Analysis of Financial Statements (Class 12 Accountancy)

Practise chapter-wise MCQs for Class 12 Accountancy — Analysis of Financial Statements. Every question comes with the correct answer and an explanation.

Analysis of Financial Statements (Class 12 Accountancy)

Practise chapter-wise MCQs for Class 12 Accountancy — Analysis of Financial Statements. Every question comes with the correct answer and an explanation.

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Practise chapter-wise MCQs for Class 12 Accountancy — Analysis of Financial Statements. Every question comes with the correct answer and an explanation.

Analysis of Financial Statements MCQs with Answers & Explanations

Q1. Which analysis technique involves comparing items in the financial statement with a base year or base period amount, expressing each item as a percentage of the base year amount?

  1. Cash flow analysis
  2. Ratio analysis
  3. Trend analysis ✓ (correct)
  4. Common-size analysis

Explanation: Trend analysis, also known as time-series analysis, uses a base period for comparison to show the percentage change of various items over time.

Q2. A higher 'Times Interest Earned' ratio suggests:

  1. Lower profitability
  2. Higher dividend payout
  3. Higher risk for lenders
  4. Lower risk for lenders ✓ (correct)

Explanation: A higher 'Times Interest Earned' ratio indicates that the company's earnings are sufficiently high to cover its interest expenses, making it less risky for lenders.

Q3. Which of the following is NOT a limitation of financial statement analysis?

  1. Can be used for comparison only with past performance ✓ (correct)
  2. Ignores the price level changes
  3. Provides historical information
  4. Ignores qualitative factors

Explanation: Financial statement analysis can be used for comparison with industry averages and competitor performance, not just past performance.

Q4. Which of the following is a component of the Cash Flow from Operations Activity?

  1. Issuance of shares
  2. Sale of goods and services ✓ (correct)
  3. Purchase of a new building
  4. Payment of dividend

Explanation: Sale of goods and services is the primary revenue-generating activity of a business and thus forms part of cash flow from operations.

Q5. Which of the following ratios would best measure a company's ability to meet its short-term obligations?

  1. Return on Capital Employed
  2. Gross Profit Ratio
  3. Current Ratio ✓ (correct)
  4. Inventory Turnover Ratio

Explanation: The Current Ratio specifically compares current assets to current liabilities, indicating the ability to pay short-term debts.

Q6. The primary objective of comparative financial statements is to:

  1. Present a company's financial position at a single point in time
  2. Determine the profitability of specific assets
  3. Show the movement of cash during a period
  4. Analyze trends and changes in financial performance over time ✓ (correct)

Explanation: Comparative statements allow for the comparison of financial data across different periods, enabling the identification of trends and changes.

Q7. A company with a high Return on Equity (ROE) ratio is generally considered:

  1. Profitable for shareholders ✓ (correct)
  2. Facing financial distress
  3. Inefficient in using shareholder funds
  4. Highly leveraged

Explanation: A high ROE indicates that the company is generating good profits relative to the shareholders' investments.

Q8. If a company's Inventory Turnover Ratio is declining, it might suggest:

  1. Improved sales performance
  2. Ineffective inventory management ✓ (correct)
  3. Increased demand for products
  4. Faster movement of goods

Explanation: A declining Inventory Turnover Ratio means inventory is not being sold as quickly, indicating potential overstocking or slow sales.

Q9. If the Current Ratio is 2:1 and the Quick Ratio is 1.5:1, what can be inferred about the company's inventory?

  1. Inventory levels are high
  2. Inventory levels are negligible
  3. Inventory is a significant component of current assets ✓ (correct)
  4. Inventory levels are low

Explanation: The difference between the Current Ratio and Quick Ratio is primarily due to inventory. A significant difference suggests inventory is a substantial part of current assets.

Q10. A decrease in the Debt-Equity Ratio generally indicates:

  1. Decreased operational efficiency
  2. Increased profitability
  3. Increased financial risk
  4. Decreased financial risk ✓ (correct)

Explanation: A lower Debt-Equity Ratio means the company relies less on borrowed funds, thus reducing its financial risk.

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