Book Keeping Accountancy Solutions 2014 Solutions for Class 12 Commerce Accountancy Chapter 12 Analysis Of Financial Statements are provided here with simple step-by-step explanations. These solutions for Analysis Of Financial Statements are extremely popular among class 12 Commerce students for Accountancy Analysis Of Financial Statements Solutions come handy for quickly completing your homework and preparing for exams. All questions and answers from the Book Keeping Accountancy Solutions 2014 Book of class 12 Commerce Accountancy Chapter 12 are provided here for you for free. You will also love the ad-free experience on Meritnation’s Book Keeping Accountancy Solutions 2014 Solutions. All Book Keeping Accountancy Solutions 2014 Solutions for class 12 Commerce Accountancy are prepared by experts and are 100% accurate.
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Question 1.A1:
Objective Type Questions :
State whether following statements are true or false :
Financial statements include only balance sheet.
Answer:
False
Explanation: Financial statements are the statements that report the operating results and the financial position of the business at the end of the accounting period. It consists of two statements, namely, Balance Sheet (i.e. Position statement) and Income Statement (i.e. Trading and Profit and Loss Account). Balance sheet reflects the financial position of the business, whereas, Trading and Profit and Loss Account reflects the operating results, i.e. gross and net profit of the business.
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Question 1.A2:
Objective Type Questions :
State whether following statements are true or false :
Analysis of financial statement is a tool but not a remedy.
Answer:
True
Explanation: Financial statements record financial transactions. However, the process of reviewing and drawing conclusions by evaluating Balance sheet and Profit and Loss Account is done through the analysis of financial statements. It is not a remedy; rather, it is a tool to evaluate results of business and helps in decision-making activity of the management. Analysis of financial statement gives the management an insight into the business and helps them in taking rational decisions.
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Question 1.A3:
Objective Type Questions :
State whether following statements are true or false :
Purchase of fixed asset is operating cash flow.
Answer:
False
Explanation: Purchase of fixed asset is an investing cost for the business. Therefore, it is an investing cash outflow for the business. On the other hand, operating cash flow consists of those activities of business that are related to the operations of the business.
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Question 1.A4:
Objective Type Questions :
State whether following statements are true or false :
Gross profit depends upon net sales.
Answer:
True
Explanation: Gross profit is ascertained by preparing a Trading Account. In this account, all the direct costs incurred are deducted from the net sales (sales less sales return), i.e. revenue, to arrive at gross profit. Hence, it is correct to say that gross profit depends on net sales.
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Question 1.A5:
Objective Type Questions :
State whether following statements are true or false :
ROI is calculated on ownership capital only.
Answer:
False
Explanation: ROI, i.e. return on investment, is calculated on total capital employed which is total of ownership capital and debt capital.
Capital Employed = Share Capital + Reserves & Surplus + Long-Term Loans + Debentures – Preliminary Expenses
Alternatively,
Capital Employed = Net Fixed Assets + Long-Term Investments + Working Capital.
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Question 1.A6:
Objective Type Questions :
State whether following statements are true or false :
Net profit shows quick ratio.
Answer:
False
Explanation: Net profit depicts the overall performance of the business and the efficiency with which business is operating. On the other hand, quick ratio is an indicator of a firm’s short-term liquidity.
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Question 1.A7:
Objective Type Questions :
State whether following statements are true or false :
Government is not interested in analysis of financial statement.
Answer:
False
Explanation: It is incorrect to say that government is not interested in the analysis of financial statements. Government uses these statements to study the profit margins and the trends to provide concessions/subsidies or to withdraw or increase/decrease excise and other duties.
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Question 1.A8:
Objective Type Questions :
State whether following statements are true or false :
Ratio Analysis is useful for inter-firm comparison.
Answer:
True
Explanation: Ratio analysis helps an organisation to compare the results of the business with other firms, industries and also helps in appraising the progress and growth of the organisation over the years. It facilitates comparison and helps in determining whether the business is doing better than other firms and if it is not, what are the improvement areas and the reasons for them.
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Question 1.B1:
Select the appropriate answer from the alternatives given below & rewrite the completed statements :
The methodical classification of financial statement is called _____________.
a) an interpretation
b) an analysis
c) ratio
d) profit and loss A/c
Answer:
The methodical classification of financial statement is called an analysis.
Explanation: The classification of financial statement is done to evaluate the health of a business concern. The methodical classification of the items in the financial statements helps to analyse and draw various conclusions regarding profitability, efficiency, liquidity and financial position of the business.
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Question 1.B2:
Select the appropriate answer from the alternatives given below & rewrite the completed statements :
The common size statement requires _____________.
a) choose of common base
b) journal entries
c) cash and flow
d) current ratio
Answer:
The common size statement requires choose of common base.
Explanation: Common size statements require choosing a common base for drawing conclusions. All the items in the balance sheet or the income statement are converted as a percentage of a common base and compared to the previous year or for the same period with different firms. The common base is an aggregate such as total of balance sheet or total of net sales.
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Question 1.B3:
Select the appropriate answer from the alternatives given below & rewrite the completed statements :
The short term deposits are _______________.
a) net cash
b) cash equivalent
c) cash flow
d) cash outflow
Answer:
The short term deposits are cash equivalent.
Explanation: Cash equivalents are those that can be converted into cash immediately. They are highly liquid in nature. For example, marketable securities, short-term deposits etc.
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Question 1.B4:
Select the appropriate answer from the alternatives given below & rewrite the completed statements :
Cash proceeds from issue of debentures is _______________.
a) financial activity
b) non financial activity
c) operating activity
d) trading activity
Answer:
Cash proceeds from issue of debentures is financial activity.
Explanation: Cash proceeds from issue of debentures are classified as financial activity for the business, as it relates to arrangement of funds for the business.
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Question 1.B5:
Select the appropriate answer from the alternatives given below & rewrite the completed statements :
Bills payable is _____________.
a) Long term loan
b) Current liability
c) Liquid asset
d) Net loss
Answer:
Bills payable is current liability.
Explanation: Bills payable are drawn in case of credit purchases. So, it is a liability to be paid in the near future, i.e. a short-term liability. It is generally payable within a period of 12 months, i.e. a year.
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Question 1.B6:
Select the appropriate answer from the alternatives given below & rewrite the completed statements :
Generally current ratio should be _______________.
a) 2:1
b) 1:1
c) 3:1
d) 1:2
Answer:
Generally current ratio should be 2:1
Explanation: The ideal current ratio should be 2:1. That is, the assets of a firm must be twice its liabilities. This ensures that the firm would not default in meeting its short-term obligations.
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Question 1.B7:
Select the appropriate answer from the alternatives given below & rewrite the completed statements :
The relationship between net profit before Tax, interest and dividend and capital employed is known from _____________.
a) Current Ratio
b) Quick Ratio
c) ROI
d) ROCE
Answer:
The relationship between net profit before Tax, interest and dividend and capital employed is known from ROI.
Explanation: Return on investment, i.e. ROI, is based on capital employed, i.e. net profit before tax, interest and dividend divided by capital employed, where capital employed reflects the total amount invested in the business.
While quick ratio and current ratio reflect the liquidity of the business, ROI reflects the profitability.
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Question 1.B8:
Select the appropriate answer from the alternatives given below & rewrite the completed statements :
From financial statement analysis, the creditors are interested to know _____________.
a) liquidity
b) profit
c) sale
d) share capital
Answer:
From financial statement analysis, the creditors are interested to know liquidity.
Explanation: The analysis of financial statements helps creditors in assessing the short-term liquidity position of a business. Such analysis helps them in judging the firm’s ability to repay the debts and interest obligations timely. Analysis of financial statements helps creditors in gaining insight about the solvency and profitability of business concerns and, thereby, its liquidity position.
Hence, the correct option is A.
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Question 1.C1:
Give one word/term/ phrase for each of the following statements :
Critical evaluation of financial statement to measure profitability.
Answer:
Analysis of financial statement
Explanation: It is the process of analysing the business results and the efficiency of the business via various tools. Analysis of financial statement provides an insight into the efficiency with which a business is operating, what is the profitability and what is the present financial position of the business. It facilitates comparison of business results of different firms and over the years.
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Question 1.C2:
Give one word/term/ phrase for each of the following statements :
The statement showing profitability of two different period and its percentage change.
Answer:
Comparative income statement
Explanation: A statement that compares financial data of different years is known as comparative income statement. Generally, the current year figures are compared with the previous year figures. Basically, it shows how the revenue and expenses have increased in relation to the previous year or year of comparison.
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Question 1.C3:
Give one word/term/ phrase for each of the following statements :
The tool for analysis of financial statement where, individual figures of balance sheet is converted into percentage.
Answer:
Common size balance sheet
Explanation: In a common-size balance sheet, the individual items (both assets and liabilities) are expressed as a percentage of some common aggregate.
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Question 1.C4:
Give one word/term/ phrase for each of the following statements :
The type of activity in cash flow analysis, involving purchase of fixed asset.
Answer:
Investing activity
Explanation: Investing activity is the business activity that involves inflow or outflow of cash for purchase or sale of fixed assets and investments.
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Question 1.C5:
Give one word/term/ phrase for each of the following statements :
A particular mathematical number showing relationship between two accounting figures.
Answer:
Accounting Ratio
Explanation: Accounting ratio expresses the relationship between two accounting variables. It is one amongst the various tools available for financial analysis. Financial ratios are calculated from the financial statements to derive conclusions regarding liquidity, profitability and solvency of a business. They are used to measure the efficiency and profitability of a company based on the financial reports prepared by the business. They facilitate the decision-making task of the management.
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Question 1.C6:
Give one word/term/ phrase for each of the following statements :
An asset which can be converted into cash immediately.
Answer:
Liquid asset
Explanation: Those assets of the business that can be converted into cash immediately are known as liquid assets. They are highly liquid in nature and are also known as quick assets.
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Question 1.C7:
Give one word/term/ phrase for each of the following statements :
The ratio measuring the relationship between gross profit and net sales.
Answer:
Gross profit ratio
Explanation: It is the ratio based on net sales and gross profit earned. It is used to assess the profitability of the core business. It reflects the efficiency with which a firm produces its products. Higher the gross profit, better is its financial performance.
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Question 1.C8:
Give one word/term/ phrase for each of the following statements :
The ratio measuring the relationship between net profit and ownership capital employed.
Answer:
ROCE
Explanation: Return on capital employed reflects the company's profitability and the efficiency with which its capital is employed.
Algebraically,
ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed
A higher ROCE indicates more efficient use of capital. ROCE should be higher than a company’s capital cost. Lower ROCE indicates that the company is not employing its capital effectively and is not adding to the shareholder value.
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Question 2.1:
Answer the following in brief :
What do you mean by analysis of financial statements?
Answer:
It is a process by which financial statements, i.e. Balance Sheet and Income Statement, are analysed to study the business results and the efficiency of the business operations. Also, it helps in the comparison of profitability and financial position of the business over the years or with different firms. Such analysis also facilitates decision-making.
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Question 2.2:
Answer the following in brief :
State any three limitations of Analysis of financial statement.
Answer:
Limitations of analysis of financial statements:
a. The analysis is done for past information, while the users are more concerned about current and future information.
b. It ignores the non-monetary transactions that are also very useful and relevant for decision-making.
c. Such analysis is subject to personal bias and judgement. The conclusions drawn from the financial statements are based on the ability and experience of the accountant.
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Question 2.3:
Answer the following in brief :
What is comparative financial statement?
Answer:
A statement that compares financial data of different years is known as comparative financial statement. It helps determine business trends and assess a company’s success or failure over a period of time.
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Question 2.4:
Answer the following in brief :
What are the different cash inflows and cash outflows of operating activity?
Answer:
1. Cash inflows of operating activity:
b. Receipts from the sale of debt or equity instruments in a trading portfolio
c. Interest received on loans
2. Cash outflows of operating activity:
b. Payments to employees or on behalf of employees
c. Interest payments
d. Taxes paid
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Question 2.5:
Answer the following in brief :
What is cash equivalent?
Answer:
Cash equivalents are the assets, such as marketable securities and short-term investments, which are readily convertible into cash. They are regarded as highly liquid assets.
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Question 2.6:
Answer the following in brief :
What are the components of current ratio?
Answer:
There are two components of current ratio, i.e. current assets and current liabilities. It is calculated as the ratio of current assets to current liabilities. This ratio shows the liquidity position of the business, i.e. the ability of a company to pay off its current liabilities.
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Question 3.1:
Explain the following :
Operating profit.
Answer:
It is also known as EBIT, i.e. earnings before interest and taxes. It is the difference between operating income and operating expenses. All the non-operating items (i.e. income and expenses) are ignored.
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Question 3.2:
Explain the following :
Quick assets
Answer:
They are highly liquid assets that can be easily converted into cash. It includes cash and other assets, such as marketable securities and accounts receivable, which can be converted easily into cash. However, prepaid expenses and stock are not included in quick assets.
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Question 3.3:
Explain the following :
ROI.
Answer:
ROI is calculated to know the return on investment in a business. It is ascertained by dividing the net profit earned with the total capital employed in the business. Higher the ROI, the better it is. It helps in knowing the efficiency and profitability of the business compared to other businesses and also the efficiency with which the capital is employed.
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Question 3.4:
Explain the following :
Comparative income statement
Answer:
It is a statement that compares the revenue and expenses of the current and previous year of a business and helps in knowing the trends in the business. It reflects the increase/decrease in the revenue and expenses and explains the trends in the financials and how the business reacts to the changes in the market.
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Question 3.5:
Explain the following :
Common size balance sheet.
Answer:
It is a statement that reflects the items of the Balance Sheet as a percentage of some common bases (total assets or total liabilities). It helps in easy analysis of performance during various years (intra-firm comparison) or between different companies (inter-firm comparison).
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Question 3.6:
Explain the following :
Operating activities in cash flow.
Answer:
These are the routine and recurring activities of a business, i.e. activities related to core operations of the business. They reflect the result of net cash flow (used or generated) of the company’s normal business operations. All the inflows, such as receipt from sale of goods/services etc and outflows, such as payment to suppliers, form part of operating activities, and the net result depicts whether the business is operating efficiently or not.
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Question 4.1:
Solve the following:
(1) In common size balance sheet fixed assets are Rs 50,000 and balance sheet total as Rs 1,50,000. Find out percentage of fixed assets to total assets.
Answer:
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Question 4.2:
Solve the following:
If current assets are Rs 2,50,000 and current liabilities are Rs 1,25,000. What will be current ratio?
Answer:
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Question 4.3:
Solve the following:
If gross profit as Rs 2,20,000 and operating expenses are Rs 85,000 and non operating expenses are Rs 30,000, find out operating profit.
Answer:
Note: While calculating Operating Profit, Non-Operating Expenses should not be considered.
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Question 4.4:
Solve the following:
If total capital invested by company is Rs 5,00,000 and net profit before interest, tax and dividend is Rs 1,60,000, what is ROI?
Answer:
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Question 4.5:
Solve the following:
If office expenses of two different periods are Rs 4,000 and Rs 5,000 respectively and sales for same two periods are Rs 1,00,000 and Rs 2,00,000 respectively then what is absolute change and percentage?
Answer:
Note: In the question, it is not mentioned what is to be calculated, i.e. Absolute Change and Percentage of Expenses or Sales.
Hence, for the convenience of the students, Absolute Change and Percentage Change of both (Office Expenses as well as Sales) have been calculated.
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