control because the business receives more frequent budgeted information. This allows the owner to identify variances earlier, respond to cash flow issues more quickly, and make more timely decisions about spending, sales, inventory or financing.
The advantage is not simply that monthly budgets are “more detailed”.
The advantage is that more frequent budgeting can improve decision-making and corrective action.
This is a common feature of Accounting theory questions. Students need to explain why a practice improves business performance.
Ethical and financial considerations both mattered
Question 5 concerned Gazza’s Gas, a service station that operated 24 hours a day in a regional town. The owner was considering whether to continue the 10 pm to 6 am shift.
This was one of the most interesting performance questions in the paper because it required both financial and ethical reasoning.
Financially, students needed to calculate the profit generated by the night shift under the current wage rate and under a proposed 20% wage increase. The owner was prepared to continue the shift if it generated at least $60,000 per year towards overall profit.
Ethically, the decision was broader. The business was the only service station open all night in a large regional town. The shift provided a valuable service to the community and employment for local university students. At the same time, there had been incidents of customers driving off without paying and antisocial behaviour after 10 pm, raising staff safety concerns.
A strong recommendation needed to balance these issues.
If the night shift still generated the required contribution and served the community, there may be a case for continuing it, especially if safety measures could be improved. If staff safety risks were significant, the owner may need to increase staffing, improve security or reconsider the operating hours.
This question showed that Accounting supports decision-making beyond profit.
Financial data informs the decision. It does not make the decision alone.
Return on Assets showed why sales growth can mislead
Question 6 asked students to consider Earthwrkx, where Return on Assets was declining while Asset Turnover and Sales were increasing.
This is a strong example of why performance analysis must go beyond surface trends.
The owner focused on rising sales and faster Asset Turnover. The accountant was concerned that Return on Assets was falling.
Return on Assets measures how effectively the business uses its assets to generate profit. A decline in ROA suggests that each dollar invested in assets is generating less profit.
Sales and Asset Turnover can increase while ROA declines if expenses rise faster than revenue, if profit margins fall, or if the business generates more sales at lower profitability. The business may be using assets more efficiently to generate sales, but not converting those sales into profit as effectively.
This is an important business insight.
More sales do not automatically mean better performance.
A business can grow revenue while profitability weakens.
High-scoring responses needed to explain that relationship clearly.
Sales had to be linked to an accounting element
Question 6c asked students to explain how Sales meets the definition of one accounting element.
This kind of theory question often catches students because it looks simple.
Sales is a revenue. Revenue is an increase in assets or decrease in liabilities that increases owner’s equity, other than capital contributions.
When a business makes a sale, it may receive cash or increase Accounts Receivable. This increases assets. It also increases owner’s equity through profit, provided the increase is not a contribution by the owner.
A strong response needed to use the definition of the element and apply it to Sales.
The key is not merely naming revenue. The student must explain how Sales satisfies the definition.
That is VCE Accounting theory at its most precise.
Business performance requires linked indicators
The 2025 exam repeatedly showed that one figure rarely tells the full story.
Inventory turnover had to be read alongside inventory loss, inventory on hand and net profit. Accounts payable turnover had to be read alongside credit terms and supplier relationships. Return on Assets had to be read alongside Sales and Asset Turnover. Night shift profitability had to be considered alongside ethical responsibilities and community needs.
This is how business analysis works.
Accounting indicators are connected. A liquidity issue may become a profitability issue. A supplier relationship issue may become an inventory issue. A customer satisfaction issue may become a sales issue. An efficiency improvement may not improve profitability if expenses rise.
Students who analyse indicators in isolation miss these connections.
High-scoring students explain the flow-on effects.
What future Accounting students should learn from 2025
The 2025 VCE Accounting exam shows that performance analysis requires more than ratio definitions.
Students need to be able to:
- interpret non-financial indicators such as credit notes
- explain inventory turnover in relation to liquidity and profitability
- identify causes of inventory loss beyond theft
- describe internal controls and how they reduce risk
- understand FIFO as a cost assignment assumption
- link accounts payable turnover to supplier relationships
- distinguish net profit from net cash flow
- explain how budgeting supports control
- consider ethical and financial factors in recommendations
- interpret Return on Assets alongside Sales and Asset Turnover
- apply accounting element definitions accurately
The strongest responses did not simply state what the indicator was.
They explained why the indicator mattered.
How ATAR STAR approaches business performance analysis
At ATAR STAR, Accounting analysis is taught as business reasoning.
Students learn how to move from a ratio, figure or trend to its effect on liquidity, profitability, efficiency, stability and decision-making. They practise using accounting terminology precisely while applying it to the specific business in the question.
The 2025 Examination Report confirms why this approach matters. High-scoring responses connected accounting data to business consequences.
They did not stop at the number.
They explained what the number revealed.