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Objectives
7.3 Assessment of the sensitivity to changes in economic and business
variables
A change in economic or business variables can have an impact on
an entity's ability to meet its objectives.
Economic variables Business variables
(such as interest rates, exchange (such as margins and volumes of
rates and inflation) activity)
e.g. a change in exchange rates could e.g. a fall in sales volume can impact
impact selling prices and hence profitability ratios and could prevent
profitability ratios, and could prevent an entity from achieving an earnings
an entity from achieving an earnings growth objective.
objective.
If you are asked in the exam to assess the likelihood of an entity
achieving a given objective:
Step 1: revise the financial statements to reflect the expected change
Step 2: recalculate the necessary ratios.
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