Question

1. Analyze the preparing of the statement of cash flows.

2. Summarize a transactions balance.

3. Explain the “value” of assets on a balance sheet.

4.Assess how the gross profit and expenses are calculated for the income statement.

Answer 1

1. Once you have constructed a cash flow statement you will be much closer to understanding the financial position of your company. while a balance sheet and income statement are tools for management,without a cash flow statement they are limited barometers and may even be misleading.Preparation of a cash flow statement is the first step towards financial mangement for long term success.

Cash flow is divided as follows

a. Operating Activities:

The cashflow statement will tell you where money came from and how it was used. when analyzing the cashflow, the first place to look into is the cash flow from operating activities. It tells you whether the firm generated cash or whether it needs a cash infusion. However if a negative cashflows is a surprise to managers and owners it is undesirable

b. Investing Activities:

The cash flow statement puts investing activities into perspective. At one glance, you can see whether or not a surplus in operations is being used to grow the company A lack of investing activities,which is few purchases of new equipment or oher assets, may indicate stagnant growth or a diversion of funds away from the company.

c.Financing Activities:

It shows repayment of debts and borrowing of funds, as well as injections of capital and payment of dividends. As a company expands this area of cashflow statement will become increasingly important. It will tell outsiders how the company has grown and the financial strategies of management

Together the three sections show the net change in cash during the period being examined. A comparision between past periods will give idea about the trends of business  

2.Summarize a transaction balance

A balance sheet summarizes the transactions made during the year and consists of assets and liabilities owners equity accounts

This gives a clear picture of financial position of a company and an idea to the investors whether to invest or not

3. Asset valuation is a process of assessing the value of a company, real property or any other item of worth, in particular assets thet produce cash flows.Value can be of many types i.e. Book value & Market Value

When valuing a company analysts look into the book value and market value of assets.The book value is lower than the market value of assets because assets are listed at their historical cost

Common methods for determining an assets value include comparing it to similar assets and evaluating its cash flow potential

Book value is equal to the assets historical purchase price minus accumulated depreciation. This is more reliable but less relevant than market value

Market value is called as fair market value which is equal to the current market price it is considered as more relevant but less reliable

4.A.Gross Profit:

Gross profit reflects total revenue minus cost of goods sold.Gross profit is a company's profit before operating expenses,interest payments and taxes.Gross profit is also known as gross margin

Example: Total Revenue = 10,00,000

(-)Opening stock = 100,000

(-)Purchases = 500,000

(-)Direct Expenses = 100,000

Gross Profit = 300,000

B.Expenses

Expenses are what cost you to run and maintain your business operations succesfully Expenses are of two types Direct and Indirect expenses

Direct expenses will be included in cost of goods sold and used to arrive gross profit these are directly attributable for the business

Indirect expenses are the expenses which are not direct expenses and these are charged to profit & Loss account

and are not directly attributable over the business