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FINANCIAL REPORTING AND ETHICS4.8.2 Trend AnalysisAnalysis of financial statements can be enhanced further by the use oftrend analysis. This can be in respect of the absolute figures of key itemsof the balance sheet and income statement (such as the type shown inthe five year financial summary) or of the relevant ratios calculated. Atrend analysis or time series is a display of key figures for a period ofyears, usually between five and ten years, for the purpose of showingthe direction of changes in these figures. This is with a view to allowingthe analyst to appreciate the overall strength or weakness of the firm.The trend analysis of key ratios can be prepared for examination purposesto the extent that information is available for such computations. It isalso possible to have trend percentages for profit and loss account andbalance sheet items. This involves assigning 100% to the items of thebase year and calculating percentage changes in each of the items ofthe other years in relation to the base year.Trend analysis can be used as a basis for future forecasting in respectof a firm addition to usings it for interpretation of financial statements.It becomes essential to ensure that the underlying information used forthe analysis is free of all sorts of biases. Its measurement should be ona consistent basis.There is, therefore, the need to look out for the possible effects of changesin accounting policies during the year(s) under review and the impactof inflation on the trend. The latter is particularly important in respectof sales because it is only when the sales figure have been adjusted bya suitable index of general prices that the true trend of growth in salescan be deduced.It should be noted that CAMA 2004 (as amended) provides that eachcompany should include in its financial statements:(a) Five-Year financial summary(Section 334(2)); and(b) Corresponding figures for the immediately preceding year(Schedule 2, Section 9(1)).The above two requirements are examples of provisions made by thelaw and many accounting standards to encourage trend analysis. Theyare equally required for group accounts.4.8.3 Inter-Firm AnalysisAfter the in-depth analysis of the financial statements of a firm (verticaland horizontal as well as the trend), it becomes necessary to know theposition of the firm among the various firms in its industry. Thisnecessitates an inter-firm analysis, which involves comparing the firm’sratios with those of its competitors or with the industry average.84
ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTSIn undertaking inter-firm analysis, one would need to take note of somefactors which may render the analysis invalid. They include:(a) Use of different accounting dates by the various companies;(b) Application of different accounting policies especially as theyrelate to asset valuation;(c) Differences in the size of companies, which result in differencesin the relative advantages that the bigger firms may have overthe smaller ones;(d) Differences in the management structure and technical expertiseof the companies; and(e) Differences in product range and sales mix among companieswithin the same industry.4.9 USEFULNESS AND LIMITATIONS TIONS OF RATIO ANALYSIS4.9.1 UsefulnessRatio analysis serves as a useful guide which provides indicators of afirm’s past performances and near-present financial position in orderto give the user a basis for predicting future performance and financialposition. A carefully prepared trend analysis of accounting ratios canassist in the construction of a pattern of the firm’s behavior and financialposition, which in turn can help in predicting the firm’s futureperformance. However, ratios should be used in conjunction with otherinformation relevant to the interpretation of the financial statements ofany particular organisation. The overall usefulness of ratio analysisdepends very much upon the ability of the analyst to use the result ofthe ratios calculated along with all other relevant information, bearingin mind the nature of trade (or business) carried on and the type ofcircumstance surrounding each case. The various user groups ofaccounting information use ratios to determine the operating andfinancial efficiency as well as growth potentials of the firm in whichthey are interested. Ratio analysis can help to determine:(a)(b)(c)(d)The efficiency with which the firm is using its assets in generatingrevenue, for example, sales;The extent to which the firm is using its long-term solvency toborrow funds;The ability of the firm to meet its current obligations as and whenthey fall due; andThe overall operating efficiency and performance of the firm.4.9.2 LimitationsIn spite of the usefulness of ratio analysis, there are certain limitationsto its use and it is important that analysts always pay attention to theselimitations. Some of these limitations are:85
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FINANCIAL REPORTING AND ETHICS1.3.3
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ACCOUNTING AND REPORTING POLICIESsu
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ACCOUNTING AND REPORTING POLICIES(j
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ACCOUNTING AND REPORTING POLICIES(i
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ACCOUNTING AND REPORTING POLICIES2.
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3AMALGAMATION, ABSORPTION ANDRECONS
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AMALGAMATION, ABSORPTION AND RECONS
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Page 113 and 114: 6ETHICAL FRAMEWORK, CONCEPTSAND VAL
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ETHICAL FRAMEWORK, CONCEPTS AND VAL
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7THE ENVIRONMENT: CORPORATE,PROFESS
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THE ENVIRONMENT: CORPORATE, PROFESS
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8PROFESSIONAL ETHICS8. 0 LEARNING O
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PROFESSIONAL ETHICSobjectivity are
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PROFESSIONAL ETHICS(c)(d)The type o
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PROFESSIONAL ETHICSabout conflicts
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PROFESSIONAL ETHICS(d)(e)Confidenti
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PROFESSIONAL ETHICSA. III onlyB. II
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9DECISION MAKING IN ETHICS9. 0 LEAR
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DECISION MAKING IN ETHICS9.2 A FRAM
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ETHICAL THREATS AND SAFEGUARDS(d)We
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DECISION MAKING IN ETHICS4. A perso
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10ETHICAL THREATS TS AND SAFEGUARDS
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ETHICAL THREATS AND SAFEGUARDS(iv)(
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ETHICAL THREATS AND SAFEGUARDSto th
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ETHICAL THREATS AND SAFEGUARDSpayab
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ETHICAL THREATS AND SAFEGUARDS(a)Fi
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ETHICAL THREATS AND SAFEGUARDSimmin
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ETHICAL THREATS AND SAFEGUARDSHowev
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ETHICAL THREATS AND SAFEGUARDS(iii)
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11CORPORATE GOVERNANCE11.0 LEARNING
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CORPORATE GOVERNANCE11.3.1 Nature(a
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CORPORATE GOVERNANCEThe company sho
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CORPORATE GOVERNANCEtrust, possible
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CORPORATE GOVERNANCEAn agent has im
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CORPORATE GOVERNANCE(a)(b)(c)(d)(e)
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CORPORATE GOVERNANCE11.6.1 The law
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CORPORATE GOVERNANCEILLUSTRAUSTRATI
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CORPORATE GOVERNANCEimitated. They
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CORPORATE GOVERNANCE(a)(b)Greenbury
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CORPORATE GOVERNANCE11.9.2 Boards d
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CORPORATE GOVERNANCErelationship wi
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CORPORATE GOVERNANCE(e)(f)(g)(h)(i)
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CORPORATE GOVERNANCE(vi)Inquisitive
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CORPORATE GOVERNANCE(e)ConsultancyA
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CORPORATE GOVERNANCEThe incoming au
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CORPORATE GOVERNANCEIn summary, acc
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CORPORATE GOVERNANCEAccording to Th
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CORPORATE GOVERNANCE3. A body corpo
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12SOCIAL AND ENVIRONMENTALISSUES IN
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SOCIAL AND ENVIRONMENTAL ISSUES IN
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APPENDIX ISUGGESTED SOLUTIONS TO RE
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SUGGESTED SOLUTIONS TO REVISION QUE
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SUGGESTED SOLUTIONS TO REVISION QUE
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APPENDIX IICOMPREHENSIVE QUESTIONS
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COMPREHENSIVE QUESTIONS AND SUGGEST
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APPENDIX IIICASE STUDY 1Karsashi, a
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CASE STUDIES(iii)(iv)The floor sale
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CASE STUDIESShare price and dividen
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CASE STUDIESSUGGESTED SOLUTION(A) A
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CASE STUDY 3The following informati
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CASE STUDIESCASE STUDY 4Ologobojo i
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APPENDIX IVTable 1:SUMMARY OF INTER
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SUMMARY OF INTERNATIONAL ACCOUNTING
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APPENDIX VGLOSSARY OF TERMSAbsorpti
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GLOSSARY OF TERMSEthical Objectivis
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APPENDIX VIBIBLIOGRAPHYChambers Ham
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APPENDIX VIISTUDY AND EXAMINATION T
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STUDY AND EXAMINATION TECHNIQUES7.3
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INDEXAAbsorption, 17, 19, 39, 40, 4
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INDEXProfessional Behaviour, 136, 1
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