Explain Q. 1 In performing a horizontal analysis on a company\'s income statemen
ID: 2701666 • Letter: E
Question
Explain
Q. 1
In performing a horizontal analysis on a company's income statement, you notice that sales have decreased by 4%, but the gross profit has increased by 10%. What are some factors that could cause this to happen?
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Q.2
What are the benefits of ratio analysis? What are the limitations of ratio analysis? What can be done to minimize the limitations on ratio analysis? Explain.
Q.3
You have computed all of the liquidity ratios for a company, and each of them appears to be close to or better than the industry averages. What other information would you want before you made a final assessment of the company's short-term debt paying ability?
Q.4
What is a static budget? What is a flexible budget? Which is more useful, and why?
Q.5
What is the difference between a value-added and a non-value-added cost? Give an example of each.
Q.6
What is the product life cycle? How does it impact pricing decisions?
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Explanation / Answer
Answer No. 1 : Cost of Good Purchased/Manufactured and Indirect Expenses must have been reduced.
Answer No. 2 :
Advantages
1. It simplifies the financial statements.
2. It helps in comparing companies of different size with each other.
3. It helps in trend analysis which involves comparing a single company over a period.
4. It highlights important information in simple form quickly. A user can judge a company by just looking at few numbers instead of reading the whole financial statements.
Limitations
Despite usefulness, financial ratio analysis has some disadvantages. Some key demerits of financial ratio analysis are:
1. Different companies operate in different industries each having different environmental conditions such as regulation, market structure, etc. Such factors are so significant that a comparison of two companies from different industries might be misleading.
2. Financial accounting information is affected by estimates and assumptions. Accounting standards allow different accounting policies, which impairs comparability and hence ratio analysis is less useful in such situations.
3. Ratio analysis explains relationships between past information while users are more concerned about current and future information.
Answer No. 3: Acid Test Ratio or Quick Ratio
Answer No. 4 :
Value added Cost
Non Value Added Cost
value-added costs refer to the direct expenses of producing a product or service and include direct materials and direct labor
value-added cost is an expense that customers find necessary to improve the quality of the product or service
Non value-added costs refer to expenses relating to production or providing services that do not add to the final product
Expenses customers do not find necessary to enhance the final product or service delivered.
Example : In the manufacturing industry, Regular maintenance of essential equipment can be classified as a value-added cost. If equipment works as needed, production stays on schedule.
Example : when equipment breaks down, it can significantly delay production. To fulfill standing obligations, the company may need to expedite the production process, taking on extra costs such as overtime pay for workers or possibly temporary employees to keep production on schedule. Equipment breakdowns then are non value-added costs that can in turn lead to additional non value-added costs such as wait time.
Answer No. 5 :
Conventionally, four main stages compose a product's life cycle:
Value added Cost
Non Value Added Cost
value-added costs refer to the direct expenses of producing a product or service and include direct materials and direct labor
value-added cost is an expense that customers find necessary to improve the quality of the product or service
Non value-added costs refer to expenses relating to production or providing services that do not add to the final product
Expenses customers do not find necessary to enhance the final product or service delivered.
Example : In the manufacturing industry, Regular maintenance of essential equipment can be classified as a value-added cost. If equipment works as needed, production stays on schedule.
Example : when equipment breaks down, it can significantly delay production. To fulfill standing obligations, the company may need to expedite the production process, taking on extra costs such as overtime pay for workers or possibly temporary employees to keep production on schedule. Equipment breakdowns then are non value-added costs that can in turn lead to additional non value-added costs such as wait time.
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