Financial Statement and Trend Analysis - Class XII

True. Financial statements helps to understand the financial position of the company. It helps to understand the deviation between the actual position and the position that the company had planned. By looking at the deviation the company can understand how efficiently the managers have worked. 

During inflation, historical cost depreciation is understated relative to the current replacement cost of assets. Consequently, because expenses are understated, the reported real economic income is overstated.

False. Financial Analysis helps the users of the financial statements to understand the complicated matters in a simplified manner. Financial analysis is reviewing and analyzing of financial data, understand the past, present and future projected data. 

False. On the basis of financial analysis, earning capacity of the enterprise can be assessed or computed. Financial analysis means analysing the financial statements of the firm to make financial decisions. It helps in assessing the earning capacity, present position, past performance, managerial efficiency and helps in inter-firm comparison. 

Financial analysis means analysing the financial statements of the firm to make financial decisions. It helps in assessing the earning capacity, present position, past performance, managerial efficiency and helps in inter-firm comparison. 

True. Past financial statement analysis helps in assessing developing future, especially in the next year. Financial analysis helps in analysing the past and current position of the company which helps the company in further making economic decisions. 

False. Inter-firm comparison will become easier with help of financial analysis as it analyses and interprets the financial information in a simplified manner. Inter firm comparison is comparison between 2 different enterprises. 

True. Financial Analysis helps the users of the financial statements to understand the complicated matters in a simplified manner. Financial analysis is reviewing and analysing of financial data, understand the past, present and future projected data. It gives a useful insight to the users as to what is the condition of the company.

Financial analysis can be made more comprehensive by charts, graphs and diagrams. It will be more comprehensive as all the elements will be covered and will be easier for the users of the financial statements to understand the same. 

Financial statements of a company as useful as they are have a few limitations as well. They are prepared on historical cost as all the assets of the company are recorded at the cost. 

Financial statement analysis involves evaluating the balance sheet, income statement, and cash flow statement to assess the long-term and short-term solvency and profitability of an enterprise.

True. Window dressing a limitation of financial analysis. Window dressing means where the company shows a better financial position of the company than actual. It Is usually done to impress the lenders or to existing investors. 

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. The company understands how much tax benefit will the company have after the investment, whether the rate of return is more than the cost of capital and how much is to be paid in terms of present value. All these are taken into account but rate of cash discount is not. 

Capital budgeting is evaluating all the big expenses and cost that the business will incur on a project. They only take into consideration all the cash expenses and revenues and not accrued cost and revenues.

Sunk cost is a cost that cannot be recovered and has been incurred already. Existing investment in a project is treated as a sunk cost as it is incurred in the past and cannot be recovered. 

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. They include all the potential expenses/costs. It includes opportunity cost, actual cost, incremental and relevant cash flows. It does not include sunk costs.

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. Hence, capital budgeting decisions are irreversible as its difficult to take back the decision. 

Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. Therefore, risk in capital budgeting means uncertainty of cash flows. 

Feasibility Set Approach to capital Rationing can be applied in Accept-reject situations.  Accept-Reject situations are the situations which the company is not sure about, so conducting a feasibility test would ensure if the project is suitable or not for the company. 

Feasibility Set Approach to capital Rationing can be applied in divisible projects. Indivisible projects are the one which can be accepted or rejected wholly. So conducting a feasibility test would ensure if the project is suitable or not for the company. 

The real rate of return formula is the sum of one plus the nominal rate divided by the sum of one plus the inflation rate which then is subtracted by one. The formula for the real rate of return can be used to determine the effective return on an investment after adjusting for inflation.

Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. The decision maker after analysing the risk will have of fair idea of the cash flows that might arise from the decision that is made. 

A proposal is not a capital budgeting proposal if it brings short-term benefits only. Capital budgeting decisions involve huge funds and are long term decisions, it benefits the firm in long term. As they involve huge costs one wrong decision would have a big effect on the business.

Profitability index is an index that identifies the relationship between cost and profitability of a project. Profitability Index. when applied to divisible projects impliedly assumes that project cannot be taken in parts has to be accepted fully, NPV is linearly proportionate to part of the project taken up and NPV is additive in nature. 

Capital budgeting is based on cash flows because there is discounting and other factors used which can be done only on cash. Moreover, cash can be spent and not profit. Cash is more important than profit as the company has to focus on many costs. As in the long run the company will succeed if it focuses mote on cash flow statement. 

The Risk Adjusted Discount Rate (RADR) and Certainty Equivalent (CE) approaches are different methods for incorporating risk into capital budgeting. They generally yield different NPV results because they adjust for risk in different ways.

The factors that increase riskiness of a capital budgeting project are industry specific risk, competition risk and project risk. Industry specific risk/market risk are the risks that might occur due to change in the industry, competition risks are the risk that can occur because of the competitors strategy and lastlyt project risk are the risk that are associated with the project as whether or not the project will be profitable or not. 

Risk aversion means the tendency of a person to avoid a decision/investment when there is risk involved. Risk aversion is a personal trait of a person. Risk-aversion of an investor cannot be measured by market rate of return, risk free rate of return or portfolio profit. 

Generally the first year is taken as the base year. The figure of base year is taken as 100. Trend percentage is calculated by following formula:

Commonly used tools of financial analysis are: Comparative statements, Common size statements, trend analysis, ratio analysis, funds flow analysis, and cash flow analysis.

General reserve is created out of divisible profits. This is the only true statement. General reserve is created to meet any future uncertainties, they are basically the retained earnings of the company.