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by Diploma Examiners 15 Nov 2001 Diploma in Financial Management Relevant to All Papers

Diploma Paper 1 – Interpretation of Financial Statements
The overall standard of scripts showed a slight deterioration in comparison to recent sessions. There were fewer very good scripts.

General Comments
Examination technique was poor in a significant number of cases. The principal failing was in careless reading of the requirements. The detailed comments below illustrate how candidates failed in this respect. The second failing was in managing time in the examination. The comment ‘ran out of time’ appears a number of times whilst the same scripts exhibit irrelevant, lengthy and repetitive answers to the questions attempted.

Question 1
This question considered basic explanation and analysis of the profit and loss account. Part (a) was well answered except for a minority of candidates who ignored simple instructions. The problem with part (b) was that many candidates did not ‘explain in general the nature’ of the profit figures identified, instead they provided the answer actually required for part (c) that is to comment on the ratios. This resulted in confused, repetitive answers in part (c). Many candidates also ignored the instruction to comment on the nature of the exceptional items. Easy marks were not gained here!

Question 2
This question sought explanation of the difference between the 1999 company and group balance sheets. A large number of candidates did not provide such explanations. Many calculated and commented on changes between 1998 and 1999 without discussion of company/group issues. Another common approach was to calculate numerical difference and percentages again without any reference to company/group issues. Overall this question was answered badly.

Question 3
A straight forward but targeted financial statement ratio question. Most candidates produced reasonable ratios and analysis, however, identification of limitations was less well done. Part (b) produced many good answers.

Question 4
The cash flow statement is one of the few areas where preparation of a financial statement is specified in the Examiners Guide. Most answers exhibited a sound grasp of the principals although there were some who appear to still be using a ‘source and application of funds’ approach. Part (b) was generally well done.

Question 5
This question was concerned with the recognition and measurement of tangible fixed assets. Part (a) was reasonably well answered as far as the basic issues are concerned. Answers to part (b) showed that many candidates were able to produce numbers from first principles although those principles were not always well founded. Marks were given for answers of this sort, for example in the treatment of the foreign exchange and interest capitalisation issues raised by the question.

Question 6
This question was concerned with the measurement of goodwill and related issues. Part (a) was in general answered competently. A surprising number of candidates failed to follow the basic instruction of part (b) to calculate the two sets of ratios. The fact that in past examinations question 6 has been a discussion question may have resulted in failure to read the question to the end, a particularly short sighted approach!

Diploma Paper 2 – management accounting
The overall pass rate and standard were similar to recent sittings. The large difference between UK and overseas pass rates persists. There was a significant number of very good scripts which demonstrated a good grasp of the syllabus and a breadth of knowledge. Such candidates scored high marks. The comments below relate to the weaknesses revealed in many scripts. There was a significant number of candidates who were clearly under-prepared for the examination. It appeared that these candidates had not studied the full syllabus, nor had they used the published Questions and Answers for recent exams. The largest single cause of low marks was writing too little. Four or five lines in answer to a question worth 10 marks will not merit many marks!

Question 1
In sections (a and b), which examined the ability to calculate traditional and ABC costs, a minority of candidates could not prepare ABC product costs correctly. Part (c) required an understanding of managerial action that may result from ABC data, however weaker candidates wrote very little for part (c) and often mentioned only one of many possible managerial actions.

Question 2
This question was generally answered well, with low marks resulting from not attempting parts of the question, or writing very little.

Question 3
In section (a) a poor knowledge of relevant costs principles, such as including fixed costs, was a common cause of poor performance. Some candidates had little knowledge of how to include probabilities and, as before, the main weakness was writing very little.

Question 4
Basic breakeven was done well in most cases, but some candidates used incorrect variable costs. In section (c) the alternatives were often analysed incorrectly as candidates did not determine which costs were varying with the new proposal. Section (d) was generally answered very poorly and many candidates did not attempt the third part, yet it was not difficult or intricate.

Question 5
Most answered section (a) well, which only required following the instructions in the question carefully. In section (b) the greatest weakness was in writing too little. Also, weaker candidates repeated what the data showed with no attempt to explain the significance or importance of the results. In section (c) a paragraph was not enough to earn 5-7 marks.

Question 6
This question gave five main areas to consider. Candidates who ignored any of these areas did not score well. Similarly a couple of lines for a section could not gain the full marks for that section. Candidates were particularly weak at considering the features of the new and improved system.

Diploma paper 3 – Financial Management
The pass rate was satisfactory and was broadly in line with past examination sittings. The question report set out below considers the candidates’ performance in more detail.

General comments
The general standards of presentation were satisfactory. Workings were usually clear and the handwriting of candidates was usually readable.

Question 1
This question was divided into three parts. The first two parts related to two mutually exclusive investment options. Candidates were required to calculate the net present value of each option and to make a selection. The first investment option involved a joint venture and so the costs and benefits attributable to the investing company had to be separated from the costs and benefits associated with the investment as a whole. This often caused candidates difficulty. Nevertheless, the marks achieved for these two parts were satisfactory, with some candidates scoring very high marks. The final part of the question required candidates to explain why cash flow forecasts rather than profit forecasts are used in net present value calculations. This part was less well answered with a significant number of candidates scoring low marks.

Question 2
This question was concerned with rights issues. The first two parts required candidates to make calculations relating to a particular rights issue and to evaluate the options open to a shareholder in the company. These parts were generally well answered with many candidates scoring maximum marks for their calculations. The final part required candidates to explain the term ‘pre-emptive’ rights and to discuss their advantages and disadvantages. This part was not well answered, and it was clear that a number of candidates did not really understand the term. This topic is important, however, in the context of rights issues and has been examined on more than one occasion in the past,

Question 3
This question was based around the use of expected values and the collection of outstanding debts. The first part required candidates to use expected values to make a decision concerning the appointment of a debt collection agency. On the whole, this part was well answered with many candidates scoring maximum marks. The second part required candidates to calculate the amount of debt that must be collected to cover the costs of the debt collection agency. Again, this part was generally well answered, although some failed to recognise that a simple break even analysis calculation was all that was required. The third part required candidates to explain the concept of expected value and to evaluate its role in dealing with risk. This topic has been examined in previous examinations and candidates seemed generally well prepared. The final part required candidates to identify ways in which the level of bad debts from high-risk customers might be reduced. This part was less well answered. A significant number of candidates did not answer the question as posed; instead they identified general points relating to the efficient collection of debts.

Question 4
This question was concerned with the assessment of two mutually exclusive financing options. Candidates were required to calculate the forecast profit, earnings per share and levels of gearing associated with each option and to discuss the results. On the whole, this question was well answered with some candidates scoring very high marks indeed.

Question 5
This question was concerned with the effects of inflation on the financial management of a business. This was not a popular question and those who attempted it produced generally poor answers. It was clear that few candidates were prepared for this question. However, this is an important area that has been examined on various occasions in the past.

Question 6
This question required candidates to evaluate the dividend policy of a particular company. The first two parts were concerned with the Modigliani Miller view that the pattern of dividends has no effect on shareholder wealth. A surprising number of candidates did not appear to be familiar with this view or at least seemed unable to detect that this viewpoint formed the basis of the questions posed. As a result, many candidates did not achieve high marks. The final part required candidates to comment on the past dividend policy of the company. Generally speaking, this part was answered well.

Diploma Paper 4 – Business Analysis
Question 1
This question sought to test candidates on their knowledge of value chain analysis. It was surprising that a significant number of candidates seemed to have no knowledge of this question whatsoever and yet still attempted to answer it, working from basic common sense. Unfortunately this was not sufficient and most taking this approach gained very few marks.

Other candidates drew a simple diagram, often found in text books, to depict value chain analysis and whilst these scored better than the group above, many stopped with the diagram and did not use it in terms of the case scenario. Those candidates who scored best on this question were those who applied their knowledge of value chain analysis to the case scenario.

The Business Analysis paper comes to an end in December 2001 and throughout my reports for the last five years, I have consistently indicated that the paper requires candidates to apply their knowledge. To date too many candidates seem to have missed this very basic message.

Question 2
This was a very basic question calling for candidates to conduct an environmental analysis and to identify gaps in the information provided in the case scenario. It should have been a straightforward question and so it was for many.

I was however surprised that quite a large number of candidates simply did not address the second part of the question in any way.

Question 3
This was a question looking for knowledge, and its application, about change management. Many answers were simply rambling statements about the changing world of business and seemed to lack any theoretical knowledge about the processes and techniques for managing change in organisations.

The best candidates were those who were able to pull out of the case scenario the many changes facing the company and use force field analysis to assess them. Such candidates were few and far between.

Question 4
Candidates were required to demonstrate their knowledge of teamwork and organisational cultures. Many candidates were able to give sound and basic information about team development. The very best were able to discuss Charles Handy’s work on cultural types and relate it to the case scenario. Others clearly knew Handy’s material and reproduced it without connecting to the case scenario and therefore scored less well, although generally getting a bare pass on this question.

Question 5
International questions have been a feature of my papers, over the last couple of years or so and candidates, and tutors may have picked this up, as generally the question was well done.

Question 6
This was one of the most popular questions and was well done by candidates, at least as regards the main responsibilities of a Finance Director. Only the very best were able to identify strategic financial issues from the case study.

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