Financial Analysis A2

Question 1

Meaning of income statement

Answer 1

-at end of each accounting period— usually one year— finance dep will draw up the financial statement of bst
-Is an essential bst process as the summary of financial transactions will allow the bst to assess their bst performance+ make future decisions

-Income statement is- 1 part of these financial statements—-which calculates the profit or loss that the bst generates from their activities
-also known as profit or loss account

Question 2

What are the four uses of income statement

Answer 2

-1 can be used to measure+ compare performance of bst overtime-with other firms
2 actual profit— can be compared with budgeted profit level of bst
3 bankers+ creditors will need the info to help decide whether to lend money to bst
4 prospect investors— will use the profit performance of bst as a guide to whether to buy shares in it or not

Question 3

Are the two types of profit?

Answer 3

-high-quality profit— profits that can be repeated and sustained
-Low quality profit- — profits that cannot easily be repeated+ sustained

Question 4

What are the contents of income statement?

Answer 4

-trading account
-Appropriation account

Question 5

What falls in the trading account content of the income statement

Answer 5

1) sales revenue— is the income to a bst during a period of time from the sales of goods+ services

2) cost of goods sold—-is the cost of purchasing goods or buying in the goods actually sold by business during a time period

3) gross profit—-made when sales revenue is greater than cost of good sold

4) operating profit —-also known as net profit- —-gross profit-expenses

5) profit for the year—-operating profit-interest costs and corporation tax

Question 6

Explain the appropriation account content of the income statement

Answer 6

-shows how the profit for the year is distributed btw the owners— in the form of dividends (share of profit paid to the shareholders) + retained earnings (profit left after all the deductions-including dividends)

Question 7

How are amendments of the income statement made?

Answer 7

-The accountants often have to make adjustments to the accounting statement— that they are preparing
-This is when new financial data becomes available— or when one of the key variables used in financial.s changes
— then a revised statement might have to be producedw

Question 8

Explain the change of
-Increase in price-demand for products in elastic
Explain the impact on statement of profit or loss

Answer 8

-Revenue+ gross profit+ profit from operations+ profit before tax+ profit for the year+ retained earnings—-will all increase

Question 9

Explain the impact of change of
increase in direct cost per unit in the statement of profit or loss

Answer 9

-cost of sales will increase
-Gross profit+ profit from operations+ profit before tax+ profit for the year will all fall

Question 10

Explain the impact of
change of increase in expenses on the statement of profit or loss

Answer 10

-profit from operations+ profit before tax+ profit for the year+ retained earnings— will all fall

Question 11

Explain the impact of
-The change of reduction in the rate of profit (corporation) tax on the statement of profit or loss

Answer 11

Profit after tax+ retained earnings will increase

Question 12

Explain the impact of the change
-Directors decide to increase dividends
On the statement of profit or loss

Answer 12

-retained earnings will fall

Question 13

What is the meaning and purpose of statement of financial position?

Answer 13

-statement of financial position— is one part of financial statements— which records the value of the assets+ liabilities— that the business owes and owns

-Statement basically records net worth or shareholders equity of a bst— at one moment in time
-bst — aims to maximise the shareholders equity-by raising the value of assets owned by more than the increase in value of its liabilities

Question 14

What are the contents of SOFP

Answer 14

1 assets
2 liabilities
3. Shareholders equity.

Question 15

Explain assets and non-current assets and current assets

Answer 15

-assets— those items of value which are owned by the business
-Maybe non-current or current assets

Non-current assets— asses that are kept+ used by the business for more than a year
-Maybe tangible such as land+ buildings—-may be intangible such as patents+ copyrights etc
-Intangible assets also become a part of the firms intellectual capital that is the amount by which the market value a firm exceed its tangible assets less liabilities

-Current assets — assets likely to be turned into cash before one year

Question 16

Explain current liabilities and non-current liabilities

Answer 16

Liabilities— financial obligation of a bst— that is required to be paid in the future

-Current liabilities—-debts of business that will usually have to be paid within one year
-non-current liabilities— value of debt of business that will be payable after more than a year

Question 17

Explain shareholders equity

Answer 17

-is represented by the shareholders funds— in the form of share capital+ retained earnings+ other reserves

Question 18

Explain the amendments of SOFP

Answer 18

-when preparing a new SOFP— it is common to start with the statement for the end of previous financial year— then make amendments to it
-There has to be a balancing double entry adjustment— to make sure that this statement still balances (total assets equals to shareholder equity+ liabilities)

Question 19

cause
-sale of inventories for cash for the same price as valued in the accounts
What is the impact of SOFP and what is the balancing entry in the accounts

Answer 19

1 value of inventory will fall
2 cash balance will increase

Question 20

Cause
-sale of inventories for cash at a higher price, than valued in the accounts
What is the impact on SOFP
What is the balancing entry in the account

Answer 20

-Value of inventory will fall
-Shareholders equity increase by the value of the profit recorded + cash balance increase

Question 21

Cause
-depreciation of equipment
What is the impact on SOFP
What is the balancing entry in the account

Answer 21

1 value of non-current assets will fall
2 shareholders equity will fall-as company is now worth less than before

Question 22

Cause of amendment
-intangible assets-such as intellectual property are revalued
What is the impact on SOFP
What is the balancing entry in the account?

Answer 22

1 value of non-current asset will increase
2 value of shareholder equity increase

Question 23

Cause of amendment
-trade paybales ask for immediate payment
What is the impact on SOFP
What is the balancing entry in the account?

Answer 23

-1 value of trade papers will fall
2 Cash balance will decline

Question 24

Cause of amendment
-additional shares are sold and the share capital raised is used to buy property
What is the impact on SOFP
What is the balancing entry in the account?

Answer 24

1 value of share capital will increase under shareholders equity
2 value of property non-current asset will increase

Question 25

Explain the relationship between the financial statement By explaining the change on statement of profit or loss = the change on statement of financial position 

Answer 25

-retained earnings are made during the year————shareholder equity increases+ cash increases (if retained earnings are in cash form) -Losses made during year—— shareholder equity falls+ cash falls or non-current liabilities increased to cover the loss -non-current assets are depreciated+ this is recorded as an expense — — - - -Shareholder equity falls+ value of non-current asset falls -value of closing inventory is reduced— as it is now out of date— this increases sales cost + GP and retained profits will fall—————inventory evaluation falls (ca) + shareholder equity falls

Question 26

Explain inventory valuation

Answer 26

-inventories are unsold goods -Might also be in the form of raw materials+ components that have not yet been into completed units -Accounting standard suggests that inventory should be measured at lower of 1 cost (purchase price or cost of production) 2 net reliable value (nrv) Nrv = estimated selling price-cost to sell

Question 27

What is the role of depreciation in the accounts

Answer 27

-depreciation is the fall in value of non-current assets over a period of time -Mainly due to wear+ tear -through usage+ due to technical advancements -Nearly all fixed assets— will decline in value over a period of time -Seems reasonable— therefore to record only the value of each year’s depreciation as a cost on each year’s income statement

Question 28

Explain the impact of depreciation on accounts using the straight line method only

Answer 28

- straight line depreciation — is when constant amount of depreciation is subtracted from the value of asset each year Formula is— original cost of asset-expected residual value/useful life of asset -compared to other depreciation methods— straight line is easy to calculate+ understand+ widely used by limited companies -This is used for those non-current assets which are expected to perform at a steady rate-over the years such as furniture -However— this method of depreciation— will require estimations about useful life+ residual value -Any errors in these estimates?— lead to inaccurate depreciation charges being calculated