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ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements

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

The best approach is to compare ratios with prior years or industry figures, explain the likely reasons for changes, and note limitations of the data. Simply listing ratios or choosing only favourable ones does not give an objective, useful interpretation.

  1. APresent ratios with comparisons to prior year or industry, explain likely causes, and note limitations of the dataCorrect
  2. BList every ratio calculated without comment so the reader can form their own view
  3. CFocus only on ratios that show favourable results
  4. DRestate the figures in the statement of financial position in narrative form

Explanation

A useful report compares ratios with benchmarks, interprets trends and causes, and recognises limitations such as year-end window dressing or differing accounting policies. Listing ratios without comment or selecting only favourable ones is not helpful or objective.

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