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ee) Financial Statement Analysis Questions Latest Financial Statement Analysis MCQ@ Objective Que: CER ABR he lial Start Complete Exam Preparation aC a a eee ra Glens Practice fox} Mock Tests ere jon Bank Download App Ext Question 1: View this Question Online > Rising promotion costs and shrinking profit margins are the result of : 1, Heightened competition 2. Globalisation 3. Deregulation 4, More than one of the above 5. Noné of the above a Answer (Detailed Solution Below) Option 1: Heightened competition coaching India’s Super Teachers for all govt. exams Under One Roof Financial Statement Analysis Question 1 Detailed Solution The correct answer is heightened competition. Key Points Heightened Competitior + Rising promotion costs and shrinking profit margins are often the result of heightened competition. + When competition in a market intensifies, firms may need to spend more on marketing and advertising to differentiate their products or services and attract customers. * This can lead to rising promotion costs. At the same time, competition can drive down prices and reduce profit margins as firms compete for market share. In an effort to maintain their margins, firms may need to increase sales volume or reduce costs, which can also put pressure on promotion costs. + In some cases, rising promotion costs and shrinking profit margins may also be the result of changes in consumer behavior or technological disruption + For example, if consumers are increasingly turning to online channels to shop and compare prices, firms may need to invest in digital marketing and e-commerce capabilities to remain competitive. This can lead to rising promotion costs, particularly if firms are competing with online marketplaces that can offer lower prices due to their lower overhead costs, Hence, the correct answer is Heightened Competition. - Ee APE Ral) Recaro Start Complete Exam Preparation PUTS esd PaaS Ds cielny Oresieurd Px tiz ry my” D> Download App — Question 2: The process of converting cash tlow into present equitables is called : 1. Discounting 2. Compounding _ co “oot gor? iswer (Detailed Solution Below) Option 1 : Discounting Financial Statement Analysis Question 2 Detailed Solution The correct answer is Discounting. © Key Points Discounting: + The process of converting cash flow into present equitable is called Discounted Cash Flow (DCF) analysis. + The goal of DCF analysis is to estimate the value of an investment, business, or asset based on its expected future cash flows, discounted to its present value using a discount rate that reflects the risk associated with the investment. + In other words, DCF analysis involves estimating the future cash flows that an investment is expected to generate, determining the appropriate discount rate to reflect the risk of those cash flows, and then calculating the present value of those cash flows by discounting them back to their present value. + The resulting present value is then used to determine whether the investment is worth undertaking or not, based on the investor's required rate of return. © Additional Information co Compounding: Compounding is the process of earning interest on an invest ipal amount and the accumulated interest earned over time. In other words,compounding refers to the exponential growth of an investment, as the interest earned unt is reinvested and generates more interest. The compounding effect can b era long period, as the interest earned on the interest earned can become a sub: the total return. ke Budgeting: Budgeting is the process of allocating financial resources, such as income and expenses, over a specified period. The purpose of budgeting is to help individuals and organizations to plan and control their finances, by setting priorities, identifying areas of potential savings, and ensuring that expenses do not exceed income. A budget typically involves estimating future income and expenses, setting spending limits for each category, and monitoring actuel spending against the budget to identify variances. Rationing: Rationing refers to the process of allocating scarce resources among competing uses, based on predetermined criteria. Rationing is often used in situations where there is not enough of a resource to meet the demand, and some form of prioritization is required, In a financial context, rationing may involve allocating funds among different projects or departments, based on their strategic importance or financial performance. Rationing decisions may be made by senior management, a budget committee, or other decision-making bodies within an organization. Hence, the correct answer is Discounting. eee Paci) Start Complete Exam Preparation CaCO DR Sco lees Obes be haa scold Exc Download App resin Question 3: View this Question Online > ‘An annual report is furnished by a company to its : 1. Directors 2. Auditors 3. Shareholders 4. Management Answer (Detailed Solution Below) Option 3: Shareholders Financial Statement Analysis Question 3 Detailed Solution The correct answer is Shareholders. © Key Points + Shareholders: > An annual report is a comprehensive report on a company’s activities throughout the preceding year, intended primarily for shareholders. » The purpose of the report is to give shareholders and othér interested people information about the company’s activities and finantialiperformance. © It serves as a means of communication between'the company’s management and its investors, providing details on operations, financial condition, and future outlook. 2 While directors are in the preparation of the annual report, it is not furnished specifically for them; the, already have access to the information being reported as part of their governance role. + Auditors: * Auditors review the financial statements which are a part of the annual report, but the report itself is not primarily for them. Their role is to provide an independent opi those financial statements. + Management: + Management is responsible for the preparation and accuracy of the annual report. However, the report is designed for shareholders and potential investors, not for the management team itself. emer ec PSE Tame CM cima y leh tel) Rec eet ee an ew ores a foschemery Download App Question 4: View this Question Online > Pick the odd one out while Calculating Cash Flow from Financing Activities : 1, Issue of Shares 2. Repayment of Bank Loan 4. Rent received Answer (Detailed Solution Below) Option 4: Rent received Financial Statement Analysis Question 4 Detailed Solution The correct answer is Rent received. © Key Points + Rent received: 22 © Rent received is considered an operating/activity, nota financing activity. It is associated with the primary operations of the business rather’than with its financing. + Financing activities involve transactions between the company and its investors or creditors that impact the equity,anddebt of the business. Rent received does not fit this category. & Additional InfodBon + Issue of Shares: = Issuing shares involves obtaining equity financing by selling shares of the company to investors, This increases the company's equity and is a financing activity. + Repayment of Bank Loan: © Repaying a bank loan involves the outflow of funds to settle the company’s debt obligations. This is a financing activity because it affects the company's financial structure. + Redemption of Debentures: + Redeeming debentures refers to repaying the borrowed amount to debenture holders. Like loan repayment, it is a financing activity because it involves managing the Pe eee) Start Complete Exam Preparation CCC Da Soc ane Pa head Rows Cea I en Ces Download App Question 5: View this Question Online > Current liabilities include: (A) Trade receivables »% (8) Unclaimed dividend oOo. (Q Imerest accrued but not due on loan G (D) Acceptances Nie (£) 1296 debentures re Choose the corres Ss options given below: (A), only (8), (C) and (D) only 3. (A), (©) and (D) only 4. (A), (8) and (D) only Answer (Detailed Solution Below) Option 2 : (6), (C) and (D) only Financial Statement Analysis Question 5 Detailed Solution The correct answer is (B), (C) and (D) only. « Trade receivables (A) » This statement is incorrect. * Trade receivables are amounts owed to a business by its customers co of goods or services on credit. They are considered a current =t) liability. + Unclaimed dividend (B) © This statement is correct © Unclaimed dividends refer to dividends that h 0 set aside for shareholders but have not yet been claimed. sidered a current liability because the company owes these amounts ers + Interest accrued but not due on loan © This statement is correct © Interest accrued but not, presents the interest expense that has been incurred but not yet paid. It is recog current liability because it is an obligation that the company needs to settle in the near term + Acceptances (D) » This statement is correct. * Acceptances refer to agreements to pay for goods or services at a future date, usually within a year. They are considered current liabilities because they represent a commitment to make payments within the short term. + 12% debentures redeemable after four years (E) CR Den tent ey Soe on Peres = Debentures redeemable after four years are classified as non-current liabi »s because they do not require settlement within the company's normal operating cycle or twelve months, They represent long-term borrowing. Hence, the correct statements are (B) Unclaimed dividend, (C) Interest accrued but not due on loan, and (D) Acceptances, making the correct option ‘(B), (©) and (0) only’. Top Financial Statement Analysis MC@ Objective Questions India’s #1 Learning Platform Start Complete Exam Preparation CRCeo Lc notte Peay Practice maar ad Cosco resieacoag a eet Download App Question 6 "View this Question Online > When net profit is Rs 44,000 and profit on sale of a fixed asset is Rs 4,000, what is the fund fram operations? 1, Rs 40,000 2. Rs 44,000 3) » 4. Cannot be computed Answer (Detailed Solution Below) Option 1: Rs 40,000 Financial Statement Analysis Question 6 Detailed Solution Net Profit: Net profit is the difference in total revenues and total expenses and losses which include both operating and non-operating items. Funds From Operation: Funds from operation exeludes both non-operating incomes and nen- ‘Ganson: lomsceianiiainc. Non-operating income refers to the part of a company’s income that is not attributable to its core business operations. It is a category in a multi-step:ineome statement. Dividend incames, gains or losses from foreign exchange, 2s well a5 sales of assets, a write-clown of assets, interest incomes, and expenses are all examples of non-operating income items. Formula: Fund from operation = Net Profit - Non-operating income(sale of the fixed asset) = Rs. 44,000 - Rs. 4,000 = Rs. 40,000 Therefore, When net profit is Rs. 44,000 and profit on the sale of a fixed asset is Rs. 4,000, the fund from operations will be Rs. 40,000. 2 ECE Paci) OREO cesta Start Complete Exam Preparation Cee Cor a MasterCl Download App Question 7 View this Question Online > Sources and uses of funds statements are examined as part of 1. A forecasting technique 2. Aratio analysis 3. The preparation ofthe balance sheet 4 _ floiy aralysis Answer (Detailed Solution Below) Option 4: A funds flow analysis Financial Statement Analysis Question 7 Detailed Solution ‘The correct answer is A fund flow analysis. © Key Points Fund Flow Statement: + A fund flow statement is a document prepared to examine the factors that led to changes in a company’s financial situation between twio balance sheets. + It depicts the inflow and outflow of funds during a specific time period, including the s6urces and uses of that money. + Fund flow analysis is done through fund flow statement Steps to prepare Fund flow statement- + Prepare statement of changes in working capital. + Prepare funds from operations. + Preparation of funds flow statement. Be Addit ; : Ratio analysis- + Ratio analysis is a nate MMB Svioe for analysing a company’s financial documents, such as the balance sheet and income statement, to gather knowledge about its liquidity, operational effectiveness, end profitability by procession various ratios. Preparation of Balance sheet- + Balance sheet is prepared on the basis of accounting equation that says assets of an organization is equal to its liabilities and shareholder's equity. Forecasting technique- + Forecasting is a method for estimating the likely course of future events based on a review of the past. ae eet ery et Start Complete Exam Preparation ees en os Peston resieaccg xtc r Download App Question 8 View this Question Online > Deferred payment arrangement aim at financing 1. working capital needs FERS OF Geos: 3. purchase of GDRs NA 4. import of plant an conc a ition Below) 4: import of plant and machinery Financial Statement Analysis Question 8 Detailed Solution The correct answer is import of plant and machinery. Deferred Payment: 1, A loan arrangement in which the borrower is allowed to start making payments at some specified time in the future. 2. Deferred payment arrangements are often used in retail settings where a person buys and receives an item with a commitment to begin making payments at a future date. 3, Many times suppliers of machinery provide deferred credit facilities under which payment for the purchase of machinery can be made over a period of time, 4, The entire cost of the machinery is financed and the company is not required to contribute any amount initially towards the acquisition of the machinery. Therefore, the Deferred payment arrangement aims at financing the Import of plant and machinery. ge Confusion Points 1, Working capital finance * Working capital finance is business finance designed to boost the working capit Go a business. + It's often used for specific growth projects, such as taking on a bigger contra Wvesting ina new market. @ + Different businesses use working capital finance for a variety of p is that using working capital finance frees up cash for g recouped in the short- to medium-term. + A deferred payment arrangement may also sie working capital needs eg. Trade credit. it the general idea ess which will be aaaitional Inform: 4. Redemption of debt + Redemption describes the repayment of any money market fixed-income security at or before the asset's maturity date. + Investors can make redemptions by selling part or alll of their investments such as shares, Pa car ra acc 2.GDRs: 1. Global Depository Receipt (GDR) is an instrument in which a company located in a domestic country issues one or more ofits shares or convertibles bonds outside the domestic country. 2. In GDR, an overseas depository banki.e. bank outside the domestic territory of a company, issues shares of the company to residents outside the domestic territory. 3. Such shares ere in the form of a depository receipt or certificate created by overseas the depository bank Eee Eee) Start Complete Exam Preparation eee ar teeter if Bee Practice Dac MasterClasse Cisse eae eX Download App Question 9 View this Question Online > Which of the following is a source of funds? 1. Sale of building only 2. Issue of shares only 3. Term loan borrowedhonly 4. All of the above ” Answer (Detailed Solution Below) Option 4:: All of the above Financial Statement Analysis Question 9 Detailed Solution The correct answer is All of the above. Funds can be raised by all the above methods ie. sale of building, issue of shares , and term lean. @ Key Points Fund Flow Statement: + A fund flow statement is a statement created to examine the factors that led to changes in a company’s financial position between two balance sheets. + It displays the sources and uses of money for a given period, or the inflow and outflow of ~ money. + To putit another way, a funds flow statement is created to describe changes to company's working capital position. » \mportant Points Sources of Funds + Issue of Shares. + Issue of debentures. + Accept public deposits. + Owner's savings or Retained earnings, + Loan from financial institutions (Fis). + Decrease in Working Capital Application of Funds: + Purchase of Fixed Assets and Investments + Redemption of Debentures, Preference Shares and Repayment of Loan + Payment of Dividend & Tax + Increase in Working Capital & Additional Information These sources of fund can be classified as Owner's fund and Debt fund. [Owner's Fund [Debt Fund Equity shares Debentures Preference shares Public deposits Retained earings lLoan from Fis Sen aro Ree Dances Start Complete Exam Preparation eau rales aos Giese ee eon Herd Download App Question 10 View this Question Online > In Fund Flow Statement, which one of the following is not a valid statement? 1. It is prepared to know the total sources and their uses in'@lyear. 2. Dividend received is a source of funds. 3. Its preparation is at t di management. 4, It is useful nancial management. etailed Solution Below) Option 4: Itis useful for external financial management. Financial Statement Analysis Question 10 Detailed Solution @ Key Points Fund Flow Statement: + A fund flow statement is a document created to examine the factors that led to changes in a company’s financial situation between two balance sheets. + It depicts the inflow and outflow of funds during a specific time period, including the sources and uses of that money. > \mportant Points Statement 1: It is prepared to know the total sources and their uses in a year. A fund flow statement will give us the following two information: «ty + Sources of funds - From where the funds have come in. * Application of funds - Where these funds have been used Hence, Statement 1 is true. Nis Statement 2: Dividend received is a source of funds. 0° * Dividend received facilitates the inflow of cash vi and hence they are regarded as, sources of funds. Hence, statement 2 is correct. XS Statement 3: Its preparation is iccretion of the management. + The income statement, balance sheet, and statement of cash flows are mandatory financial statements. + Fund flow statement is prepared at a discretion of the management. Hence, Statement 3 in correct. Statement 4: It is useful for external financial management. + Itacts as a financial parameter tht aids in controlling a company's finances, improving long- term financial planning strategies, and utilising both short- and long-term cash. + Hence. it is useful for internal financial management. Hence, Statement 4 in incorrect. & Teese eto SETA Mew Cima le lie) @ Trusted by 1,86,00,449+ Student Download App Question 11 ‘View this Question Online > As per the Companies Act 2013, the balance sheet ofa company must be in the format specified in of the Companies Act. 1. Schedule Ill 2. Schedule VI 4, Schedule IV Answer (Detailed Solution Below) Option 1: Schedule Ill Financial Statement Analysis Question 11 Detailed Solution © Key Points Balance Sheet: Abalance sheet is a financial statement of a company that represents the values of its assets, liabilities, and Shareholder's Equity at a specific time, |t basically represents the financial position of a company. Section 129 of the Companies Act of 2013 Mandates that a vertical balance sheet be kept by every company. There are multiole calugns on a vertical balance sheet, starting with obligations and capital and ending with all ass at lieasinnetenc? Dalaba + Acompany’s balance sheet is created in accordance with the format outlined in section | of Schedule III of the 2013 Companies Act. + Only the vertical format is required for financial statement presentation according to Schedule Me + Asa result, a corporation will no longer be able to submit financial results in horizontal style. Hence, it can be concluded that as per the Companies Act 2073, the balance sheet of a company must be in the format specified in schedule Ill of the Companies Act. Ce Am Re icuy ORR roe Start Complete Exam Preparation antes (pe ra Cpr Poscoeery Download App ‘Question 12 View this Question Online > When current ratio is 2: 1 and if there is an equal increase in current assets and current liabilities would result in 1. No change in current ratio, 2. Increase in.current ratio 4. Current ratio will double Answer (Detailed Solution Below) Option 3 : Decrease in current ratio Financial Statement Analysis Question 12 Detailed Solution The current ratio is a liquidity ratio that measures 2 company's ability to pay short-term, obligations or those due within one year It tells investors and analysts how a company an maximize the current assets on its balance sheet to satisfy its current debt and othauitvabies Cxey-Points When the current ratio is 2: decrease the current ratio. Let us understand this eames Current Assets = Rs.200000 and Ctirrent Liabilities = Rs.100000 Current ratio = Current assetsiCurrent liabilities = 200000/100000 = 2:1 , an equal increasevitcurrentiassets and current liabilities would Now let us increase the current assets and current liabilities by Rs.100000 and calculate the new current ratio ; Current ratio = 300000/200000 = 4.5:1. Thus, option 3is the correct answer. Ce an Rec) Rea cect Start Complete Exam Preparation Cc eee Cee Download App Question 13 View this Question Online > The practice of omitting paise and then rounding off the figures in the financial statement is based on 1. Materiality concept 2. Duality concept 3. Realization concept a" ? Answer (Detailed Solution Below) Option 1: Materiality concept Financial Statement Analysis Question 13 Detailed Solution The correct answer is Materiality concept. © Key Points Materiality concept + It is the practice of omitting paise and then rounding off the figures in the financial statement. + It states that only that information should be stated in the financial statement which have an impact on the decision making of the users. + Since paise won't majorly impact the finances, it is omitted. + The practice of omitting paise and then rounding off the figures in the financial statement is based on Materiality concept. & Additional Information Duality aspect concept + It states that since every transaction has a dual éfféct, the Accounting records must reflect the same to show the accurate movement of funds. | + If the buyer is giving money, the seller is receiving the money. + It suggests double entry of usiness transaction while preparing a financial or accounting report. “~ Realization concept + It states that revenue can only be recognized once the underlying goods or services have been delivered or rendered. + It helps in calculating profit/loss for a period under a specific accounting period. + It entails the time when a business should record revenue in the books of accounting records. Cost concept + The cost concept is a concept of accounting which states that the value of an asset will be calculated on the basis of historical cost or acquisition cost. + Such as an asset purchased at 40 lac in 1977 and same cost will be shown in 2023 financial statement in all future years. & CER ABR Rell RR ron PS ela meow ei kre lela tela) ovis parca Crete Guertin nt [al slettee Download App Question 14 View this Question Online > According to the accounting profession, which of the following would be considered a cash-flow item from an “investing” activity in the company involved in trading of securities? 1. Cash inflow from interest income 2. Cash inflow from dividend income 3. Cash outflow to acquire fixed assets 4. All of the above Answer (Do Option 3: Cash outflow to oe cy Frac Stent Question 14 Detailed Solution h Cash flows from Investing Activities + Its the section of the company’s cash flow statement that displays how much money has been generated from or used in making investments during a specific period of time. + Investing activities include the purchese of long-term fixed assets like plant, property, equipment, etc., acquisition of other businesses, and investments in marketable securities like stocks and bonds. Cash flows included and not cluded from Investing activities are listed below: Included Not included + Cash outflow to acquire fixed assets like + Cash outflow from property, plant, interest payment. and equipment (PP&E). + Cash inflow from | + Cash inflow from the sale of PP&E. interest income. *Ceshoutfow 1 cash outiow from rom acquisitions| * Cash, outflow of other eae C businesses. payment. + Cash inflow from |. Gash inflow from 0° the sale of other dividend ificomie. businesses. *egash otittiow + Cash flows from from the debt, equity, or purchase of other forms of marketable : inancing securities. * Depreciation of + Cash inflow from | capital assets (even the sale of though the marketable purchase of these securities. assets is part of investing). + All.cash flows related to normal business activities. + There are more items that can be included in this list; the only sure way to know what's included is to look at the balance sheet and analyze any difference between non-current assets over the two periods. + Any changes in the value of these long-term assets (other than depreciation) mean there will be investing items to display on the cash flow statement. Therefore, according to the accounting profession, Cash outflow to acquire fixed assets would be considered a cash-flow item from an "investing" activity. Eee er een) Start Complete Exam Preparation CCC ec Bien one Mock Tests Des ciolny esieacrg xtc) Download App Question 15 View this Question Online > Cash flow statement is prepared as per accounting standard 1, AS-5 2. AS-4 3. AS-3 ~ Answer (Detailed Solution Below) Option 3: AS-3 Financial Statement Analysis Question 15 Detailed Solution The correct answer is AS-3 © Key Points Accounting Standards: Accounting Standards can be any form of statement which consistsiof rules and guidelines, issued by the accounting institutions, for the preparation of uniform and | consistent financial statements. This also includes disclosures required by the different usetsyof accounting information. List of few Accounting Standards in detail: 1. Policies related to accounting disclosure (AS 1): This standard deals with the disclosure of Qe eee eee ee ancial statements Ce. 2. Valuation of Inventorie: This lard deals with the determination of value at which inventories are carried al statements, including the ascertainment of cost of inventories and any write ereof to net realizable value. 3. Cash Flow Statements (AS 3): This standard deals with the historical changes in cash and cash equivalents of an enterprise. This is cone by preparing a statement popularly called Cash Flow Statement. This statement classifies cash flows during the period from operating, investing, and financing activities. 4. Contingencies and Events Occurring After Balance Sheet Date (AS 4): This Standard deals with the treatment of contingencies and events occurring after the balance sheet date. 5. Net profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies (AS 5): This standard should be applied by an enterprise in presenting profit or loss from activities in the normal course of business, extraordinary items, and prior period items. This also includes changes in accounting estimates and changes in accounting policies. Therefore, the Cash flow statement is prepared as per accounting standard As- 3

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