Analysis of Financial Statements (12 Accountancy)
Practise chapter-wise MCQs for Class 12 Accountancy — Analysis of Financial Statements. Every question comes with the correct answer and an explanation.
TL;DR: Practise chapter-wise MCQs for Class 12 Accountancy — Analysis of Financial Statements. Every question comes with the correct answer and an explanatio…
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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?
- Cash flow analysis
- Ratio analysis
- Common-size analysis
- Trend analysis ✓ (correct)
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:
- Lower risk for lenders ✓ (correct)
- Higher risk for lenders
- Lower profitability
- Higher dividend payout
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?
- Ignores the price level changes
- Can be used for comparison only with past performance ✓ (correct)
- Ignores qualitative factors
- Provides historical information
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?
- Purchase of a new building
- Payment of dividend
- Sale of goods and services ✓ (correct)
- Issuance of shares
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?
- Gross Profit Ratio
- Inventory Turnover Ratio
- Return on Capital Employed
- Current Ratio ✓ (correct)
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:
- Analyze trends and changes in financial performance over time ✓ (correct)
- Determine the profitability of specific assets
- Show the movement of cash during a period
- Present a company's financial position at a single point in time
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:
- Inefficient in using shareholder funds
- Profitable for shareholders ✓ (correct)
- Highly leveraged
- Facing financial distress
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:
- Faster movement of goods
- Improved sales performance
- Ineffective inventory management ✓ (correct)
- Increased demand for products
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?
- Inventory levels are high
- Inventory levels are low
- Inventory levels are negligible
- Inventory is a significant component of current assets ✓ (correct)
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:
- Decreased financial risk ✓ (correct)
- Increased financial risk
- Decreased operational efficiency
- Increased profitability
Explanation: A lower Debt-Equity Ratio means the company relies less on borrowed funds, thus reducing its financial risk.
More 12 Accountancy MCQs
- Accounting for Partnership: Basic Concepts
- Goodwill: Nature and Valuation
- Reconstitution of a Partnership Firm - Change in Profit Sharing Ratio
- Reconstitution of a Partnership Firm - Admission of a Partner
- Reconstitution of a Partnership Firm - Retirement and Death of a Partner
- Dissolution of Partnership Firm
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