Whenever an asset is revalued, the profit on revaluation is transferred to Revaluation Reserve Account. Plagiarism Prevention 4. 0000001529 00000 n The general price index in 2000 (base year) was 100: in 2006,200 and in 2011 it was 300. 1. 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. 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. 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. Method of Price Level Accounting # 1. 1 Financial analysis may be classified into different categories depending upon: (i) The materials used, and (ii) The method of operation followed in the analysis. Current Cost Accounting (CCA). It must be remembered that in the closing balance sheet, the monetary items will remain unchanged. Such items whose amounts are fixed and do not require reassessment are also known as money value items. The essential characteristics of current cost accounting technique are as follows: 1. 0000005273 00000 n Financial Statement Analysis 1. (b) For opening stock—the index at the beginning of the year. The amounts of such items are fixed, by contract or otherwise in term of rupees, regardless of change in the general price level. Fund Flow Analysis. In addition to the balance sheet and profit and loss account, an appropriation account and a statement of changes is prepared. 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. (b) There is an element of subjectivity in this technique. Hence, adjustment of inventory and cost of sales is very important. Method of Price Level Accounting # 1. Exhibit 2: 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 balance sheet and profit and loss account are adjusted with the help of recognized general price index. x�b```b``�d`e`���ˀ �@16� L N0q% ">��m�E�ʒ���|g�|:3a��j���� ��lO�ߗ�j�������#T�jw����. Rates of Return 10. A proper analysis consists of five key areas, each containing its own set of data points and ratios. %%EOF The types of financial analysis are: Horizontal analysis . This type of analysis helps analyze the spending trend of a business. (ii) To make necessary entries for recording the changes in the ledger using the index numbers and the replacement cost. There are various method which are described in this note. 4. The difference in the balance sheet is taken as reserves after converting the equity capital also. Standing Ovation Award: "Best PowerPoint Templates" - … The consumer price index or the wholesale price index prepared by the Reserve Bank of India can be taken for conversion of historical costs. WINNER! The consumer price index or the wholesale price index prepared by the Reserve Bank of India can be taken for conversion of historical costs. Depreciation charged on historical or original cost does not serve any of the two purposes. (ii) The technique seems to be more of theoretical nature than of any practical utility. Variance 0000002261 00000 n During this time, there might be changes in the price levels. Financial statement analysis types & techniques 1. 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. The major weaknesses of these techniques are as follows: (i) As it takes into account the general price index, it does not account for changes in the individual assets of the company. 4 ANALYSIS TOOLS HORIZONTAL (TREND) ANALYSIS evaluates a series of financial statement data over a period of time. Financial Analysis Techniques by Elaine Henry, PhD, CFA, Thomas R. Robins on, PhD, CFA, and J an H endrik v an G reuning, D Com, CFA Elaine Henry, PhD, CFA, is … 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. In case depreciation is charged on original cost, after 10 years we shall have Rs 1, 00,000 from the total depreciation provided. Purchases, sales and other expenses which are incurred throughout the year are converted at average index. The fixed assets are shown in the balance sheet at their current values and not on historical costs. Financial Statement Analysis
Chapter - 4
2. xref 0000000016 00000 n 0000003722 00000 n Regression is one of the most popular types of data analysis methods used in business, data-driven marketing, financial forecasting, etc. Efficiency 8. 2. Also, it helps managers identify strengths on which the fi … 0000005149 00000 n Hence, to rectify this, it is necessary that fixed assets are valued at replacement cost values and depreciated on such replacement cost values. The following points highlight the four methods of price level accounting, i.e., 1. And, if the index of the mid year is also not available, then the average of index at the beginning and at the end of the period may be taken. The closing inventory is entirely from current purchases. Replacement Cost Accounting Technique (RCA) 3. • BS: shows the book value of assets and liabilities of a company at year end. 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. Vertical 2. 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 The horizontal analysis measuresthe financial statements line of items with the base year. Current Cost Accounting Technique. The changes in the price levels disturb the working capital position of a concern. Method # 1. 0000004209 00000 n Financial statement analysis according to modus operandi include Horizontal and vertical analysis. 10% which is index x 100). The aim is to introduce and review the basic notation, terminology, conventions, and elementary facts. But due to inflation the cost of the machine might well have gone up to Rs 2, 00,000 or even more in 2011 when the machine is to be replaced and we may find it difficult to replace the asset. CCA method requires a financing adjustment reflecting the effects of changing prices on net monetary items, leading to a loss from holding net monetary assets or to a gain from holding net monetary liabilities when prices are rising, and vice-versa, in order to maintain the monetary working capital of the enterprise. This statement should include the monetary gain or loss and a reconciliation of changes in the stock equity. ADVERTISEMENTS: The following points highlight the four methods of price level accounting, i.e., 1. Symbolically. This involves the side-by-sid The effect of holding monetary items in terms of gains and losses having an impact on the finance of the business is also highlighted. This technique of price level accounting has been followed by a number of companies in Germany, Australia and U.S.A. ‘Specific Capital Reserves’ or ‘Replacement Reserves’ should be provided in addition to the normal depreciation provided on actual cost of the asset. You are required to adjust the same for price level changes under CPP method. The closing inventory in LIFO is out of the purchases made in the previous year. Cost of sales is adjusted as discussed in point (d) above. The method of calculating MWCA is the same as that of COSA. <]>> CHAPTER 4: FINANCIAL ANALYSIS OVERVIEW FOREST RESOURCE MANAGEMENT 70 NPV Revenue Cost i t t t T = − = + ∑ 0 (1 ) A key consideration when selecting a discount rate is the financial position of the person or company for whom the analysis is being done. But, the revaluation also gives rise to backlog depreciation. 0000005227 00000 n In this sense the replacement cost accounting technique is considered to be a improvement over current purchasing power technique. 0000002119 00000 n (3) Income Tax Act. As depreciation under CCA is provided on current cost, the method prevents overstatement of profits and keeps the capital intact. 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. People who analyze the financial statements of a company include company executives, competitors, creditors, managers and potential investors. 0000008408 00000 n Rs 1, 00,000 and Rs 1, 50,000 respectively. (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. Highlighted are some of the important ways of financial risk analysis. 0.1) or more frequently in % (e.g. However, there are many difficulties in the operation of CCA technique: (a) It is very difficult to determine the ‘value to the business’ of a real asset. 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. This process of adjustment of cost of sales and inventory has been explained in the following illustration. Liquidity ratios don't take credit worthiness and borrowing capacity into consideration. 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. The important principle is that current costs must be matched with current revenues. The following information has been extracted from the books of a company. Sandilands to consider and recommend the accounting for price level changes. This backlog depreciation should be charged to Revaluation Reserve Account. (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. Privacy Policy 8. But in case of inventories, certain adjustments will have to be made, known as cost of sales adjustment. The British Government had appointed a committee known as Sandilands Committee under the chairmanship of Mr. Francis C.P. Financial Statement Analysis found in: Financial Statement Analysis Ppt PowerPoint Presentation Complete Deck With Slides, Financial Statements Ratio Analysis Interpretation Ppt PowerPoint Presentation Complete Deck With 0000000795 00000 n The financial statement applies tools, analytical techniques and required methods for business analysis. VERTICAL ANALYSIS expresses each item in a financial statement as a percent of a base amount RATIO 5551 24 Replacement Cost Accounting (RCA) Technique is an improvement over Current Purchasing Power Technique (CPP). Financial Risk Management Methods and Techniques: A firm needs to understand the intensity and types of potential risks it is prone to. 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 closing stock enters current purchases opening stock enters into cost of sales. 1. Current Cost Accounting (CCA). The replacement cost of the assets on 31st December is Rs 80,000. Ratios are popular because they readily 1961 does not provide for any other method than the actual cost method. 0000009483 00000 n (c) For purchases of previous year—the average index of the relevant year. Academia.edu is a platform for academics to share research papers. 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. It must be noted that, in the process of conversion, it is only the non monetary items which are adjusted to the current purchasing power of money. 2. Growth 5. This adjustment reflects the amount of additional finance needed to maintain the same working capital due to the changes in price levels. Suppose a machine was purchased in 2000 for Rs 1, 00,000 having a life of 10 years. Revenues. Helps in judging the solvency i.e. the capacity of the business to repay their loans. For conversion of such items, average index of the year can be taken as the one index for all such items. Liquidity 7. But although this method is simple, it may be considered as only a first step towards inflationary accounting. Valuation 11. 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. Its replacement cost was Rs 18, 00,000 on 1.1.2009 and Rs 20, 00,000 on 31.12.2009. 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. ‘Gearing adjustment’ is also a financing adjustment like COSA and MWCA. Prohibited Content 3. The same is true is in deflation also, as current revenues are not matched with current costs. Monetary accounts are those assets and liabilities which are not subject to reassessment of their recorded values owing to change of purchasing power of money. A ratio gives relationship between two numbers, in this case items in the financial statements. (2) The replaced new assets are not of the same type and quality as old assets because of new developments and improved qualities. Common Size Statements. The value of the net assets at the beginning and at the end of the accounting period is ascertained and the difference in the value in the beginning and the end is termed as profit or loss, as the case may be. 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