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Financial statement analysis: the lowdown

Financial statement analysis is a key skill for ACA students. Anne Porcheron takes you through the exam and how to prepare for it

April 2016

The case study exam tests whether nearly qualified accountants can conduct a thorough valuation of a company’s financial performance and communicate their findings to a board of directors.

What you will be asked to do: The case study requirements typically ask you to evaluate the performance of a business for the year, with a focus on revenue, profit and other specific areas. You will need to compare the results to the prior year, and sometimes to KPIs or a forecast.

Know your approach: Good financial analysis will tell a story using numbers. Build up each point with:
• A financial fact – eg “revenue has increased by 10% to £11m”.
• Cause(s) – eg “due to the launch of a new product…”
• Your opinion – eg “which is impressive”.
• A benchmark or context – eg “given industry growth of only 4%”.
• Implication(s) – eg “but growth will be limited in 2015 as the factory reaches production capacity”.

Analysing revenue: Consider the overall revenue growth and then the individual areas of the business, noting any requirement to focus on a particular business line. For causes of revenue growth or decline, make sure you think about price, volume, new contracts, clients or products.

Analysing gross profit: Start with the movement in overall gross profit and margin and then drill down into the detail of the individual division’s gross profit margins. Take care not to repeat your revenue analysis – focus on mix, margins and costs and efficiencies. Changes in revenue mix between business streams are useful in explaining movements in the overall company gross profit margin; and you can use changes in product mix to explain the movement in gross margin for an individual business stream.

Making adjustments: Some recent case study exams have included a requirement to make adjustments to the accounts and then appraise the results. Don’t panic. The background to the adjustments will be something you know about, and this won’t be as difficult as the problems you’ve been set in Financial Accounting and Reporting or Corporate Reporting. Follow the instructions and use your analysis of the Advance Information to help you work out the implications.

Make those numbers talk: Remember, this is financial statement analysis – it has to include numbers. The best approach is to use a mix of absolute figures (£s) and percentages. A new division with 75% revenue growth sounds amazing, but if it’s only contributing £300,000 of the company’s £15m total revenue it’s important to stress this is not the core of the business.
For case study exam resources go to icaew.com/examresources

1. Read the requirement carefully. Cover everything you’ve been asked for.
2. Aim for a balanced answer. You won’t write exactly the same quantity for each sub-requirement, but you shouldn’t have pages on revenue and just a couple of paragraphs on profit.
3. Make your wider business issues count. Weave them into your analysis to explain or evaluate performance. In the commentary on Rolling Stores (Nov 2014) the examiner said: “Weaker candidates frequently used bland generalised comments – such as ‘the UK is coming out of the recession’ – without in any way tying that statement to RS’ business activity to show its relevance, which meant that no reward was given.”
4. Get your opinion across. Identifying the main cause, or the best and worst performing division shows you are exercising your judgement.

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