Statement Analysis Tools and Accounting Ratios Test - 4

Formula of Calculating Working Capital: Working Capital = Current Assets – Current Liabilities

Companys can disclose information regarding aggregate expenditure and income on this items.

External analysis is done on the basis of published financial statements by those who do not have access to the accounting information, such as stock holders, banks, creditors, and the general public.

It is a capital loss, therefore do not comes under any expense category.

Solvency ratios indicates the company's ability to meet long term debts while quick ratio indicates the company's ability to meet short term debts.

Accounting Ratio is also called financial ratios provide a way of expressing the relationship between one accounting data point and another which is intended to provide a useful comparison.

Financial statement analysis is a post mortem of business transactions. Because it involves analysis of each and every transactions in detail.

Common Size financial statement is Vertical Analysis of financial statements in which each account is expressed as a percentage of the value of sales. It enables easy analysis between companies or between time periods of a company.

Liquid Ratio is also known as Acid Test Ratio which helps in assessing the short term liquidity position of the firm.

Loan taken for more than one year can be termed as long term borrowings

Current assets will reduce by that much amount as cash is paid and liabilities will reduce by that amount as outstanding liabilities will decrease

Low working capital turnover ratio indicates that the working capital of business is under-utilized. It means firm is investing in too many account receivable and inventory to support its sales.

Financial statement analysis is of two types i.e. External and internal analysis. External analysis is concerned with comparing business with other firm. Internal analysis undertaken by the mangement of the company to monitor its financial and operating performance.

Quick assets are the assets which can be converted into cash in a short term.

Accounting Ratios can be expressed as follows:

a) Simple or pure ratio

b) Percentages

c) Rate

Rent received is shown as other income and it is added to the revenue from operations to find out the total revenue.

Quick Assets do not include inventories because it cannot be converted into cash quickly ie., illiquid asset

Deferred tax asset is treated as a fictitious asset because it doesn’t play any role in the firm. It refers to a situation where a business has overpaid taxes or taxes paid in advance. These are eventually returned to the business.

An ideal current ratio is 2:1. It means a business must try to maintain its current assets twice of current liabilities. High ratio indicates under trading and over capitalisation.

Ratio Analysis is a tool used by individuals to conduct a quantitative analysis of information in a company's financial statements.