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Topic 2: Analysing and Interpreting Financial Information

4 dot points, in syllabus order. Each dot point has a focused answer, with exam-style questions and worked answers where available.

How do horizontal, vertical and trend analysis turn raw statements into comparisons?

Apply horizontal, vertical and trend analysis to compare financial statements over time and within a period

Horizontal analysis measures change between periods in dollars and percentages; vertical analysis expresses each item as a percentage of a base within one statement; trend analysis indexes several years to a base year.

6 min read →

How do we turn financial figures and ratios into a judgement about a business?

Interpret financial information using trend analysis, benchmarking and the limitations of the data to evaluate performance

Interpreting performance means reading ratios and figures in context: comparing trends over time, benchmarking against others, and recognising the limitations of historical accounting data.

7 min read →

How well does a business manage its assets and how exposed is it to debt?

Calculate and interpret efficiency and financial stability ratios to evaluate asset management and gearing

Efficiency ratios such as inventory turnover and debtors collection measure how well assets are used; financial stability ratios such as the debt ratio and equity ratio measure long-term solvency and exposure to debt.

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How do ratios reveal profitability and liquidity from the statements?

Calculate and apply profitability and liquidity ratios to evaluate the performance and position of a business

Profitability ratios measure how well a business turns sales and assets into profit; liquidity ratios measure its ability to pay short-term debts. Ratios convert raw figures into comparable measures.

8 min read →