44
Paper F2
Financial
Management
When it comes to tackling the written section of
the analysis and interpretation question, too many
F2 candidates deny themselves easy marks by
ignoring or forgetting the clear prompts provided
By Sally Baker
Senior lecturer, Kaplan Financial
T
he F2 paper always contains a 25-mark
question requiring an analysis and
interpretation. Jayne Howson’s arti-
cle in March’s Study Notes focused
on the typical ratio calculations called
for by this question. Now it’s time to
focus on the written element of the answer.
The typical requirement is to “analyse the fin­
ancial performance and financial position” of the
company in the scenario for 20 marks, with five
marks given for the limitations of ratio analysis
or extra information required. Sometimes the
requirement is preceded with “prepare a report”.
The number of candidates who do not follow this
basic instruction always surprises me – if it’s
required, do it. You do not want to waste time
­producing a lengthy introduction, but at the same
time you will be given credit for producing a report
format, so don’t let this easy mark slip through
your fingers.
An appropriate format would be as follows:
Report
To:
From:
Subject:
Introduction
As requested, I have analysed the financial
performance and position of ABC.
The mark allocations are there to guide you on
how much time to spend on the question and,
Study notes
‘When practising therefore, on how much you are expected to write.
this type of The requirement above is generally for 20 marks,
question, try of which up to eight are available for the ratio
writing your ­calculations. This means that there are 12 marks
answer, going for the writing. On the whole, one mark will be
for a tea break awarded for each relevant point you make. For
and coming back the maximum score, your answer must address
after a while to the company’s financial performance and its
read it. Does it financial position. So, if you can make four or five
say what you good points on each of performance and position,
had in mind?’ you’ll be doing well.
Construct your answer to fit in with this ­marking
guide. Use headings that link to the requirement
– e.g. “Financial performance”, “Financial posi-
tion” and “Recommendation” (if required). This
will not only help to keep you focused and on
track, it will also help the marker.
Start a new paragraph for each point you are
making. Use no more than three sentences per
paragraph and leave a line space between each
paragraph. This helps you to focus on making a
new point each time rather than simply repeating
the same one over and over – another common
error. It will also help your marker, as there is
nothing worse for them than trying to decipher
the different points being made if the answer is
written as one long essay.
When practising this type of question, try writ-
ing your answer, going for a tea break and coming
back after a while to read it. Does it say what you
had in mind? I often find that students know what
Getty Images
they are trying to explain, but can’t get this down
on paper. If the meaning is not clear to the marker,
they cannot give you credit and, unfortunately,
 46
Paper F2
Financial Management
you won’t be sitting with them to explain what
you actually meant.
In one of her post-exam guides, the examiner
makes the key point about scoring well on these
questions: “Having said this many times in arti-
cles and presentations, I feel the need to reiterate
a key consideration to passing the financial ana­
lysis question: please, please read the scenario
and ensure that your answer is consistent with
the scenario given.”
The information provided is there specifically
to help you. Use the reading time to highlight the
key points and consider how these will affect the
ratios and financial results. In the exam time, after
you have calculated the ratios, take a few minutes
to consider how a movement or difference can be
linked back to the information in the question.
You can then use this as the basis of your answer.
It is important that you say more than merely
that the ratio has gone up/down or is higher/lower.
You need to explain why the ratios have changed
and this reason should link back to the scenario.
Consider the following opening sentences from
question 7 in the September 2011 F2 paper (bit.ly/
F2Sep2011): “LKJ has expanded during the last
year and from 1 October 2010 has been supplying
a new range of products, some of which are simply
cheaper versions of existing products and some
of which are completely new. This has resulted in
LKJ increasing its market share and creating a
more mixed customer base.”
From these two sentences alone, the following
thought process can occur:
Scenario Thought Ratio
“LKJ has expanded” Have revenue and profit risen?
Financed how? Gearing
“New range of products” Sales mix has changed Gross profit margin
“Cheaper versions” Lower prices? Gross profit margin
“Mixed customer base” Impact on receivables Receivables days
Calculating the above ratios using the figures
in the scenario gives the following information:
Ratio 2011 2010
Gross profit margin 21.7% 25.6%
Gearing (debt –: [debt + equity]) 13.4% 5.4%
Receivables days 65 days 47 days
On the basis of all this information, you can
make the following comments in your report:
Further reading CIMA Official Study Text – Financial Management (2012-13 edition), CIMA Publishing, 2012.
Study notes
Financial performance
The statement of comprehensive income shows
that LKJ’s revenue has increased substantially
and its profit has doubled from last year. This is
because of the firm’s expansion and it indicates
an improvement in financial performance.
But the gross profit margin has fallen, which is
probably the result of the lower prices on the
cheaper versions of LKJ’s products. The new
products will have altered the sales mix, which
will also have affected the gross margin. In
particular, the firm may be selling these items at
a discount to establish them in the market.
Financial position
Receivables days have increased significantly.
This is probably a result of the more mixed
customer base. The company may also have
deliberately offered extended credit terms in
order to attract more customers and increase
its market share.
LKJ’s gearing ratio has increased, but seems
to still be at a very moderate level. Both debt
and equity financing have been raised to fund
the expansion. Long-term borrowings have
more than trebled, but given the moderate level
of gearing and increased profits, this does not
appear to be a cause for concern.
This is not the answer to the whole question, of
course, but I hope that this gives you ideas on how
to answer similar questions. Kaplan’s free master
class (bit.ly/BitesizeVideos) will take you through
this question in greater detail and provide more
insight into how to answer it effectively.
Lastly, it is worth noting that every exam
question has asked candidates to comment on
either the limitations of ratio analysis or the extra
information that may be required before further
conclusions can be reached, typically for five
marks. Ensure that you are prepared to do this.
Candidates often either simply forget to answer
this part of the question or run out of time.