Tag: analysis of financial statements

Questions Related to analysis of financial statements

Past financial statement analysis helps in assessing developments in future, especially in the next year.

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

  1. True

  2. False

Show answer
Correct Option: A
Explanation:

True. Past financial statement analysis helps in assessing developing future, especially in the next year. Financial analysis helps in analysing the past and current position of the company which helps the company in further making economic decisions. 

Analysis helps the company understanding what to do next and what not to do in order to achieve goals. 

Inter-firm comparison becomes difficult with the help of financial analysis.

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

  1. True

  2. False

Show answer
Correct Option: B
Explanation:

False. Inter-firm comparison will become easier with help of financial analysis as it analyses and interprets the financial information in a simplified manner. Inter firm comparison is comparison between 2 different enterprises. 

Financial analysis helps the users of the financial statements to understand the complicated matter in a simplified manner.

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

  1. True

  2. False

Show answer
Correct Option: A
Explanation:

True. Financial Analysis helps the users of the financial statements to understand the complicated matters in a simplified manner. Financial analysis is reviewing and analysing 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.

Financial data can be made more comprehensive by _______________.

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

  1. Charts

  2. Graphs

  3. Diagrams

  4. All of the above

Show answer
Correct Option: D
Explanation:

Financial analysis can be made more comprehensive by charts, graphs and diagrams. It will be more comprehensive as all the elements will be covered and will be easier for the users of the financial statements to understand the same. 

Which of the following is the limitation of financial statement analysis?

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

  1. Historical analysis

  2. Ignores price level changes

  3. Not free from bias

  4. All of the above

Show answer
Correct Option: D
Explanation:

Financial statements of a company as useful as they are have a few limitations as well. They are prepared on historical cost as all the assets of the company are recorded at the cost. 

They ignore price level changes because of the historical cost concept. They are not free from personal bias, as the statements are prepared by humans personal bias being a human tendency might affect the financial statements. 

Long-term and short-term solvency of the enterprise can be assessed on the basis of ___________ statement analysis.

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

  1. cash flow

  2. income

  3. financial

  4. all of the above

Show answer
Correct Option: C

Window dressing is one of the limitation of financial analysis.

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

  1. True

  2. False

Show answer
Correct Option: A
Explanation:

True. Window dressing a limitation of financial analysis. Window dressing means where the company shows a better financial position of the company than actual. It Is usually done to impress the lenders or to existing investors. 

Which of the following is not incorporated in Capital Budgeting?

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

  1. Tax-Effect

  2. Time Value of Money

  3. Required Rate of Return

  4. Rate of Cash Discount

Show answer
Correct Option: D
Explanation:

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. The company understands how much tax benefit will the company have after the investment, whether the rate of return is more than the cost of capital and how much is to be paid in terms of present value. All these are taken into account but rate of cash discount is not. 

Which of the following is not followed while taking Capital budgeting decisions?

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

  1. Cash flows be calculated on incremental terms

  2. All costs and benefits are measured on cash basis

  3. All accrued costs and revenues be incorporated

  4. All benefits are measured on after-tax basis

Show answer
Correct Option: C
Explanation:

Capital budgeting is evaluating all the big expenses and cost that the business will incur on a project. They only take into consideration all the cash expenses and revenues and not accrued cost and revenues.

 In capital budgeting cash is more important than profit. All benefits are measured on cash basis, tax is taken into consideration to understand the tax benefit. 

Which of the following is not true with reference to capital budgeting?

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

  1. Capital budgeting is related to asset replacement decisions

  2. Cost of capital is equal to minimum required return

  3. Existing investment in a project is not treated as sunk cost

  4. Timing of cash flows is relevant

Show answer
Correct Option: C
Explanation:

Sunk cost is a cost that cannot be recovered and has been incurred already. Existing investment in a project is treated as a sunk cost as it is incurred in the past and cannot be recovered.