ANALYSIS OF FINANCIAL STATEMENTS

Assignment I
[Type the document subtitle]
M. Naeem Riaz
Aleena Inayat
Haseeb Abid
Hasan Hanif
Q. 3.2 Are the following balance sheet items Asset, Liability, or Stockholders equity

Ans:
Asset:
 Investment in stock
 Cash
 Land
 Inventory
 Marketable securities
 Patents
 Accounts receivables
 Organizational costs
 Prepaid expenses
 Goodwill
 Tools
 Building

Liability:
 Cash dividend payable
 Mortgage notes payable
 Unearned rent
 Accounts payable

Stockholders equity:
 Capital Stock
 Retained Earning
 Donated Capital

Q.3.4 Usually current asset are listed in a specific order starting with cash. What is the
objective of this order of listing.
Current assets include cash and other assets that in the normal course of events are converted into
cash within the operating cycle. Current assets are listed in order of increasing liquidity means
how easy they are to convert to cash.

Q.3.6 What is the difference between accounts payable and receivable?

Ans: Accounts Receivable:

Accounts receivable are assets. Accounts receivable are monies due on accounts that arise from
sales or services rendered to customers. Accounts receivable are shown net of allowances to
reflect their realizable value. This amount is expected to be collected.

 Accounts payable:
Accounts payable are liabilities. It is the amounts that a person or company owes to suppliers,
but has not paid yet. It is a form of debt. it is a short term obligation created by the acquisition of
good and services.

Q.3.8 What is depreciation? Which tangible assets are depreciated and which are not?
Why?

Ans:

Depreciation is the process of allocating the cost of building and machinery over the periods
benefited. The Land is not depreciated because it does not get use up on the contrite machinery,
Building will be depreciated because they get used up and their life reduces over the period of
time.

Q.3.10 A rental agency collects rent in advance. Why is the rent collected treated as a liability?

Ans:

The rental agency treats rent as liability because the service is to provided in the future. The
service is due to customer.

Q.3.12 To be conservative, how should minority interest on the balance sheet be handled
for primary analysis?

Ans:

Minority interest reflects the ownership of minority shareholders in the equity of consolidated
subsidiaries less than wholly owned. Minority interest does not represent a liability or
stockholders equity in the firm being analyzed. It should be presented after liability and before
stockholder equity.

Q.3.13 Many assets are presented at historical cost. Why does this accounting principle
cause difficulties in financial statement analysis?

Ans:

The historical cost principle means that assets and liabilities are recorded at their actual historical
cost. When an asset is written off, the loss is recorded as the historical cost of the asset less any
accumulated depreciation. Typically, the asset would be fully depreciated and thus, no loss
recorded, but this isn't always the case.
If the asset is sold, the gain or loss is recorded as the amount received for the asset less the
historical cost (net of any accumulated depreciation). In both cases, you're using the historical
cost as your basis in the asset, but in the write off, you didn't receive anything in return for the
asset. To record a sale, you must account for the payment you receive and that amount is of
course, the current value of the asset.