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CBSE Questions for Class 12 Commerce Accountancy Analysis Of Financial Statements Quiz 4 - MCQExams.com
CBSE
Class 12 Commerce Accountancy
Analysis Of Financial Statements
Quiz 4
Window dressing is one of the limitation of financial analysis.
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True
0%
False
Explanation
True. Window dressing a limitation of financial analysis. Window dressing means where the company shows a better financial position of the company than actual. It Is usually done to impress the lenders or to existing investors.
Long-term and short-term solvency of the enterprise can be assessed on the basis of ___________ statement analysis.
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cash flow
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income
0%
financial
0%
all of the above
Financial analysis helps the users of the financial statements to understand the complicated matter in a simplified manner.
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True
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False
Explanation
True.
Financial Analysis helps the users of the financial statements to understand the complicated matters in a simplified manner. Financial analysis is reviewing and analysing of financial data, understand the past, present and future projected data. It gives a useful insight to the users as to what is the condition of the company.
Past financial statement analysis helps in assessing developments in future, especially in the next year.
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True
0%
False
Explanation
True. Past financial statement analysis helps in assessing developing future, especially in the next year. Financial analysis helps in analysing the past and current position of the company which helps the company in further making economic decisions.
Analysis helps the company understanding what to do next and what not to do in order to achieve goals.
Financial statement analysis helps to identify the areas where the managers have been efficient and the areas where they have been lacking behind.
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0%
True
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False
Explanation
True. Financial statements helps to understand the financial position of the company. It helps to understand the deviation between the actual position and the position that the company had planned. By looking at the deviation the company can understand how efficiently the managers have worked.
Which of the following is the limitation of financial statement analysis?
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Historical analysis
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Ignores price level changes
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Not free from bias
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All of the above
Explanation
Financial statements of a company as useful as they are have a few limitations as well. They are prepared on historical cost as all the assets of the company are recorded at the cost.
They ignore price level changes because of the historical cost concept. They are not free from personal bias, as the statements are prepared by humans personal bias being a human tendency might affect the financial statements.
Markets which bring closer institutions needing funds and with surplus funds are classified as _____________.
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financial markets
0%
corporate institutions
0%
hedge firms
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retirement planners
Explanation
Markets which bring closer institutions needing funds and with surplus funds are classified as financial markets. A financial market is a broad term describing any marketplace where trading of securities including equities, bonds, currencies, and derivatives occur.
Therefore, A is the correct option.
Financial analysis is used only by the creditors.
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0%
True
0%
False
Explanation
Financial statement analysis is used
by internal and external stakeholders to evaluate business performance and value.
Financial
accounting calls for all companies to create a balance sheet, income
statement
, and cash flow
statement
which form the basis for
financial statement analysis
.
Inter-firm comparison becomes difficult with the help of financial analysis.
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0%
True
0%
False
Explanation
False. Inter-firm comparison will become easier with help of financial analysis as it analyses and interprets the financial information in a simplified manner. Inter firm comparison is comparison between 2 different enterprises.
The current ratio of a company is 2: 1 which of the following suggestions would Improve, reduce and net change it. I. Payment to trade creditors II. Sell machinery for cash Ill. Purchased goods for cash IV. Issue of equity shares ________________________.
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Decrease, Increase, Increase, No effect
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No effect, Increase, Decrease, Increase
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Increases, Increase, No effect, Increase
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Increase, No effect, Decrease, Increase
Capital Budgeting is a part of ___________.
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Investment Decision
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Working Capital Management
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Marketing Management
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Costing Decision
Explanation
Capital Budgeting is the planning process used to determine whether organisation's long term investment proposal are worth funding through firm's capitalization structure i.e, debt, equity & retained earnings.
The
capital budgeting
process is a measurable way for businesses to determine the long-term economic and
financial
profitability of any
investment
project. A
capital budgeting decision
is both a
financial
commitment and an
investment
.
Real rate of return is equal to__________.
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Nominal Rate x Inflation Rate
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Nominal Rate $$\div$$ Inflation Rate
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Nominal Rate - Inflation Rate
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Nominal Rate + Inflation Rate
Explanation
The
real rate of return
formula is the sum of one plus the nominal
rate
divided by the sum of one plus the inflation
rate
which then is subtracted by one. The formula for the
real rate of return
can be used to determine the effective
return
on an investment after adjusting for inflation.
The paid-up capital of Mukund Ltd. is Rs $$18,00,000$$. The company decided to propose a dividend of Rs $$2,16,000$$ out of current profit. How much of current profit is to be transferred to reserve?
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At least $$2.5$$ $$\%$$
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At least $$5$$ $$\%$$
0%
At least $$10$$ $$\%$$
0%
None of the above
Explanation
As per the provision of sub section (2) of section 205 of the companies act, no dividend can be declared or paid by the company to its shareholders out of the profits of the company for the financial year after providing depreciation until a specified percentage of profit of the financial year is transferred to reserves.
Rules are as under:
If proposed dividend exceeds 10% but less than 12.5% of the paid up capital, an amount of 2.5% of the current profit need to be transferred to reserve.
If proposed dividend exceeds 12.5% but less than 15% of the paid up capital, an amount of 5% of the current profit need to be transferred to reserve.
If proposed dividend exceeds 15% but less than 20% of the paid up capital, an amount of 7.5% of the current profit need to be transferred to reserve.
If proposed dividend exceeds 20% of the paid up capital, an amount of 10% of the current profit need to be transferred to reserve.
In present case dividend percentage is 12% (216000/1800000), falls under first rule, hence 2.5% need to be transferred to reserves from current year's profit.
Which of the following is not used in Capital Budgeting?
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Time Value of Money.
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Sensitivity Analysis.
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Net Assets Method.
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Cash Flows.
Explanation
Capital Budgeting is the process of determining the viability to long term investment on purchase or replacement of property, plant & equipment, new product line or other projects. It takes into account various factors such as time value of money, sensitivity analysis & cash flows.
Which one of the following statements is correct?
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Increases in liabilities are credits and decreases are debits.
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Increases in assets are credits and decreases are debits.
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Increases in capital are debits and decreases are credits.
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Increases in expenses are credits and decreases are debits.
Explanation
Business transactions are events that have a monetary impact on the financial statements of an organization. When accounting for these transactions, numbers in two accounts are recorded, where the debit column is on the left side and the credit column id on the right side.
1. A debit is an accounting entry that either increase an asset or expense account, or decreases a liability or equity account. It is positioned on the left in an accounting entry.
2. A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned to the right in an accounting entry.
Feasibility Set Approach to Capital Rationing can be applied in ____________.
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Accept-Reject situations
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Divisible projects
0%
Mutually Exclusive Projects
0%
None of the Above
Explanation
Feasibility Set Approach to capital Rationing can be applied in Accept-reject situations. Accept-Reject situations are the situations which the company is not sure about, so conducting a feasibility test would ensure if the project is suitable or not for the company.
When preparing the annual financial statements, the balance of prepaid rent account should be treated as a _____________.
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Personal account
0%
Real account
0%
Nominal account
0%
Deferred revenue expenditure
Explanation
Prepaid expenses are those expenses which have been paid in advance and related benefits are not consumed within the same accounting period. The benefits of expenses incurred are carried to the next accounting period. Examples-prepaid salary, prepaid rent etc. Prepaid expenses are recorded n the books at the end of an accounting period to show true numbers of a business.
When preparing the annual financial statements, the balance of prepaid rent account should be treated as the balance of a personal account and is shown on the assets side of a balance sheet.
Both assets and owners' equity would be increased by _________.
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Capital brought in
0%
Purchase of an asset on credit
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Payment of creditors
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Proprietors drawings
Explanation
Accounting Equation:
Owners Equity+Liabilities=Fixed Assets+Current Assets
When Owner is bringing capital, it increases owners equity along with the cash or bank balance. Hence both assets and owners equity increases.
Redeemable preference shares of $$Rs. 2,00,000$$ are redeemed at par for which purpose fresh equity capital of $$Rs. 80,000$$ is issued at par. What amount should be transferred to Capital Redemption Reserve account?
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Nil
0%
$$Rs. 80,000$$
0%
$$Rs. 1,20,000$$
0%
$$Rs. 2,00,000$$
Explanation
Redeemable preference shares : $$Rs.200000$$
Fresh Equity Shares $$Rs.80000$$
-------------------
Balance Amount $$Rs.120000$$
--------------------
An amount of $$Rs.120000$$ need to be transferred to Capital Redemption Reserve Account.
Risk with respect to Capital budgeting can be incorporated by __________.
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0%
adjusting the cash flows
0%
adjusting the discount rate
0%
adjusting the life
0%
All of the above
Explanation
With a few
adjustments
to the
capital budgeting
formula, you can compare projects under different
risk
situations. Increase the required rate of return discount factor for your project's cash flows. This
adjustment
will reduce the value of future cash flows indicating higher uncertainty for the project.
____________ reduces both total assets as well as owner's equity.
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0%
Credit purchases
0%
Retained earnings
0%
Bank loans
0%
Drawings
Explanation
A drawing account is an accounting record maintained to track money withdrawn from a business by its owners. For example if proprietor withdraw cash from business then cash in hand account in decreased i.e. total assets decreased and it is recorded in the proprietor capital account as drawing which will reduce owner's equity.
Which of the following are the limitations of financial analysis?
a. Financial analysis does not consider price level.
b. Financial analysis is just a study of interim reports.
c. Financial analysis may be leading with the knowledge of the changes in accounting procedure followed by a firm.
d. Financial statements are prepared on the the basis of going concern concept.
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Both (a) and (b)
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Both (b) and (c)
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Both (c) and (d)
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Both (a) and (d)
Explanation
Following are the limitations of the financial analysis:
1. Financial analysis does not consider price level changes.
2. Financial analysis may be misleading without the knowledge of the changes in accounting procedure followed by a firm.
3. Financial analysis is just a study of interim reports.
4. Monetary information alone is considered in financial analysis while non-monetary aspects are ignored.
5. The financial statements are prepared on the basis of on-going concept, as such, it does not reflect the current position.
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