In Grade 12 accounting, students will learn about analyzing and interpreting financial statements, including using ratios to interpret the information available in the Income Statement and the Balance Sheet
Ratios play a crucial role in this process, as they can help interpret financial information accurately and are classified into categories such as profitability, return, liquidity, solvency, operating efficiency, and risk.
These ratios are used to check business growth, compare results with competitors, and assess financial risk. Stakeholders such as management, investors, banks, and trade unions are interested in measuring business results.
Some important ratios include gross profit on turnover, solvency ratio, current ratio, acid test ratio, and others, each with a specific formula and guidelines for interpretation.
Additionally, students will also be familiar with Analysis and Interpretation of Partnership’s Financial Statements, which is taught in Grade 11
Main Questions for Analysis and Interpretation of Financial statements
Below are the main questions for Grade 12 Accounting for analysis and interpretation of financial statements:
- Can the business pay off its immediate debts in the short term?
- To what extent is the business financed by borrowed capital?
- Are investors interested in buying shares in this company?
- Is the business controlling expenses effectively?
- Is the business able to meet all their financial obligations with existing assets?
- Are shareholders receiving a favourable benefit from this business?
How to answer Interpretative Questions for Accounting Grade 12
- Identify the appropriate financial indicators necessary to answer the question: At times, the question will not give any indications of the financial indicators to be used. Example, Comment on the liquidity of the business… You may need to calculate the ratios (if they are not given on the table of indicators).
- Quote the figures and show the trend. Do some comparison (increase/decrease):Comparisons would include:
- Information of the same business (previous financial year/s)
- Other businesses in the same industry (competitors)
- Targets set by the business (such as a mark-up percentage)
- An alternative action (such as an investment in a fixed deposit)
- External factors such as the inflation rate, interest rate and market price of shares.
- Comment: Showing insight or understanding (focus on whether this is good or bad for the business). Provide short, concise statements. Be guided by the mark allocation as to how much information you need to provide.