FINANCIAL STATEMENT ANALYSIS - CLASS XII QUESTIONS WITH ANSWERS

Q. 1. What is meant by Analysis of Financial Statements? 

Ans. Analysis of Financial Statements is a systematic process of the critical examination of the financial information contained in the Financial Statements in order to understand and make decisions regarding the operations of the firm.

Q. 2. What is Horizontal Analysis?

Ans. Horizontal (or Dynamic) Analysis is made to review and analyse Financial Statements of a number of years and are, therefore, based on financial data taken for those years It is very useful for long-term trend analysis and planning.

Q. 3. Why Horizontal Analysis is considered dynamic in nature? 

Ans. Horizontal Analysis is dynamic in nature since it is a time series analysis. It shows comparison of financial data for several years against a chosen base year.

Q. 4. What is Vertical Analysis?

Ans. Vertical Analysis is made to review and analyse the Financial Statements of one particular year only. This type of analysis is also called Static Analysis. 

Q. 5. Give an example of Horizontal and Vertical Analysis.

Ans. Comparative Financial Statement is an example of Horizontal Analysis Ratio Analysis of the financial year relating to a particular accounting year is an example of Vertical Analysis

Q. 6. What is Intra-firm Analysis?

Ans. Intra-firm Analysis is a comparison of financial variables of a firm over a period of time. It is also known as Time Series Analysts or Trend Analysis.

Q. 7. What is Inter-firm Analysis? 

Ans. Inter-firm Analysis is a comparison of two or more business firms. It analyses and compares financial variables of two or more firms to determine the competitive position of these firms.

Q.8 Name the three financial characteristics which are analysed by Financial Analysis. 

Ans. Profitability, liquidity and solvency.

Q. 9. Give two areas of interest for investors while analysing the Financial Statements. 

Ans. Areas of Interest for Investors or Shareholders:

• Knowledge of short-term and long term solvency of the firm. 

• Knowledge of return on investment, i.e., profitability.

Q. 10. Give two areas of interest for management while analysing the Financial Statements. 

Ans. Areas of Interest for Management:

• Knowledge of performance of the enterprise as a whole i.e., profitability

• Knowledge of short-term and long-term solvency position of the enterprise.

Q. 11. Give two areas of interest for bankers/lenders while analysing the Financial Statements.

Ans. Areas of Interest for Bankers/Lenders: 

• To assess whether the company will be able to repay the amount of loan/credit or not as well as to assess whether the interest on loan will be received periodically.

• To assess the liquidity, solvency, profitability and efficiency of the business.

Q12. How is financial strength of a business unit assessed?

Ans. The financial strength of a business unit can be assessed on the basis 

of its earning capacity and its ability to pay debts and dividends.

Q.13. State the significance of Analysis of Financial Statements to the "Creditors".

Ans. Creditors are interested in analysing Financial Statements so that they can assess the financial position of the enterprise before granting or extending credit

0.14. Give two purposes which are served by Analysis of Financial Statements.

Ans. (i) It helps to determine the creditworthiness and earning potential of a business entity. 

(ii) Long-term as well as short-term solvency can be determined with the help of Analysis of Financial Statements.

Q. 15. One of the objectives of Financial Statements Analysis is to identify the reasons for change in the financial position of the enterprise. State two more objectives of this analysis. 

Ans. (i) To determine operational efficiency with which resources are utilised in generating revenue.

(ii) To determine profitability with respect to sales and capital employed or invested.

Q. 16. One of the objectives of Financial Statement 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. 

Ans (i) To determine operational efficiency with which resources are utilised in generating revenue.

(ii) To determine profitability with respect to sales and investment.

Q. 17. One of the objectives of Financial Statements Analysis' is to ascertain the relative importance of the different components of the financial position of the firm. State two more objectives of this analysis.

Ans. (i) To determine profitability with respect to sales. 

(ii) To compare inter firm position and to identity the strong and weak areas (if any) and to take necessary corrective action.

Q. 18. Why are investors interested in analysing Financial Statements?

                          OR

State the interest of investors in the Analysis of Financial Statements.

Ans. Investors are interested in analysing the Financial Statements to assess the safety of the investments and return

Q. 19. State the interest of tax authorities in the Analysis of Financial Statements. 

Ans. Tax Authorities are interested to analyse the financial statements to know about the performance of the company and to collect various types of taxes.

Q 20. State the interest of trade unions in the Analysis of Financial Statements. 

Ans. Employees and trade unions are interested in their welfare, i.e, better emoluments, better working conditions and security of their jobs. So, they are always interested in profitability and strength of the concern.

Q. 21. How is the Financial Statements Analysis useful to Finance Manager? 

Ans. Financial Statements Analysis is very useful to Finance Manager for taking financial decisions for the business. Financial analysis can shed light on the financial strengths and weaknesses of the business unit.

Q. 22. Explain how Financial Statement Analysis ignores qualitative elements. 

Ans: Since the financial statements are confined to the monetary matters only the qualitative elements like quality of product quality of management public relations are ind while carrying out the Analysis of Financial Statements 

Q. 23. State any one objective of Financial Statement Analysis.

Ans. To know long-term as well as short-term solvency of the firm.

Q. 24. State any one limitation of Financial Statement Analysis. 

Ans. It ignores price level changes.

Q. 25 How is 'window dressing' a limitation of Financial Statement Analysis? 

Ans. Window dressing means presenting better financial position than actual. On account of such a situation, financial analysis may give false information to the users.

Q. 26 How does 'subjectivity' become a limitation of Financial Statement Analysis?

Ans. Subjectivity means using personal judgement in selecting the methods of accounting treatment from the alternatives available. i.e, choice in the method of depreciation or choice in the method of inventory valuation. Since the subjectivity is inherent in personal judgement the financial statements are not free from bias.

Q. 27. State any two limitations of Financial Statement Analysis Or State any fuo limitations of Analysis of Financial Statements.

Ans. Limitations of Financial Statement Analysis are: 

(i) Financial Statement Analysis is subjective in the sense that each analyst exercises his own judgement in drawing conclusions.

(ii) It ignores the qualitative aspects like quality of management quality of work force. etc, and changes in the price level.

Q.28 Name two parties interested in Financial Statement Analysis.

Ans. Parties interested in Financial Statement Analysis (Any two):

(i) Owners (ii) Lenders/Bankers

(iii) Managers (iv) Government

Q. 29. State the significance of Analysis of Financial Statements to Top Management.

Ans. Financial Statement Analysis is useful for taking financil decisions or preparing budgetary programmes.

Q.30. State why shareholders are interested in Financial Statement Analysis. 

Ans. Shareholders invest capital to conduct the business. They are interested in the profitability. dividends, safety and market value of their holdings and long-term solvency of the business concern.

Comparative And Common Size Statements — Class XII