11.08.2020 - F7 - Interpretation of FS - Sept Dec 2019 Exam

Sept / Dec 2019 - ACCA FR Exam
Interpretation of Financial Statements
Ratio - Calculation has less marks

Discussion and analysis has more marks
What usually are the issues in the question?
1. Financial statemets - Trend Analysis 2018/2019

2. Financial statemets - competitor analysis
3. Financial statemets - industry analysis
How you should approach it
1. Financial statemets - Trend Analysis 2018/2019
a. if the business has launched a new product / project

b. change in management
c. A new competitor / new technology
d. Overll change in the external business env
e. Difference in accounting policies
2. Financial statemets - competitor analysis

a. Difference in accounting policies Alpha with Beta
b. Ownership of assets
c. Capital Structure
3. Financial statemets - industry analysis

a. Difference in accounting policies Alpha with rest of the industry
b. Uncertainty about the accunting policies
c. Changes in dates of financial statements
a Loss on inventory 000`
Selling Price 1500

Margin 20% -300
Cost of Inventory 1200
Sold for 50% 600
Loss on Valuation of Inv 600
SOFP Date 31.12.2007

Loss Date Feb-08
Authorization of FS 15.03.2008
Bun co incurred a loss of 600 thousand during Feb 2008 which was before the date of authorisation
Under IAS 10 Events after the reporting period this should be considered as
an adjusting event and therefore we need to make chnages in the FS
prepared on 31.12.2007
According to IAS Inventories, Inventories should be measured at lower of cost and NRV
In this case cost is 1.2 million and NRV is 0.6 million and therefore we would value inventory at 0.6 m
Impact of the loss on inventory on PnL
As per FS Change Revised

Revenue 100800 0 100800
COS -70000 -600 -70600
Gross Profit 30800 30200
Operating Exp -17640 0 -17640
PBIT 13160 12560
Impact of the loss on inventory on SOFP
Inventory 3960 -600 3360

Retained Earnings 10480 -600 9880
Ratio Comparison of Bun CO with the Industry
Industry Bun
ROCE PBIT/Cap Emp 12560/(32880-600+14400) 18.60% 26.91%
PBIT PBIT /Sales 12560/100800 8.60% 12.46%
Net Assets Turover Sales/Net Assets 100800/(32880-600) 2.01 3.12
Inventory Holding Inv/COS (3960-600)/70600*365 4 days 17.37
Debt to Equity Debt / Equity 14400/32280 80% 44.61%
Capital Employed Total Assets - Current Liabilities

Capital Employed Equity + Non Curent Liab
Net Assets Total Assets - Total Liabilities

Net Assets Equity
Asset Turnover Sales / Assets Sales / Net Assets

Return On Investment PBIT/Investment
ROCE PBIT/Cap Empl (Equity +Non Cur Liab)
Return on Equity PBIT/Equity (Net Assets)
Inv Days Clo Inv / COS*365

Avg Inv / COS*365
Clo Inv / Purch *365
Avg Inv / Purch *365
Gearing Debt / Equity
Debt / (Debt+Equity)
Calculate Gearing ???? Debt / (Debt+Equity)
Financial Performance of Bun in relation to the industry
The financial pefromance is refected by to key ratios one is PBIT and the other is ROCE. We can see
of Bun company is 26.91 % and the industry average is 18.60 % which is app 44% more than the mar
Having a higher ROCE is a good sign for investors and the managers however
we must consider that there could be other reasons for having a higher ROCE
ROCE is a result of PBIT and Cap Employed. And we know that PBIT depends
on accounting policies of a business and the same goes for cap employed.
For instance, in this case we know that Buncompany has recently revalued the assets and there is a r
surplus lying in the Cap Employed. If the BUN has not revalued the assets then this ROCE would hav
In case of PBIT again the BUN Co has 12.46% whereas market is just 8.6%. This shows BUN co bet
fin perf against the industry. It could be due to the reason that BUN co might have better control over
One reason could be that Bun company owns its shops and cafes and does not pay rent
On the other, in market may be other companies do not own and pay high rentals which
have resulted in a lower PBIT
The higher PBIT puts BUN company in a position to outclass its competitors on pricing
Since their profit margins are more therefore, they can offer some discounts to increase their sales
This discount offering will also solve their problem of higher inventory days
Financial Position of Bun in relation to the industry
Net Assets Turover Sales/Net Assets 100800/(32880-600) 2.01 3.12

Inventory Holding Inv/COS (3960-600)/70600*365 4 days 17.37
Debt to Equity Debt / Equity 14400/32280 80% 44.61%
As for the financial position the most alarming number is with inventory holding period
BUN co has 17 days inv holding whereas the industry is having 4 days. Considering the the bakery bu
17 days seems to be a huge period. It could be due to the fact that either the prices are more, which
inventory management is poor. One sign of this was the writing down of inventory by 600 thoudsand U
and this could happen again
It is suggested that they should review the pricing policy as well as the inventory management to redu
result in a loss.
The Asset turnover is slightly more than the industry average which could be due to better manageme
Debt to Equity ratio is 44.61% whereas the industry average is 80%. It shows that BUN Co
has less debts and more equity. One reaosn of this could be revaluation of assets because as a resu
and this improves the debt to equity ratio. Lower debts means lower ineterst costs and lower risks in fu
Conclusion
Overall the BUN Co is performing good. Their financial performance is better than the market and fina
is also strong with lower debts and lower interest payments
However, they should control the inventory holding periods and this can be achieved
by giving discounts as they have sufficent profit margins
rest of the industry
e date of authorisation
st and NRV
value inventory at 0.6 m
er is ROCE. We can see that the ROCE
p 44% more than the market average
he assets and there is a revaluation

hen this ROCE would have been even mpre
This shows BUN co better

have better control over expenses
not pay rent
ntals which
to increase their sales

sidering the the bakery business
e prices are more, which is reflected in higher PBIT, or the
ntory by 600 thoudsand USD just in the beginning of the year
ory management to reduce the holding period otherwise this perishable inventory could
due to better management of assets by the business

s that BUN Co
assets because as a result of revaluaton equity increases
costs and lower risks in future
r than the market and financial position

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Sept / Dec 2019 - ACCA FR Exam

Interpretation of Financial Statements

Ratio - Calculation has less marks

What usually are the issues in the question?

1. Financial statemets - Trend Analysis 2018/2019

How you should approach it

1. Financial statemets - Trend Analysis 2018/2019

a. if the business has launched a new product / project

2. Financial statemets - competitor analysis

3. Financial statemets - industry analysis

a Loss on inventory 000`

Selling Price 1500

SOFP Date 31.12.2007

Impact of the loss on inventory on PnL

As per FS Change Revised

Impact of the loss on inventory on SOFP

Inventory 3960 -600 3360

Ratio Comparison of Bun CO with the Industry

Capital Employed Total Assets - Current Liabilities

Net Assets Total Assets - Total Liabilities

Asset Turnover Sales / Assets Sales / Net Assets

ROCE PBIT/Cap Empl (Equity +Non Cur Liab)

Return on Equity PBIT/Equity (Net Assets)

Inv Days Clo Inv / COS*365

Gearing Debt / Equity

Calculate Gearing ???? Debt / (Debt+Equity)

Financial Performance of Bun in relation to the industry

Financial Position of Bun in relation to the industry

Net Assets Turover Sales/Net Assets 100800/(32880-600) 2.01 3.12

he assets and there is a revaluation

This shows BUN co better

to increase their sales

due to better management of assets by the business

r than the market and financial position

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