Interpretation of Financial Statements part a

In this lecture we will look at Interpretation of Financial Statements

Financial statements are prepared to assist users in making decisions. They therefore need
interpreting, and the calculation of various ratios makes it easier to compare the state of a company
with previous years and with other companies.

We will look at Interpretation of Financial Statements and the various ratios that you should learn. We will work through an example to illustrate the various ratios.

View ACCA F3 / FIA FFA lectures Download F3 notes


  1. avatar says

    hi john, i read Examiner’s report
    F3/FFA Financial Accounting
    June 2012
    Extracts from the financial statements of Miller Co are shown below:
    31 May 2012
    Revenue 475
    Cost of sales (342)
    Gross profit 133
    Expenses (59)
    Finance cost (26)
    Profit before tax 48

    What is the interest cover ratio for the year ended 31 May 2012?
    A 2.85
    B 1.85
    C 5.12
    The answer is:
    Profit before interest and tax (133-59) = 2.85 (Answer option A)
    Finance cost 26

    can you explane me? I couldn’t understand..

    • Profile photo of John Moffat says

      Nita, this is probably too late for you now, but you should ask questions like this in the Ask the Tutor forum.
      It is not possible for us to read every comment under every lecture!

      Interest cover is profit before interest and tax divided by the interest.
      The profit before interest and tax is 133-59 = 74
      The interest (finance cost) is 26.

      So the interest cover is 74/26 = 2.85

  2. Profile photo of abdulwahab0 says

    you are great sir… you are awsome.. but i want to ask u something irrelevent to lecture.. but important and that is only the females students (e.g leega.. areena etc.) in ur live lecture class… no boy… why ??? haha..

    • Profile photo of John Moffat says

      For asset turnover look at revenue / (total assets – current liabilities), which is the same as revenue / (share capital + non-current liabilities).

      An alternative is to look at the fixed asset turnover (or non-current asset turnover), which is revenue / non-current assets.

      It depends what the question asks for – if they want asset turnover then it is as per the first sentence of this reply (and as per the course notes)

  3. Profile photo of gahraman says

    I don’t understand why you use PBIT in calculating Net Profit Margin ?PBIT is similar to Operating Profit, so it seems like you calculate Operating Profit Margin. Also Net Profit is profit available for shareholders and PBIT is not fully available for shareholders. Maybe its because of syllabus of ACCA, please, could you explain?

    • Profile photo of John Moffat says

      Although for financial accounts, the net profit is the profit available for shareholders, here we are trying to measure how well the business is being run. So for these purposes , we treat net profit as being the net operating profit (before tax and interest). The tax depends on the state policy and the interest depends on how the company is financed. It is the net operating profit that measures how well the managers are running the business.

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