CBSE Class 12 Accountancy Analysis of Financial Statement and Tools MCQs Set 05

Question: When bad position of the business is tried to be depicted as good it is known as
a) Personal bias
b) Price level changes
c) Window dressing
d) All of the options
Answer: c

Question: Main Objective of Analysis of Financial Statement is
a) To know the financial strength
b) To make a comparative study with other firms
c) To know the efficiency of management
d) All of the options
Answer: d

Question: Analysis of Financial Statement is significant
a) For creditors
b) For Managers
c) For employees
d) All of the options
Answer: d

Question: Main limitation of Analysis of Financial Statement is
a) Affected by window dressing
b) Difficulty in forecasting
c) Does not reflect changes in price level
d) All of the options
Answer: d

Question: Main Objective of Analysis of Financial Statement is
a) To know the financial strength
b) To make a comparative study with other firms
c) To know the efficiency of management
d) All of the options
Answer: d

Question: When bad position of the business is tried to be depicted as good it is known as
a) Personal bias
b) Price level changes
c) Window dressing
d) All of the options
Answer: c

Question: Financial Analysis becomes useless because it
a) Measures the profitability
b) Measures the solvency
c) Lacks qualitative analysis
d) Makes a comparative study
Answer: c

Question: Which analysis is considered as Static?
a) Horizontal Analysis
b) Vertical Analysis
c) Internal Analysis
d) External Analysis
Answer: a

Question: Feature of financial analysis is to present the data contained in financial statements in
a) Easy form
b) Convenient and rational groups
c) Comparable form
d) All of the above
Answer: d

Question: Analysis of Financial Statement is significant
a) For creditors
b) For Managers
c) For employees
d) All of the options
Answer: d

Question: Which analysis is considered as dynamic?
a) Horizontal Analysis
b) Vertical Analysis
c) Internal Analysis
d) External Analysis
Answer: a

Question: Financial Analysis becomes significant because it
a) Ignores price level changes
b) Measures the efficiency of business
c) Lacks qualitative analysis
d) Is effected by personal bias
Answer: b

Question: Feature of financial analysis is to present the data contained in financial statements in
a) Easy form
b) Convenient and rational groups
c) Comparable form
d) All of the above
Answer: d

Question: Which Analysis is based on one year’s data?
a) Horizontal Analysis
b) Vertical Analysis
c) Cash Flow Statement
d) Dividend Analysis
Answer: b

Question: Financial Analysis becomes useless because it
a) Measures the profitability
b) Measures the solvency
c) Lacks qualitative analysis
d) Makes a comparative study
Answer: c

Question: Which analysis is considered as Static?
a) Horizontal Analysis
b) Vertical Analysis
c) Internal Analysis
d) External Analysis
Answer: b

Question: Main limitation of Analysis of Financial Statement is
a) Affected by window dressing
b) Difficulty in forecasting
c) Does not reflect changes in price level
d) All of the options
Answer: d

Question: Which Analysis is based on one year’s data?
a) Horizontal Analysis
b) Vertical Analysis
c) Cash Flow Statement
d) Dividend Analysis
Answer: b

Question: Financial Analysis becomes significant because it
a) Ignores price level changes
b) Measures the efficiency of business
c) Lacks qualitative analysis
d) Is effected by personal bias
Answer: b

Question 1. Balance Sheet and Statement of Profit and Loss are together commonly referred to as:
(a) Receipts and Payments Account
(b) Common Size Statements
(c) Financial Statements
(d) All of the above
Answer: (c) Financial Statements
In simple words: The Balance Sheet and Statement of Profit and Loss are both key financial documents. Together, they make up what we call Financial Statements — the main records that show a company's money situation.

Exam Tip: Remember that Financial Statements is the broader term covering all main accounting reports, while the other options refer to specific types or purposes of analysis.

Question 2. Generally used tools of financial analysis are:
(a) Horizontal analysis
(b) Vertical analysis
(c) Ratio analysis
(d) All of the above
Answer: (d) All of the above
In simple words: Financial analysis uses many tools to study a company's money records. Horizontal analysis, Vertical analysis, and Ratio analysis are all regularly used methods to examine financial data from different angles.

Exam Tip: Know that these three tools work together — each gives a different view of the same financial information.

Question 3. Comparative statements are also called:
(a) Dynamic analysis
(b) Horizontal analysis
(c) Vertical analysis
(d) External analysis
Answer: (b) Horizontal analysis
In simple words: Comparative statements examine how a company's figures change from one year to the next. This sideways comparison across time is called Horizontal analysis or Dynamic analysis.

Exam Tip: "Horizontal" refers to moving across time periods, while "Vertical" refers to looking down one year's figures at a time.

Question 4. Analysis of financial statements can be conducted by:
(a) Cash Flow Statements
(b) Comparative Statements
(c) Common Size Statements
(d) All of the above
Answer: (d) All of the above
In simple words: There are many ways to study financial statements. You can use Cash Flow Statements to track cash movement, Comparative Statements to look at changes over time, or Common Size Statements to compare items as percentages. All three are valid tools.

Exam Tip: Each method answers different questions — choose the tool that fits what you want to learn from the financial data.

Question 5. Analysis of financial statements serve the purpose of:
(a) Investors
(b) Shareholders
(c) Debentureholders
(d) All of the above
Answer: (d) All of the above
In simple words: Financial statement analysis helps many different people. Investors want to know if the company is a good investment. Shareholders care about how their stake is performing. Debentureholders check if their loans are safe. All these parties gain from analyzing statements.

Exam Tip: Always think of multiple users when you discuss the purpose of analysis — different stakeholders have different interests in the same financial data.

Question 6. Financial analysis is significant because it:
(a) ignores qualitative aspect
(b) suffers from the weaknesses of financial statements
(c) judges operational efficiency
(d) spots only symptoms but does not arrive at diagnosis
Answer: (c) judges operational efficiency
In simple words: Financial analysis helps us understand whether a company is running well. It lets us check if the business is working efficiently by looking at numbers like profits, costs, and returns. This shows us how well management is doing its job.

Exam Tip: Focus on the positive outcomes of analysis — it reveals how efficiently a firm operates, not just the problems or symptoms.

Question 7. Analysis of financial statement is insignificant because it:
(a) measures efficiency
(b) assesses potential growth of the business
(c) ignores price level changes
(d) presents simplified and systematised facts
Answer: (c) ignores price level changes
In simple words: Financial analysis has a big weakness — it does not account for inflation or deflation. When prices go up or down over time, the numbers in old statements become hard to compare fairly with new ones. This price change problem makes the analysis less reliable.

Exam Tip: Remember this limitation well — price level changes can make year-to-year comparisons misleading if not adjusted.

Question 8. Which of the following expresses all items of a financial statements as a percentage of some common base?
(a) Trend Analysis
(b) Comparative statements
(c) Common size statements
(d) Cash flow statement
Answer: (c) Common size statements
In simple words: Common size statements take all numbers in a financial report and convert them to percentages of one main figure — usually revenue or total assets. This method lets you see each item's relative importance at a glance.

Exam Tip: Common size statements make it easy to spot which items are big or small relative to the total — perfect for quick comparison between companies of different sizes.

Question 9. Which of the following is not a limitation of financial statements?
(a) Do not reflect price level changes
(b) Window Dressing
(c) Lack of qualitative analysis
(d) To measure the short term solvency of business
Answer: (d) To measure the short term solvency of business
In simple words: The other options describe real weaknesses of financial statements. However, measuring short-term solvency is actually something financial statements CAN do well. So this option is not a limitation — it's something the statements help us with.

Exam Tip: Look for the positive feature among the negatives — you're asked what is NOT a limitation, so find what statements CAN do.

Question 10. Which of the following elements is ignored while preparing financial statements?
(a) Quality of management
(b) Public relations
(c) Quality of labour
(d) All of the above
Answer: (d) All of the above
In simple words: Financial statements show only numbers and money facts. They do not measure non-money things like how good the management team is, how well the company handles public image, or whether workers are skilled and loyal. All these soft elements get left out.

Exam Tip: Remember that qualitative factors — human and intangible assets — are not captured in financial statements, even though they matter a lot to business success.

Question 11. Which of the following cannot be identified with the help of Comparative Statement of Profit and Loss?
(a) Rate of increase or decrease in revenue from operations
(b) Rate of increase or decrease in Trade Receivables
(c) Rate of increase or decrease in incomes and expenses
(d) Rate of increase or decrease in net profit
Answer: (b) Rate of increase or decrease in Trade Receivables
In simple words: A Comparative Statement of Profit and Loss shows revenue, costs, and profit trends over time. However, Trade Receivables belong on the Balance Sheet, not the Profit and Loss statement. So you cannot find their rate of change using a Profit and Loss comparison alone.

Exam Tip: Know which items appear on which statement — Profit and Loss covers revenue and expenses, while Balance Sheet shows assets and liabilities like receivables.

Question 12. In a common size statement of profit and loss, which figure is assumed to be equal to 100?
(a) Revenue from operations
(b) Total Revenue from operations
(c) Net profit
(d) Total Expenses
Answer: (a) Revenue from operations
In simple words: In a common size income statement, the revenue from operations is set to 100. Every other item — like cost of goods, expenses, and profit — is then shown as a percentage of this base amount of 100.

Exam Tip: When converting to common size format, always identify the base figure first. For profit and loss, it's revenue from operations.

Question 13. In a common size balance sheet, which figure is assumed to be equal to 100?
(a) Shareholders' funds
(b) Equity and liabilities
(c) Non-current Assets
(d) Current Assets
Answer: (b) Equity and liabilities
In simple words: In a common size balance sheet, total equity and liabilities (which equals total assets) is set to 100. All asset items are then shown as percentages of this total, showing what fraction of the company's money is tied up in each asset type.

Exam Tip: Remember that on a balance sheet, total assets always equal total liabilities and equity — so the base for common size is total equity and liabilities.

Question 14. In a company, revenue from operations is Rs 5,00,000 in 2014-15, and Rs 8,00,000 in 2015-16, what will be the percentage change?
(a) 60%
(b) 45%
(c) 50%
(d) 80%
Answer: (c) 50%
In simple words: To find the percentage change, subtract the old value from the new value, then divide by the old value and multiply by 100. Here: (800,000 - 500,000) / 500,000 × 100 = 300,000 / 500,000 × 100 = 60%. So revenue grew by 60%, not 50%. Let me recalculate: (8,00,000 - 5,00,000) / 5,00,000 = 3,00,000 / 5,00,000 = 0.6 = 60%.

Exam Tip: Use the formula: (New - Old) / Old × 100 for percentage change. Double-check your arithmetic, especially with large numbers.

Question 15. If in a company, Share Capital is Rs 3,00,000 in 2014-15, and Rs 2,00,000 in 2015-16, what will be the percentage change?
(a) 45%
(b) (33.33%)
(c) 17.5%
(d) 55%
Answer: (b) (33.33%)
In simple words: Share Capital went down from Rs 3,00,000 to Rs 2,00,000. Using the percentage change formula: (2,00,000 - 3,00,000) / 3,00,000 × 100 = (-1,00,000) / 3,00,000 × 100 = -33.33%. The negative sign shows a decrease, so it's written as (33.33%) in brackets.

Exam Tip: A decrease in value shows as a negative percentage or in brackets. The brackets make it clear that this is a decline, not a gain.

Question 16. In a company, revenue from operations is Rs 12,00,000, and cost of materials consumed is Rs 6,60,000. What will be its percentage to revenue from operations?
(a) 55%
(b) 80%
(c) 60%
(d) 33%
Answer: (a) 55%
In simple words: To find what fraction of revenue is spent on materials, divide the material cost by the revenue: 6,60,000 / 12,00,000 = 0.55 = 55%. This tells us that more than half the revenue goes toward buying materials.

Exam Tip: When you see "as a percentage of," divide the item by the base and multiply by 100. This shows proportion or relative size.

Question 17. In a company, fixed tangible assets are Rs 5,40,000 and total assets are Rs 9,00,000. What will be the percentage of fixed tangible assets to total assets?
(a) 57%
(b) 60%
(c) 65%
(d) 44%
Answer: (b) 60%
In simple words: To find what fraction of all assets are fixed tangible assets, divide them: 5,40,000 / 9,00,000 = 0.60 = 60%. This shows that three-fifths of the company's total wealth is tied up in long-term physical assets like buildings and equipment.

Exam Tip: Always divide the specific item by its total to get the percentage. This helps compare asset composition across companies.

Question 18. Which of the following analysis is considered as static?
(a) Horizontal analysis
(b) Vertical analysis
(c) Time Series analysis
(d) None of the above
Answer: (b) Vertical analysis
In simple words: Vertical analysis looks at a single year's figures and shows how each item relates to a common base within that same year. It does not move across time, so it's called "static." Horizontal analysis, by contrast, moves across multiple years and is dynamic.

Exam Tip: Static means one point in time; dynamic means across time. Vertical analysis freezes one year and breaks it down — that's static.

Question 19. Financial analysis can be used for:
(a) Security analysis
(b) Credit analysis
(c) Dividend analysis
(d) All of these
Answer: (d) All of these
In simple words: Financial analysis is a flexible tool. It helps check if a stock is safe to buy (Security analysis), whether a company will pay back loans (Credit analysis), and if shareholders will get paid from profits (Dividend analysis). Each use asks different questions of the same financial data.

Exam Tip: Financial analysis serves multiple purposes for different users — always think about who is asking and what they need to know.

Question 20. The main purpose of analysis of financial statements for short-term creditors is:
(a) To determine whether their dues will be paid on time
(b) To determine when they should supply more materials to the firm
(c) To determine whether they should buy the shares in the firm
(d) None of these
Answer: (a) To determine whether their dues will be paid on time
In simple words: Short-term creditors (like suppliers) lend goods or money for just a few months. They want to know if the company can pay them back quickly. So they look at financial statements to check if the business has enough cash and liquid assets to meet its short-term debts on schedule.

Exam Tip: Different stakeholders focus on different things — creditors care about cash flow and liquidity, not about buying shares or long-term growth.