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Business Accounting Financial Accounting: Information for Decisions

1 Introduction: The ratio analyses is a method of analyzing the performance of the company by using different financial, liquidity and profitability ratios. The results of these ratios help in both intra-firm and inter-firm comparison. These ratios are calculated with the help of the information mentioned in the financial statements of the company. To explain: The limitation of ratio analyses when examining companies reporting under different accounting systems. Different companies follow different accounting standards and systems. The two most common accounting standards are IFRS and U.S. GAAP. IFRS is International financial reporting standards and GAAP stands for Generally Accepted Accounting Principles. When two companies who are being examined using ratio analysis have prepared their financial statements and reports according to two different accounting standards, the ratio analysis will not serve the purpose. Since the methods of inventory valuation , depreciation and other such procedures are different in different accounting standards, examining two different companies who have used different accounting standards will give misleading results and hence the objective of ratio analysis will not be achieved. In such a case it is suggested to adjust one company’s financial statements as per the accounting standards followed by another company, i.e. , if company ‘A’ has prepared financial statements according to IFRS and company ‘B’ has used U.S GAAP while preparing financial statements, then company ‘A’ will have to adjust its statements as per U.S GAAP or vice versa. 2 Introduction: The horizontal analyses is used to analyze historical data of a company using ratios or line items over a number of accounting periods. The vertical analyses, on the other hand records each item as a percentage of the base item within the current period. To explain: The advantage of using horizontal and vertical analyses when examining companies under different currencies. Using horizontal and vertical analyses help the company in eliminating differences between U.S. GAAP and IFRS while interpreting financial statements. All the financial numbers are converted into percentages. When companies reporting under different currencies are examined, the horizontal and vertical analyses helps as the figures are converted into percentages which makes it easier to compare the performance of the company. The user of the financial statements can actually compare the performances of two companies or the user can even look at the past performance of a particular company and the changes it has gone through over the years. The currencies are converted into percentages using the figures from the base year.

1 Introduction: The ratio analyses is a method of analyzing the performance of the company by using different financial, liquidity and profitability ratios. The results of these ratios help in both intra-firm and inter-firm comparison. These ratios are calculated with the help of the information mentioned in the financial statements of the company. To explain: The limitation of ratio analyses when examining companies reporting under different accounting systems. Different companies follow different accounting standards and systems. The two most common accounting standards are IFRS and U.S. GAAP. IFRS is International financial reporting standards and GAAP stands for Generally Accepted Accounting Principles. When two companies who are being examined using ratio analysis have prepared their financial statements and reports according to two different accounting standards, the ratio analysis will not serve the purpose. Since the methods of inventory valuation , depreciation and other such procedures are different in different accounting standards, examining two different companies who have used different accounting standards will give misleading results and hence the objective of ratio analysis will not be achieved. In such a case it is suggested to adjust one company’s financial statements as per the accounting standards followed by another company, i.e. , if company ‘A’ has prepared financial statements according to IFRS and company ‘B’ has used U.S GAAP while preparing financial statements, then company ‘A’ will have to adjust its statements as per U.S GAAP or vice versa. 2 Introduction: The horizontal analyses is used to analyze historical data of a company using ratios or line items over a number of accounting periods. The vertical analyses, on the other hand records each item as a percentage of the base item within the current period. To explain: The advantage of using horizontal and vertical analyses when examining companies under different currencies. Using horizontal and vertical analyses help the company in eliminating differences between U.S. GAAP and IFRS while interpreting financial statements. All the financial numbers are converted into percentages. When companies reporting under different currencies are examined, the horizontal and vertical analyses helps as the figures are converted into percentages which makes it easier to compare the performance of the company. The user of the financial statements can actually compare the performances of two companies or the user can even look at the past performance of a particular company and the changes it has gone through over the years. The currencies are converted into percentages using the figures from the base year.

Solution Summary: The author explains the advantages of using horizontal and vertical analyses when examining companies reporting under different accounting systems.

Financial Accounting: Information for Decisions

Financial Accounting: Information for Decisions

8th Edition

ISBN: 9781259533006

Author: John J Wild

Publisher: McGraw-Hill Education

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Chapter 13 Solutions

Financial Accounting: Information for Decisions

Ch. 13 - Explain the difference between financial reporting...Ch. 13 - Prob. 2DQ Ch. 13 - Prob. 3DQ Ch. 13 - Prob. 4DQ Ch. 13 - Prob. 5DQ Ch. 13 - Prob. 6DQ Ch. 13 - Prob. 7DQ Ch. 13 - Prob. 8DQ Ch. 13 - Prob. 9DQ Ch. 13 - Prob. 10DQ

Ch. 13 - Prob. 11DQ Ch. 13 - Prob. 12DQ Ch. 13 - Prob. 13DQ Ch. 13 - Prob. 14DQ Ch. 13 - Prob. 15DQ Ch. 13 - Prob. 16DQ Ch. 13 - Prob. 17DQ Ch. 13 - Financial reporting Cl. Which of the following...Ch. 13 - Prob. 2QS Ch. 13 - Prob. 3QS Ch. 13 - Prob. 4QS Ch. 13 - Prob. 5QS Ch. 13 - Prob. 6QS Ch. 13 - Prob. 7QS Ch. 13 - Prob. 8QS Ch. 13 - Prob. 9QS Ch. 13 - Prob. 1E Ch. 13 - Prob. 2E Ch. 13 - Prob. 3E Ch. 13 - Prob. 4E Ch. 13 - Prob. 5E Ch. 13 - Prob. 6E Ch. 13 - Prob. 7E Ch. 13 - Prob. 8E Ch. 13 - Risk and capital structure analysis P3 Refer to...Ch. 13 - Prob. 10E Ch. 13 - Prob. 11E Ch. 13 - Prob. 12E Ch. 13 - Prob. 14E Ch. 13 - Prob. 15E Ch. 13 - Prob. 1PSA Ch. 13 - Prob. 2PSA Ch. 13 - Prob. 3PSA Ch. 13 - Prob. 4PSA Ch. 13 - Prob. 5PSA Ch. 13 - Prob. 6PSA Ch. 13 - Prob. 1PSB Ch. 13 - Prob. 2PSB Ch. 13 - Prob. 3PSB Ch. 13 - Prob. 4PSB Ch. 13 - Prob. 5PSB Ch. 13 - Prob. 6PSB Ch. 13 - Prob. 13SP Ch. 13 - Prob. 1BTN Ch. 13 - Prob. 2BTN Ch. 13 - Prob. 3BTN Ch. 13 - Prob. 7BTN Ch. 13 - Prob. 9BTN

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