Analysing financial data/financial statements often seem like such a task; how to calculate the numbers; what the numbers mean; how to interpret the analysis, with relevance to answering the exam case study question.
Unfortunately, financial statement analysis is unavoidable. For those of us doing ACCA, Financial Analysis is part of the syllabus for F3, F5, F7, F9, P4, P2, and P3.
Analysing financial data for exam questions needn’t be that question you hope wouldn’t be in the paper, or that you avoid answering. Generally, for the ACCA, there are 3 levels to financial data analysis
Level1- Knowledge & comprehension – know how to calculate different ratios; know what types of financial ratios there are
Level 2 – Application & analysis – basic common sense analysis, and application to question
Level 3 – Synthesis & evaluation – in the advanced level papers, where case study questions are given.
Regular readers know by now, that the point of any post here is to aid the understanding of any topic up for discussion, so below are easy steps on how to analyse financial data, which should be practiced.
How to Analyse Financial Data
*Please, don’t use long-sounding officious words if they don’t come naturally to you. You want the examiner to understand your answer.
Also, know that for the written parts of an analysis question (where you explain the ratios), there are several possible answers; the answers at the back of practice questions aren’t the only possible answer. You will be awarded marks for any relevant answer. I have passed exams where my answers were not the same as those in the past paper/answers when it was released after the exams. Yes! I’m a geek like that, I read past papers of exams I’ve already passed for fun.
The current F3 syllabus (where financial analysis is introduced) states that ‘analysis is calculating & interpreting relationships between elements of the financial statements’. This means that there are 2 parts to analysing financial data
- Where you calculate the ratios (please take time to learn your liquidity, profitability, efficiency, & position ratios)
- Where you write about the ‘why’ to the ratios, or if you prefer ‘the reason behind the ratios’. (This is the part where most people are stuck)
Here’s how to do it:
- Indicate the increase/decrease in year-on-year ratios both in percentage and in amount. E.g. the net profit for 2013 is 69%, compared to last year (2012) 35%. This is an increase of almost $17,000.
- Comment on the figures. Is it significantly better/worse than the previous year? E.g. this can be considered a significant improvement on the previous year
- The reason(s) behind the figures. Here is where you have to consider the question, and pick out reasonable reasons for the figures. When results are better, look for improvements the company has made, which may have had an effect on the figures. E.g. the increase in the net profit ratio is likely as a result of the reduction in administrative costs due to new management, the paying-off of loan, thus no loan interest this year…
- Suggest ways for improvement or continued improvement. You need not be afraid of making suggestions, giving your opinion is also part of valid analysis.
Practice questions in F5, and F7 to build confidence, and knowledge of how to analyse financial data, using the suggestions in this post.
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