1 Groups and consolidation: an overview

comparing one figure against another 
to 
produce a ratio, and assessing whether the ratio indicates a 
weakness or strength in the company's affairs, and is the main 
focus of this chapter. 
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PART H: INTERPRETATION OF FINANCIAL STATEMENTS 
 
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Study Guide 
Intellectual level
H Interpretation of financial statements 
1 Importance and purpose of analysis of financial statements 
(a) Describe how the interpretation and analysis of financial 
statements is used in a business environment. 
K 
(b) Explain the purpose of interpretation of ratios. 
K 
2 Ratios 
(a) Calculate key accounting ratios: 
(i) Profitability 
(ii) Liquidity 
(iii) Efficiency 
(iv) Position 
S 
(b) Explain the interrelationships between ratios. 
K 
3 Analysis of financial statements 
(a) Calculate and interpret the relationship between the 
elements of the financial statements with regard to 
profitability, liquidity, efficient use of resources and financial 
position. 
S 
(b) Draw valid conclusions from the information contained within 
the financial statements and present these to the 
appropriate user of the financial statements. 
S 
 
1
Information required by users 
Users of financial statements can gain a better understanding of the 
significance
of the information in 
financial statements by comparing it with other relevant information.
The accounts of a business are designed to provide users with information about its performance and 
financial position. The bare figures, however, are not particularly useful and it is only through 
comparisons
(usually in ratios) that their significance can be established. Comparisons may be made with previous 
financial periods, with other similar businesses or with averages for the particular industry. The choice will 
depend on the purpose for which the comparison is being made and the information that is available. 
1.1 User groups 
Various groups are interested in the performance and financial position of a company.
(a)