Chapter 17.1 Do In Class 1. How are financial statements used to analyze a busin
ID: 2431227 • Letter: C
Question
Chapter 17.1 Do In Class 1. How are financial statements used to analyze a business? a) Name the three main ways to analyze financial statements: i) b) An provides information about a company's financial condition Another part of the annual report is operations and the financial condition of the company What is the difference between unqualified opinions and qualified opinions? c) which is intended to help investors understand the results of the d) 2. How do we use horizontal analysis to analyze a business? a) What is the purpose of the horizontal analysis? What is the amount and percentage of Gross profit is $100,000 for 2019 and $120,000 for 2020. increase or decrease in gross profit? b) 3. How do we use vertical analysis to analyze a business? a) What is the purpose of the vertical analysis? b) Net Sales Revenue is $100,000 and gross profi is $40,000 for 2020. What is the percentage of gross profit to net sales revenue? c) A common-size statement reports only the same percentages that appear in d) In your own words, what is benchmarking?Explanation / Answer
Answer 1:
a: Three main ways to analyze financial statements are:
i) Vertical analysis
ii) Horizontal Analysis
iii) Ratio analysis
b :
A balance sheet provides information about a company's financial condition.
Balance sheet provides information on assets, liabilities and equity as on balance sheet date.
c :
Another part of the annual report is Profit and Loss Statement or Income Statement which is intended to help investors understand the results of operations and financial condition of the company.
d:
In Unqualified opinion, the auditors conclude that financial statements of the business present fairly its affairs in all material aspects. The opinion means that the business complied with generally accepted accounting principles and statutory requirements.
In qualified opinion, the auditor concludes that except for specific issue(s), financial statements of the business present fairly its affairs. The auditor qualifies the audit report when there is limitation in scope or there is material issue in compliance with generally accepted accounting principles . The material issue should not be pervasive as otherwise the auditors may issues disclaimer or adverse opinion.
Answer 2:
a: Purpose of Horizontal analysis is to show changes in the amounts of corresponding financial statement items over a period of time. It is also known as trend analysis. It is used to compare changes in financial items over periods. Financial Statements of two or more periods are used to do horizontal analysis.
b:
Gross profit = $100,000 in 2019
Gross profit = $120,000 in 2020
Hence amount of increase in Gross profit in period 2020 over 2019 = $120,000 - $100,000 = $20,000
Percentage of increase in Gross profit in period 2020 over 2019 = $20,000 / $100,000 = 20%
Answer 3:
a: Purpose of vertical analysis to provide relative size of different acounts in a financial statement.In case of profit and loss account Sales is taken as 100% and expense items are shown as percentage of sales. In case of balance sheet asset and liability items are shown as percentage of total assets/total liabilities.
b:
Percentage of gross profit to net sales revenue = Gross profit / Net sales revenue = $40,000 / $100,000 = 40%
c:
A common size statement reports only percentages the same percentage that appear in a vertical analysis.
d:
Benchmarking is process of measuring a company's performance in comparison to that of best in industry. In benchmarking the performance (over various parameters /measures) of best in class company in the industry is taken as benchmark /standard and performance of the company on that parameter is compared with such standard to find where the company lacks in performance and need to improve.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.