Chapter 04 - Answer - MANAGEMENT ACCOUNTING - Solutions...

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MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 4 FINANCIAL STATEMENTS ANALYSIS - I I. Questions 1. The objective of financial statements analysis is to determine the extent of a firm’s success in attaining its financial goals, namely: a. To earn maximum profit b. To maintain solvency c. To attain stability 2. Some of the indications of satisfactory short-term solvency or working capital position of a business firm are: 1. Favorable credit position 2. Satisfactory proportion of cash to the requirements of the current volume 3. Ability to pay current debts in the regular course of business 4. Ability to extend more credit to customers 5. Ability to replenish inventory promptly 3. These tests are: 1. Improvement in the financial position 2. Well-balanced financial structure between borrowed funds and equity 3. Effective employment of borrowed funds and equity 4. Ability to declare satisfactory amount of dividends to shareholders 5. Ability to withstand adverse business conditions 6. Ability to engage in research and development in an attempt to provide new products or improve old products, methods or processes 4. Some indicators of managerial efficiency are: 4-1
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Chapter 4 Financial Statements Analysis - I 1. Ability to earn a reasonable return on its investment of borrowed funds and equity 2. Ability to control operating costs within reasonable limits 3. No overinvestment in fixed assets, receivables and inventories 5. The techniques used in Financial Statement Analysis are: I. Vertical analysis which shows the relationships of the items in the same year: also referred to as “static measure.” a. Financial ratios b. Common-size statements II. Horizontal analysis which shows the changes or tendencies of an item for 2 or more years; also referred to as “dynamic measure.” a. Comparative statements - showing changes in absolute amount and percentages b. Trend percentages III. Use of special reports or statements a. Statements of Changes in Financial Position b. Gross Profit / Net Income Variation Analysis 6. Refer to page 133 of the textbook. 7. Horizontal analysis involves the comparison of items on financial statements between years. Analysis of comparative financial statements or the increase/decrease method of analysis and trend percentages are the two techniques that may be applied under horizontal analysis. Vertical analysis involves the study of items on a single statement for a single year, such as the analysis of an income statement for some given year. Common-size statement and financial ratios are techniques used in vertical analysis. 8. Trends can indicate whether a situation is improving, remaining the same or deteriorating. They can also give insight to the probable future course of events in a firm. 9.
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This note was uploaded on 07/18/2011 for the course ECON 102 taught by Professor Sadassad during the Spring '11 term at Abant İzzet Baysal University.

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Chapter 04 - Answer - MANAGEMENT ACCOUNTING - Solutions...

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