Financial Statements and Analysis Test - 5

Rent received, Profit on sale of fixed assets, Compensation for acquisition of land are example of Non-operating incomes.Non-operating income is the portion of an organization's income that is derived from activities not related to its core operations. 

Following Items that can be shown as contingent Liabilities in a company‘s Balance sheet except Advance to Subsidiaries.

1)Claims against the Company not acknowledged as debts

2)Uncalled Liability on partly paid shares.

3)Arrears of Dividend on Cumulative preference shares

Contingent liabilities are those which may or may not arise as they are dependenT on happening in future.

Following are the limitations of financial statement analysis:

•Don't reflect changes in price level.

•Affected by the personal ability and bias of the Analyst

•Single years' Analysis of financial statement have limited use.

Break-even point is a point where total of sales is exactly equal to the total of cost to the total of cost of sales.

Shareholders fund is divided into the following parts:

Share Capital

Reserves and Surplus

Money received against share warrant

The main objective of analysis of financial statement is to measure the financial strength and performance  of the firm.

Because it is a liability repayable normally within 12 months. 

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.

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.

Non-operating income, in accounting and finance, is gains or losses from sources not related to the main activities of the business.

Non-operating income is the portion of an organisation's income that is derived from activities not related to its core operations. Non-operating income can include such items as dividend income, profits and losses from investments, gains or losses incurred due to foreign exchange, asset write-downs and other non-operating revenues and expenses

Internal analysis is done by the management to analyse financial position and performance. The analysis done by the shareholders, bankers and creditors is called external analysis.

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. 

Shareholders are interested in the analysis of financial statement because they want to judge the present and future earning capacity of the business. They want to know whether their investment would yield how many returns.

Because it is in the form of a short term loan from bank repayable within 12 months. 

Financial year always begins on 1st April  of current year and ends on 31st March in the next year.

Horizontal analysis is a time series analysis because it shows comparison of financial data for several years.

Intra-firm comparison means comparison of two or more departments or divisions of the same business unit with the objective of meaningful analysis in order to improve the operational efficiency of all the departments or divisions.

Analysis conducted by the Investors and Creditors is known as External Analysis because they both are treated as outsiders.