For this purpose, historical figures must be multiplied with the conversion factor. 0000006175 00000 n Ratio analysis is formed by the ratios of certain items from the financial statements and is the most common method of financial analysis. 0000004057 00000 n The crux of the current cost accounting technique is the preparation of financial statements (Balance Sheet and Profit and Loss Account) on the current values of individual items and not on the historical or original cost. Analysis and interpretation of financial statements help in determining the liquidity position, (c) For purchases of previous year—the average index of the relevant year. But adopting the replacement cost accounting technique will mean using a number of price indices for conversion of financial statements and it may be very difficult to find out the relevant price index to be used in a particular case. The British Government had appointed a committee known as Sandilands Committee under the chairmanship of Mr. Francis C.P. As for sales are concerned, it is current revenue and out of the costs, all operating expenses are current costs. The changes in the price levels disturb the working capital position of a concern. %PDF-1.4 %���� The following are the Balance Sheets of XYZ Company Limited. The difference in the balance sheet is taken as reserves after converting the equity capital also. The fixed assets are shown in the balance sheet at their current values and not on historical costs. Valuation 11. Profit is calculated as the net change in reserves, where equity capital is also converted; and will be equal to net change in equity, where equity is not converted. 0000001803 00000 n 0000002261 00000 n 0000005227 00000 n It proves that we have been charging less depreciation which resulted in overstatement of profits and higher payment of dividends and taxes in the past and insufficient funds now to enable the replacement of the asset. In case depreciation is charged on original cost, after 10 years we shall have Rs 1, 00,000 from the total depreciation provided. They are briefly explained below. 5551 24 This backlog depreciation should be charged to Revaluation Reserve Account. (i) To calculate the amount of depreciation up to 2000 on Historical Cost and Current Purchasing Power basis and. Current Purchasing Power Technique: Current Purchasing … Understanding the different types of financial analysis is crucial in making informed business decisions. Financial Statement Analysis is the examination of both the relationships among ... SEARS, ROEBUCK AND CO. Net sales (in million) in relation to base period 1993 ... – A free PowerPoint PPT … Its replacement cost was Rs 18, 00,000 on 1.1.2009 and Rs 20, 00,000 on 31.12.2009. Liquidity ratios don't take credit worthiness and borrowing capacity into consideration. See, it is possible to effectively present financial statements, results, or analysis. For conversion of such items, average index of the year can be taken as the one index for all such items. 0000009483 00000 n The financial statement applies tools, analytical techniques and required methods for business analysis. Disclaimer 9. Sets and Functions This introductory chapter is devoted to general notions regarding sets, functions, se-quences, and series. 0000002119 00000 n The amounts of such items are fixed, by contract or otherwise in term of rupees, regardless of change in the general price level. The consumer price index or the wholesale price index prepared by the Reserve Bank of India can be taken for conversion of historical costs. Calculate the amount of depreciation adjustment. Revenues are probably your business's main source of cash. Clipping is … Non-monetary: items include items such as stocks, land, building, plant and machinery, etc. Mechanism of Preparing Financial Statement under CPP Method: Current Purchasing Power Method (CPP) requires conversion of historical figures at current purchasing power. The purpose of charging depreciation is twofold: (i) To show the true and fair view of the financial statements and the profitability of the concern, and. (4) The fixed assets should not be written-up in the balance sheet when the prices are not stable. Variance balance sheet and profit and loss account are adjusted with the help of recognized general price index. It helps in presenting the financial statements in terms of a unit of measurement of constant value when both cost and revenue have been changing due to changes in the price levels. 1 This guide is designed to be useful for both beginners and advanced finance professionals, with the main topics covering: (1) income statement, (2) balance sheet, (3) cash flow, and (4) rates of return. 6. This could be done by horizontal analysis which compares two or more years of financial data in both Rupee and percentage form and vertical where each category of accounts on the balance sheet is shown as a percentage of … FINANCIAL ANALYSIS CURRENT RATIO Current Ratio was less than 100% for all 3 firms in this study, except in Year 2000. Further, the replacement cost accounting technique provides for an element of subjectivity and on this ground it has been criticized by various thinkers. For adjusting the figures for price level changes the following indices are applied: (a) For current purchases—the average index of the year. The examples of such items are cash, debtors, bills receivables, outstanding incomes, etc., as assets and creditors, bills payable, loans etc., as liabilities. Hence, it may not be possible to charge depreciation on replacement cost basis. Financial Statement Analysis
Chapter - 4
2. 5551 0 obj<> endobj This adjustment depends upon the method adopted for the outflow of inventories, viz., first-in-first-out or last-in-first-out. The replacement cost of the assets on 31st December is Rs 80,000. The surpluses arising out of revaluation are transferred to Revaluation Reserve Account and are not available for distribution as dividend to the shareholders. Trend Ratios or Trend Analysis. In this financial risk management course, you have learned about various types of financial risk and analysis techniques for evaluating risk. Depreciation can be calculated on converted values. ‘Gearing adjustment’ is also a financing adjustment like COSA and MWCA. Dollar analysis is the first way method of horizontal financial analysis in which the amounts in absolute dollars of various items are compared for an entity over different periods of time. Rs 1, 00,000 and Rs 1, 50,000 respectively. The main objective of this method is to take into consideration the changes in the value of money as a result of changes in the general price levels. Hence, adjustment of inventory and cost of sales is very important. Financial statement analysis embraces the methods used in assessing and interpreting the result of past performance and current financial position as they relate to … Current Purchasing Power Technique (CPP) 2. Current Cost Accounting (CCA). Replacement Cost Accounting (RCA) Technique is an improvement over Current Purchasing Power Technique (CPP). Plagiarism Prevention 4. The horizontal analysis measuresthe financial statements line of items with the base year. Rates of Return 10. Exhibit 2: In this method also, like replacement cost accounting technique, it is very difficult to determine relevant current values and there is an element of subjectivity in this technique. Further, if assets and liabilities are converted as stated above, it may be found that a loss or gain arises from the difference of the converted total value of assets and that of liabilities. trailer The closing stock enters current purchases opening stock enters into cost of sales. Sandilands to consider and recommend the accounting for price level changes. (iii) In a country like India, even the price indices may not be correct and it may further cause inaccurate presentation of the financial statements. 1. Historic analysis - Financial statements • P&L or income statement: Net Operating Profit (NOP, Gross returns - tot operating expenses), Profit before Tax, Net Profit after Tax (NPAT). Image Guidelines 5. People who analyze the financial statements of a company include company executives, competitors, creditors, managers and potential investors. FINANCIAL STATEMENT ANALYSIS By Dr. B. Krishna Reddy Professor and Head_SKIM 2. 0000004209 00000 n Cost of sales adjustment can be calculated with the help of the following formula: Calculate the ‘Cost of sales adjustment’ (COSA) from the following: A machine was purchased on 1.1.2004 at a cost of Rs 10, 00,000 and its useful life was estimated to be 10 years. Methods of Financial Statement Analysis: Academically, we are all aware of common size analysis which is restating the financial information in a standardized format. The Glamour Corporation has prepared the following comparative position statement (unadjusted): Assuming that all sales and purchases were made at an average of the period, beginning and ending price indices. Report a Violation, Main Methods for Translation of Financial Statements | Financial Analysis, Price Level Accounting: Advantages and Disadvantages | Financial Analysis, Top 6 Advantages of Human Resource Accounting. 0 Depreciation charged on historical or original cost does not serve any of the two purposes. (1) It is not possible to find accurately the replacement cost till the replacement is actually made. Identify the industry economic characteristics. (i) Current Cost of Sales Adjustment (COSA): Under the CCA technique, cost of sales are to be calculated on the basis of cost of replacing the goods at the time they are sold. 1. Statement of Changes in Working Capital. Cons – The company operates in the industrial cycle and if the industry is downgrading in spite of the company is performing better, due to specified factors that affect the industry; trend analysis will show … 0000003179 00000 n 0000004920 00000 n But adopting replacement cost method is also not free from difficulties. In addition to the balance sheet and profit and loss account, an appropriation account and a statement of changes is prepared. The method of calculating MWCA is the same as that of COSA. In the Replacement Cost Accounting technique the index used are those directly relevant to the company’s particular assets and not the general price index. Financial statement analysis according to modus operandi include Horizontal and vertical analysis. Financial planning and analysis (FP&A) is a decision-making platform that includes reporting and analysis, planning and budgeting, forecasting, and financial modeling, and is a big part of the management accounting body of knowledge. Helps in judging the solvency i.e. Purchases, sales and other expenses which are incurred throughout the year are converted at average index. Ratio Analysis: Ratio analysis is the most widely used tool of financial statement analysis. Financial statement analysis often points to areas in which additional data must be gath-ered, including details of significant transac-tions, market share information, competitors’ plans, and customer demand forecasts. Current Value Accounting Technique: Method of Price Level Accounting # 4. In this method the various items of financial statements, i.e. Inventories or stocks are valued in the balance sheet at their current replacement costs on the date of the balance sheet and not cost or market price whichever is lower. 0000010514 00000 n Content Guidelines 2. If you want to see more examples of visuals, here’s a whole page of examples for financial topics organized by type of message you want to communicate.I also have articles on each of the three key financial statements: Income/P&L, Balance Sheet, and Cash Flow. This type of analysis helps analyze the spending trend of a business. 6. As depreciation under CCA is provided on current cost, the method prevents overstatement of profits and keeps the capital intact. The results may be shown either as an index (e.g. Scenario & Sensitivity 12. If such an average is not available, the index of the mid-year is taken for this purpose. The effect of holding monetary items in terms of gains and losses having an impact on the finance of the business is also highlighted. Common Size Statements. The current cost accounting (CCA) technique has been preferred to the current purchasing power (CPP) technique of price level accounting as it is a complete system of inflation accounting. The concept of backlog depreciation can be followed with the help the following illustration: Compute the backlog depreciation from the information given in illustration 14. This adjustment reduces the total adjustment for cost of sales, depreciation and monetary working capital in the proportion of finance by borrowings to the total financing. Average Analysis. Revenues. The first step toward improving financial literacy is to conduct a financial analysis of your business. Sometimes it is possible that there may be an increase in the general price index, but there may not be any increase (rather there might be a decrease) in the value of a particular asset of a certain company. Leverage 4. Replacement Cost Accounting Technique (RCA) 3. The general price index in 2000 (base year) was 100: in 2006,200 and in 2011 it was 300. 1 1 13 Financial Statements Analysis and Interpretation Application of analytical tools Involves transforming data Reduces uncertainty Basics of Analysis Internal ... – A free PowerPoint PPT presentation (displayed as a Flash Current Cost Accounting (CCA). Financial statements are used as a management tool primarily by company executives and investor’s in assessing the overall position and operating results of the company. Financial statements are prepared to have complete information regarding assets, liabilities, equity, reserves, expenses and profit and loss of an enterprise. %%EOF In this sense the replacement cost accounting technique is considered to be a improvement over current purchasing power technique. The computation of monetary gain or loss can be followed with the help of the following illustrations. Profitability 6. Common-Size Statements 3. Trend Ratios 4. startxref Financial analysis is not an exact science for business owners. Therefore, there are three objects of financial statement analysis: financial position, operating results and cash flow. Other assets and liabilities, the values of which do change or are subject to reassessment along-with the change in the purchasing power of money are called non-monetary items or real value assets and liabilities. From the information given below, ascertain the cost of sales and closing inventory under CPP method, if (i) LIFO and (ii) FIFO is followed: Profit under Current purchasing Power (CPP) accounting can be ascertained in two ways: This method is based on the normal accounting concept that profit is the change in equity during an accounting period. Pros – It helps to analyze the growth of the company from year on year or quarter on quarter with the increase in operations of the company. 0000000795 00000 n Current Value Accounting Technique (CVA) 4. This loss or gain arises through monetary items or money value assets and liabilities i.e., cash, debtors, receivables, creditors, bills payable, etc., and not through real value assets and liabilities or non-monetary items. Financial statements are official records of the financial actions of a company, firm or other unit over a period of time which provide a general idea of a company or To adjust such profit or loss on account of borrowings, ‘gearing adjustment’ is required to be made. Under first-in-first out method (FIFO) cost of sales comprise the entire opening stock and current purchases less closing stock. Gearing adjustment can be calculated with the help of the following formula: Before publishing your articles on this site, please read the following pages: 1. (iv) Monetary Working Capital Adjustment (MWCA): Working capital is that part of capital which is required to meet the day to day expenses and for holding current assets for the normal operations of the business. Financial analysis helps managers with effi ciency analy-sis and identifi cation of problem areas within the fi rm. 7. Symbolically. 0000005149 00000 n Method of Price Level Accounting # 1. Highlighted are some of the important ways of financial risk analysis. The following points highlight the four methods of price level accounting, i.e., 1. 1. Current Cost Accounting Technique. (a) Prepare comparative position statements for January 1,2011 and December 31, 2011, where all items are expressed in terms of rupees of the value of December 31, 2011; (c) Prepare an income statement that shows all items in rupees of year-end purchasing power. First, determine a value chain analysis for the industry—the chain of activities involved in the creation, manufacture and distribution of the firm’s products and/or services. Financial analysis may be classified into different categories depending upon: (i) The materials used, and (ii) The method of operation followed in the analysis. The closing inventory in LIFO is out of the purchases made in the previous year. Hence, to rectify this, it is necessary that fixed assets are valued at replacement cost values and depreciated on such replacement cost values. Financial Risk Management Methods and Techniques: A firm needs to understand the intensity and types of potential risks it is prone to. The most common types of financial analysis are: 1. Academia.edu is a platform for academics to share research papers. 0000002607 00000 n Financial statement analysis is the process of analyzing a company's financial statements for decision-making purposes. In the Current Value Accounting Technique of price level accounting all assets and liabilities are shown in the balance sheet at their current values. Financial Statements As mentioned, there are three main financial … Current Purchasing Power Technique of accounting requires the companies to keep their records and present the financial statements on conventional historical cost basis but it further requires presentation of supplementary statements in items of current purchasing power of currency at the end of the accounting period. Financial statement analysis types & techniques 1. Financial Analysis and Appraisal of Projects Chapter 3, Page 2 of 43 3.1.4 These Guidelines holistically addresses project appraisal from a financial perspective. One of the major weaknesses of Current Purchasing Power technique is that it does not take into account the individual price index related to the particular assets of a company. The financial statements prepared under this technique provide more realistic information and make a distinction between profits earned from business operations and the gains arising from changes in price levels. (c) It does not hold good during the periods of depression. Introduction
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