CBSE Class 12 Accountancy Analysis of Financial Statement and Tools MCQs Set 06

Answer: (c) Financial Statements

Explanation:
1. The Balance Sheet and the Statement of Profit and Loss together form the financial statements of a company.

Teacher's Note:
1. Common size statements are a tool of analysis, not the name of the financial statements themselves.

Answer: (d) All of the above

Explanation:
1. Horizontal analysis (comparative statements), vertical analysis (common size statements) and ratio analysis are all commonly used tools.

Teacher's Note:
1. Remember the four tools: comparative statements, common size statements, ratio analysis and cash flow statement.

Answer: (b) Horizontal analysis

Explanation:
1. Comparative statements compare figures of two or more years side by side, which is horizontal analysis.

Teacher's Note:
1. Comparative = horizontal (across years); common size = vertical (within one year).

Answer: (d) All of the above

Explanation:
1. Cash flow statements, comparative statements and common size statements are all tools of financial statement analysis.

Teacher's Note:
1. Ratio analysis is the fourth commonly used tool along with these three.

Answer: (d) All of the above

Explanation:
1. Investors, shareholders and debentureholders all use the analysis to judge safety of funds, returns and solvency.

Teacher's Note:
1. Each user group looks for something different: shareholders for returns, debentureholders for safety of interest and principal.

Answer: (c) judges operational efficiency

Explanation:
1. Judging operational efficiency is a significance (objective) of financial analysis; the other three are its limitations.

Teacher's Note:
1. Sort such options into objectives and limitations first; only one option will be an objective.

Answer: (c) ignores price level changes

Explanation:
1. Ignoring price level changes is a limitation of financial analysis; the other options are its uses.

Teacher's Note:
1. Because figures are in historical rupees, inflation can make comparisons across years misleading.

Answer: (c) Common size statements

Explanation:
1. Common size statements express every item as a percentage of a common base (revenue from operations or total of Balance Sheet).

Teacher's Note:
1. Common base: revenue from operations for the Statement of Profit and Loss; total assets (or total equity and liabilities) for the Balance Sheet.

Answer: (d) To measure the short term solvency of business

Explanation:
1. Measuring short-term solvency is a use of financial statements, not a limitation.

Teacher's Note:
1. Read the word 'not' carefully: pick the option that is an advantage.

Answer: (d) All of the above

Explanation:
1. Financial statements record only items measurable in money, so qualitative factors like quality of management, labour and public relations are ignored.

Teacher's Note:
1. Anything that cannot be measured in money does not appear in financial statements.

Answer: (b) Rate of increase or decrease in Trade Receivables

Explanation:
1. Trade receivables are a Balance Sheet item, so they appear in the Comparative Balance Sheet, not in the Comparative Statement of Profit and Loss.

Teacher's Note:
1. First decide whether the item belongs to the Balance Sheet or the Statement of Profit and Loss.

Answer: (a) Revenue from operations

Explanation:
1. In a common size Statement of Profit and Loss, revenue from operations is taken as 100 and every other item is expressed as its percentage.

Teacher's Note:
1. The base is revenue from operations, not total revenue (which includes other income).

Answer: (b) Equity and liabilities

Explanation:
1. In a common size Balance Sheet, total of equity and liabilities (equal to total assets) is taken as 100.

Teacher's Note:
1. Both totals of the Balance Sheet are equal, so total assets is equally correct as the base.

Answer: (a) 60%

Explanation:
1. Change = 8,00,000 − 5,00,000 = ₹ 3,00,000
2. Percentage change = 3,00,000 ÷ 5,00,000 × 100 = 60%

Teacher's Note:
1. Always divide the change by the previous (base) year figure, not by the current year.

Answer: (b) (33.33%)

Explanation:
1. Change = 2,00,000 − 3,00,000 = (₹ 1,00,000)
2. Percentage change = 1,00,000 ÷ 3,00,000 × 100 = (33.33%), a decrease

Teacher's Note:
1. A decrease is shown in brackets; the base is still the earlier year.

Answer: (a) 55%

Explanation:
1. Percentage = 6,60,000 ÷ 12,00,000 × 100 = 55%

Teacher's Note:
1. In common size income statements every item is divided by revenue from operations.

Answer: (b) 60%

Explanation:
1. Percentage = 5,40,000 ÷ 9,00,000 × 100 = 60%

Teacher's Note:
1. In a common size Balance Sheet the base is total assets (or total equity and liabilities).

Answer: (b) Vertical analysis

Explanation:
1. Vertical analysis studies figures of one date or one period only, so it is static; horizontal analysis covers several years and is dynamic.

Teacher's Note:
1. Static = one point of time (vertical); dynamic = over a period (horizontal).

Answer: (d) All of these

Explanation:
1. Investors use it for security analysis, lenders for credit analysis and shareholders for dividend analysis.

Teacher's Note:
1. Link each use to the user who needs it; that makes such questions easy.

Answer: (a) To determine whether their dues will be paid on time

Explanation:
1. Short-term creditors are interested in liquidity, i.e., whether their dues will be paid on time.

Teacher's Note:
1. Short-term creditors look at liquidity; long-term lenders look at solvency.