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

Which of the following is a reason why analysis based on a single year's financial statements may be misleading?

A single year's statements give no indication of trend, so one-off or unusual events can distort the ratios and mislead users. Comparison with prior periods, budgets or competitors provides the context needed for a sound interpretation.

  1. AFinancial statements are always prepared on a cash basis
  2. BA single year gives no indication of trend, so unusual events in that year may distort the pictureCorrect
  3. CIFRS requires ratios to be disclosed for five years
  4. DRatios can only be computed using two years of data

Explanation

One year of data cannot show whether results are improving or deteriorating, and one-off events may distort ratios. Comparing with prior periods and benchmarks gives context. Financial statements are on an accrual basis, and IFRS does not require five years of ratios.

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