Evaluate the usefulness of FWB's accounting ratio analysis to its directors when making business decisions.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2023). The mark or mark type is shown in brackets.

1. [1] Knowledge of ratio analysis: Ratios are used to assess business performance, efficiency, liquidity, and shareholder returns.
2. [1] Knowledge of ratio analysis: Gearing measures dependence on debt finance.
3. [1] Knowledge of ratio analysis: Inventory turnover measures financial efficiency (higher number means more efficient).
4. [1] Knowledge of ratio analysis: Liquidity ratios measure ability to meet short-term debt.
5. [1] Knowledge of ratio analysis: Profitability ratios measure ability to generate profit from sales/assets.
6. [1] Knowledge of links to decision-making: Ratios help with decisions regarding budgets, shareholder dividends, and borrowing.
7. [1] Knowledge of links to decision-making: Gearing informs decisions about long-term finance sources.
8. [1] Knowledge of links to decision-making: Inventory turnover informs decisions about stock management.
9. [1] Knowledge of links to decision-making: Liquidity ratios inform decisions about short-term finance.
10. [1] Knowledge of links to decision-making: Profitability ratios inform decisions about pricing and cost control.
11. [1] Application to FWB: Need for finance for ERP investment will impact gearing.
12. [1] Application to FWB: FWB's gearing is not high but close to 50%.
13. [1] Application to FWB: Gearing has increased by 10 percentage points in the past year.
14. [1] Application to FWB: ROCE has decreased by 0.7 percentage points.
15. [1] Application to FWB: Trade payables turnover has increased by 5 days.
16. [1] Application to FWB: Expansion to international markets will require finance.
17. [1] Application to FWB: Interpretation of ratios in Table 2: current ratio indicates sufficient short-term assets to cover short-term debt.
18. [1] Application to FWB: Interpretation of ratios in Table 2: profit margin of 5.3% means $5 profit for every $100 of revenue (FWB made $2.1465m profit last year).
19. [1] Application to FWB: Interpretation of ratios in Table 2: inventory turnover of 12 indicates FWB holds inventory for 30.4 days (could link to ERP investment).
20. [1] Application to FWB: Interpretation of ratios in Table 2: trade payables turnover of 34.2 days is good for cash flow (likely higher than trade receivables).
21. [1] Analysis: Gearing helps make finance decisions; high gearing indicates increased risk of inability to service debt interest, influencing decisions on debt vs. equity finance for expansion.
22. [1] Analysis: Gearing will impact investment financing decisions (e.g., ERP) and can support finance applications if FWB's gearing is below 50% (relatively low risk for further borrowing).
23. [1] Analysis: Decreased inventory turnover indicates a risk of deterioration in FWB's product quality, prompting managers to introduce JIT stock control to improve customer satisfaction.
24. [1] Analysis: Decreasing profitability ratios highlight areas for managers to act, focusing on cost control to increase returns, improve business performance, and satisfy shareholders.
25. [1] Analysis: The quantitative nature of ratio analysis makes decisions more objective and increases the quality of decision-making, improving FWB's performance.
26. [1] Analysis: Data indicating high gearing may make managers more cautious about undertaking future investment.
27. [1] Evaluation: A judgement about the usefulness of FWB's accounting ratio analysis.
28. [1] Evaluation: Data in Table 1.2 suggests a decline in performance on most ratio measures, providing a warning sign to managers to investigate trends and make decisions for 2024 and beyond.
29. [1] Evaluation: One ratio by itself is not very useful (e.g., current ratio not sufficient without acid test).
30. [1] Evaluation: Identification of which ratio is most significant and important to improve.
31. [1] Evaluation: Inter-firm comparisons may be necessary to judge FWB's performance.
32. [1] Evaluation: Ratio analysis is only a quantitative technique; managers increasingly consider qualitative factors.
33. [1] Evaluation: Ratios alone do not necessarily indicate the true cause of business problems.
34. [1] Evaluation: Decisions depend on other factors like the external environment (e.g., forecast interest rate increases impacting borrowing decisions).
35. [1] Evaluation: Ratio analysis may be unhelpful due to disagreement on interpretation, competition for resources, departmental bias, or window dressing.
36. [1] Evaluation: Too much emphasis may be placed on ratios at the expense of more qualitative factors.