QUESTION OND a) The information in the statement of comprehensive income if used
ID: 2819797 • Letter: Q
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QUESTION OND a) The information in the statement of comprehensive income if used with information in the other financial statements help external users answer several questions. State and briefly explain the questions that can be answered by analysing the statement of comprehensive income. (8 marks) Analysis of earnings quality is often affected by an analysis of receivables and thei collectability. The analyst must be alert to changes in the allowance computed relative t sales, receivables, or industry and market conditions. Two key questions arise for the analyst: 1. Collection Risk 2. Authenticity of receivables b) Explain the key issues or questions an analyst should consider when analysing: i) Collection Risk i) Authenticity of receivables. (8 marks)Explanation / Answer
a) The statement of comprehensive income shows the financial performance and operational result of a company or an organisation for a period of time. One can explain the below mentioned questions or points by analysing the statement of comprehensive income.
1. Profit or Loss - from the on going operations
2. Profit or Loss - before tax
3. Revenue generated
4. Gross profit
5. Other Incomes
6. Administrative expenses
7. Other expenses
8. Cost of sales
9. Distribution cost, if any.
10. Share of profit or loss of asociates and joint ventures.
11. Income tax expense
12. Profit or loss from failed or discontinued operations etc.
b)
i) Collection Risk:
- An anlayst must check the customers Information. They shouls check the cutomers credit record.
- Should develop a good rapport with the customers.
- Should make sure that the terms of credit was already agreed upon by the customers before taking those credits.
- Also should make sure that all the bases are covered i.e. to make sure that the products were insured which can protect you against the non-payment or breach of contract.
ii) Authenticity of receivables: Receivables are debts owed to a company but its clients or customers for the services rendered. It sometimes becomes an issue while collecting those debts. Managing receivables and folowing up with those customer who has not paid is important. Receivables acts as a part of working capital of a company. So, managing the receivables immediately allows the comapny to put extra capital to support their operations.
- While collecting the receivables, one must also check the authenticty of it.
- One must get the confirmations to make sure that the amounts reflected in accounts receivables is accurate.
- An analyst must verify the customers existence and correctness of the balance.
- An analyst must check the transactions history.
- Analyst must also check the balance of that particular customer to see that the accounts have been properly written of.
- An anlayst must check the receivales ledger at all times which have a record of the amount a customer owes to the company and number of outstanding days.
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