Page 344 - CA Final PARAM Digital Book.
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considered-
o The adequacy or otherwise of fixed and working capital. Are these sufficient for the
growth of the business?
o What will be the trend of the sales and profits in the future?
The success of a business in the future would depend on the position enjoyed by it in
the past in relation to its competitors. A business may be successful because it enjoys
a monopoly.
In such a case, the possibility of emergence of competition must be examined. This
may be ascertained on the basis of the trend in market share of the product and the
licensing policy followed by the government. Establishing the trend of sales, product-
wise and area-wise will ordinarily help in drawing a conclusion on whether the trend
will be maintained in the future.
o Whether the profit which the business could be expected to maintain in the future
would yield an adequate return on the capital employed?
• From the accountant’s view point, the following specific areas need to be looked into:
o Statement of Profit and Loss:
To study the Statement of Profit and Loss of a concern and consider each item, included
therein, in relation to the corresponding items in the Statement of Profit and Loss of the
previous years. It is therefore, necessary that a summary, in a columnar form, should be
prepared of the balances included in the Statement of Profit and Loss of the business for a
period, say of 5 to 7 years.
o Fixed Assets:
Fixed assets, usually, are shown in accounts at cost less depreciation but the accounts do not
show the ages of different assets. It is desirable, therefore, to obtain age analysis of various
items of fixed assets. Assets which are old or are obsolete would naturally have to be
replaced. It should be seen that their values are not in excess of the value of service that they
could be expected to render to the business during the balance period of their active life and
the amount they would fetch on sale as scrap.
o Inventories:
It should be seen that stocks have been valued consistently and that the basis of valuation was
such that the value placed on inventories did not include any element of profit. Also, there
should be due allowance for damaged, obsolete and slow-moving inventories.
o Other liquid assets:
It should be ascertained that the assets so described are readily realisable. Money with a bank
in liquidation should be taken only to the extent guaranteed by Deposit Insurance Scheme.
o Idle assets:
On a scrutiny, it may appear that certain assets are remaining idle and are not being properly
applied in the business. For example, certain plant and machinery may have been put to use
after a considerable period of time after acquisition. Some of the fixed assets may be awaiting
installation even at the valuation time.
o Liabilities:
The important matter to investigate in this regard is whether those are stated fully or
understated or overstated. In other words, whether the profits of the business have been
inflated by suppression of liabilities or there are any free reserves included in the liabilities. In
either case, an adjustment would be necessary. Secondly, it should be ascertained that
liabilities are not unduly ‘large or are not outstanding for a long time, in such cases, it would
be necessary to pay off some of them which would cause a drain on the liquid resources of the
concern. The fact should be stated in the report.
o Taxation:
Orders in respect of assessments completed should be studied and it should be verified that
an adequate provision has been made in respect of liabilities for taxes which have not been
assessed. Also, it should be seen that in the past there has been no reopening of assessments.
If so, the company may be liable for an undisclosed sum of taxes plus penalties. Any
temporary tax benefit should also be disregarded.
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