Performance appraisal is an important topic in Paper F7, Financial reporting. it has been the subject of many past examination questions and will continue to be examined on a regular basis.
　　Examination approach
　　In an examination there is a limit to the amount of rations that may be calculated. A structured approach is useful where the question does not specify which ratios to calculate:
　　Limit calculations to important areas and avoid duplication;
　　It is important to come to conclusions, as previously noted, candidates often get carried away with the ratio calculations and fail to comment on them;
　　Often there are some obvious conclusions that must be made.
　　Vertical pr trend analysis
　　A company’s performance may be compared to its previous period’s performance.
　　Horizontal analysis
　　Try to overcome the problem of vertical analysis, it is common to compare a company’s performance for a particular period with the performance of an equivalent company for the same period. This introduces an independent yardstick to the comparison. However, it is important to pick a similar sized company that operates in the same industry.
　　Average comparison
　　This type of analysis compares a company’s results (ratios) to a compilation of the average of many other similar types of company. This has the advantage of anonymity and avoids the bias of selecting a single company.
　　The context of the analysis needs to be kept in mind. You may be asked to compare two companies as a basis for selecting one for an acquisition. Alternatively, a shareholder may be asking for advice on how their investment in a company has performed. A bank may be considering offering a loan to a company and require advices. It may be that your chief executive asks for your opinion on your company’s results.

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