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Q1 State the meaning of financial statement analysis? Ans: Financial statements analysis includes gaining an idea of an entitys financial situation by analysing the financial statements of the company. You will use three main financial statements—statement of income, balance sheet and cash flow statement. Analysis of these financial statements is also submitted to the board of directors and senior management committees. They use the information in their decision- making process as input. This research is also used by third stakeholders, such as regulatory authorities and investors, to gain insight into the organisation.
Q2 What are limitations of financial statement analysis? Ans: Limitations of financial statement analysis:
1. Not a Substitute of Judgement An analysis of financial statement cannot take place of sound judgement. It is only a means to reach conclusions. Ultimately, the judgements are taken by an interested party or analyst on his/ her intelligence and skill.
2. Based on Past Data Only past data of accounting information is included in the financial statements, which are analyzed. The future cannot be just like past. Hence, the analysis of financial statements cannot provide a basis for future estimation, forecasting, budgeting and planning.
3. Problem in Comparability The size of business concern is varying according to the volume of transactions. Hence, the figures of different financial statements lose the characteristic of comparability.
4. Reliability of Figures Sometimes, the contents of the financial statements are manipulated by window dressing. If so, the analysis of financial statements results in misleading or meaningless.
Q3 List any three objectives of analysing financial statements? Ans: 1. Assessment of Past Performance and Current Position
2. Prediction of Net Income and Growth Prospects
3. Prediction of Bankruptcy and FailureQ4 State the importance of financial statements to (i) shareholders (ii) creditors (iii) government (iv) investors Ans: (i)Shareholders- They are interested in assessing the profitability and viability of the capital invested by them in the business. The financial statements prepared by the business concerns enable them to have sufficient information to assess the financial performance and financial health of the business.
(ii) Creditors- Creditors are interested in the financial statements of businesses to learn about the status of their going concern, profitability, financing, liquidity, and cash flow. An entity is a going concern if it is likely to remain in business for the foreseeable future without going into bankruptcy.
(iii) Government- As a business owner, your financial statements offer valuable
information about your companys overall financial position, such as areas of
financial strength or weakness. Financial statements are important to tax authorities to ensure the accuracy of taxes and additional duties declared and
paid by your company.(iv) investors- Financial statements are important to investors because they can
provide enormous information about a companys revenue, expenses,
profitability, debt load, and the ability to meet its short-term and long-term
financial obligations.Q5 How will you disclose the following items in the Balance Sheet of a company; (i) Loose tools (ii) Uncalled liability on partly paid-up shares (iii) Debentures redemption reserve (iv) Mastheads and publishing titles (v) 10% debentures (vi) Proposed dividend (vii) Share forfeited account (viii) Capital redemtion reserve (ix) Mining rights (x) Work-in-progress Ans: Disclosure of various items in the Balance Sheet of a company is given below.
Items
Main Head
Sub-Head
(i)
Loose Tools
Current Assets
Inventories
(ii)
Uncalled liability on partly paid-up shares
Contingent Liability and Capital Commitments
Capital Commitments
(iii)
Debentures Redemption Reserve
Shareholders’ Funds
Reserve and surplus
(iv)
Mastheads and publishing titles
Non-Current Assets
Fixed Assets – Intangible assets
(v)
10% debentures
Non-Current Liabilities
Long-Term Borrowings
(vi)
Proposed dividend
Current Liabilities
Short-Term Provisions
(vii)
Share forfeited account
Shareholders’ Funds
Subscribed Capital (to be added)
(viii)
Capital Redemption Reserve
Shareholders’ Funds
Reserve and surplus
(ix)
Mining Rights
Non-Current Assets
Fixed Assets – Intangible assets
(x)
Work-in-progress
Current Assets
Inventories