Topic list Syllabus reference

Exam focus point
One of the competences you require to fulfil Performance Objective 8 of the PER is the ability to assess the financial performance and position of an entity based on financial statements and disclosure notes. You can apply the knowledge you obtain from this chapter to help to demonstrate this competence.
Analysis questions require the exercise of a certain amount of critical judgement. Questions are often set in which the directors propose a course of action and the ACCA examination team reports that candidates often agree with the directors' proposals. In which case, why was the question set? Critical appraisal of the proposal is required by the students, supported by calculations where appropriate.
BPPF?
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Chapter Roundup
You must be able to appraise and communicate the position and prospects of a business based on given and prepared statements and ratios.
Return on capital employed (ROCE) may be used by shareholders or the Board to assess the performance of management.
Banks and other lenders will be interested in a company's gearing level.
Ratios such as EPS and dividend per share help equity shareholders and other investors to assess the value and quality of an investment in the ordinary shares of a company.
However, many ratios you can find to calculate numbers alone will not answer a question. You must interpret all the information available to you, support your interpretation with ratio calculations.
Quick Quiz

1. 
   List the main categories of ratio.
   

_{n П}ллг • Profit before interest and tax .....

2. 
   ROCE is x 100%
   

Capital employed
True
False

3. 
   Company Q has a profit margin of 7%. Briefly comment on this.
   
4. 
   The debt ratio is a company's long-term debt divided by its net assets.
   

True
False

5. 
   The cash flow ratio is the ratio of:
   

A Gross cash inflow to total debt
В Gross cash inflow to net debt
C Net cash inflow to total debt
D Net cash inflow to net debt

6. 
   List the formulae for:
   

1. 
   Current ratio
   
2. 
   Quick ratio
   
3. 
   Accounts receivable collection period
   
4. 
   Inventory turnover period
   

Answers to Quick Quiz

1. 
   See Section 1.1.
   
2. 
   True
   
3. 
   You should be careful here. You have very little information. This is a low margin but you need to know what industry the company operates in. 7% may be good for a major retailer.
   
4. 
   False (see Section 3.2)
   
5. 
   C (see Section 3.6)
   
6. 
   See Sections 3.9, 3.10 and 3.12.
   

Now try the question below from the Practice Question Bank