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ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements

When writing a report interpreting a company's financial ratios for a user, which approach is most appropriate?

A good report compares ratios with prior years and industry benchmarks, explains the likely causes of changes, and states limitations such as different accounting policies. Simply listing figures, selecting only favourable ones, or using one year alone provides little useful insight.

  1. ACompare ratios with prior years and industry averages and explain likely causes and limitationsCorrect
  2. BList every ratio calculated without commentary
  3. CConcentrate only on the highest-performing ratios
  4. DBase conclusions on a single year's ratios in isolation

Explanation

Ratios are meaningful only when compared with prior periods, competitors or industry norms, and the report should explain reasons and note limitations such as differing accounting policies or year-end timing. Listing figures or ignoring weak ones gives no useful analysis.

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