Financial Statements and Analysis Test - 2

Goodwill is an intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company's brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill.

Because it is a liability repayable normally within 12 months.

Classification of items:

Preliminary Expense --- Fictitious Asset

The expenses incurred when a company is formed and before the start of any business operations are termed as preliminary expenses, they are a good example of fictitious assets which are written off every year from the profits earned by the business.

Preliminary expenses include Legal cost, Professional fees, Stamp duty, Printing fees, etc.

Preliminary expenses are shown on the Assets side of the balance sheet.

Following are the non-operating expenses:

Interest on long term debts

Loss on sale of fixed assets

Intangible assets written off such as goodwill, patents etc.A non-operating expense is an expense incurred by a business that's unrelated to its core operations. The most common types of non-operating expenses relate to depreciation, amortization, interest charges or other costs of borrowing. 

Statement of Profit and Loss is prepared to assess the net profit or net loss of the firm.

Sales appear in the Statement of Profit and Loss and the following items are shown in the balance sheet:

•Creditors

•Goodwill

•Trade Payables

Loose Tools are shown under the heading of Inventories. Loose Tools are current assets of the company.

Loose Tools are Current Assets, with high turnover. Unlike other Assets these tools go useless very fast, besides they are used in production of something else with direct process.

Example: Screw drivers

Stores and spares comes in balance sheet under the heading Inventories. Following items do not take place in Balance Sheet:

•Sales

•Purchase

•Expenses

Sales ,Purchases and Expenses are a art of Statement of Profit and Loss,not Balance Sheet.

Statement of profit and loss shows whether the enterprise is earning adequate profits and whether the profits have increased or decreased as compared to previous years whereas balance sheet shows the position of the business as regards to the payment of its short term as well as long term liabilities. Different ratios are also calculated. Hence, to assess the profitability and solvency is one of the objective of the financial statement analysis.

Other options i.e. historical analysis, ignores price level changes, ignores qualitative aspect are the limitations of financial statement analysis.

Various figure of single year Financial Statement are converted in to percentage with respect to some common base. In Income Statement, sales is taken as base (i.e.100) where as in Balance Sheet total assets are taken as base.