Financial Statements and Analysis Test - 7

Window dressing is the limitation of accounting which is directly concerned with:

hide some vital information

show items at incorrect value to portray better profitability

may overvalue closing stock to show higher profits

It records all income and expenses of the business relating to the same accounting period,  normally one year,  and show the result of the business in the form of profit or loss.

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.

Government is interest in financial statement analysis to compile the national income,do tax research and to take decisions related to policies of economic interest..

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

When goods are sold on credit and an amount is receivable for such sale of goods or services rendered in the ordinary course of business is classified as Trade Receivable.It consist of debtors and bills receivable.

Contingent liabilities are those liabilities which are not actual liabilities of the business today but may become liabilities of the business in future.

Study of relationship between various items is known as Ratio Analysis. It is represented by a percentage.

A comparative statement is a document that compares a particular financial statement with prior period statements or with the same financial report generated by another company. Analyst and business managers use the income statement, balance sheet and cash flow statement for comparative purposes.

Partnership firm's balance sheet is a T format balance sheet where capital and liabilities are shown on left hand side and assets are shown on right hand side. There is no need of sub dividing assets and liabilities into sub heads. A Company's balance sheet has a vertical format under which assets,liabilities and capital has to be sub divided into sub headings like shareholders fund,non current assets,current assets,current liabilities etc.

Internal Analysis is conducted by the management and analysis conducted by the creditors, bankers and government agencies is called external analysis.

Non-operating expenses refer to the indirect expenses relating to the principal revenue generating activities of the enterprise.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.

 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.

These are the short term assets held by the company for a short period,  less than one year. These assets keep rotating throughout the year.  Present asset gets consumed or gets converted into cash and new assets comes into business.  Unlike fixed assets,  its balances keep changing several times in a year.

Following formula is used to calculate the Gross Profit: Gross Profit = Net revenue from operations – Cost of goods sold

Public is interested in analysis of financial statements because they use the data for research and to understand the system of preparing financial statement.

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.

When a liability is due to be settled within 12 months form the closing date of previous accounting period it is shown under the current liabilities.

Loss on sale is a non operating expense Following are the examples of operating expenses:   Selling and Distribution expense,  Cash discount allowed to customers,Bad debts and Provision for doubtful debts

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

A cash flow statement is concerned with the inflow and outflow of cash under operating activities,investing activities and financing activities as per AS-3.

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