Analysis Of Financial Statements - Class 12 Commerce Accountancy - Extra Questions

Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.

It is very much true that accounting equation remains intact under all circumstances the reason behind is that accounting equation is another form of dual aspects concept. Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital ( owners equity). This is the reason that the Accounting equations read as follows 
                               A= L+C
Where,                   A= Assets
                              L= Liabilities
                             C= Capital
In every circumstance, the business entry must be equal to the claims of those who have financed these resources. The proprietors and outsiders provide the resources of the business. The claim of the proprietors is called Capital and that of the outsides is known as Liabilities.
Each element of the equation is the part of balance sheet, which states the financial position of the business on a particular date. When we analyse the transaction, we actually try to know that how balance sheet of a business entry gets affected, Assets side of the balance sheet is the list of assets, which the business entry owns. The liabilities side of the balance sheet is the list of owner's claims and outsider's claims, i.e.what the business entry owes. The equality of the assets side and the liabilities side of the balance sheet is an undeniable fact and this justified the name of accounting equation as balance sheet equation also.
Example When business is started with cash Rs.2,00,000, the equation would be 
Cash(2,00,000) = Capital (2,00,000)
When goods is purchased for cash Rs. 50,000, the equation would be 
Cash (2,00,000 - 50,000 = 1,50,000) + Stock (50,000) = Capital (2,00,000)
Hence the equation would be equal both sides.


If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability, is the decrease recorded as debit or as credit?

When a transaction has the effect of decreasing an asset, the decrease will be recorded in the credit side because the balance of all the assets are debited. e.g. when an asset is decreased because of depreciation in that case depreciation is reduced in the debit side of the assets. 
On the other hand, when the transaction has the effect of decreasing a liability, the decrease will be recorded in the debit side because the balance of all the liabilities are credit. e.g. when capital is decreased because of the withdrawal by the proprietor, Drawing accounts is debited.


Some of the transactions of a firm are given below. Against each transaction the accounts to be debited and credited are given. There are some obvious errors. Point out the errors and give correct answers.
Purchased goods from Rao for Cash : 
Debit:  Goods & Purchase: Credit Rao.

  • Errors:- 
1. Purchase A/c is to be debited as rule for Dr. is that what comes in.
2. Cr. What goes out rule is to be followed , hence cash should be credited.
  • The correct Journal Entry Will be :-
Purchase A/c Dr.
     To Cash


State and explain any 'four objectives' of analysis of financial statement from a business concern's point of view.

The 4 objectives of analysis of financial statement from a business concern's point of view are:- 
1) Assessment of past performance and current position of the company. 
2) Assessment of net income and growth prospects. 
3) Prediction of bankruptcy or failure. 
4) Helps in getting loans from bank and financial institutions. 


Give any two differences between horizontal analysis and vertical analysis of financial statements.

 BasisHorizontal Analysis Vertical Analysis 
 MeaningThis analysis is carried out to review ana analyse financial statements for a number of years.  This analysis is carried out to review and analyse the financial statements of one year only
Usefulness It is gnerally used for time serires analysis. It is generally used for cross-sectional analysis. 


Kamal and vimal were partners in a firm sharing profits in the ratio of 3:Ghosh was admitted as a new partner for $$\dfrac{1}{5} th$$ share in the profits. 
On Ghosh's admission the Balance Sheet of the firm showed a credit balance of $$Rs 10,000$$ in its Profit and Loss Account which was debited by the accountant of the accounts of kamal and Vimal. Did the accountant give correct treatment to the balance of Profit and Loss Account ? If 'yes' give the reason and i 'not' give the correct treatment.

At the time of admission of a partner, the balance of accumulated profits and losses is transferred among the old partners in the old ratio. The capital accounts of the old partners are to be debited or credited depends whether the balance available in the fund is a credit balance or a debit balance. Here, profit and Loss Account had a credit balance of $$Rs 10,000$$. This implies that the capital accounts of the old partners (Kamal and Vimal) should have been credited in the ratio of 3:2 (old ratio). Thus, the accountant has wrongly debited the capital accounts of the old partners.
The correct journal entry in this case is given below.
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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. 

(a) The following are the other objectives of financial analysis:
(i) To determine operational efficiency with which resources are utilized in generating revenue.
(ii) To determine profitability with respect to sales and investment.


Explain briefly any four limitations of 'Analysis of Financial Statements'.

Limitations of “Analysis of Financial Statements” are: 
(i) The Financial Statements Analysis suffers from such limitations as Financial Statement suffers. This ignores the qualitative information like quality of management and labour force, public relations etc. 
(ii) The Analysis of Financial Statements do not disclose the current worth of the business. The Financial Statements of the company are prepared on Cost Principle. 
(iii) In many situations, Accountant has to make a choice out of various alternatives available. He may choose that alternative which may be Beneficial to the Company. In such a case, the Financial Statements are not free from bias. 
(iv) Different firms may follow different accounting policies. This may create difficulty in comparing the results of two companies.


List out any two techniques of Financial statement analysis.

  • Cash Flow Analysis :-
               Cash flow analysis is based on the movement of cash and bank balances. In other words, the movement of cash instead of movement of working capital would be considered in the cash flow analysis. There are two types of cash flows. They are actual cash flows and notional cash flows.

  • Ratio analysis :-
                Ratio analysis is an attempt of developing meaningful relationship between individual items (or group of items) in the balance sheet or profit and loss account. Ratio analysis is not only useful to internal parties of business concern but also useful to external parties. Ratio analysis highlights the liquidity, solvency, profitability and capital gearing.



Class 12 Commerce Accountancy Extra Questions