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-precisely what to look for. Here we list 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 A financial statement listing the assets, liabilities and owner’s equity of a business entity as of a specific date. from a trial balance, you should ask the following questions:

• Are sales up to expectations?
• Do the working capital The net assets of an individual enterprise, partnershi A partnership is defined as “an association of two or more persons to carry on as co–owners of a business for profit.” While no particular form of contract is necessary to create a partnership, a partnership contract usually provides what the partners’ ri p, corporatio A corporation may be defined as a voluntary association of persons who are organized under state or federal law and recognized by the law as having a corporate name, and being entirely separate and distinct from the people who own it; having continuous li n, including not only the original investment, but the gains and profits from the business. and quick ratios indicate reasonable liquidity?
• Is cash about what it should be?
• Are receivables Any money owed an enterprise, whether or not they are currently due. healthy? (You can determine the average Any partial loss or damage due to insured perils. 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 Goods held for sale or leas A contract granting the use and possession of real property for a specified time and for fixed payments. e that are furnished under contracts of service, usually raw material Industrial products that are composed of farm and natural products. s, work in proces The direct material costs, the direct labor costs and the factory overhead costs, that have entered into the manufacturing process but are associated with products that have not been finished. s, or materials used or consumed in a business. and accounts receivable A clai A right to payment or other equitable remedy in the event of a breach of contract. m against a customer for services rendered or goods sold on credit. compare reasonably with accounts payable A liability created by a purchase on credi The privilege of buying goods, services or borrowing money in return for a promise of future payment. t , 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 The excess of net over the cost of merchandise sold. of 20 percent. Then go on to determine whether its financial position has improved or deteriorated.