For some time now, the Financial Reporting (FR) examining team has observed that

candidates perform really well in the preparation of financial statements, whether that is
in the context of a group or a single entity. Unfortunately, their performance is less
strong when they are asked to analyse these financial statements, which unfortunately
tends to suggest that they don’t fully understand their composition.

The main reasons that analysis questions do not score high marks is because:

 candidates do not provide workings for their ratio calculations and so markers cannot
apply the 'own figure rule' when marking. Therefore, if an answer is wrong and there are
no workings, candidates get no marks. If the answer is wrong but workings are
provided, it is possible that markers can award marks for the parts of the calculation that
are correct

 candidates often say that a ratio has increased or decreased but don’t provide an
explanation of why that might be the case – this may indicate that a candidate does not
understand how different parts of the financial statements (and so the ratios) are
connected to each other

 candidates do not make use of the information provided in the question scenario and so
the answer lacks depth.

Unfortunately, there is little that the examining team can do to help with the last two
observations – candidates need to understand what is expected of them and the only
way to do this is to practise past exams/revision questions and compare their response
to the suggested solution. However, in an effort to encourage candidates to produce
workings in their ratio calculations, the examining team have decided to use pre-
formatted responses in some of the analysis questions, but not all.

So, for example, where candidates are asked to calculate: (i) gross profit margin; (ii)
operating profit margin and; (iii) interest cover for Loop Co and then to compare these
ratios to a sector average, the pre-formatted response area may look like this:

Ratio Working Loop Co Sector

Average

Gross profit margin To be 30%

calculated
 Operating profit margin To be 10%
calculated

Interest cover To be 4 times

calculated

This means that candidates do not have to 'build' a table in the response area and that
the Sector Average information is pre-populated. When candidates see such a pre-
formatted response area, they would be expected to provide their workings in the
appropriate column and put their answer in the cell where it currently states 'to be
calculated'. It would be better to delete the 'to be calculated' text but you won’t lose
marks if you don’t. However, you should be aware that it is possible to delete any text
that currently exists in this table (including the sector average information).

Obviously, you will need this information to complete your analysis so, in case you do
delete this by mistake, the table has been replicated in the question scenario for your
information and the requirement will remind you of this. So, to reiterate, if you delete
something by mistake in the response area, don’t panic – you will be able to find it again
in the scenario on the left-hand-side of the screen. Hopefully, this strategy will help
candidates to pick up vital marks in the ratio calculations.

Once you have calculated these ratios, you should look at the requirement to establish
what you have been asked to comment on and set up the required headings in the
response area; for example, performance and/or liquidity. It’s usually best to start at the
top of the statement of profit or loss (if provided) and work down because
changes/differences in revenue often drive similar changes/differences in other ratios.
You should then ask yourself the following questions:

 Is there a difference between the ratio that I have been asked to compare?
 Does the change/difference in this ratio impact other ratios?
 Is there an obvious reason for this? To find the answer, you will need to examine the
relationships between different ratios and/or look at the question scenario for a potential
explanation.
 Is there anything that the directors of the company can do to resolve this issue?

In following this strategy, candidates can provide answers to analysis questions that
have depth and are supported by the evidence provided in the question scenario.

We hope that you find this information useful and that you can use it to improve your
answers to analysis questions whether in the context of a group or a single entity.
Written by the Financial Reporting examining team
July 2020