Unit 2: Introduction to Analysis and Interpretation of Financial Statements

1) The term financial statement refers to…

a) Income statement
b) Cash flow statement
c) Balance sheet
d) All

2) Which of the following is the main objective of a financial statement?

a) to know the solvency
b) to know the debt capacity
c) to know the earning capacity
d) All

3) In financial statement the stock is valued at cost or market price whichever is less on the basis of…
a) Accounting concepts
b) Accounting conventions
c) Accounting principles
d) None
e) Both are false

4) The analysis and interpretations of the financial statement will reveal …

a) the financial position
b) the profitability
c) None
d) Both

5) The process of explaining the meaning, significance and relationship between two financial factors is
called …
a) Summarization
b) Analysis
c) Interpretation
d) None

6) The process of comparing various financial factors of a company over a period of time is known as …
a) Inter‐firm comparison
b) Ratio Analysis
c) Intra‐firm comparison
d) Inter‐industry comparison

7) Which of the following is technique of financial statement analysis?

 a) Common‐size statement
b) Comparative statement
c) Trend analysis
d) All

8) Which technique used for figures of two or more periods are placed side by side to facilitate easy and
meaningful comparisons?
a) Comparative statement
b) Common‐size statement
c) Trend Analysis
d) None

9) is a simply the amount of cash coming in to a business.

a) cash flow
b) inflow
c) both a and b
d) None of the above.

10) Incorrect cash flow planning can lead to

a) solvency
b) insolvency
c) bankruptcy
d) failure

11) Comparison of financial statements highlights the trend of the of the business.
a) Financial position
b) Performance
c) Profitability
d) All of the above

12) Analysis of any financial Statement comprises

a) Balance sheet
b) P&L Account
c) Trading account
d) All of the above

13) Which of the following are techniques, tools or methods of analysis and interpretation of financial
statements?
a) Ratio Analysis
b) Average Analysis
 c) Trend Analysis
d) All of the above

14) Interpretation of accounts is the

a) Art and science of translating the figures
b) To know financial strengths and weaknesses of a business
c) To know the causes for the prevailing performance of business
d) All of the above

15) Cash inflows arise from assets, liabilities, and stockholders' equity.
a) increasing; increasing; decreasing
b) increasing; decreasing; decreasing
c) decreasing; increasing; increasing
d) decreasing; increasing; decreasing
e) total assets

16) analysis is the process of studying a series of ratios for a company and/or industry over
time.
a) DuPont
b) Trend
c) Common size
d) All of the above.

17) The statement of cash flows tells us

a) accounting profit or loss
b) how cash was created
c) actual profit or loss
d) two of the above

18) The primary sections of a statement of cash flows are:

a) Cash flows from investing, operating, and financing activities.
b) Cash flows from investing and operating activities plus investments.
c) Cash flows from investing, financing, and accounting activities.
d) Cash flows from investing, operating, financing, and accounting activities.
19) Trend analysis is significant for .
a) Forecasting and budgeting
b) profit planning
c) Capital rationing
d) working capital management

20) In common size income statement analysis, which is taken as 100 percent?
a) Sales/revenue from operations
b) cost of goods sold
c) purchases
d) total assets

21) Comparative statement analysis sheet is .

a) vertical analysis
b) horizontal analysis
c) either vertical or horizontal analysis
d) neither vertical nor horizontal analysis

22) Financial statements are meaningful and useful only when they are .
a) Verified
b) Presented to owners
c) Analyzed and interpreted
d) Published

23) Vertical analysis is made on the basis of .

a) Single set of financial statements
b) Multiple sets of financial statements
c) Different schedules attached to financial statements
d) Similar set of financial statement
 Unit 3: Ratio Analysis
1) When the concept of ratio is defined in respect to the item shown in the financial statements, it is termed
as
a) Accounting ratio
b) Financial ratio
c) costing ratio
d) none of the above

2) Stock is considered as a liquid asset as anytime it can be converted into cash immediately.
a) Yes
b) No
c) Only YES
d) None of the above

3) Liquid asset is determined by

a) Current asset - stock - prepaid expense
b) Current asset + Stock + prepaid expense
c) Current asset + prepaid expense
d) None of the above

4) Which of the following is not included in liquid current assets.

a) Debtors
b) Stock
c) Cash at bank
d) Cash in hand

5) Liquidity ratios are expressed in

a) Pure ratio form
b) Percentage
c) Rate or time
d) None of the above

6) If sales is Rs 5,00,000 & net profit is Rs 1,20,000 Net profit ratio is

a) 24%
b) 41%
c) 60%
d) None of the above
7) General profitability ratios are based on
a) Investment
b) Sales
c) A & B
d) None of the above

8) Determine stock turnover ratio if, Opening stock is Rs 31,000 , Closing stock is Rs 29,000, Sales is Rs
3,20,000 & Gross profit ratio is 25% on sales.
a) 31 times
b) 11 times
c) 8 times
d) 32 times

9) An ideal Liquid ratio is considered as 1:1

a) true
b) false

10) Net profit ratio is a .

a) Turnover ratio.
b) Long term solvency ratio.
c) short term solvency ratio
d) Profitability ratio.

11) Stock turnover ratio is a .

a) Turnover ratio.
b) Profitability ratio.
c) Short term solvency ratio.
d) Long term solvency ratio.

12) Current ratio is a

a) Short-term solvency ratio.
b) Long-term solvency ratio.
c) Profitability ratio.
d) Turnover ratio.

13) Proprietary ratio is a

 a) Short-term solvency ratio.
b) Long-term solvency ratio.
c) Profitability ratio.
d) Turnover ratio.

14) Fixed assets ratio is a

a) Short-term solvency ratio.
b) Long-term solvency ratio.
c) Profitability ratio.
d) Turnover ratio.

15) Fixed assets turnover ratio is a

a) Short-term solvency ratio.
b) Long-term solvency ratio.
c) Profitability ratio.
d) Turnover ratio.

16) The ratio which measures the profit in relation to capital employed is known as
a) Return on investment.
b) Gross profit ratio.
c) Operating ratio.
d) Operating profit ratio.

17) Preliminary expenses is an example of .

a) Fixed assets.
b) Current assets.
c) Fictitious assets.
d) Current liabilities.

18) Prepaid expenses is an example of .

a) Fixed assets.
b) Current assets.
c) Fictitious assets.
d) Current liabilities.

19) The ratio which is calculated to measure the productivity of total assets is
a) Return on equity.
b) Return on shareholders’ funds.
c) Return on total assets.
 d) Return on equity share holders’ funds.

20) The ratio which indicates earnings per share reflected by the market price is .
a) Retained earnings ratio.
b) Payout ratio.
c) Earnings per share.
d) Price earnings ratio.

21) Turnover ratio is also known as .

a) Activity ratios.
b) Solvency ratios.
c) Liquidity ratios.
d) Profitability ratios.

22) Inventory or stock turnover ratio is also called .

a) Stock velocity ratio.
b) Debtors velocity ratio.
c) Creditors velocity ratio.
d) Working capital turnover ratio.

23) The ratio which measures the relationship between the cost of goods sold and the amount of average
inventory is
a) Stock turnover ratio.
b) Debtors velocity ratio.
c) Creditors velocity ratio.
d) Working capital turnover ratio.

24) Sales – Gross Profit = .

a) Net profit.
b) Administrative expenses.
c) Cost of production.
d) Cost of goods sold.

25) Opening stock + purchases + direct expenses – closing stock =

a) Net profit.
b) cost of production
c) Administrative expenses.
d) cost of goods sold
26) Debtors turnover ratio is also called
a) Stock turnover ratio.
 b) Debtors velocity ratio.
c) Creditors velocity ratio.
d) working capital turnover ratio

27) The primary purpose of the liquidity ratios is to determine

a) How much working capital is tied up in inventory?
b) The relative level of short-term debt.
c) How well a firm is able to pay off short-term obligations?
d) More than one of the above

28) Quick ratio is 1.8:1, current ratio is 2.7:1 and current liabilities are Rs 60,000. Determine value of stock.
a) Rs 54,000
b) Rs 60,000
c) Rs 1, 62,000
d) None of the above
 Unit 4: Cash Flow Statement
1) Statement of cash flows includes
a) Financing Activities
b) Operating Activities
c) Investing Activities
d) All of the Above

2) In cash flows, when a firm invests in fixed assets and short-term financial investments results in
a) Increased Equity
b) Increased Liabilities
c) Decreased Cash
d) Increased Cash

3) A firm that issues stocks and bonds to raise funds results in

a) Decreases Cash
b) Increases Cash
c) Increases Equity
d) Indian Overseas Bank

4) The basic financial statements include

a) Statement of Cash Flows
b) Income Statement
c) Balance Sheet
d) All of the Above

5) The statement of cash flow classifies cash flows according to

a) Operating and Non-Operating Flows

b) Inflow and Outflow

c) Investing and Non-Operating Flows
d) Operating, Investing, and Financing Activities

6) Cash flow example from a financing activity is

a) Payment of Dividends
b) Receipt of Dividend on Investment
c) Cash Received from Customers
d) Purchase of Fixed Asset
7) Cash flow example from an investing activity is
a) Issue of Debenture
b) Repayment of Long-term Loan
c) Purchase of Raw Materials for Cash
d) Sale of Investment by Non-Financial Enterprise

8) Cash flow example from an operating activity is

a) Purchase of Own Debenture
b) Sale of Fixed Assets
c) Interest Paid on Term-deposits by a Bank
d) Issue of Equity Share Capital

9) Which item comes under financial activities in cash flow?

a) Redemption of Preference Share
b) Issue of Preference Share
c) Interest Paid
d) All the above

10) As per Accounting Standard-7, Cash Flow is classified into

a) Operating activities and investing activities
b) Investing activities and financing activities
c) Operating activities and financing activities
d) Operating activities, financing activities and investing activities

11) Cash Flow Statement is also known as

a) Statement of Changes in Financial Position on Cash basis
b) Statement accounting for variation in cash
c) Both a and b
d) None of the above.

12) The objectives of Cash Flow Statement are

A) Analysis of cash position
B) Short-term cash planning
C) Evaluation of liquidity
D) Comparison of operating Performance

a) Both A and B
b) Both A and C
 c) Both B and D
d) A, B, C, D

13) Cash Flow Statement is based upon

a) Cash basis of accounting
b) Accrual basis of accounting
c) Credit basis of accounting
d) None of the above

14) Which of the following is not a cash outflow?

a) Increase in Prepaid expenses
b) Increase in debtors
c) Increase in stock
d) Increase in creditors

15) Which of the following is not source of cash?

a) Issue of shares
b) Purchase of Machinery
c) Sale of Asset
d) Dividend received

16) If a machine whose original cost is ₹40,000 having accumulated depreciation ₹12,000, were sold for
₹34,000 then while preparing Cash Flow Statement its effect on cash flow will be:

a) Cash flow from financing activities ₹34,000

b) Cash flow from financing activities ₹6,000
c) Cash flow from investing activities ₹34,000
d) Cash flow from investing activities ₹6,000

17) If 6% Pref. share capital ₹2,00,000 were redeemed at a premium of 5%, while preparing
Cash Flow Statement its effect on cash flow will be :
a) Cash used from financing activities ₹2,12,000
b) Cash received from financing activities ₹2,12,000
c) Cash used (Payment) from financial activities ₹2,10,000
d) Cash used (Payment) from financial activities ₹2,00,000

18) If the amount of goodwill is ₹40,000 at the beginning of a year and ₹48,000 at the end of that
year then while preparing cash flow statement its effect on cash flow will be :
 a) Cash used (Payment) in Investing Activities ₹8,000
b) Cash received from operating activities ₹8,000
c) Cash used (Payment) from Operating Activities ₹8,000
d) Cash used (Payment) from Financial Activities ₹8,000

19) How will you deal increase in the balance of ‘Securities Premium Reserve’ while preparing a
Cash Flow Statement?
a) Cash Flow from Operating Activities
b) Cash Flow from Investing Activities
c) Cash Flow from Financing Activities
d) Cash Equivalent

20) How will you treat payment of dividend in a Cash flow statement?
a) Cash Flow from Operating Activities

b) Cash Flow from Investing Activities

c) Cash Flow from Financing Activities
d) Cash Equivalent

21) How will you treat Bank Overdraft in a Cash Flow Statement?
a) Cash Flow from Operating Activities ’
b) Cash Flow from Investing Activities
c) Cash Flow from Financing Activities
d) Cash Equivalent

22) Where will you show purchase of Goodwill in a Cash Flow Statement?
a) Cash Flow from Operating Activities
b) Cash Flow from Investing Activities
c) Cash Flow from Financing Activities
d) Cash Equivalent

23) How will you treat payment of ‘Interest on Debentures’ while preparing a Cash Flow Statement?
a) Cash Flow from Operating Activities
b) Cash Flow from Investing Activities
c) Cash Flow from Financing Activities
d) Cash Equivalent