Financial Statements and Analysis Test - 31

Claim against the company not acknowledged as debt is shown as contingent liability after preparing the balance sheet. It is shown as a footnote to the balance sheet. Contingent liabilities are those which may or may not arise as they are dependent on happening in future.

Computer software is an intangible asset. It shown under the heading of Fixed Assets and sub heading Intangible Assets.It does not have physical existence and gives benefit for more than one accounting period.

Work in progress is shown under the heading of current assets and sub heading Inventories.Work in progress is semi finished stock of goods held for purpose of trade in moral course of business.So they are shown under inventories under current assets. But capital work in progress is shown under the fixed assets.

Analysis made by external users on the basis of published financial statements is called external analysis. Only an external user may have to use published statements; an internal user has access to all accounting records, he would not have to depend on and wait for the information to be published and they can do internal analysis throughout the year.

Cross sectional analysis is the analysis of a financial ratio of a company with the same ratio of different companies in the same industry. For example, one may conduct a cross-sectional ratio analysis of the debt ratios of multiple companies in the telecommunications industry. Quite simply, one does this by taking the debt ratios of each company and comparing them to one another. An analyst does this in order to find the company with healthiest financial status. This is helpful in making informed investment decisions.

Comparative financial statement is an example of Horizontal analysis because it requires comparative financial statements of two or more accounting periods.

Vertical analysis is used for cross section analysis.Vertical analysis is analysis and review for single year. Cross section analysis is comparing 2 firms at same point of time.

Operating cycle is the number of days a company takes in realizing its inventories in cash. It equals the time taken in selling inventories plus the time taken in recovering cash from trade receivables. It is called operating cycle because this process of producing/purchasing inventories, selling them, recovering cash from customers, using that cash to purchase/produce inventories and so on is repeated as long as the company is in operations.

Inventories include the following items except Patents:

Work-in-progress

Goods acquired for trading

Stores and spares

A patent is a government license that gives the holder exclusive rights to a process, design or new invention for a designated period of time.

All assets are shown in the order of permanence i.e. Fixed Assets will come first,then investments , then current assets and liquid assets.