Question

1. What is the importance of working capital in the financial statements and for financial statement analysis?

2. Discuss the matching concept and its importance to income reporting.

3. How is the balance sheet useful to investors?

4. Explain how comprehensive income is consistent with the all-inclusive concept of accounting.

5. Explain how comprehensive income is consistent with the financial capital maintenance concept. Give examples to support your decision.

Answer 1

1.Working capital as a financial metric to measure the cash and operating liquidity position of a business. It consists of the sum of all current assets and current liabilities. Net working capital measures the short-term liquidity of a business, and can also indicate the ability of company management to utilize assets in an efficient manner.

The amount of net working capital a company has available can also be used to determine if the business can grow quickly. With substantial cash in its reserves, it may have enough to scale the business rather fast. Conversely, if the business has very little in cash reserves then it's highly unlikely that the company has the resources to handle fast-paced growth.

Management, vendors, and general creditors watch a company’s net working capital because it provides a snapshot at any given time of the firm's short-term liquidity and ability to pay off its current liabilities with current assets.

2 . Matching Concept:

The matching concept is used under accrual accounting.

Accrual Accounting simply means recognizing revenue when they are earned and expenses when they are incurred. So credit sales made in January for which cash will be received in February will be recorded as January sales.

The alternative approach is Cash accounting where revenue and expenses will be recognized when cash is actually received or paid for.

All the matching concept is saying is this, recognize all revenue and expenses in the period for which they were earned and incurred respectively.

In other words, expenses made in a period must be matched against revenue made in that period.

The essence of this concept is to avoid mistatement of profit/loss within a particular period.

3 . Balance sheet is the only) statement that helps investors to analyze the financial condition and health of the company which is very important for any company along with income statements.

On the balance sheet, investors can see the company assets, liabilities and cash flow.

The importance of balance sheet is it is a customized report of accounting that are reconciled and can be considered to take financial decisions.

With analyses of company balance sheet, can determine the plan to sustain the future operation.

4.