Question

1. What are the six interconnected activities related to financial statement analysis? (CH1)
2. Identify Porters’ Five Forces? (CH1)
3. Classification of cash flows: Operating activities (O); Investing activities (I), or Financing activities (F). (CH1)
4. What valuation methods reflect historical cost? Discuss the advantages and disadvantages of valuing assets and liabilities using historical valuations. (CH2)
5. What valuation methods reflect current values? Discuss the advantage(s) and disadvantage(s) of valuing assets and liabilities using current values. (CH2)
6. When income tax expense differs from income taxes currently payable on taxable income companies recognize deferred tax assets and deferred tax liabilities. What type of event would create a deferred tax asset and deferred tax liability? (CH2)
7. Discuss operating, investing, and financing cash flows in relation to the various stages of the product life cycle. (CH3)
8. What is working capital from operations? Discuss what types of firms will have similar net income and working capital from operations? For which types of firms will net income and working capital from operations be significantly different? (CH3)

Answer 1

1. What are the six interconnected activities related to financial statement analysis? (CH1)

Answer :-

Financial Statement Analysis is a statistical tool used by the users of financial statements to study the impacts and implications of Financial Statements for various decision making purposes. The various users like Shareholder, suppliers of Long-term Finance and Management officials often use this Financial Statement Analysis of any organization to aid various decision making purposes.

Financial Statement Analysis however is interconnected to various activities. The details of these activities is as given below:-

1. Identify the economic characteristics of the industry in which a particular firm participates. It is important to access the industry as a whole, the features of the competitors, various industry standards being followed for the accounting purposes and any technical influences on the industry. These all factors affect the Financial Statement Analysis as we come to an understanding about the various economic factors impaction our organization and this also helps establishing the industry standard performance to act as a benchmark for our organization.
2. Identify Company Strategies, the strategies that the firm pursues to gain and sustain a competitive advantage. Study the firm’s policies as to its plans to grow in the given market. Check if the firm has sustainable plans to survive the target markets as compared to the products and strategies of its competitors.
3. Assess the quality of the firm’s financial statements and, if necessary, adjust them for such desirable characteristics as sustainability or comparability. The financial statements needs to be prepared by following the Accounting Standards applicable to the Industry and the kind of Operations the firm is engaged into. In order to ascertain the actual profits of the firm, we need to check the various expense heads and that the expenses are accounted under the correct accounts head. This is to ensure the correctness and comparability of the firms Financial statements with the Financial Statements of it’s competitors and to compare it with the Industry standard.
4. Analyze the current profitability and risk of the firm using information in the financial statements. Most financial analysts assess the profitability of a firm relative to the risks involved. Ratios of particular items in the financial statements are the tools used to analyze profitability and risk
5. Prepare forecasted financial statements. Assessments of the recent profitability from step 4 provide the basis for projecting the likely future profitability and, in turn, the likely future returns from investing in the company. Forecasted financial statements that rely on a set of analyst assumptions about the future provide the basis for projecting future profitability and risk
6. Value the firm. Financial statement analysis is most frequently applied to value companies.

2. Identify Porters’ Five Forces? (CH1)

Answer :-

Porter's Five Forces is a business analysis model that helps to explain why various industries are able to sustain different levels of profitability. The five forces are frequently used to measure competition intensity, attractiveness, and profitability of an industry or market.

The Five Forces identified are as given below:-

1. Threat of New Entrants
2. Threat of Substitutes
3. Rivalry Among Existing Competitors
4. Bargaining Power of Suppliers
5. Bargaining Power of Buyrs.

3. Classification of cash flows: Operating activities (O); Investing activities (I), or Financing activities (F). (CH1)

Answer :-

While forming the Cash Flow Statements, the overall business Operations are classified under three activates as Given below :-

1. Operating Activities :- these activities includes the basic business operations of the given business. Like,

1. Sales Revenues
2. Receipts from Customers
3. Payments to Suppliers of Goods and/or services
4. Payments to employees, etc.

2. Investing Activities:- these activities includes the changes in the Fixed Assets of the Organisaion. Like,

1. Receipts from sale of assets
2. Payments for the Purchase of Assets
3. Cash adjustments for the Profit or loss on the Sale of Fixed Assets, etc.

3. Financing Activities:- these activities includes the operations relating to the Equity and Long-term resources of Finances. Like,

1. Receipts from Capital Contributions
2. Receipts or Repayment of Loan
3. Receipts from issue of equity Shares or Debentures
4. Payments for the redemption of Shares or Debenture, etc.

4. What valuation methods reflect historical cost? Discuss the advantages and disadvantages of valuing assets and liabilities using historical valuations. (CH2)

Answer :-

Historical cost accounting is an accounting method in which the assets listed on a company's financial statements are recorded based on the price at which they were originally purchased.

Under generally accepted accounting principles (GAAP) in the United States, the historical cost principle accounts for the assets on a company's balance sheet based on the amount of capital spent to buy them. This method is based on a company's past transactions and is conservative, easy to calculate, and reliable.

Some of the Advantages of using Historical Cost Methods are :-

1. Objectivity and Reliability of Accounting information
2. Simplicity and convenience
3. Consistency and comparability of financial statements.

Some of the Disadvantages of using Historical Cost Methods are :-

1. Failure to disclose current worth of the enterprise.
2. Uncomparable items in financial statements. Sometimes due to inflation, some items in financial statements show higher value, it never means that the enterprise is making progress.
3. Difficult replacement of fixed assets. As the asset is depreciated at the historical cost the depreciation amount set aside is not usually enough to replace the asset as the new asset’s price will be elevated due to inflation.
4. Inaccurate determination of profit. Because of Inflation, the stock is mostly over valued due to inflation but the deprivation amount is not taken considering the inflation factor into account. Hence the Profit shown is elevated.
5. Mixing up of holding and operating profits. The historical cost accounting does not disclose what is the effect of closing stock on profit and thus profit due to overvaluation of inventories is mix up to business profits does not show the correct profitability.

5. What valuation methods reflect current values? Discuss the advantage(s) and disadvantage(s) of valuing assets and liabilities using current values. (CH2)

Answer :-

The valuation methods where the Present values of all the variables are calculated can be identified as the Valuation methods that reflect current Value. These methods most importantly does not include the historical method of valuation of the Assets and Liabilities.

The various Advantages of valuing Assets and Liabilities using Current Values is as follows :-

1. It reflects the actual status of assets as on today
2. It takes into consideration the inflation factor into account.
3. It gives a better and more accurate calculation of the profits of the given organization.
4. It states the Accurate Valuation of the Assets and Liabilities
5. It gives the true Income

The various Disadvantages of valuing Assets and Liabilities using Current Values is as follows :-

1. Value Reversal as to find the current value in volatile market conditions can bring a massive change in the values of the assets and liabilities.
2. Market Effects on the resale price of the Assets as the current asset price may not be the current market offer price for resale of the given asset.

6. When income tax expense differs from income taxes currently payable on taxable income companies recognize deferred tax assets and deferred tax liabilities. What type of event would create a deferred tax asset and deferred tax liability? (CH2)

Answer :-

Deferred Tax Asset is created when we Over Pay the current Taxes due to differences in Accounting and Tax Profits. DTA is created only when we are sure that the tax over paid will be recoverable in future. The various events that creates a Deferred tax Asset are as follows :-

1. When the Accounting Profit is More than the Income tax Profit
2. Depreciation as per Accounts is less than the depreciation as per Tax
3. Provision for Bad debts is less than the actual bad debts.

Deferred Tax Liability is created when we Under Pay the current Taxes due to differences in Accounting and Tax Profits. DTL is created only when we are sure that the tax under paid will be payable in future. The various events that creates a Deferred tax Liabilities are as follows :-

1. When the Accounting Profit is less than the Income tax Profit
2. Depreciation as per Accounts is more than the depreciation as per Tax
3. Provision for Bad debts is more than the actual bad debts.

7. Discuss operating, investing, and financing cash flows in relation to the various stages of the product life cycle. (CH3)

Answer :-

The Product life Cycle can be said to have Five Stages.

1. Development
2. Introduction
3. Growth
4. Maturity
5. Decline

Initially we have to arrange the Finances to start any product. So the Financing Activities in relation to the Cash flow Statement shall be required at the Development and Introduction Stage. Also at the Declining stage, when we make up our mind to shut the operations then we also have to repay the Finances, hence it can be stated that Financing activities will be impacted at the Development and Declining Phase of the Product life cycle.

The Investing Activities involves Purchasing Fixed Assets in the beginning of any given operation, and hence In the Development Stage of the Product itself, the Investing Activities of Cash Flow Statement shall be impacted. Also at the declining Stage, when we decide to shut the operations and so we may require to sell off the assets initially acquired. hence it can be stated that Investing activities will be impacted at the Development and Declining Phase of the Product life cycle.

Operating Activities includes the daily operations including sale proceeds of the product, payments for the suppliers and payments for staff salaries. These activites more or less takes place during the entire life cycle of the product. Hence it can be stated that the Operating Activities of Cash flows takes place at all the stages of Product life cycle.

8. What is working capital from operations? Discuss what types of firms will have similar net income and working capital from operations? For which types of firms will net income and working capital from operations be significantly different? (CH3)

Working Capital from Operations is the flow of cash arising due ti day to day business operations from the sale of products and services.