The paper “ Components of Financial Analysis” is a thoughtful example of a finance & accounting math problem. Net profit won’ t be the same amount as the increase in cash at the bank because some of the customers might have paid in cash. This might have resulted in some profits accruing to cash. b. The value of the asset has not been revised as the company is following a conservatism principle and recording assets on historical prices. (Conservatism Principle, 2010) This also prevents the business from fluctuating in the prices of assets and helps to ensure the value of the assets is not overestimated. c.
Depreciation is “ the reduction in the value of assets due to wear and tear” . (Kennon, 2010) A separate account is created so that the organization use funds from this account when the assets need to be replaced thereby not affecting the normal business cycle. (Kennon, 2010) The amount hasn’ t been credited to the asset account as it would reduce the value of the asset on the balance sheet and disclosing the original amount helps to understand the true value of the asset on the purchase date. d.
The payment of insurance has not been recorded as it is a personal payment and business is a distinct entity from the individual. The payment will be recorded as drawings in the business financials. e. Gross profit is the profit after charging a direct expense for the production of goods whereas net profit is the final figure after all expenses have been charged. Both the figures have high relevance but net profit has a higher relevance as it discloses the actual profit the business earns.
Part Ba. Direct cost is “ cost which is directly attributable to the product and can be identified to be incurred while manufacturing goods” . (Fixed Cost, 2010) Indirect costs are those “ which cannot be attributed directly to a product” . (Fixed Cost, 2010) Manufacturing overhead is considered as a direct cost as the cost should be attributed to the manufacturing process and the products themselves. b. Work in progress is that inventory that hasn’ t been fully processed to be sold in the market but is in the process of being completed.
Work is progress is treated as current assets and falls under the assets side.
Conservatism Principle, (2010), “The Conservatism Principle”, Accounting Coach
Cram, (2010), “Fixed Cost and Variable Cost”, retrieved on September 30, 2010, from www.college-cram.com
Financial Modelling Guide, (2010), “Liquidity ratios”, retrieved on September 29, 2010, from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/
Fixed Cost, (2010), “Fixed cost and variable cost”, Answers Corporation
Micro Strategy, (2010), “Financial Analysis”, retrieved on September 29, 2010, from http://www.microstrategy.com/financial-analysis/
Joseph K, (2010), “Analyzing an income statement: Inventory Turnover”, about.com guide, The New York Times Company
Kennon J, (2010), “Analyzing an income statement: Gross Profit”, about.com guide, The New York Times Company
Translator, (2010), “Capital Structure Ratios”, retrieved on September 29, 2010, from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.aspx