UNIVERSITY OF CENTRAL PUNJAB

FALL 2020
Fall 2020

Course Title: Financial Statement Analysis

Course Code: FIN4233

Assignment No.1

Name of Course Instructor: Snober Javid

Name of Student: HASHIM IMRAN WAHLA Reg. # L1F17BBAM0217

Section:A Program: BBA Date: 11th November, 2020

Submission Date:19th November, 2020 Maximum Marks: 20

Program Objective: P01, Course Objective: C01,

Course Learning Objective: CL01, CL02
P02 C02

QUESTION 1
GAAP is a common set of accepted accounting principles, standards, and procedures that
companies and their accountants must follow when they compile their financial statements.
IFRS is a set of international accounting standards, which state how particular types of
transactions and other events should be reported in financial statements.
The primary difference between the two systems is that GAAP is rules-based and IFRS is
principles-based. IFRS guidelines provide much less overall detail than GAAP. Consequently, the
theoretical framework and principles of the IFRS leave more room for interpretation and may
often require lengthy disclosures on financial statements. On the other hand, the consistent
and intuitive principles of IFRS are more logically sound and may possibly better represent the
economics of business transactions.
The most notable specific difference between GAAP and IFRS involves their treatment of
inventory. IFRS rules ban the use of last-in, first-out (LIFO) inventory accounting methods. GAAP
rules allow for LIFO. Both systems allow for the first-in, first-out method (FIFO) and the
weighted average-cost method. GAAP does not allow for inventory reversals, while IFRS permits
them under certain conditions.
IFRS allows revaluation of the following assets to fair value if fair value can be measured
reliably: inventories, property, plant & equipment, intangible assets, and investments in
marketable securities. This revaluation may be either an increase or a decrease to the asset’s
value. Under GAAP, revaluation is prohibited except for marketable securities.
Both standards allow for the recognition of impairment losses on long-lived assets when the
market value of an asset declines. When conditions change, IFRS allows impairment losses to be
reversed for all types of assets except goodwill. GAAP takes a more conservative approach and
prohibits reversals of impairment losses for all types of assets.
Internal costs to create intangible assets, such as development costs, are capitalized under IFRS
when certain criteria are met. These criteria include consideration of the future economic
benefits.
Under GAAP, development costs are expensed as incurred, with the exception of internally
developed software. For software that will be used externally, costs are capitalized once
technological feasibility has been demonstrated. If the software will only be used internally,
GAAP requires capitalization only during the development stage. IFRS has no specific guidance
for software.
GAAP requires that long-lived assets, such as buildings, furniture and equipment, be valued at
historic cost and depreciated appropriately. Under IFRS, these same assets are initially valued at
cost, but can later be revalued up or down to market value. Any separate components of an
asset with different useful lives are required to be depreciated separately under IFRS. GAAP
allows for component depreciation, but it is not required.
IFRS includes the distinct category of investment property, which is defined as property held for
rental income or capital appreciation. Investment property is initially measured at cost, and can
be subsequently revalued to market value. GAAP has no such separate category.

QUESTION 2

The selected company for our project, we choose “SAZGAR ENGINEERING”. After analyzation of
its audit report, we came to know that the auditor of the company gives his “Unqualified
Opinion” that company's all financial statements are conform to the financial reporting
standards and fulfil all requirements of fair reporting. Therefore, Sazgar Engineering company is
attractive for investors. As we know Unqualified Opinion states that the financial statements
present fairly, in all material respects, the financial position, results of operations, and cash
flows of the entity, in conformity with generally accepted accounting principles.
QUESTION 3
Land is recorded at its original cost, even though its value is much more than its cost because it
is generally acquired for business operation purposes rather than for the purpose of sale, but
when we sale land it is recorded at the amount received after sale of this asset. It is recorded on
the principle on historical cost that is to record the asset on the original value on which it is
acquired.

QUESTION 4
The inventory method a company uses affects its costs of goods sold, or COGS, which has an
impact on its profitability ratios. The formula for COGS is beginning inventory plus purchases
less ending inventory. A company using FIFO to value its inventory reports lower COGS, which
increases its gross profit margin (sales less COGS) and its net income all else being equal. Higher
net income means higher profit margin. A company using LIFO reports higher COGS, translating
into lower gross profit, net income and profit margins. This means earnings per share (net
income divided by equity shares outstanding) is higher using FIFO all else being equal.

QUESTION 5
A note payable of $100,000 due in five years would be classified as a long-term liability.
A $100,000 note due in five annual installments of $20,000 each would be classified as a
$20,000 current liability - current maturities of long-term debt - and an $80,000 long-term
liability.

QUESTION 6
Disclosure notes provide additional detail concerning specific financial statement items.
Included are such data as the fair values of financial instruments and off-balance-sheet risk
associated with financial instruments and details of pension plans, leases, debt, and assets.
Common to all companies' disclosures are certain specific notes such as a summary of
significant accounting policies, descriptions of subsequent events, and related third-party
transactions. However, many notes are designed to fit the disclosure needs of the particular
reporting company. In fact, any explanation that helps investors and creditors make decisions
should be included.

QUESTION 7
The discussion provides management's views on significant events, trends, and uncertainties
pertaining to the company's (a) operations, (b) liquidity, and (c) capital resources. Certainly the
Management Discussion and Analysis section may be slanted toward management's biased
perspective and therefore can lack objectivity. However, management can offer an informed
insight that might not be available elsewhere, so if the reader maintains awareness of the
information's source, it can offer a unique view of the situation.
 QUESTION 8
A. A subsidiary of Parent Inc. was exhibiting poor earnings performance for the year. In an effort to
increase the subsidiary’s reported earnings, Parent Inc. purchased products from the subsidiary
at twice the normal mark-up.

The Arm’s Length Assumption is involved, as we know by this selling inventory to the parent
company at a price other than the market price and the transaction between the parent and its
subsidiary violated the arm’s length assumption.
B. When preparing the financial statements for MacNeil & Sons, the accountant included certain
personal assets of MacNeil and his sons.

The Specific Business (Economic) Entity is involved, the assets of owners of a company are not
to be included when disclosing the assets of the company itself.
C. The operations of Uintah Savings & Loan are being evaluated by the federal government. During
their investigations, government officials have determined that numerous loans made by top
management were unwise and have seriously endangered the future existence of the savings
and loan.
The Going Concern an assumption is involved, this is made when preparing financial statements
is that the company will continue into the foreseeable future. In this example, the continued
existence of the savings and loan is in doubt.
D. Pine Valley Ski Resort has experienced a drastic reduction in revenues because of light snowfall
for the year. Rather than produce financial statements at the end of the fiscal year, as is
traditionally done, management has elected to wait until next year and present results for a two-
year period.

The Specific Time (Accounting) Periods assumption is involved in it, as to enhance

comparability and consistency as well as to provide periodic financial statement information,
the economic life of a company is partitioned into specific accounting periods. By producing
financial statements at two year intervals, instead of annually, this assumption is violated .
E. Colobri Inc. has equipment that was purchased in 1996 at a cost of $150,000. Because of
inflation, that same equipment, if purchased today, would cost $225,000. Management would
like to report the asset on the balance sheet at its current value.

The Monetary Units assumptions is involved in it, as the financial statements assume that the
value of the dollar remains the same over time. That is, a dollar can buy just as much today as it
can in one year. This assumption ignores the effects of inflation. It is, however, consistent with
the historical cost measurement attribute.