Plausibility, interpretation and using financial data analysis in the exam

Accurate arithmetic is necessary but never enough. In the Case Study, the marks come from choosing the right calculation, being sensible about how much detail it needs, explaining what the result means and committing to a decision. This topic covers the plausibility checks to make before you start, how to interpret results, how to reach a decision and what the exam rewards.

Plausibility and numerical output

Pause before you plunge in. Do a quick plausibility review of the details and of the output you expect, then decide how to do the work. Five choices matter.

You are assessed on these decisions and on how you present them. You are not expected to produce endless similar speculative calculations, but you are expected to notice which changes are sensitive.

If a problem can be addressed by adjusting financial facts, by amending, including or excluding figures, make those adjustments and present the amended result. Do not waste time rewriting a whole schedule such as a forecast income statement.

Do not spend ages on a calculation of doubtful accuracy and materiality, such as one month’s depreciation, when the real impact is a large purchase of non-current assets that overwhelms the forecast cash flow and closing cash balance.

Interpreting the results

Work with the numbers does not stop at the calculation. The output of a technique or of sensitivity analysis must be explained to the reader. Too often a candidate describes what could be done instead of doing the work and discussing the result. Describing a financial outcome without giving the adjusted numbers is weak analysis.

Present the financial picture clearly, so that it makes a direct impact, and answer why and so what.

Making the decision

Conclusions and recommendations must follow logically from the analysis. Your professional judgement may call for reservations, provisos or limits around the decision. But the decision itself should be an unambiguous conclusion, which shows confidence in your work, and it should be developed into clear advice through recommendations.

Using the analysis in the exam

It is very hard to pass the Case Study without good financial data analysis. Other papers often have closed questions with a defined answer. Case Study requirements are open: examiners assess your approach and how well you use the data, and there is generally no absolutely right or wrong answer within reason. To show your skill, you will need to:

1. choose the right tool or tools for the data;
2. give the context for the analysis and the reason for the tools used;
3. use judgement, especially on materiality, to choose the right level of detail;
4. build clear appendices that start from the information supplied;
5. identify and evaluate all the assumptions behind the information;
6. apply professional scepticism to where the information came from;
7. consider sensitivity analysis and flex the numbers where appropriate;
8. consider the business scenario and the wider context for depth and breadth; and
9. build a logical report that uses the appendix figures with clear explanation.

You will be under time pressure, so develop speed and confidence in the calculations. That leaves time to use the results. Many requirements ask for a specific calculation, such as a P/E valuation, a net present value, a breakeven or an accounting adjustment. Choose the most suitable technique and use it with confidence.

Requirements also often ask you to evaluate, applying judgement, using figures you have prepared or amended. Many weak candidates seem unwilling to make a decision or recommendation from their own work. You must reach a clear decision. Provided it is consistent with your analysis and evaluation, you will be given credit.

The calculation meets only part of the requirement. You must also:

• Give context: why this technique was used.
• Exercise judgement: which assumptions, which reservations, whether the results suit their purpose and whether the wider context has been considered.
• Develop conclusions and recommendations: what the results mean and what the client should do now.

These count only if they build on accurate calculations, so a thorough working knowledge of every technique remains a prerequisite for the best grades.

Worked example

1. Materiality. Depreciation is a non-cash charge, so the ₦2 million does not affect the cash forecast at all. The equipment purchase is a cash outflow that is more than three times the whole closing balance.
2. Adjust. Deduct 180 from 50. Closing cash becomes an overdraft of ₦130 million. Do not rewrite the whole statement.
3. Interpret. The forecast as supplied was materially wrong. The company cannot afford the purchase from its own cash.
4. Decide. Recommend that the purchase be funded by a term loan or deferred until cash improves, and state the reservation that the loan’s cost is not yet in the forecast.

Common mistakes

• Spending time on trivial adjustments while missing the one that matters.
• Rewriting an entire schedule instead of showing the adjustments.
• Describing what could be done instead of showing the adjusted numbers.
• Avoiding a decision, or giving one that does not follow from the analysis.
• Using the wrong technique. In the November 2015 case, many candidates used profit instead of contribution for the limiting factor.
• Leaving out the context for the technique and the reservations about the result.

Quick revision

• Plausibility choices: accuracy or speed, materiality, template, explanation, appendix or body.
• Adjust what is material and present the amended result.
• Interpret with why and so what, using actual numbers.
• Decide unambiguously, with reservations stated.
• Marks: context, judgement and conclusions on top of accurate calculation.

Practice questions

These are original questions in the style of the Institute of Chartered Accountants of Nigeria exam. Try each one before you open the answer.

Model answer

The next topic covers corporate restructuring: meaning, need and types.

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