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- Analysis by Trial Balance-Part I
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- Analysis by Trial Balance -Part III
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Analysis by Trial Balance -Part III
Like any other analytic technique, analysis by trial balance is most effective only if you know precisely what it can tell you. Listed below are some of the most important questions it can answer, both in itself and in a trend analysis with a previous financial statement. Then you have a chance to look for some trends in a where-got, where-gone analysis exercise.
Once you have constructed an interim balance sheet from a trial balance, you should ask the following questions:
- Are sales up to expectations?
- Do the working capital and quick ratios indicate reasonable liquidity?
- Is cash about what it should be?
- Are receivables healthy? (You can determine the average collection period from an interim balance sheet in the same way you do from an annual one, using monthly or quarterly, rather than annual, figures.)
- Do inventory and accounts receivable compare reasonably with accounts payable, and are purchases in line with seasonal needs?
- Are there any unusual increases (especially among cost and expense items) over the previous trial balance or balance sheet?
- Has there been any change in borrowing, either in the amount or in the source of both?
There is sufficient information on the interim statement itself to answer some of these questions. But quite obviously some of the others require additional data from a previous trial balance or balance sheet. You can best answer them by making a trend analysis, using one or another of the techniques covered in the previous topics. Often the most helpful of these for this particular job is where-got, where-gone analysis.
The material below gives you an opportunity to make a where-got, where-gone analysis with trial balance data. A firm's annual balance sheet and its most recent trial balance appear on the following page. First construct an interim balance sheet using the maintained gross profit procedure and assuming that the firm has a gross profit of 20 percent. Then go on to determine whether its financial position has improved or deteriorated.
