QUESTION THREE

a) GAAP requires the income statement to be prepared using the accrual method of accounting. Discuss TWO (2) reasons why an accrual accounting income statement is more practical for analyzing company performance than a cash flow-based income statement.

b) The shareholders' equity can either be negative or positive. A negative shareholders' equity shows that shareholders will have nothing left when assets are liquidated and used to pay all debts owed. A positive shareholders' equity shows that the company has enough assets to meet any liabilities that may arise. The shareholders' equity section in the balance sheet makes a distinction between contributed capital and retained earnings. Elaborate TWO (2) distinctions between these two major sources of equity financing.

c) Inventory valuation methods used to value the inventory of the company that impacts the cost of goods sold, ending inventory and has a financial impact on bottom-line numbers as well as the cash flow situation of the company. Discuss which inventory valuation method is suitable to be used by the Management in the following period:

i. Inflation.

ii. Recession.

d) The sustainable growth rate is an indicator of what stage a company is in during its life cycle. The growth ratio can also be used by creditors to determine the likelihood of a company defaulting on its loans. A high growth rate may indicate the company is focusing on investing in R&D and NPV-positive projects, which may delay the repayment of debt. However, a highgrowth-rate company is generally considered riskier, as it likely sees greater earnings volatility from period to period. Elaborate THREE (3) important components in growth analysis. (

e) Prospective analysis is the final steps in the financial statement analysis process. It can be undertaken only after the historical financial statements have been properly adjusted to accurately reflect the economic performance of the company. Briefly explain the uses for prospective analysis and THREE (3) elements of detailed analysis that would be incorporated into the projection process of Income Statement