Page 283 - F3 -FA Integrated Workbook STUDENT 2018-19

Interpretation of financial statements

Introduction

1.1 Gross profit margin: calculation

Financial statements provide a great deal of relevant information to those who use
them. The financial statements on their own do not always provide sufficient
information to user groups, even though they have been prepared in
accordance with IFRS Standards.

Calculating and interpreting ratios may provide users with further insight into the
profitability, liquidity and efficiency and financial position of an entity.

1.2 Calculating ratios

Ratios use simple calculations based upon the interactions within sets of data. For
example, changes in cost of sales are directly linked to changes in sales activity.
Changes in sales activity also have an effect upon wages and salaries, receivables,
inventory levels etc. Ratios allow us to see those interactions in a simple, concise
format.

Ratios are of limited use on their own – they need to be compared against a
benchmark of some sort (e.g. the equivalent ratio for the previous accounting period,
or that of a competitor). Therefore, the following points should serve as a useful
checklist if you need to analyse data and comment upon it:

 What does the ratio mean?

 What does a change in the ratio mean?

 What is the norm or expected ratio?

 What are the limitations of the ratio?

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