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40 student accountant May 2008

t e c h ni c a l

The transition from Paper F2 (and theprevious paper, Paper 1.2) to Paper F5 cannotbe underestimated. When preparing for thePaper F5 exam, students need to carefullyconsider what the examiner is looking for.The purpose of this article is to point studentsin the right direction when studying theinterpretation of financial data which is amajor topic in the Paper F5 syllabus.

This article has been written followingmarking of the December 2007 exam papers.Although there were many very good answersto Question 2 (Ties Only), it was clear thatmore guidance is needed for some candidates.Students are advised to look at Question 2

while reading this article, as extracts fromthe question are used to illustrate points andexplain the techniques needed.

ASSESSING FINANCIAL PERFORMANCEIn the December 2007 exam, candidates wereasked to assess the financial performance ofthe business in its first two quarters, whensales had jumped 61% from Quarter 1 toQuarter 2. This calculation should presentno problem ((Q2/Q1) - 1) expressed as a %increase). However, an assessment requiresa qualitative comment or two. A percentagealone will not gain a pass mark.

In most questions there will be some

background information you should useit. Ties Only operated in a competitiveenvironment as stated in the question andso a 61% increase in one quarter soundspretty good in a competitive situation, and tosay so will earn a mark. It was also the first two quarters of the business year and so thislevel of growth is impressive another mark.If you then go on to say that such high growthrates are often hard to maintain, you will gainanother mark. Top-scoring students should beaiming to make these kinds of observations.Hypothesising as to why the growth is

analyse thishappening is also a source of marks. Revenuegrowth can be the result of extra volume orincreasing prices. In the case of Ties Only, it ismuch more likely to be increased volume; theprice will surely be constrained by competition,and from the information provided in Part (b),you can work out that prices are falling(although that calculation was not required).Suggesting that Ties Only has secured morecustomers, and hence increased volume ofsales, scored a mark.

Candidates must be brave and committhemselves. You must express an opinion. Itis not acceptable to suggest that managementinvestigate. Although in the real world this

may well happen, in the exam hall you have todemonstrate that you know where to look.

INTERPRETATIONThe principle of interpretation can be appliedto other areas of the syllabus. In Question 3of the December 2007 exam, candidateswere required to interpret sales performance.Again, it is recommended that you refer toQuestion 3. Broadly, in this question, themarket was shrinking and the company wasstruggling a little as a result. It had reducedsales prices and fought off an 11% fall in themarket, losing only 2% of its budgeted sales.This is a good performance, taking the falling

market into consideration.I would expect candidates to be ableto interpret the variances and reach theabove conclusions. So, if you are given thefollowing information:

sales price variance $105,600 adv sales volume variance $28,000 adv sales market size variance $140,000 adv sales market share variance $112,000 fav

You should be able to hypothesise as to whathas happened, using the information given inthe question and your understanding of the

data. Adverse sales price variance must meanthat sales prices have fallen. This could be theresult of competitive pressure. Adverse salesvolume variance means that the businesshasnt achieved its budget, which is likelyto disappoint management. However,the favourable market share variance isencouraging. This shows that business hasbeen won from the competition, and that thebusiness has also performed well in the areasthat it can control.

The adverse market size variance showsa difficult trading environment which isprobably outside the control of the business.Performance should be assessed by taking into

account the environment in which a businessoperates and separating the controllable fromthe uncontrollable. Note the link betweenadverse market size and adverse sales price.In the shrinking market of paper diaries (theproduct in the question), it is likely that thesales prices will fall as sellers scramble toretain as much share as possible.

Geoff Cordwell is examiner for Paper F5

interpreting fnancial datarelevant to ACCA Qualifcation Paper F5

Key learning pointsIn summary:

a ratio alone is not enough use the background information

given (such as fnancial data,variances, or narrative)

hypothesise as to possible causesand be prepared to select the mostlikely

be brave and express your opinion do not opt out and suggest that

management investigate.