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Financial Statement Analysis

6 dot points across 6 inquiry questions. Click any dot point for a focused answer with worked past exam questions where available.

How do gearing and investor ratios measure financial risk and the returns available to shareholders?

Calculate and interpret the gearing ratio, interest cover, earnings per share and dividend cover
A focused answer to the H2 Principles of Accounting outcome on gearing and investor ratios. The gearing ratio, interest cover, earnings per share and dividend cover, the meaning of financial risk, and how investors read them.
10 min answer →

How are ratios interpreted together to judge performance, and what limitations must temper the conclusions?

Interpret ratios collectively to assess a business and explain the limitations of ratio analysis
A focused answer to the H2 Principles of Accounting outcome on interpreting ratios. Reading profitability, liquidity and gearing together, comparison bases, the limitations of ratio analysis, and the difference between correlation and cause.
10 min answer →

What can and cannot be learned from financial statements, given the estimates and conventions they rest on?

Explain the limitations of financial statements and the effect of estimates, conventions and omitted information
A focused answer to the H2 Principles of Accounting outcome on the limits of financial statements. Historical cost and inflation, the role of estimates and judgement, omitted intangibles and qualitative factors, and the needs of different users.
9 min answer →

How do liquidity and efficiency ratios measure a business's ability to meet short-term obligations and manage working capital?

Calculate and interpret the current ratio, quick ratio and working-capital efficiency ratios
A focused answer to the H2 Principles of Accounting outcome on liquidity and efficiency. The current and quick ratios, inventory turnover, receivables and payables days, the cash cycle, and how to interpret them together.
10 min answer →

How do profitability ratios measure how well a business turns sales and capital into profit?

Calculate and interpret the gross profit margin, profit margin and return on capital employed
A focused answer to the H2 Principles of Accounting outcome on profitability ratios. Gross profit margin, profit (net) margin, return on capital employed, what each reveals, and how to interpret movements over time.
10 min answer →

How does the statement of cash flows reconcile profit to the actual change in cash across operating, investing and financing activities?

Prepare a statement of cash flows and explain the three activity categories and the reconciliation of profit to cash
A focused answer to the H2 Principles of Accounting outcome on the statement of cash flows. Operating, investing and financing activities, the indirect-method adjustments to operating profit, and why profit differs from the change in cash.
11 min answer →