Tag: analysis of financial statements

Questions Related to analysis of financial statements

Choosing a common base (as 100), for example, sales revenue total may be taken as base (100) in case of income statement, and total assets or total liabilities (100) in case of balance sheet, is step ____ in the procedure adopted for preparing common size income statements.

book keeping and accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. 1

  2. 2

  3. 3

  4. 4

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Correct Option: B
Explanation:

Choosing a common base for example sales revenue total may ne taken as base (100) in case of income statement, and total assets or total liabilities in case of balance sheet, in step 2 in the procedure adopted for preparing common size income statements. Common-size Income statement is the vertical analysis of Income Statement. 

A vertical analysis is shows all items as percentages and not in absolute figures which provides better comparison. Each line item is expressed as a percentage figure of the base figure within the statement. The base is always shown as 100. 

Which of the following would best explain a situation where the ratio of (net income/Total equity) of a firm is higher than the industry average, while the ratio of (net income/Total assets) is lower than the industry average?

book keeping and accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. The firm's net profit margin is higher than the industry average

  2. The firm's assets turnover is higher than the industry average

  3. The firm's equity multiplier must be lower than the industry average

  4. The firm's debt ratio is higher than the industry average

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Correct Option: D

Common size financial statements make it easier to compare firms ____________.

book keeping and accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. of different sizes

  2. in different industries

  3. with different degree of leverage

  4. that use different inventory valuation methods (FIFO Vs. LIFO)

Show answer
Correct Option: A
Explanation:

Common size financial statements make it easier to compare firms of different sizes as they show all items as percentages and not in absolute figures which provides better comparison. 

Most common approach for analysing the capital structure of a firm is_______.

accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. Ration Analysis

  2. Cash Flow Analysis

  3. Comparative Analysis

  4. Leverage Analysis

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Correct Option: C
Explanation:

The most common approach for analyzing the capital structure of a firm is Comparative analysis. Comparative analysis is comparison of various ratios, balances, statements of different years of the company. 

It is basically done to understand the trend off the company. Hence, its also known as trend analysis.  

ABC Corp. wants to increase its current ratio from the present level of 1.5 when it closes the books next week. The action of ____________ will have the desired effect.

accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. payment of current payables from cash

  2. sales of current marketable securities for cash

  3. write down of impaired assets

  4. delay of next payroll

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Correct Option: A
Explanation:
Payment of current payables from cash will reduce current liabilities and also reduce current assets. 
Suppose if at the current position current assets are 1,50,000 and current liabilities 1,00,000 and if current payable repaid are 50,000. The new position will be 
    = 1,50,000 - 50,000
       --------------------------
        1,00,000 - 50,000
   = 1,00,000
    ----------------
       50,000
  2 : 1

Financial statement analysis helps to identify the areas where the managers have been efficient and the areas where they have been lacking behind.

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  1. True

  2. False

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Correct Option: A
Explanation:

True. Financial statements helps to understand the financial position of the company. It helps to understand the deviation between the actual position and the position that the company had planned. By looking at the deviation the company can understand how efficiently the managers have worked. 

In periods of inflation, accounting depreciation is ______________ relative to replacement cost and real economic income is ______________.

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  1. overstated, overstated

  2. overstated, understated

  3. understated, overstated

  4. understated, understated

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Correct Option: C

Financial Analysis does not help the users of the financial statements to understand the complicated matters in simplified manner.

trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

  1. True

  2. False

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Correct Option: A
Explanation:

False. Financial Analysis helps the users of the financial statements to understand the complicated matters in a simplified manner. Financial analysis is reviewing and analyzing of financial data, understand the past, present and future projected data. 

It gives a useful insight to the users as to what is the condition of the company.

On the basis of financial analysis, earning capacity of the enterprise cannot be assessed or computed.

trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

  1. True

  2. False

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Correct Option: B
Explanation:

False. On the basis of financial analysis, earning capacity of the enterprise can be assessed or computed. Financial analysis means analysing the financial statements of the firm to make financial decisions. It helps in assessing the earning capacity, present position, past performance, managerial efficiency and helps in inter-firm comparison. 

Which of the following are significance of Financial Analysis?

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  1. Assessing the earning capacity.

  2. Assessing managerial efficiency.

  3. Inter-firm Comparison.

  4. All of the above

Show answer
Correct Option: D
Explanation:

Financial analysis means analysing the financial statements of the firm to make financial decisions. It helps in assessing the earning capacity, present position, past performance, managerial efficiency and helps in inter-firm comparison.