Skip to content

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

Dalton Co's profit before interest and tax was $90,000 in 20X1 and $96,000 in 20X2. Capital employed (equity plus long-term debt) was $600,000 at 31 December 20X1 and $800,000 at 31 December 20X2. Revenue was $720,000 in 20X1 and $960,000 in 20X2. Using year-end capital employed, which statement is correct for 20X2 compared with 20X1?

ROCE fell from 15% to 12%. Margin dropped from 12.5% to 10% while asset turnover stayed at 1.2 times in both years, since 12.5% x 1.2 = 15% and 10% x 1.2 = 12%. The decline is therefore due to weaker margin, not asset utilisation.

  1. AROCE fell from 15% to 12% because asset turnover fell from 1.2 to 1.2 times
  2. BROCE fell from 15% to 12%, with profit margin falling from 12.5% to 10% while asset turnover stayed at 1.2 timesCorrect
  3. CROCE rose from 12% to 15%, due to a higher profit margin
  4. DROCE fell from 15% to 12%, with profit margin unchanged at 12.5% and asset turnover falling

Explanation

20X1: ROCE 90/600 = 15%; margin 90/720 = 12.5%; asset turnover 720/600 = 1.2. 20X2: ROCE 96/800 = 12%; margin 96/960 = 10%; turnover 960/800 = 1.2. So ROCE fell entirely because margin fell. The first option gives an invalid reason, as turnover did not fall.

Did you get it right without looking?

One question tells you little. A timed set on Importance and purpose of analysis of financial statements shows your real accuracy, how long you take and where you lose marks.

Practise Importance and purpose of analysis of financial statementsFree diagnostic mock

More Importance and purpose of analysis of financial statements questions