1)

Impairment loss = Cost - Accumulated depreciation - Fair value

= $11070000 -1230000 - 5904000

= $ 3936000

Date	Account title and explanation	Debit	Credit
Dec 31, 2020	Loss in impairment	$3,936,000	-
	Accumulated depreciation	-	$3,936,000
	(To record impairment loss)

2)

To look at a company's balance sheet to determine its financial health. Ideally, a company's assets should be equal to its liabilities and shareholder equity.

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By knowing how to analyze a company's financial information, we can determine:

Ø How quickly customers are paying their bills

Ø Whether short-term cash is declining or increasing

Ø The percentage of assets that are tangible (e.g., factories, plants, and machinery) and how much comes from accounting transactions

Ø Whether products are being returned at higher-than-average historical rates

Ø How many days it takes, on average, to sell the inventory the business keeps on hand

Ø How much debt the business has relative to its equity.

Ø Whether the interest coverage ratio on the bonds is declining

Ø Where profits are being spent or reinvested

Ø The average interest rate a company is paying on its debt

Ø Whether the research and development budget is producing good results

An up-to-date and accurate balance sheet is essential for a business owner looking for additional debt or equity financing, or who wishes to sell the business and needs to determine its net worth.

 

b)

Accounting ratios, an important sub-set of financial ratios, are a group of metrics used to measure the efficiency and profitability of a company based on its financial reports. They provide a way of expressing the relationship between one accounting data point to another and are the basis of ratio analysis .

Financial ratios are the most common and widespread tools used to analyze a business’ financial standing. Ratios are easy to understand and simple to compute. They can also be used to compare different companies in different industries. Since a ratio is simply a mathematically comparison based on proportions, big and small companies can be use ratios to compare their financial information. In a sense, financial ratios don’t take into consideration the size of a company or the industry. Ratios are just a raw computation of financial position and performance.

Ø Accounting ratios may be very useful for forecasting likely events in the future since past ratios indicate trends in costs, sales, profit and other relevant facts.

Ø Ideal ratios can be established and the relationships between primary ratios may be used to establish the desirable co-ordination or balance. Normally, this is linked with the Budgetary Control.

Ø Control may be materially assisted by the use of ratios and can be made effective.

Ø “Communication” is the process used to impart knowledge within the business or to outside shareholders or other interested parties. Accounting ratios can play vital role in informing what has happened from one period to another.

Ø Accounting ratios may be used as measures of efficiency. In fact, accounting ratios aid uniformity and, therefore, can made comparisons much more valid.

Ø Ratio analysis helps investment decisions. An investor is interested in both solvency and profitability of a firm. The investor can take his investment decision studying both solvency as well as profitability ratios.