Assignment AQ1(A):

The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received. Thus, when given a choice between several outcomes where the probabilities of occurrence are equally likely, you should recognize that transaction resulting in the lower amount of profit, or at least the deferral of a profit. Similarly, if a choice of outcomes with similar probabilities of occurrence will impact the value of an asset, recognize the transaction resulting in a lower recorded asset valuation. Under the conservatism principle, if there is uncertainty about incurring a loss, you should tend toward recording the loss. Conversely, if there is uncertainty about recording a gain, you should not record the gain. It is also known as Prudence because under the prudence concept, you do not overestimate the amount of revenues recognized or underestimate the amount of expenses. You should also be conservative in recording the amount of assets, and not underestimate liabilities. The result should be conservatively-stated financial statements. Another way of looking at prudence is to only record a revenue transaction or an asset when it is certain, and record an expense transaction or liability when it is probable. It not applied as strongly today as it used to be in the past because if an optimistic view of profits is given then dividends may be paid out of profits that have not been earned.

Q1(B):

The balance sheet presents a company's financial position at the end of a specified date. Some describe the balance sheet as a "snapshot" of the company's financial position at a point (a moment or an instant) in time. It is used to inform a reader of the ending balances in a company's asset, liability, and equity accounts as of the date stated on the report. The information listed on the report must match the following formula: Total assets = Total liabilities + EquityThe line items to be included in the balance sheet are up to the issuing entity, though common practice typically includes some or all of the following items:A. Current Assets: Cash and cash equivalents Trade and other receivables Investments Inventories Assets held for saleB. Non-Current Assets: Property, plant, and equipment Intangible assets GoodwillC. Current Liabilities: Trade and other payables Accrued expenses Current tax liabilities Current portion of loans payable Other financial liabilities Liabilities held for saleD. Non-Current Liabilities: Loans payable Deferred tax liabilities Other non-current liabilitiesE. Equity: Capital stock Additional paid-in capital Retained earnings

Funds Flow Statement is a statement prepared to analyse the reasons for changes in the Financial Position of a Company between 2 Balance Sheets. It shows the inflow and outflow of funds i.e. Sources and Applications of funds for a particular period. In other words, a Funds Flow Statement is prepared to explain the changes in the Working Capital Position of a Company. There are 2 types of Inflows of Funds:- 1. Long Term Funds raised by Issue of Shares, Debentures or Sale of Fixed Assets 2. Funds generated from OperationsIf the Long Term Fund requirements of a company are met just out of the Long Term Sources of Funds, then the whole fund generated from operations will be represented by increase in Working Capital. However, if the Funds generated from Operations are not sufficient to bridge a gap of Long Term Fund Requirements, then there will be a decline in Working Capital.. Funds Flow Statement is useful for Long Term Analysis. It is a very useful tool in the hands of the management for judging the financial and operating performance of the Company. The Balance Sheet and the Profit and Loss A/c (Income Statement) fail to provide the information which is provided by the Funds Flow Statement i.e. Changes in Financial Position of an enterprise. Such an analysis is of great help to the management, shareholders, creditors etc.

Q2(A):

Accounting Ratios are effective tools for analysis and interpretation of financial statements. If properly used and applied, accounting ratios are capable of providing very useful information on companys financial position, profitability and stability. They are the indicators of managerial and operational efficiency. They provide data for inter firm comparison. They highlight the factors associated with successful and unsuccessful firms. They also reveal strong and weak firms, overvalued and undervalued firms and hence facilitates inter firm comparison. Ratio analysis makes it possible to compare different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future making intra-firm comparison possible. A firm would like to compare its performance with that of other firms and of industry in general. The comparison is called inter-firm comparison. If the performance of different units belonging to the same firm is to be compared, it is called intra-firm comparison. Such comparison is almost impossible without accounting ratios. Even the progress of a firm from year to year cannot be measured without the help of financial ratios. However, two enterprises may follow different Policies like some enterprises may charge depreciation at straight line basis while others charge at diminishing value. Such differences may adversely affect the comparison of the financial statements.

Q2(B):

The payout ratio, or dividend payout ratio, is the percentage of a company's earnings paid out to investors as cash dividends. At the end of a specified period, companies will sometimes pay out dividends for every share owned. Theoretically, the money for these dividends comes from the company's earnings from that period. Thus, the payout ratio is calculated as the percentage of earnings paid out as dividends. The formula for calculating the payout ratio is:Payout ratio = (dividends paid/net earnings for the period) x 100For example, if Company XYZ earned $1.00 per share in the fourth quarter and paid a dividend of $0.60 per share, its payout ratio would equal 60%.

A company's payout ratio can reveal many things. A reduction in dividends paid is looked poorly upon by investors, and the stock price usually depreciates as investors seek other dividend-paying stocks. A stable dividend payout ratio indicates a solid dividend policy by the company's board of directors. Dividends should be paid regularly because each investor is interested in the regular payment of dividend. The management should, inspite of regular payment of dividend, consider that the rate of dividend should be all the most constant. For this purpose sometimes companies maintain dividend equalization Fund.

A number of considerations affect the dividend policy of company. The major factors are1. Stability of Earnings. 2. Age of corporation. 3. Liquidity of Funds4. Extent of share Distribution. 5. Needs for Additional Capital. 6. Trade Cycles. 7. Government Policies. 8. Taxation Policy. 9. Legal Requirements. 10. Past dividend Rates. 11. Ability to Borrow. 12. Policy of Control. 13. Repayments of Loan14. Time for Payment of Dividend. 15. Regularity and stability in Dividend Payment

Q5. Liquidity is the ability of the firm to convert assets into cash. It is also called marketability or short-term solvency. Measuring corporate liquidity may be a daunting task, especially when it comes to gauging cash that a large multinational company generates on a daily basis. Department heads also may disagree on what constitutes short-term cash, as customers often do not pay for goods on delivery. However, investors and lenders generally assess corporate liquidity levels by measuring cash that a company has in its coffers. The procedure you would adopt to study the liquidity of a business firm is to compare the liquidity rations of the business. You do this by comparing the businesses most liquid assets with its short-term liabilities.The liquidity of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors.Several financial ratios measure the liquidity of the firm. Some of these ratios are Current ratio - This ratio is a measure of the ability of a firm to meet its short-term obligations. In general, a ratio of 2 to 3 is usually considered good. Too small a ratio indicates that there is some potential difficulty in covering obligations. A high ratio may indicate that the firm has too many assets tied up in current assets and is not making efficient use to them. Quick ratio or acid test - The quick (or acid-test) ratio is a more stringent measure of liquidity. Only liquid assets are taken into account. Inventory and other assets are excluded, as they may be difficult to dispose of. Other techniques to measure the liquidity of a firm are Working Capital - Working capital equals a companys short-term resources minus its short-term liabilities. This indicator provides insight into how much cash the company has in the short-term, a period of time equal to 12 months or less. Short-term assets include cash, customer receivables and inventories. Current debts include vendor payables. Closely monitoring corporate working capital ensures that department heads do not engage in excessive spending, setting a higher savings bar for segment chiefs. Cash Revenue - Financial analysts measure business liquidity by reviewing amounts of cash revenue that a company generates. Revenues are income that the firm earns by selling goods or providing services. By reviewing corporate revenue levels, investors attempt to answer the question: Whats going on in the companys operations, and is the firm selling enough products to survive economically? Subtracting customer discounts from gross revenues yields a companys total cash revenue. Operating Cash Flows - Cash movements from operating activities provide insight into how a company funds its short-term activities, indicating to investors the firms ability to dodge the strategic bullets that competitors throw in the marketplace. Cash inflows relate to customer payments and interest remittances. Liquidity outflows mainly cover administrative and manufacturing charges, such as materials costs, salaries, insurance and rent. Subtracting cash outflows from cash inflows gives a measure of a companys short-term liquidity. Investing Liquidity - Publicly listed firms generally raise cash on financial markets, touting to investors how the funds can help grow corporate revenues in the long term. But prospects for a swift approval of fundraising initiatives may be cloudy, especially if investors believe that a company does not generate enough revenue to support long-term investments. Analyzing investing liquidity provides insight into managements strategic priorities and how they affect long-term growth. Financing Cash - Investors may gauge a firms liquidity by sifting through its cash flows from financing activities. These liquidity inflows and outflows represent important tools that the company relies on to fund operations. Financing activities relate to the issuance of common and preferred stock as well as corporate long-term loans. These activities generally draw on accounting procedures for specific financial reports, such as the statement of shareholders equity and the "long-term debts" section of the balance sheet.