Acca financial Accounting (FA) Study Text ac ca (FA)

Interpretation of financial statements 

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KAPLAN PUBLISHING

 

1 Overview 

 

 

 

 

Introduction 

 

This chapter deals with the interpretation of financial statements. As 

such, it makes use of much of the content of earlier chapters.  

Much of the content of this chapter is new. Interpretation of financial 

statements is an important topic for Financial Reporting and Strategic 

Business Reporting. 

2 

Interpreting financial information 

Introduction 

Financial statements on their own are of limited use. If you were to identify that 

a business made profits of $1 million what does that tell you about the 

business? Does it suggest the business is a success? It may do, but not if in the 

previous year it made profits of $50 million and its closest rival generated a 

profit of $60 million. 

It is important that users of financial statements can interpret the financial 

statements to be able to draw out valid conclusions. Typically this involves the 

use of comparisons to prior years, forecasts and competitors. Users can 

compare sales and expense figures, asset and liability balances and cash flows 

to perform this analysis. 

Ratio analysis is widely used to support this process of comparison. Don't forget 

though that ratios are calculated using the figures already present in the 

financial statements. The raw data is equally useful when performing analysis. 

Ratios are simply a tool to try and assist understanding and comparison. 

 

 

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