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ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements

A retailer's year end is 31 January, immediately after its peak trading season, when inventory and receivables are unusually low and cash is unusually high. Which of the following is the MOST likely effect on the analysis of its statement of financial position ratios?

The ratios may be unrepresentative, with liquidity likely overstated. A statement of financial position is a snapshot at one date, and a year end just after the peak season shows unusually high cash and low inventory and receivables, so it does not reflect the typical position through the year.

  1. AThe ratios may be unrepresentative of the position during the year, so liquidity may be overstatedCorrect
  2. BThe ratios will always be understated because inventory is valued at cost
  3. CThe ratios become unusable because revenue is seasonal
  4. DThe ratios will be unaffected because year-end figures are audited

Explanation

Year-end statement of financial position figures are a snapshot at one date. If that date follows a seasonal peak, cash is high and inventory is low, so the current ratio and cash position may be unrepresentative and show better liquidity than typical during the year. Audit does not remove this timing effect.

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