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Financial Statements
A financial statement is a record of the financial activities of a person or business entity where all related financial information are presented in an orderly manner and can be easily understood.
5,583 Questions
What are the qualitative characteristics of accounting information?
1 Relevance
2 Reliability
3 Comparability
4 Understandability
What is finalization of accounts?
Finalization of accounts is to prepare financial reports along with comparision and brefing of company's financial reports include (Income Statement, Cash flows, Balance Sheet, Statement Chages in Equity, Policies and disclousers) .
What are the limitation of Historical Cost accounting?
Limitations of historical cost accounting include :
• Depreciation charged on historically costed assets is only an arbitrary amount based on out-of-date values and estimated useful economic lives.
• Depreciation charges do not take into account actual replacement cost of assets at current prices.
• Profit will not reflect the actual 'costs' of trading, which include the replacement of assets at some point in time.
• By not accounting for inflation, there is no assurance that the entity is maintaining its capital base.
• Overstating profits by undercharging depreciation based on historical cost, and charging cost of sales at historical cost of inventories (and not current cost) can lead to the depletion of an entity's capital through high tas charges and distributions.
• While historical cost accounting provides a consistent basis for entities to prepare accounts, inflation affects different products and markets, and hence entities, to different degree.
• Historical cost accounting makes it difficult for shareholders and analysis to assess the real performance and abiliry of mamagement because changes to current market conditions are not accounted for in the historical valuation basis.
• The true valuation of entities is difficult to assess under historical cost rules.
• Interpretation of accounts over a period of time is difficult because each year relates to different purchasing powers.
• Key ratios (such as return on total assets) are inflated under historical rules because profit is overstated (as outlined...
Advantages of preparing consolidated financial statements?
Advantages of preparing consolidated financial statements? Consolidation Principles and Investments - Majority-owned, controlled subsidiaries are consolidated. The equity method is used to account for investments in affiliates in which the company exerts significant influence, generally having a 20 to 50 percent ownership interest. The company also uses the equity method for its 50.1 percent and 57.1 percent non-controlling interests in Petrozuata C.A. and Hamaca Holding LLC, respectively, located in Venezuela because the minority shareholders have substantive participating rights, under which all substantive operating decisions (e.g., annual budgets, major financings, selection of senior operating management, etc.) require joint approvals. Undivided interests in oil and gas joint ventures, pipelines, natural gas plants, certain transportation assets and Canadian Syncrude mining operations are consolidated on a proportionate basis. Other securities and investments, excluding marketable securities, are generally carried at cost. Shacnii Ms. Asma
What is the purpose of depreciating an asset on one's financial statement?
Depreciable assets include those assets that are capitalized i.e. not expensed. Examples include buildings, capital equipment, and the like. Depreciation allows someone to invest in these items and not subtract the full value of that investment in the first year, since the investment retains value over the years. Book depreciation is different from tax depreciation which is different from actual depreciation. Items that are commonly expensed are advertising expense, software expense, and research and development expenses (sometimes). Assets that are neither expensed nor depreciated, but just sit on the balance sheet, include raw land and goodwill.
Deferred tax assets is a companies asset that may reduce their income tax expenses. These can arise from net loss carryovers and can be applied to future fiscal periods.
What is an example of a revenue center?
you should meet Mr Jose at Sunderlan University to get answer for this question
Why is it important to keep good records from the start?
You will need them at the very least for tax purposes and it is very expensive and sometimes impossible to completely reconstruct the records later. To do Big things with it if you are a big boss!!
I have all the solutions and the test bank as well.
email me at sanfran.rebel@gmail.com
Why list non cash items on the cash flow statement?
non cash items are adjusted to arrive at actual cash flow from operating activities in indirect method as cash flow statement only deals with cash.
A trial balance is not a conclusive proof of the arithmetical accuracy of the posting?
A Trial Balance only proves that debits = credits. The trial balance cannot tell you if there were mistakes in either the calculation of the entry amounts or in the accounts used for the transaction.
Using external documents such as a bank statement is helpful in ensuring that correct amounts have been posted.
When you get Cash right, you are well on your way.
Advantages of joint-venture over partnership?
If taxed as a partnership why is a joint venture different. why is it not considered a partnership too Can a member of the joint venture spend whatever they want without consulting the other member
What is an error of commission?
An error of commission is one where the person responds or does something where they should not. This is compared to an error of omission, where the person fails to respond or do something when they should.
Wrong totaling, Recording with wrong amount, Wrong posting are examples of errors of commission.
Mistake committed while trying to fulfill the intention of the task
What is the Difference between Gross profit Net profit?
Gross Profit = Sales - Cost of Sales and Direct cost Net Profit = G.P - Indirect Expenses By Cyril Joseph
The Income Statement is the financial report that calculates net income (profits) so that is one place to look for the reason behind low profits. However, if the company doesn't have enough cash or other resources or it has too much debt, it could cause them to miss opportunities for sales or for financing to get the necessary resources.
The structure of the income statement is:
+ Revenue
- Costs of Goods Sold (direct cost of the product sold above)
___________________
= Gross Profit
- Operating Expenses (related to usual costs of running of business)
_____________________
= Operating Profit
+ Other Income (gains on sale of assets or other unusual "money in")
- Other Expenses (losses on sale of assets or other unusual "money out")
______________________
Net Profit (Income)
How can I calculate good will of a company?
Prof. Dicksee has defined goodwill as " When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts." According to J. O. Magee " The capacity of a business to earn profits in future is basically what is meant by the term goodwill." According to Lord Lindley " The term goodwill is generally used to denote benefit arising from connections and reputation." Lord Eldon has defined goodwill as " Goodwill is nothing more than the probability, that the old customers will resort to the old place." In the words of Lord Macnaghten, " Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connections of a business. It is the attractive force, which brings in customers. It is one thing which distinguishes an old established business from a new business at its first start." In the words of Dr. Canning, "Goodwill is the present value of a firm's anticipated excess earnings."
Methods of Valuation of Goodwill
The following are the methods of valuation of goodwill of a firm: - #
# Average Profit Method
# Weighted Average Profit Method
# Super Profit Method
# Capitalization of Average Profit Method
# Capitalization of Super Profit Method
# Present Value of Super Profits
Method 1. Average Profit Method: Under this method goodwill is calculated on the basis of the average profit of previous years. The average profit is multiplied by the number of year's purchase. Goodwill = Average Profit x Number of Years Purchase Example: Calculate goodwill at twice the average profits of last four years' profits. The profits of the last four years were: # # Rs. 27,000 # Rs. 39,000 # Rs. 16,000 (Loss) # Rs. 40,000 Solution: Total Profit for last four years = Rs. 27,000+ Rs. 39,000-Rs. 16,000+Rs. 40,000 = Rs. 80,000 Average Profit = Rs. 80,000/4 = Rs. 20,000.Goodwill = Rs. 20,000 x 2 = Rs. 40,000.
Method 2. Weighted Average Profit Method: This method is a modified version of the average profit method. Under this method the respective number of weights i.e. 1,2,3,4 multiplies profit of every year, in order to find out value product and the total of products is then divided by the total of weights in order to ascertain the weighted average profits. Goodwill = Weighted Average Profits x No. of years Purchase Weighted Average Profit = Total of Products of Profits/ Total of Weights Example: Calculate goodwill at twice the weighted average profits of last four years' profits. The profits of the last four years were:
2001. Rs. 37,000
2002. Rs. 29,000
2003. Rs. 26,000
2004. Rs. 40,000
Solution:
Years Profits Rs. Weight ProductRs.
2001 37,000 1 37,000
2002 29,000 2 58,000
2003 26,000 3 78,000
2004 40,000 4 160,000
Total 10 333,000
Weighted Average Profit = Rs. 333,000/10 = Rs. 33,300 Goodwill = Rs. 33,300 x 2 = Rs. 66,600
Method 3. Super Profit Method: When the actual profit is more than the expected profit or normal profit of a firm, it is called 'Super Profit.' Under this method goodwill is to be calculate of on the following manner: Goodwill = Super Profit x Number of Years Purchase Example: The books of a business showed that the capital employed on January 1, 2001 was Rs. 4,50,000 and the profits for the last five years were as follows: 2001-Rs. 40,000; 2002 -Rs. 50,000; 2003 - Rs. 60,000; 2004 -Rs. 70,000 and 2005 -Rs. 80,000. You are required to find out the value of goodwill, based on three years' purchase of the super profit of the business given that the normal rate of return is 10%.Solution: Total Profit of last five years = Rs. 40,000 + Rs. 50,000 + Rs. 60,000 + Rs. 70,000 + Rs. 80,000 = Rs. 300,000Average Profit = Rs. 300,000/5 =Rs. 60,000 Normal Profit = Rs. 450,000 x 10/100 = Rs. 45,000 Super Profit = Actual/Average Profit - Normal Profit Super Profit = Rs. 60,000 - Rs. 45,000 = Rs. 15,000 Goodwill = Rs. 15,000 x 3 = Rs. 45,000.
Method 4. Capitalization of Average Profit Method: Under this method goodwill is difference between the total Capitalized value of the firm and the net assets of the firm. Goodwill = Capitalized Value the firm - Net Assets Capitalized Value of the firm = Average Profit x 100/ Normal Rate of Return Net Assets = Total Assets - External Liabilities Example: A firm earns Rs. 65,000 as its average profits. The usual rate of earning is 10%. The total assets of the firm amounted to Rs. 680,000 and liabilities are Rs. 180,000. Calculate the value of goodwill.Solution : Total Capitalized value of the firm = Rs. 65,000 x 100/10 = Rs. 650,000 Net Assets = Rs. 680,000 - Rs. 180,000 = Rs. 500,000 Goodwill = Total Capitalized value of the firm - Net Assets Goodwill = Rs. 650,000 - Rs. 500,000 = Rs. 150,000.
Method 5. Capitalization of Super Profit Method: # # Calculate Capitalized value of the firm # Calculate required profit on capital employed by using the following formula: Normal Profit = Capital Employed x Required Rate of Return/100 # # Calculate average profit # Calculate super profit Goodwill = Super Profit x 100/Normal Rate of Return Example: Verma Brothers earn a profit of Rs. 90,000 with a capital of Rs. 4,00,000. The normal rate of return in the business is 15%. Use Capitalization of super profit method to value the goodwill. Solution: Normal Profit = Rs. 4,00,000 x 15/100 = Rs. 60,000 Super Profit = Rs. 90,000 - Rs. 60,000 = Rs. 30,000 Goodwill = Super Profit x 100/Normal Rate of Return = Rs. 30,000 x 100/15 = Rs. 200,000
Method 6. Present Value of Super Profit: Under this method, goodwill is estimated as the present value of the future super profits. The following steps are taken: # # Calculate the future super profits for next years # Choose the required rate of return # Calculate present value factors # Multiply present value factors with future super profits # The sum of product of present value factors and super profits is the value of goodwill. Example: A firm has the forecasted profits for the coming 4 years as follows:
Years Profits Rs.
1 80,000
2 100,000
3 90,000
4 120,000
The total assets of the firm are Rs. 900,000 and outside liabilities are Rs. 300,000. The present value factors at 10% are as follows:
Years Present Value Factor
1 .9279
2 .8029
3 .7056
4 .6978
Calculate the Value of goodwill. Solution: Net Assets = Total Assets - Liabilities = Rs. 900,000 - Rs. 300,000 = Rs. 600,000
Normal Profit = 10/100 x Rs. 600,000 = Rs. 60,000
Years 1
2
3
4
Profits (Rs.) 80,000
100,000
90,000
120,000
Normal Profit 60,000
60,000
60,000
60,000
Super Profit 20,000
40,000
30,000
60,000
Present Value Factor .9279
.8029
.7056
.6978
Present Value of Super Profit 18,558
32,116
21,168
41,868
Goodwill = Rs. 18,558 + Rs. 32,116 + Rs. 21,168 + Rs. 41,868 = Rs. 113,710.
What are the basic financial decisions?
basic financial decisions are three type:
1. Financial Decisions,
2.Investment Decisions,
3.Dividend Decision.
What are operating cash flows?
operating cash flows are all those cash inflows and outflows due to basic business operating activities.
What is Fund Statement Explain its purposes sources of fund application of fund etc?
The fund means all the financial resources of a firm such as cash in hand, bank balance, accounts receivable etc. Any changes in these resources are reflected in the firm's financial position.
The Funds Statement is called by different names, viz., Source and Application of Funds, Sources and Uses of Funds, Movements of Working Capital statement, Movements of Funds statement and Where Got and Where Gone statement. This statement is prepared to indicate the increase in the cash resources and the utilization of such resources of a business during a given period. It is prepared to enable the management to know the movement in liquid assets between two dates. Increases and decreases together with adjusted profits for the period and depreciation charges, taxation, dividends paid will be shown. It shows the ebb and flow of funds into and out of the business. This statement gives a clear picture of what has become of the net profits and of the funds obtained from other sources. It is a means of analyzing in detail the items contained in the balance sheets by recast of increase and decrease of certain figures not found in the balance sheets and linking in the analysis. They are not intended to report the changes in the assets and liabilities from all aspects of a company's performance during an accounting period.
What is the journal entry to record accrued interest income from bonds?
Dr. Interest Receivable Cr. Interest Income When Collected. Dr. Cash in Bank Cr. Interest Receivable
How does management manipulate profit in the income statement?
By manipulating pre-payments or accruals
Why do you prepare a balance sheet?
Balance Sheet exhibits the financial soundness of the comopany as a whole . It gives alomost complete picture to any party interested any type of relation with the company. It gives a birds eys view of assets and liabilities that company possess and Profit / Loss that company has incurred or is projected. For taking any financial decision ( Loan diisbursement , IPO investement etc.) there are some basic ratios to be calculated , balance sheet can be the base of such ratios.
What are the advantages and disadvantages of journal entries in accounting?
what is the disadvantages of general journal
