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# CIMA Management level Analysis of financial performance and position

## CIMA Management level Analysis of financial performance and position

CIMA Management level Analysis of financial performance and position: Under the 2015 syllabus for the F2 advanced financial reporting objective tests, 25% of the syllabus will examine ‘analysis of financial performance and position’. The questions will examine either the calculation of ratios, evaluation of performance and position or advice.

The style of the question will mean that the answers will be specific and not open to judgement. This means that calculation questions will have a correct answer and incorrect distracters. This article will cover five ratios that students often calculate incorrectly and then give their meaning to help with evaluation questions. Remember that ratios examined extensively in F1 are unlikely to be examined in the same way in F2.

#### CIMA Management level Analysis of financial performance and position: Price earnings ratio (PE)

Calculation:

Share price/Earnings per share = a number e.g.5

• Share price will be given.
• EPS is Earnings / number of ordinary shares. The earnings figure is the profit available to those shareholders i.e. profit after tax and dividends due to irredeemable preference shareholders.

Meaning: the confidence the market has in the company. The larger the figure the more shareholders are prepared to pay for the share compared to the historic earnings made by the company.

#### CIMA Management level Analysis of financial performance and position:  Non-current asset (NCA) turnover

Calculation:

Revenue/ NCA = number of times

• Revenue is the revenue line in the income statement (IS).
• NCA is the total non-current asset figure in the statement of financial position (SoFP).

Q: Should NCA include ‘investment in associate’?
A: No, because the revenue figure does not include revenue generated from that investment (it appears further down the IS).

Meaning: How the use of NCAs generate revenue. In theory if the answer is a large number this is better for the company. Remember though, that this figure can be distorted by the policy of revaluations as well as the age of these assets.

#### CIMA Management level Analysis of financial performance and position: Gearing

Calculation:

Debt/equity = a number

Debt/debt + equity) = %

• The exam question will make it clear as to which formula you should use but the key to passing is knowing what is defined as debt and equity.
• Debt is the long term debt figure in the SoFP.

Q: Does this include pension liabilities?
A: Yes

Q: Does this include overdraft?
A: It depends! If the organisation is using the overdraft as a long-term source of finance then it should be. If the organisation has dipped into overdraft as a very short term measure then no. To avoid ambiguity the multiple choice question would make this clear.

• Equity is total equity on the SoFP and would include all reserves.

Meaning: How the organisation is financed. If the result is high, it suggests that the company relies on long-term debt to fund its activities rather than relying on the funds provided by shareholders.

#### CIMA Management level Analysis of financial performance and position: Interest cover

Calculation:

Operating profit/Finance charge = number of times

• Operating profit is also described as profit before interest and tax (PBIT) and comes from the IS. You may be offered several profit figures including gross profit and profit before tax to examine this point.

Q: Should this figure include the profit/loss from the Investment in the Associate?
A: No – always take the figure before associates.

• Finance charge is the interest payable in the IS.

Meaning: This tells you how comfortably the company can cover its interest payments from profits. A high number suggests there should be few problems. It is nothing to do with cash and ability to pay.

#### CIMA Management level Analysis of financial performance and position: Return on capital employed (ROCE)

This will require a good deal of care as there are a number of distracters the question could offer.

Calculation:

Operating profit/Capital Employed = %

• Operating profit (as for interest cover).
• Capital employed is the total of funds used to generate the profit above i.e. total equity plus non-current liabilities (NCL) from SoFP.

Q: Should overdraft be included?
A: As for the gearing ratio above.

Q: What should be done with Investments in Associate?
A: These should be deducted from the total equity plus NCL.

Meaning: This tells us how efficiently the organisation is generating profits from the financial resources that they have available. A large percentage is a good result but the ratio can be distorted by revaluation policies and the age of assets.

Students often believe that the calculation of the ratio is not important as long as it is interpreted correctly. That may be true in practice, but not so for multiple choice questions. Maximise your chance of success and learn the formulae above.

#### CIMA Management level Analysis of financial performance and position

CIMA Management level Analysis of financial performance and position: The Chartered Institute of Management Accountants (CIMA) is a UK based professional body offering training and qualification in management accountancy and related subjects. It is focused on accountants working in industry, and provides ongoing support and training for members.

CIMA is one of the professional associations for accountants in the UK and Ireland. Its particular emphasis is on developing the management accounting profession. CIMA is the largest management accounting body in the world with more than 227,000 members and students in 179 countries. CIMA is also a member of the International Federation of Accountants.

CIMA operates a standard scheme of qualifying examinations for prospective members. It promotes local education, training and management development operations, and new techniques through its research foundation and the dissemination of management accounting practices through publications and other media related activities. CIMA has been active in recent educational and vocational initiatives in former Eastern bloc countries. It publishes a monthly journal, supplied free to members and registered students, called ‘Financial Management’.

CIMA is recognised as a professional accounting body for various statutory purposes by UK and various overseas governments. The institute regulates the activities of its members by a code of practice, a discipline committee and (a recent innovation) a continuing education scheme. Its governing body is its council, comprising members elected from regional branches. Each of the branches has a committee and is responsible for much of the ‘grass roots’ activity. Activity such as qualification development is undertaken from the London head office.

The CIMA Global Business Challenge, an annual international business and strategic management competition for undergraduates around the world, is designed to bring out the best in the young business leaders of tomorrow.

In July 2009, CIMA added an online community – CIMAsphere – to its website. The community consisted of a range of blogs, discussion boards, groups, community answers, expert Q&A sessions and some social networking features for members, students and the general public. This has since been shut down. Members are instead encouraged to join the CIMA LinkedIn group, and students are directed to CIMAconnect, an online study support portal.

In 2011, CIMA entered into a joint venture with the American Institute of Certified Public Accountants (AICPA) to launch a global management accounting designation called the Chartered Global Management Accountant (CGMA).In the Americas outside the U.S., non-U.S. CPAs can obtain the new designation as an AICPA International Associate, after a rigorous assessment process. In the rest of the world, new designation holders are able to become members of CIMA after the same assessment process.

CIMA is proactive to tie up with American CPA because of the current convergence trend between US-GAAP and IFRS, reinforced following the merger of the iconic New York Stock Exchange with Germany’s Deutsche Boerse AG. “It remains to be seen whether companies listed in a combined exchange would be required to report under IFRS, US GAAP or both, but as the US appears to be moving towards IFRS adoption it is more likely the international standards would be the accounting rules of choice”.