ACCA Applied Knowledge · Financial Accounting · Ratios
When writing a report interpreting a company's ratios for a shareholder, which approach is most appropriate?
The best approach is to compare ratios with previous years or similar entities, explain the probable reasons for the changes, and state the limitations of the information. Ratios in isolation have little meaning, and selective or purely descriptive reporting does not help the shareholder.
- ACompare ratios with prior years or similar entities, explain likely causes of changes, and note limitations of the dataCorrect
- BList each ratio calculated with its formula, without commenting on the results
- CConcentrate only on ratios that have improved so the report stays positive
- DUse only the current year's ratios because comparisons are unreliable
Explanation
Ratios have meaning only when compared with prior periods, competitors or industry averages. A useful report explains causes and acknowledges limitations such as differing accounting policies. Listing figures or selecting only favourable ones fails to inform the user.
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