Interpretation of accounts

ACCA考試 Interpretation of accounts

Performance appraisal is an important topic in Paper F7, Financial reporting. it has been the subject of many past examination questions and will continue to be examined on a regular basis.

Examination approach

In an examination there is a limit to the amount of rations that may be calculated. A structured approach is useful where the question does not specify which ratios to calculate:

Limit calculations to important areas and avoid duplication;

It is important to come to conclusions, as previously noted, candidates often get carried away with the ratio calculations and fail to comment on them;

Often there are some obvious conclusions that must be made.

Vertical pr trend analysis

A company’s performance may be compared to its previous period’s performance.

Horizontal analysis

Try to overcome the problem of vertical analysis, it is common to compare a company’s performance for a particular period with the performance of an equivalent company for the same period. This introduces an independent yardstick to the comparison. However, it is important to pick a similar sized company that operates in the same industry.

Average comparison

This type of analysis compares a company’s results (ratios) to a compilation of the average of many other similar types of company. This has the advantage of anonymity and avoids the bias of selecting a single company.

The context of the analysis needs to be kept in mind. You may be asked to compare two companies as a basis for selecting one for an acquisition. Alternatively, a shareholder may be asking for advice on how their investment in a company has performed. A bank may be considering offering a loan to a company and require advices. It may be that your chief executive asks for your opinion on your company’s results.