With increased focus on big data and emerging technologies in our day-to-day lives and professional careers, CPA Canada has placed more focus on Information Technology (IT) and Data Analytics and Information Systems (DAIS) in the competency map. Despite previous inclusion on the CPA Competency Map, many resources like the E-Book, weekly practice cases (PCs) and integrated problems (IPs) have not explained DAIS sufficiently. This article will help you prepare for DAIS issues in the CPA Canada PEP and CFE exams.
Data Analytics and Information Systems (DAIS) topics
Though DAIS affects all competencies, Management Accounting (MA) is the most commonly tested area. The following sections have been added to the MA competency regarding information and decision making:
- Data visualization of financial and nonfinancial data
- Dashboards, graphs, tables report design
- Communication of information for quality decision making
- Framing information recognizing uncertainty
- What is the value of information in the decision-making process?
- Transformation of data to decision relevant information
- Creation of intellectual property and knowledge development
- Ethical use of information
- Dimensions of information quality – relevance, ease of use, integrity, timeliness
- Types of data and their attributes (nature, sources, format, timing, extent and level of aggregation)
- Professional skepticism regarding data
- Information quality and the impact of processing models
- Data cleansing
- Data structure and standards
- Data extraction and import
- Data life cycle
I don’t suggest spending the time to study above concepts. They may come as MCQs in PEP exams, but you’ll be able to find the right answer through logical thinking. Instead, study data visualization, because this is the most commonly tested DAIS topic on the cases and CFE.
Data visualization (charts)
Using the CFE September 2021 Day 2 FFTY case and solution, let’s walk through an example of how data visualization (charts) DAIS can be tested on a case. I will walk through the first three charts. (Note: If you don’t know how to approach CFE level cases, follow the steps below as I break down the case and the solution).
Step 1: Required
On page 15 of the case, under the Excerpts from the management committee meeting appendix, it’s indicated that they would like you to analyze the data (charts and graphs) provided in Appendix VI and provide any recommendations for improving operating profits.
In the background information (page 3 and 9), we are told that FFTY is a grocery store chain specializing in locally-produced, farm fresh foods. FFTY produced three types of products:
- 1) Freshly prepared hot and cold food
- 2) Non-perishables (eg. canned and dry goods)
- 3) Perishables (eg. fruit, vegetables, dairy and meat)
Step 2: Analysis
We see the charts in Appendix VI (page 18) and our task is to analyze the charts and provide a recommendation.
First set of charts are seasonal trends. We see that the perishable “Cost of goods sold” line is higher than the revenue line for the months of December to February. We also see that the COGS are not a straight-line.
To analyze the chart, we’ll follow the steps below:
- (1) We write what’s the issue that the chart reveals (ie, perishable items are being sold at a loss during winter)
- (2) We explain the results (ie, we assess why this may be occurring. For example, it may be harder to get organic perishable items during the winter months due to lack of access. We also state the impact. We discuss what the results mean for the company. For example, because the revenue is not enough to cover the costs, perishable items are generating a loss for FFTY during these months. It’s important to integrate case facts to achieve depth. On page 9 on the case, it says that “FFTY tries to keep prices for most items stable throughout the year”. This is contributing to the losses as the price remains constant during the periods when costs are higher.
- (3) We provide a recommendation (the case says that “customers are willing to pay a premium for locally produced, whole foods” (Page 9), so customers are less price sensitive. We can suggest FFTY to increase the pricing of perishable items during the winter months.)
In summary, we’ll write in our analysis that perishable items are being sold at a loss, since COGS during winter months is higher than the revenue. This could be due to lack of access to organic perishable items and selling prices not being adjusted to cover the cost increase.
For non-perishables, we see that there’s decrease in non-perishable revenue during the summer months (July to September). Comparing with the earlier chart, we see increase in perishable revenue during the same time period.
We’ll write that there’s a decrease in non-perishable revenue during July to September months. This could be due to customers substituting non-perishable items with perishable ones during the summer.
The next seasonal trend is for freshly prepared hot and cold foods. We see that freshly prepared foods revenue is lower in the summer months.
We’ll write that freshly prepared foods revenue is lower in the summer months. This could be due to customers being away or having more time to cook their own food than purchase prepared food during those months. FFTY does not currently have seating areas for people to eat prepared foods, which could explain why the revenues are down.
Step 3: Assumptions
In addition to analyzing the charts, we’re also required to discuss data limitation and reliability of the charts. This is needed for C.
Always consider that you may not have access to the entire data set and must acknowledge that there can be gaps or unreliable information provided. To assess this, you will want to consider and discuss the following items:
- When (i.e. year) the data was provided: Have there been significant changes since? In the case of FFTY, the data is from 2019 but the company saw growth and franchise expansion in 2020.
- The source of the data: Who is providing the information? Do they have a bias? What systems is the data coming from?
Template for DAIS
Format your answer with IER + WIR.
- IER means: Issue, Explanation (interpretation + implication + impact), Recommendation.
- WIR means: Weakness, Implication, Recommendation.
You must write both (IER and WIR) to get a C.
In IER, we analyze the chart. We write what’s the issue based on the chart, explain (interpretation, implication, impact and relevance to the company), and give recommendation (specific, clear recommendation on what action to take).
In WIR, we discusses reliability of the charts. We discuss the weakness, implication, and recommendation.
Here’s a sample answer to the first three charts in this case:
Chart #1: Perishables:
- Issue: Throughout the year, perishable are providing a reasonable gross margin. During the winter months (December to February), perishable items are being sold at a loss, since COGS during those months is higher than revenue.
- Explanation: This could be due to lack of access to organic perishable items and selling prices not being adjusted to cover the cost increase.
- Recommendation: Given that FFTY’s customers are willing to pay premium for locally sourced foods (ie, less price sensitive), FFTY should increase the pricing of perishable items during the winter months to cover the increase in costs.
Chart #2: Non-perishables:
- Issue: There’s increase in perishable revenue during the summer months (July to September) and decrease in non-perishable revenue during the same period.
- Explanation: FFTY tries to keep prices stable, the increase in perishable revenue is likely due to increased volume of sales. Given that customers are likely substituting non-perishable items with perishable ones during the summer, this appears reasonable.
- Recommendation: FFTY could attempt to keep non-perishable revenue high during the summer months by offering a small discount on non-perishable items that pair well with perishable items.
Chart #3: Freshly prepared hot and cold foods
- Issue: Freshly prepared foods revenue is lower in the summer months.
- Explanation: This could be due to customers being away or having more time to cook their own food than purchase prepared food during those months. FFTY does not currently have seating areas for people to eat prepared foods, which could explain why the revenues are down.
- Recommendation: Add seating areas which may help increase revenue during the summer months since there may be a group of customers who will purchase freshly prepared food to eat at FFTY.
Below, I’ll discuss reliability and gaps in the information provided.
- Weakness: Jim has used financial data only from 20X0, not 20X1.
- Implication: There are some changes in 20X1, such as company growth and new franchisees, that could cause 20X0 not to be representative of 20X1 or of future years.
- Recommendation: Use more recent data to get better analysis.
- Weakness: Jim used only two sources of data: the accounting system and the spoilage spreadsheet.
- Implication: Data could be incomplete and not include all relevant information (eg popularity of certain brands or whether discounts are being used). This could result in poor decisions or inappropriate recommendations.
- Recommendation: Seek additional sources of information (eg information in POS system should have useful data, such as which products are more popular and when products are being purchased). This would provide useful information for FFTY’s operational plans.
- Weakness: Jim has used internal sources of information only.
- Implication: Data could be incomplete, as external sources (eg industry statistics) are valuable in helping to interpret results.
- Recommendation: Use industry statistics. They can be used to understand if FFTY is making good decisions (eg is FFTY’s strategy of keeping prices stable throughout the year different/same as its competitors).
(Note: For this AO, 3 IER and 3 WIR items were enough to get C. To be able to answer this AO, you needed to know the rest of the case and key case facts. Notice that I’m keeping the “issue” and “weakness” lines short; most of the marks are in the “explanation” and “recommendation”, you should focus on these. Though I wrote in bullet form, using two tables is better.)
CPA Canada will continue to test more DAIS in PEP and CFE exams, as the importance of analyzing data and innovating processes continues to emerge. To get extra resources on DAIS, check out my PEP and CFE courses.