Page 203 - CAPE Financial Services Syllabus Macmillan_Neat

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02269020/CAPE/KMS 2016 SPEC

FINANCIAL SERVICES STUDIES

UNIT 2 - PAPER 02

KEY AND MARK SCHEME

(c) Ways in which ratio analysis aids in the evaluation of
financial statements and the comparison of companies’
financial performance or position.

- Provide a method of standardization especially within
financial services. Most ratios in this area have
benchmarks imposed by a regulatory institution. (2)

- Provide a profile of firm’s economic characteristics and
competitive strategies.

- They can serve as screening devices, indicate areas of
potential strength or weakness, and reveal matters that
need further investigation. (2)

- Differences in firm size may confound cross sectional and
time series analyses. To overcome this problem, common size
statements are used. For example, a common size balance
sheet expresses each item on the balance sheet as a
percentage of total assets.

- A common size income statement expresses each income
statement category as a percentage of total sales revenues.
(2)