It is often worth calculating some of the ratios (e.g. The operating profit margin is also likely to be affected as the profit or loss on disposal will be included when calculating this. When calculating ratios, the disposal will improve asset turnover as the asset base over which revenue is spread becomes smaller and will, therefore, also improve return on capital employed (ROCE). It is worth noting that while the current year results will be affected by this, it is a one-off adjustment and this needs to be factored in when comparing it with the results of other periods. When constructing your answer, you must consider the effect that this information would have on the company results.Ī major asset disposal would most likely have a significant impact on a company's financial statements in that it would result in a gain or loss on disposal being taken to the statement of profit or loss and cash being received. The question scenario may provide you with a set of financial statements and some further information such as details of non-current assets (potentially including a revaluation, a major asset purchase or disposal) or measures undertaken during the year in an attempt to improve performance. Do not simply list all the possibilities of why a ratio may have changed link the reason to the scenario that you have been provided with. It is important that you carefully consider this information and incorporate it into your response because it has been provided for a reason. A weak answer will make no attempt to refer to this information and, therefore, will often score few marks. Questions relating to interpreting financial statements will also include some background information and accompanying details in the scenario. discursive elements often not attempted.limited understanding of the implication of accounting issues.limited knowledge of ratio calculations. When marking this style of question some common weaknesses have been identified, which are highlighted below: This article is designed to aid candidates in understanding what is expected to create a good answer to a financial statements interpretation question. As a result, markers find it difficult to award sufficient marks to candidates to achieve a pass. Candidates regularly state facts such as 'gross profit margin has increased' or, 'payables days have gone down' but this offers no interpretation of the reason for the change in ratio. Increasingly, candidate exam performance is demonstrating a lack of commercial awareness and knowledge that sometimes does not go beyond the 'rote learning' of ratios and associated commentary. In the FR exam, you will often be required to make use of ratios to aid interpretation of the financial statements for the current year and to compare them to the results of a prior period, another entity, or against industry averages. Interpreting financial and non-financial information is an important aspect of the Financial Reporting (FR) exam and is an important skill to develop in advance of the Strategic Business Reporting (SBR) exam. Candidates require good interpretation skills and a good understanding of what the information means in the context of a question. Interpreting financial statements requires analysis and appraisal of the performance and position of an entity.
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