CBSE Class 12 Accountancy Analysis of Financial Statement and Tools Important Questions Set 01

Very Short Answer Questions (1 Mark)

Question 1. State whether the following statement is True or False: Determining operating efficiency and profitability is an objective of financial analysis.
Answer:
True

Teacher's Note:
1. Profitability and efficiency are judged mainly through the Statement of Profit and Loss.

Question 2. State whether the following statement is True or False: Financial statement analysis does not ignore qualitative elements.
Answer:
False

Teacher's Note:
1. Only money-measurable items are analysed, so qualitative elements are ignored; this is a limitation.

Question 3. State whether the following statement is True or False: Horizontal analysis is based on one year’s financial data.
Answer:
False

Teacher's Note:
1. Horizontal analysis needs data of two or more years; one year's data gives vertical analysis.

Question 4. State whether the following statement is True or False: Financial statement analysis is always free from personal bias.
Answer:
False

Teacher's Note:
1. Choices like depreciation method and inventory valuation involve judgement, so bias can creep in.

Question 5. State whether the following statement is True or False: Financial analysis is significant for investors, bankers, lenders, employees and management.
Answer:
True

Teacher's Note:
1. Learn one specific interest for each user group; it is a common short-answer question.

Question 6. Fill in the blank: The comparison of financial statements of a firm with that of another firm is known as __________.
Answer:
Inter-firm comparison

Teacher's Note:
1. Comparison of the same firm over years is intra-firm comparison; with another firm it is inter-firm.

Question 7. Fill in the blank: In a firm, share capital is ₹ 3,00,000 and ₹ 3,60,000 at the end of two consecutive years. The percentage change is __________.
Answer:
20% increase (60,000 ÷ 3,00,000 × 100)

Teacher's Note:
1. Divide the change by the earlier year's figure.

Question 8. Fill in the blank: __________ analysis is considered as dynamic.
Answer:
Horizontal

Teacher's Note:
1. Horizontal analysis covers several periods, so it shows movement over time.

Question 9. Fill in the blank: Financial Statement analysis ignores price level changes, it is its __________.
Answer:
limitation

Teacher's Note:
1. Inflation makes rupee figures of different years not strictly comparable.

Question 10. Fill in the blank: In a company, Revenue from operations is ₹ 6,00,000 and employee benefit expenses are ₹ 75,000. __________ will be its percentage to revenue from operations.
Answer:
12.5% (75,000 ÷ 6,00,000 × 100)

Teacher's Note:
1. Common size percentages of expenses are always taken on revenue from operations.

Question 11. What is meant by Analysis of Financial Statements? [CBSE Delhi 2007, (AI) 2014, (F) 2014]
Answer:
Analysis of Financial Statements is a systematic process of identifying the financial strengths and weaknesses of the firm by properly establishing relationship between the items of Balance Sheet and Statement of Profit and Loss.

Teacher's Note:
1. Keywords to include: systematic process, strengths and weaknesses, relationship between items.

Question 12. One of the objectives of ‘Financial Statements Analysis’ is to judge the ability of the firm to repay its debt and assessing the short-term as well as the long-term liquidity position of the firm. State two more objectives of this analysis. [CBSE Delhi 2016]
Answer:
(i) Assessing the earning capacity or profitability of the firm as a whole as well as its different departments so as to judge the financial health of the firm.
(ii) Assessing the managerial efficiency by using financial ratios.

Teacher's Note:
1. Do not repeat the objective already given in the question; it earns no marks.

Question 13. State any one limitation of Financial Statement Analysis. [CBSE Delhi 2014]
Answer:
(i) Historical records, (ii) Affected by personal judgement, (iii) Different accounting practices, (iv) Ignores the qualitative aspect, (v) Ignores the price level changes.

Teacher's Note:
1. When asked for one point, write one point clearly; extra points do not add marks.

Question 14. State one advantage of Financial Statements Analysis. [CBSE Delhi 2013]
Answer:
Financial statements analysis is useful in assessing profitability, operating efficiency and financial stability of an enterprise.

Teacher's Note:
1. Advantages and objectives overlap; any one clearly stated point is enough.

Question 15. Name two parties interested in Financial Statements Analysis. [CBSE (F) 2010]
Answer:
(i) Shareholders, (ii) Top executives, (iii) Banks and other financial institutions, (iv) Creditors, (v) Investors and potential investors.

Teacher's Note:
1. Both internal (management, employees) and external (lenders, investors) users are interested.

Question 16. State the significance of analysis of financial statements to the ‘Lenders’. [CBSE Delhi 2012] OR State the significance of analysis of financial statements to the ‘creditors’. [CBSE (F) 2012]
Answer:
Lenders and creditors of the business are interested in the short-term and long-term financial soundness of the enterprise. They want to ensure themselves, whether their funds are safe and secured and the business is capable of making payment of interest regularly and to make refund as per agreement.

Teacher's Note:
1. Lenders focus on safety of funds, regular interest and repayment, so liquidity and solvency matter most.

Question 17. State the interest of trade unions in the analysis of financial statements. [CBSE (F) 2011]
Answer:
Trade unions are interested in better emoluments, bonus and continuation of business and would like to know its financial performance, profitability and operating sustainability.

Teacher's Note:
1. Link the trade union's interest to wages, bonus and job security.

Question 18. State why shareholders are interested in financial statements analysis. [CBSE (F) 2010]
Answer:
Shareholders are interested to know the safety of their investment, return and solvency.

Teacher's Note:
1. Shareholders are owners, so return on investment and safety of capital are their concerns.

Question 19. State the significance of analysis of financial statements to ‘Top Management’. [CBSE Delhi 2012]
Answer:
(i) It is useful for taking financial decision or preparing budget of any programme,
(ii) Top management is interested in knowing the overall efficiency of business.

Teacher's Note:
1. Management uses analysis for decision-making, planning and control.

Question 20. State the interest of management in the analysis of financial statements. [CBSE (F) 2011]
Answer:
Management needs different informations for different decisions to be taken by it. These informations can be obtained from the analysis of the financial statements. It supplies informations about financial health, performance, creditability, solvency, etc.

Teacher's Note:
1. Mention that analysis helps management in decision-making and control.

Question 21. Name two different types of financial analysis.
Answer:
(i) Horizontal analysis, (ii) Vertical analysis.

Teacher's Note:
1. Horizontal compares years (comparative statements); vertical compares items of one year (common size statements).

Short Answer Questions (3 Marks)

Question 22. State the objectives of ‘Analysis of Financial Statements’. [CBSE Delhi 2017, 2019 (67/3/1)]
Answer:
Objectives of ‘Financial Statements Analysis’: (Any four)
(i) Assessing the earning capacity or profitability of the firm as a whole as well as its different departments so as to judge the financial health of the firm.
(ii) Assessing the managerial efficiency by using financial ratios to identify favourable and unfavourable variations in managerial performance.
(iii) Assessing the short-term and the long-term solvency of the enterprise to assess the ability of the company to repay principal amount and interest.
(iv) Assessing the performance of business in comparison to that of others through inter firm comparison.
(v) Assessing developments in future by forecasting and preparing budgets.
(vi) To Ascertain the relative importance of different components of the financial position of the firm.

Teacher's Note:
1. Begin each point with the bold keyword and add one line of explanation; that is how marks are awarded.

Question 23. Explain briefly any four limitations of analysis of financial statements. [CBSE Delhi 2017, 2019 (67/2/1)]
Answer:
Limitations of ‘Financial Statements Analysis’: (Any four)
(i) It is a historical analysis as it analyses what has happened till date. It does not reflect the future.
(ii) It ignores price level changes as a change in price level makes analysis of financial statements of different accounting years invalid.
(iii) It ignores qualitative aspect as the quality of management, quality of staff etc. are ignored while carrying out the analysis of financial statements.
(iv) It suffers from the limitations of financial statements as the analysis is based on the information given in the financial statements.
(v) It is not free from bias of accountants such as method of inventory valuation, method of depreciation, etc.
(vi) It may lead to window dressing, i.e. showing a better financial position than what actually is by manipulating the books of accounts.
(vii) It may be misleading without the knowledge of the changes in accounting procedure by a firm.

Teacher's Note:
1. Quality of management and staff cannot be measured in money, which is why analysis ignores the qualitative aspect.

Teacher's Note:
1. Tax is charged on profit before tax, so tax and profit after tax change by the same percentage as profit before tax when the rate is unchanged.

Teacher's Note:
1. Note that the question gives the later year first; in the answer put the earlier year in column A, because percentage change is always on the earlier year.

Teacher's Note:
1. Tax rates differ (30% and 40%), so compute tax separately for each year on that year's profit before tax.
2. Profit after tax fell even though revenue doubled, because expenses grew faster than revenue.

Teacher's Note:
1. Total revenue can exceed 100% because other income is added to revenue from operations, the base.

Teacher's Note:
1. Deduct sales return first; cost of materials consumed is taken on net sales (revenue from operations less returns).
2. Administrative expenses are shown under Other Expenses in the Statement of Profit and Loss.

Teacher's Note:
1. Split the combined figure first: manufacturing expenses are half of 'Manufacturing and Office Expenses', the other half is office expenses.

Teacher's Note:
1. Find cost of materials consumed first; revenue and other expenses are both worked out from it.

Teacher's Note:
1. Expenses are a percentage of operating revenue (revenue from operations), not of total revenue.

Teacher's Note:
1. A negative change in inventories (closing stock more than opening) reduces expenses, so it appears in brackets.

Teacher's Note:
1. Check that both totals of each year agree (54,50,000 and 52,00,000) before working out the changes.

Teacher's Note:
1. Work from what is given: purchases for 2019 = 5,00,000 + 4,00,000; then total expenses and profit follow by addition and subtraction.
2. Tax is 30% of profit before tax in both years, so tax and profit after tax change by the same 188.89%.

Long Answer Questions (5 Marks)

Teacher's Note:
1. Compare the increase in current assets (₹ 8,00,000) with the increase in current liabilities (₹ 4,00,000) to comment on liquidity.
2. A fall in Reserves and Surplus usually means a loss or a transfer/utilisation during the year.

Teacher's Note:
1. Common size statements let you compare two companies of different sizes, because each total becomes 100.
2. Check that each column of percentages adds up to exactly 100.00 on both sides.