Interpret financial transactions and financial statements
PO 11 links to Paper F3, Financial Accounting, Paper F7, Financial Reporting, and Paper P2, Corporate Reporting
Professionally qualified accountants must be able to do more than simply post transactions correctly and prepare accurate financial statements – intelligent analysis and interpretation of these, with a view to reaching, presenting and explaining a valid conclusion, is just as necessary.
Whether you are dealing with company-wide financial information or data and records from specific divisions, sites or accounting periods, it is likely that you will also be required to identify and investigate unusual or alarming indicators, make deductions based on how different aspects of financial reports interrelate, and suggest reasons for certain financial results or trends reflected in the figures. End users of financial statements – whether internal or external – need to be confident they can make sound, informed decisions based on the information with which they are presented.
To effectively demonstrate your competency, you might:
- calculate and interpret ratios for meaningful comparison of year-on-year figures or benchmarking against relevant departments of industry competitors – for instance, to evaluate profitability, efficiency or investor yield
- analyse and draw conclusions from inventory levels, revenue figures and balance sheets
- identify trends and use your knowledge of the business and industry sector to raise issues management may want to address (eg common features of under-performing or significantly over-performing profit centres)
- meet with external clients or internal stakeholders to present and discuss your findings.
The next step is to answer the challenge questions for this objective:
- Outline your contribution to interpreting financial transactions or financial statements. State your individual responsibility within the context of the team or overall process – who uses the information you prepare, and for what purpose? What were you asked to do – and how might you have exceeded the demands made on you in a positive way?
- How has this interpretation helped your department or organisation? Provide examples of decisions or recommendations that have arisen from your findings, made by you, your colleagues or management. Consider the impact of those decisions or recommendations – such as saving costs, improving cash flow, generating extra revenue or securing investment.
- What business decisions have or could be made based on this interpretation? These could include new capital purchases, piloting new products or services, opening new sites/branches (or even closure of sites or lines of business) or calculation of commission payments to sales and business development staff. Also relevant would be instructions to keep a watching brief on specific trends where you may have identified potential threats or opportunities, but which need observation over a longer period before any decisions might be taken.