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Financial Performance Indicators

International Journal of Applied Finance For Non-Financial Managers (ISSN: 1742-528X) Volume 1 Issue 1

Dr Philip E Dunn

Focus on the usefulness of published financial statements has been at the centre of public debate for over three decades. In 1975 the Corporate Report was published. This was the outcome from the Accounting Standards Steering Committee’s wide ranging discussion paper and in part considered the usefulness of financial statements. The Report’s; conclusion as to the fundamental objective of published accounts included the following statement:

‘The fundamental objective of corporate reports is to communicate economic measurements of and information about the resources and performance of the reporting entity useful to those having reasonable rights to such information.’

In more recent times the Accounting Standards Board published its Statement of Principles for Financial Reporting (December 1999). The concept of usefulness was a significant feature in this publication.

The Statement of Principles seeks to identify why financial statements are produced and whether they are meeting their objective. The reasons stated are as follows:

‘to provide information about the financial position, performance and financial adaptability of an enterprise, that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions’.

To meet their basic objective financial statements must be useful and the information relevant and reliable. Information will have relevance if it influences the decisions of the users. Irrelevant information has no use. Relevance and reliability are primary characteristics relating to content together with the threshold quality, materiality. The primary characteristics relating to presentation include comparability, clarity and understandability.

The Statement of Principles identifies the major use groups, as did the Corporate Report in the 1970s. The main user groups include:

Various user groups apply a series of accounting ratios to interpret and appraise financial performance and such comparisons may include:

Financial performance indicators in the form of ratios cover a number of concepts and are grouped as::

The case study which follows, covers the issues of profitability, liquidity and utilisation. Financial structure and shareholder ratios will be the subject of a further paper on the VLE.

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