Rajasthan Board RBSE Class 12 Accountancy Chapter 10 Analysis of Financial Statements
RBSE Class 12 Accountancy Chapter 10 Textbook Questions
RBSE Class 12 Accountancy Chapter 10 Multiple Choice Questions
Question 1.
Which tool of teaching is used for horizontal analysis?
(a) Balance sheet
(b) Comparative statement and trend analysis
(c) Common size profit and loss account
(d) Common size balance sheet
Answer:
(b) Comparative statement and trend analysis
Question 2.
In horizontal analysis financial statement of accounting periods are necessary.
(a) two or more
(b) only one
(c) (a) and (b) both
(d) none of these
Answer:
(a) two or more
Question 3.
Intra firm comparison is also known as :
(a) Time Series
(b) Trend Analysis
(c) Cross Sectional Analysis
(d) All of these
Answer:
(c) Cross Sectional Analysis
Question 4.
The most commonly tools used for financial analysis are :
(a) Ratio analysis
(b) Horizontal analysis
(c) Vertical analysis
(d) All of these
Answer:
(d) All of these
Question 5.
In common size, income statement, various items are presents as a percentage of
(a) Revenue from operations
(b) Gross sales
(c) Net profit
(d) Gross profit
Answer:
(a) Revenue from operations
Question 6.
Common size balance sheet is also called as :
(a) Percentage Balance Sheet
(b) Percentage Income Statement
(c) Statement of Absolute Figures
(d) None of these
Answer:
(a) Percentage Balance Sheet
Question 7.
Cost of goods sold =
(a) Purchase + Direct expenses
(b) Opening stock of material + Purchase of material + Direct expenses – Closing stock of material
(c) Opening stock of material + Purchases of material – Closing stock of material
(d) None of the above
Answer:
(b) Opening stock of material + Purchase of material + Direct expenses – Closing stock of material
Question 8.
The comparative balance sheet presents……changes between the each item of balance sheet.
(a) relative
(b) absolute
(c) absolute and relative
(d) none of these
Answer:
(c) absolute and relative
Question 9.
In common size balance sheet, total of equity and liabilities are assumed to be equal to :
(a) 1
(b) 100
(c) 10
(d) 1000
Answer:
(b) 100
Question 10.
Vertical analysis is known as :
(a) Structural Analysis
(b) Static Analysis
(c) Dynamic Analysis
(d) None of these
Answer:
(b) Static Analysis
RBSE Class 12 Accountancy Chapter 10 Very Short Answer Questions
Question 1.
Explain the meaning of financial statement.
Answer.
These are the final accounts prepared at the end of the accounting period and include balance sheet and statement of profit and loss along with notes to accounts.
Question 2.
As per Companies Act, 2013, what are included in a full set of financial statements, write only names
Answer.
- Balance Sheet
- Profit & Loss Account
- Notes to Account and Explanatory Notes
- Cash Flow Statement.
Question 3.
Write any two nature of financial statements.
Answer.
- Financial Statements are affected from personal decision.
- Financial statements are prepared by adopting accounting concepts.
Question 4.
Write any two characteristics of financial statements.
Answer.
- Summary,
- Show in currency.
Question 5.
Write any two essentials of financial statements.
Answer.
- Completion,
- Reality.
Question 6.
How financial statements are affected by personal judgement?
Answer.
Financial statements are affected by personal judgement like, by which method, stock’s valuation will done. Its decision will personal decision of manager which will effected of financial statements.
Question 7.
Write any four names of external users of financial statements.
Answer.
- Bank and Financial Organisations.
- Creditors.
- Govt, and Other Departments.
- Debenture holders and Other Future Investors.
Question 8.
Write any four limitations of financial statements.
Answer.
- Historical Facts,
- Depend on Guess
- To Hide, Real position
- No attention on qualitative facts.
Question 9.
Explain the meaning of financial analysis.
Answer.
The financial analysis is a study of relationship among various financial figures as set out in the financial statements.
Question 10.
Write the names of types of financial analysis.
Answer.
- External analysis,
- Internal Analysis
- Horizontal analysis
- Vertical analysis.
Question 11.
Explain four differences between horizontal and vertical analysis.
Answer.
Distinction between Horizontal Analysis and Vertical Analysis
Basis | Horizontal Analysis | Vertical Analysis |
Period | It requires comparative financial statements of two or more accounting periods. | It requires a statement of one period. |
Components of items | It deals with same item of different periods. | It deals with different item of same period. |
Information | It provides information in absolute and percentage terms. | If provides information in percentage terms. |
Usefulness | It is generally used for time series analysis. | It is generally used for cross sectional analysis. |
Comparison | It is a part of comparison. | It is a step towards comparison. |
Question 12.
What is meant by comparative balance sheet ?
Answer.
Comparative balance sheet is a technique of financial analysis in which financial figures for two or more years are placed side by side to facilitate comparison, these are called comparative financial balance sheet.
Question 13.
What is meant by comparative income statement?
Answer.
Comparative statement of profit and loss (Income statement) is the horizontal analysis of income statement which shows the operating results for more than one accounting period.
Question 14.
What is meant by common size balance sheet?
Answer.
A common size Balance Sheet is a statement in which total of assets or equity and liabilities is assumed to be equal to 100 and all the figures are expressed as percentage of the total.
Question 15.
What is meant by common size income statement?
Answer.
Common size income statement means in which revenue from operation (Net sales) is taken as 100 and expenses are expressed as percentage at revenue from operation.
Question 16.
What is meant by trend analysis?
Answer.
Trend analysis determines the direction upwards and downwards and involves the computation of the percentage relationship that each item bears to the same item in the base year.
RBSE Class 12 Accountancy Chapter 10 Short Answer Questions
Question 1.
Narrate any four characteristics of financial statements.
Answer.
- Understand ability : The information must be readily understandable to users of the financial statement. This means the information must be clearly presented.
- Relevance’s : The information must be relevant to the needs of the users.
- Reliability: The information must be free or material error and bias and not misleading. Thus, the information should faithfully represent transactions and other events.
- Comparability : The information must be comparable to the financial information presented for other accounting period.
Question 2.
Write down names of various techniques of financial analysis.
Answer.
- Comparative Financial Statement
- Common Size Financial Statement
- Trend Analysis
- Ratio Analysis
- Cash Flow Analysis
- Fund Flow Analysis
- Break Even Analysis
Question 3.
Write a format of comparative balance sheet.
Answer.
Question 4.
Prepare comparative income statement from the following information :
Answer.
Question 5.
From the following information, prepare Common Size Statement of Profit and Loss.
Answer.
Question 6.
Calculate Trend Percentage of Revenue from Operations from the following informations, assume 2010-11 as base.
Answer.
Question 7.
Calculate Trend Ratio of Employees Benefit Expenses from the following informations taking 2011-12 as base.
Answer.
Question 8.
Give format of common size balance sheet.
Answer.
Question 9.
What do you understand by horizontal and vertical analysis?
Answer.
(i) Horizontal (or Dynamic) Analysis : This analysis is made to review and analysis financial statements for a number of years. It is a time series analysis. It shows comparison of financial data for several years against a chosen base year. It is useful for long term trend analysis and planning. Comparative statements or comparative financial statements are an example of horizontal analysis.
(ii) Vertical (or Static) Analysis : This analysis is made to review and analyse financial statements of one year only. Ratio analysis of the financial statement relating to a particular accounting year is an example of this type of analysis. Such an analysis is useful in comparing the performance of several companies of the same type or divisions or departments in one enterprise.
Question 10.
Is there any conflict between horizontal and vertical analysis?
Answer.
Horizontal and vertical analysis are two main & important types of analysis method. They are supporting each other, so there is not any conflict between horizontal and vertical analysis.
Question 11.
Financial statement analysis is a postmortem of the business transaction. Are you agree?
Answer.
Yes, its measure financial soundness, predictability and other activities of an organisation by historical information. By this analysis new plan, decision, control are possible. So, can called financial statement is a postmortem of the business transaction.
Question 12.
Which type of financial analysis will be used for inter-firm and intra-firm comparison?
Answer.
- External Analysis
- Internal Analysis
- Horizontal Analysis
- Vertical Analysis.
Question 13.
Time series analysis and static analysis are the another names of which type of financial analysis?
Answer.
- These are called horizontal or active time analysis series and static analysis also. To show real growth and deficiency of amount means to depict positive and negative amount of items in statement of two periods.
- Vertical or fixed analysis are also called static analysis. Here, data in ratio analysis are taken of a specific period.
Question 14.
Prepare the format of comparative profit and loss account showing main headings.
Answer.
Question 15.
Prepare common size balance sheet from the following balance sheet:
Answer.
Question 16.
Prepare Common Size Balance Sheet from the following balance sheet:
Answer.
Question 17.
Prepare Comparative Balance Sheet from the following information as at 31st March 2016-2017 :
Answer.
Question 18.
Prepare Comparative Balance Sheet as on 31st March, 2017 from the following informations :
Answer.
RBSE Class 12 Accountancy Chapter 10 Essay Type Questions
Question 1.
Explain parties interested in financial statements and their utility.
Answer.
Society and nation are effected by the activities of every trading organisation. So, many people have interest in financial statement of organisation. The users of financial statements are divided into two parts:
Internal Users
1. Shareholders : They invest capital so, they are always interested to know that organisations profitability, financial capacity and status of cash. These all information’s are available in financial statements.
2. Management: It is duty of the operators and controller of the business to take care the safety of the investment of the organisation with its maximum beneficial use of resources. So, they received those information’s from financial statement which can measure the efficiency and profit earning capacity of business. For all this statement is as useful as a harmful to a sculpture.
3. Employee: Employees get bonus on the basis of financial condition of the organisation, their fruitful planning gets affected by financial condition. So, they have interest in financial statements.
External Users:
- Banks and Financial Institutes: They want the information of refinement capacity and profit earning capacity while giving or facilitating credit to these institutes.
- Debenture holders and future investors : Debenture holders want to know the refinement capacity and the pay interest of institute/organisation, while future investor wants to know about profit quantity, dividend, market condition. They all want information of financial strength which can be taken from financial statement.
- Creditors : They want to know about organisation’s liquidity and financial strength which comes from financial statement.
- Govt, and Other Departments: We need financial statement to know about ethically decision, law and rules of govt.
- Researchers and Analyst: They can also use financial statement to fulfill specific and limited objectives and they can present a summary of an organisation’s financial statement in front of society and govt.
- Trading Council: Chamber of commerce, cement manufacturer association etc. non-profit gaining organisations in their own areas studying the financial statements for the safety and growth reason. Compare their nature after knowing or getting the extract.
- Stock Market and Indian Securities and Exchange Board: the rules and regulations which are made for the safety of investors are not kept or kept by them, this analysis facts is done from the financial statement and other information’s. So, this is also useful for these.
Question 2.
Write down limitations of financial statements.
Answer.
Limitations of Financial Statement Analysis : Analysis of financial statements helps the interested parties in ascertaining the strengths and weakness of an enterprise, but at the same time it suffers from certain limitations. These limitations must always be kept in mind while undertaking the analysis of financial statements.
The limitations of financial statements analysis are :
(i) Historical Analysis: Financial statement analysis is a historical analysis. It analysis what has happened till date. It does not reflect the future. Person like shareholders, investors etc. are more interested in knowing the likely position in future.
(ii) Ignore Price Level Changes: Price level changes and purchasing power of money are inversely related. A change in the price level makes analysis of financial statements of different accounting years invalid because accounting records ignore change in value of money.
(iii) Qualitative Aspect Ignored: Since the financial statements are confined to monetary matters alone, the qualitative aspects like quality of management, quality of staff, public relations are ignored while carrying out the analysis of financial statements.
(iv) Suffers from the Limitations of Financial Statements : Analysis of financial statements is based on the information given in the financial statements. Hence, this analysis suffers from all such limitations from which the financial statements suffer. Therefore, unless the basic data given in the financial statements is reliable the conclusions derived on the basis of the analysis of this data cannot be reliable.
(v) Not Free from Bias: In many situations the accountant has to make a choice out of alternatives available e.g., choice in the method of inventory valuation or choice in the method of depreciation (straight line or written down value etc.) Since the subjectivity is inherent in personal judgement the financial statements are therefore not free from bias.
(vi) Variation in Accounting Practices: From inter firm comparison it is necessary the accounting practices followed by the firms do not very significantly. As there may be variations in accounting practices followed by different firms a meaningful comparison of their financial statements is not possible.
(vii) Window Dressing: Window dressing refers to the presentation of a better financial position that what it actually is by manipulating the books of account. On account of such a situation financial analysis may give false information to the users.
(viii) Identifies Symptoms : Financial analysis identifies symptoms of the problems but does not | offer its diagnosis. The management has to look for the remedy to rectify the problems.
Question 3.
Explain objectives of financial analysis.
Answer.
Following are the objectives of financial analysis :
1. Knowing Profitability of Business: Financial statement are required to ascertain whether the enterprise is earning adequate profit and to know whether the profit have increased or decreased as compared to the previous years. So, that corrective steps can be taken well in advance.
2. Knowing the Solvency of the Business: Financial statement help to analysis to position of the business as regards to the capacity of the entity to repay its short as well as long term liabilities.
3. Judging the Growth of the Business : Through comparison of date of two or more years of business entity, we can draw a meaningful conclusion as regard to growth of the business. For example, increase in sales with simultaneous increase in the profits of the business indicates a healthy sign for the growth of the business.
4. Judging Financial Strength of Business : Financial statement help to entity in determining solvency of the business and help to answer various aspects.
5. Making Comparison and Selection of Appropriate Policy: To make a comparative study of the profitability of the entity with other entities engaged in the same trade, financial statements help the management to adopt sound business policy by making Intra firm comparison. .
6. Forecasting and Preparing Budgets: Financial statement provides information regarding the weak-spots of the business so that the management can take corrective measures to remove these short comings. Financial statements help the management to make forecast and prepare budgets.
7. Communicating with different parities: Financial statements are prepared by the entities to communicate with different parties about their financial position. Hence, it can be conducted that understanding the basic financial statements is a necessary step towards the successful management of commercial enterprise.
Question 4.
Explain procedure of financial analysis.
Answer.
The procedure of financial analysis is as follows:
1. Determine objective and limits of financial analysis : It is necessary to determine that why the financial analysists want to do the analysis? As if it is for study of business progress, only profit & loss account will be analysed. Thus, balance sheet will be analysed if it is to analysis financial condition, the method of analysis will be chosen according to the object and limits.
2. End to end study of financial statement: There will be an end to end study for the evaluation of the given information.
3. Collection of useful information : Financial analysist will collect other information related shown information in financial other statement for analysis.
4. Re-classification of information’s and imminent the figures: Figures are should be in round figures on the basis of immanency by re-collecting the informations.
5. Comparison: Impersonal data is extract less so there will be a comparative study the compare inter-firm to intra-firm.
6. Analysis: Comparative data should be used for an objective analysis.
7. Explanation and Presentation : Explanation is not possible without analysis, analysis is useless without explanation.
Thus, financial analysis accounting’s last product is explanation and presentation. Business transaction’s records, classification and summation is extract less without it.
Question 5.
Give the format of common size balance sheet and common size profit and loss account.
Answer.
RBSE Class 12 Accountancy Chapter 10 Numerical Questions
Question 1.
From the following balance sheets, prepare comparative balance sheet
Answer.
Question 2.
Complete the following Comparative Balance Sheet:
Answer.
Question 3.
From the following balance sheet, prepare Comparative Balance Sheet:
Answer.
Question 4.
Prepare Comparative Statement of Profit and Loss from the following informations :
Answer.
Question 5.
Complete the Comparative Balance Sheet from the following information :
Answer.
Question 6.
Prepare Common Size Balance Sheet from the following information’s :
Answer.
Question 7.
Complete the Common Size Balance Sheet.
Answer.
Question 8.
Convert the following statement of profit and loss in to common size statement of Profit and Loss :
Answer.
Question 9.
From the following informations calculate Trend Ratio of various items of profit and loss account, taking as base 2012-13.
Answer.
Question 10.
Calculate Trend Percentage from the following informations, taking base 2012-13 :
Answer.
Question 11.
Calculate Trend Ratio from the following figures taking the year ending 31, March, 2012 as base.
Answer.
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