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Hi Mike,
If in the exam, my financial ratios calculations are wrong but my interpretation of them is correct, will I get marks for my comments?
Not referring to any specific questions, let’s say I am required to compare an entity to the sector average industry.
The correct answer:
(The specific entity) operating profit margin = 20%
(Sector average) operating profit margin = 25%The correct comment: the entity has performed poorly in respect to operating profit margin due to……….
If I had calculated an operating profit margin of 29% instead, and made a comment such as “the entity has performed well in respect to operating profit margin due to…….”, would I be awarded any marks for such?
“If in the exam, my financial ratios calculations are wrong but my interpretation of them is correct, will I get marks for my comments?” – most probably, yes
“The correct comment: the entity has performed poorly in respect to operating profit margin due to……….”
I know this is only a hypothetical illustration but it’s a poor “correct answer” – a chimpanzee with only average intelligence could have reached the same conclusion.
It’s relative performance that is more important than absolute comparison
Much better would be something like:
“The company’s operating profit margin at 20% is 5% below the sector average.
This represents an under-performance of 20% in relative terms and could be due to a multiplicity of reasons.
Included amongst these reasons are:
– xxxxx
– yyyyy
– zzzzz”“If I had calculated an operating profit margin of 29% instead, and made a comment such as “the entity has performed well in respect to operating profit margin due to…….”, would I be awarded any marks for such?”
In theory, yes. But that error should hit you in the face in the light of the non-numeric information given in the question and also when taken in conjunction with other calculated ratios
Don’t forget also that presumably other students are making the same calculation error so a marker will be able instantly to see where you have gone wrong and will mentally adjust his idea of what an answer should be based on this incorrect calculation
That’s great, I’ve been getting some incorrect answers on my financial ratios adjustments so I was worrying. Thanks for the tip. 🙂 It’s a great format to keep my answers organized
Sorry Mike, I have another question.
When making adjustments to most of statement of profit or loss figures used to calculate the financial ratios, why shouldn’t we adjust the income tax expense/ relief figure?
Question: HARDY co, Kaplan revision kit question 220
Note 1:
Market conditions during the year ended 30 September 2010 proved to be very challenging due to a sharp recession which has led to an impairment loss of $6million in HARDY’s properties. The excess of these losses over previous surpluses has led to a charge to cost of sales of $1.5m in addition to the normal depreciation charge.Note 2:
Investments at fair value through profit or loss has been marked to market resulting in a loss of $1.6m.Note 3:
In response to the downturn, Hardy had to make a number of employees redundant incurring severance costs of $1.3m and undertaken cost savings in advertising and other administrative expenses.Note 4:
The difficulty in the credit markets has meant that the finance costs of HARDY co variable rate bank loan has increased from 4.5% to 8%.Note 5:
“Despite the above events and associated costs, the board believes the company’s underlying performance has been quite resilient in these difficult times.”SOFP:
Bank loan:
2009- 5,000
2010- 4,000Revaluation reserve:
2009 – 4,500Retained earnings:
2009 – 6,500
2010 – 3,600The statement of profit or loss for year ended 30 September 2009 as given in the question:
Revenue $36,000
Cost of sales (26,000)
Gross profit 10,000
Distribution costs (800)
Administrative expenses (3,900)
Investment income 200
Finance costs (500)
Profit before taxation 5,000
Income tax expense (1,500)
Profit for the year 3,500The statement of profit or loss for year ended 30 September 2010 as given in the question:
Revenue $29,500
Cost of sales (25,500)
Gross profit 4,000
Distribution costs (1,050)
Administrative expenses (4,900)
Investment income 50
Finance costs (600)
Profit before taxation (2,500)
Income tax relief 400
Loss for the year (2,100)I redrafted the SOPL by removing the effects of notes 1-4:
Revenue 29,500
Cost of sales 22,700
Gross profit 6,800
Distribution costs (1,050)
Administrative expenses (3,300)
Investment income 50
*Finance costs (420)
Profit before tax 2,080
**Income tax expense (624)
Profit for year 1,456*[600 – (0.08*4,000) + (0.045*4,000)]
**[(1,500 / 5,000) * 2,080]
The answer had only removed the effects of notes 1-3 with finance costs unadjusted at $600, and income tax relief unadjusted at $400. Was I wrong to have made the adjustments to finance costs and income tax relief?
When calculating ROCE and gearing, I had adjusted the equity figure as well:
Retained earnings:
6,500- 800(dividends paid) + 530
=6,230Revaluation reserve:
4,500The question did not make any adjustments for such either. Would my answer have been accepted as well?
Hoping to hear from you again, thank you 🙂
If ROCE is calculated as PBIT / capital employed, then dividends has no affect on the calculation
‘Retained earnings:
6,500- 800″‘The question did not make any adjustments for such either. Would my answer have been accepted as well?”
It’s a mistake – with the heavy emphasis on “A” mistake
You lose a mark! So long as your interpretation is in line with your calculations, that’s fine
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