WINNER! In this method also, like replacement cost accounting technique, it is very difficult to determine relevant current values and there is an element of subjectivity in this technique. 0000004679 00000 n Finance managers are supposed to thoroughly analyze the situation and they’ve to choose the most apt approach or process or method to check that financial … Whenever an asset is revalued, the profit on revaluation is transferred to Revaluation Reserve Account. Pros – It helps to analyze the growth of the company from year on year or quarter on quarter with the increase in operations of the company. The cost of goods sold is calculated on the basis of their replacement cost to the business and not on their original cost. Under first-in-first out method (FIFO) cost of sales comprise the entire opening stock and current purchases less closing stock. In this method, various items of balance sheet and profit loss account are adjusted with the help of recognized general price index. It must be noted that, in the process of conversion, it is only the non monetary items which are adjusted to the current purchasing power of money. Ratio analysis is formed by the ratios of certain items from the financial statements and is the most common method of financial analysis. The amounts of such items are fixed, by contract or otherwise in term of rupees, regardless of change in the general price level. 0000009483 00000 n Replacement Cost Accounting Technique: Method of Price Level Accounting # 3. The purpose of charging depreciation is twofold: (i) To show the true and fair view of the financial statements and the profitability of the concern, and. Vertical 2. The main objective of this method is to take into consideration the changes in the value of money as a result of changes in the general price levels. It proves that we have been charging less depreciation which resulted in overstatement of profits and higher payment of dividends and taxes in the past and insufficient funds now to enable the replacement of the asset. 5551 0 obj<> endobj If you want to see more examples of visuals, here’s a whole page of examples for financial topics organized by type of message you want to communicate.I also have articles on each of the three key financial statements: Income/P&L, Balance Sheet, and Cash Flow. 0000000016 00000 n (3) Income Tax Act. Introduction
The primary objective of financial reporting is to … The examples of such items are cash, debtors, bills receivables, outstanding incomes, etc., as assets and creditors, bills payable, loans etc., as liabilities. This adjustment reduces the total adjustment for cost of sales, depreciation and monetary working capital in the proportion of finance by borrowings to the total financing. 0000011530 00000 n In this sense the replacement cost accounting technique is considered to be a improvement over current purchasing power technique. Common-Size Statements 3. Financial analysis may be classified into different categories depending upon: (i) The materials used, and (ii) The method of operation followed in the analysis. (iv) Monetary Working Capital Adjustment (MWCA): Working capital is that part of capital which is required to meet the day to day expenses and for holding current assets for the normal operations of the business. But, the revaluation also gives rise to backlog depreciation. 2. The types of financial analysis are: Horizontal analysis . Cash Flow 9. A proper analysis consists of five key areas, each containing its own set of data points and ratios. But adopting replacement cost method is also not free from difficulties. Current Purchasing Power Technique (CPP) 2. Academia.edu is a platform for academics to share research papers. This adjustment reflects the amount of additional finance needed to maintain the same working capital due to the changes in price levels. This adjustment depends upon the method adopted for the outflow of inventories, viz., first-in-first-out or last-in-first-out. 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