Overview and Interpretation

Question 1

The purpose of interpretation

What is the objective of financial statements?
Who are the users of financial statements?
What are the fundamental and enhancing qualitative characteristics?

Answer 1

What is the objective of financial statements?

• To provide users with information to help them make decisions about providing resources to an entity

Who are the users of financial statements?

• Investors (current/ prospective), creditors, employees, HMRC etc

Fundamental qualitative characteristics:

• Relevance and faithful representation

Enhancing qualitative characteristics:

• Comparability, verifiability, timeliness, understandability

Question 2

The potential of ratio analysis as an analytical / interpretive tool

What is the problem with numbers?
How do we increase the value and what effect does this have?
Allow comparison across: (4)

Answer 2

The problem with numbers:

• Isolated numbers have little or no value

We add value through division into other, contextualising numbers

• Assesses the financial health / financial position and performance through structured analysis

Allow comparison across:
- Time
- Divisions/subsidiaries of the same organisation
- Different organisations, may be different sizes
- Planned performance

Prediction analysis

Question 3

Overview of techniques for analysis

Who helps to achieve uniformity in the preparation of financial statements?
Check…?
Be aware of ______________ __________
No _______ or ________ answer

Answer 3

• IFRS help to achieve uniformity in the preparation of financial statements
• Check the accounting policies between companies / over time
• Be aware of underlying issues
• No right or wrong answer

Question 4

Return on equity (shareholders’ funds)

What may you be able to use?
What is it?
What does it need?

Answer 4

• May be able to use the average figure for shareholders funds= (funds at start of year + funds at end of year)/2
• Comparing profit for the year with a figure that is at a point in time
• Needs 3 years of data

Question 5

Return on capital employed

What is it also known as?
What does it compare?
Example?
Often used as what?
Ranges between…?
What is it not influenced by?
No…

Answer 5

• ROCE = PRIMARY MEASURE OF PROFITABILITY
• Compares inputs (CE) with outputs (operating profit)
• i.e. the effectiveness with which funds have been deployed
• Often used as a profitability and efficiency target
• Ranges between companies and between industries
• Not influenced by interest
• No single definition

Question 6

Operating profit margin

What is operating profit?
Also known as?

Answer 6

Operating profit = PBIT = Profit Before Interest and Tax
Sometimes referred to as Net Profit Margin

Question 7

Gross profit margin

A measure of what?
Cost of sales is a ….?
Therefore a change in GPM can have a significant effect on the ‘_________ ____’

Answer 7

A measure of profitability in buying and selling before any other expenses are taken into account
Cost of sales = a major expense
Therefore, a change in GPM can have a significant effect on the ‘bottom line’

Question 8

Expenses to revenue

Answer 8

Helps to identify where changes have occurred
E.g., Operating expenses
E.g., Administration expenses