Examiner’s report – FR March/June 2021
18
Weaker candidates start with ROCE, explaining how ROCE is made up. This is not
needed in the exam, as we are looking for candidates to explain the reasons for
movements rather than explaining the definitions of ratios.
From the Pastry Co scenario, the following facts can be established from information
provided in the narrative:
•
Both companies are in the catering industry
•
Dough
Co sells to the public, whereas Cook Co is a wholesaler selling to coffee
shops
•
Dough Co has expensive city-centre premises, whereas Cook Co has a low-
cost production facility
•
Dough Co
revalues its property, whereas Cook Co uses the cost model
•
Dough Co charges amortisation of research and development (R&D) to
operating expenses, whereas Cook Co charges it to cost of sales.
•
Dough Co had $2.5m R&D expense, whereas Cook Co had $1.2m.
•
Dough Co pays its directors a salary of $560,000, whereas Cook Co pays its
directors $110,000.
The above information is all we know about the two businesses. All of the comments
or suggestions made by candidates should be based around that information. Any
answer that does not incorporate the above information will not score
highly as the
reasons given for differences would be based on guesswork rather than the given
scenario.
A good answer discussed the differing customers that the two companies sold to,
comparing the margins made as a retailer to that as a wholesaler in assessing the
gross profit margin. This could then be developed further by talking about the differing
levels of R&D expense in the two companies, which affects the
margins but also
highlights the potential future benefits that may arise.
It would then be hoped that candidates would go on to explain the impact of the
property costs and salary costs on the ratios, discussing how that may fit into the
strategy of each company. Only the very best candidates considered that Cook Co’s
directors may be taking a smaller salary to ensure profits remain high to possibly sell
the company on.
When discussing ROCE, the candidates should have been comparing the vastly
different retained earnings figure, coupled with the difference in loan notes balances.
Some candidates were able to do that and to attempt to explain why this may be, but
other candidates simply stated which company was the most efficient based on which
had the highest ratio.
Candidates who tended to score the highest marks were able
to discuss how the
results looked dramatically different when Dough Co’s accounting policies were
brought in line with Cook Co, showing how the choice of accounting policy from a
company can significantly affect its results.
Overall, the standard of narrative was disappointing in responses to this question.
Answers were either too brief or too generic. The golden rules for candidates to think
about to produce a good answer are:
Examiner’s report – FR March/June 2021
19
•
Use the scenario – any answer not based
on this will not score well
•
One mark per well explained point
•
Talk about all key areas (revenue in particular), even if it’s not in a ratio
calculation
•
Always say WHY ratios or figures have changed or are different
If a candidate follows these rules, they will be able to score well in this type of question.
Unfortunately, far too many candidates seem to be content with learning ratio
definitions and trying to repeat these in the exam.
Chia sẻ với bạn bè của bạn: