Question

What are the financial statement analysis objectives? 1. The following are the steps in the accounting cycle. List them in the order in which they are 2. completed: Prepare adjusted trial balanèe Post transactions Prepare an unadj Journalize trapsacti Prepare the inancrál staterzen Close the temporary accounts Adjust the ledger accounts Prepare a post-closing trial balance Analyze transactions On January 1, a company borrowed $10,000 cash by signing a 9% installment note that is to be repaid with 4 annual year-end poyprens of $21,607. While the amount borrowed equals $70,000, the total payments on this note dhoupt to $86,428. Explain 3. nmens one ihuo 5,2wed squli: 500. 4. Define the return on total assets and expláin how i is used to measure a company's financial performance.

Answer 1

(1) Financial statement analysis objectives :-

Analysis of financial statements means diagnosis and interpretation of financial statements.

Financial statements speak about the financial status of business organisation.

Objectives :-

(1) Financial statements does not provide clear picture about financial position. To know the reality, diagnosis must be done to have clarity over the position.

(2) To make meaning ful intra and inter comparison

(3) To assess earning capacity / profitability of the firm,

(4) To assess shorterm and long-term solvency of the firm

(5) To assess operational efficiency and management effectiveness.

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(2)

I. Analyze transaction,

II. Journalize transaction

III. Post transaction

IV. Prepare unadjusted trial balance

V. Adjusted ledger accounts

VI. Prepare adjusted trial balance

VII. Financial statements

VIII. Close temporary accounts

IX. Prepare a post closing trial balance.

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(3)

Amount borrowed by company = $70,000

Such amount borrowed to be repaid with in four years by making annual payment of $21607.

As per time value concept value of today's dollar not equal to tomorrow's dollar.

Here amount recieved = $70,000

While amount paid to settle the above liability = $86,428

The difference($16,428) between amount received and paid attributes to interest.

Verification :-

Here $70,000 stands for present value figure,while $21,607 stands for future value periodic payment.

r = 9%, n =4

PV = FV * PVAF(i,n)

Pvaf = {1- (1+i)^-n}/i

Substituting i = 9%, n =9.

PVAF = { 1-(1+9%)^-4}/9%

= {1- (1.09)^-4}/0.09

= {1- 0.7084} /0.09

= 0.2915 /0.09

= 3.2397

PV = $21,607 * PVAF(9%,4)

PV = $21,607 * 3.2397

PV = $70,000.

#Hence, payment in excess of $70,000 attributes to interest.

(4) Return on assets :- It is a profitability ratio that measures net income produced by average total assets.

Usage of return on assets ratio to measure company financial performance.

Company financial performance refers to outcome of profit or loss statement.

Every year business organisation may get either profit or loss but not both at a point of time.

We use assets to run the business activities. Return assets ratio enables us to know how effectively a company can earn a return on funds invested on assets. This is an example of analysis of financial statements.

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