Tag: financial statement analysis

Questions Related to financial statement analysis

Financial statement analysis helps to identify the areas where the managers have been efficient and the areas where they have been lacking behind.

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  1. True

  2. False

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Correct Option: A
Explanation:

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. 

In periods of inflation, accounting depreciation is ______________ relative to replacement cost and real economic income is ______________.

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  1. overstated, overstated

  2. overstated, understated

  3. understated, overstated

  4. understated, understated

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Correct Option: C

Financial Analysis does not help the users of the financial statements to understand the complicated matters in simplified manner.

trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

  1. True

  2. False

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Correct Option: A
Explanation:

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. 

It gives a useful insight to the users as to what is the condition of the company.

On the basis of financial analysis, earning capacity of the enterprise cannot be assessed or computed.

trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

  1. True

  2. False

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Correct Option: B
Explanation:

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. 

Which of the following are significance of Financial Analysis?

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  1. Assessing the earning capacity.

  2. Assessing managerial efficiency.

  3. Inter-firm Comparison.

  4. All of the above

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Correct Option: D
Explanation:

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. 

Past financial statement analysis helps in assessing developments in future, especially in the next year.

trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

  1. True

  2. False

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Correct Option: A
Explanation:

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. 

Analysis helps the company understanding what to do next and what not to do in order to achieve goals. 

Inter-firm comparison becomes difficult with the help of financial analysis.

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  1. True

  2. False

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Correct Option: B
Explanation:

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. 

Financial analysis helps the users of the financial statements to understand the complicated matter in a simplified manner.

trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

  1. True

  2. False

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Correct Option: A
Explanation:

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 data can be made more comprehensive by _______________.

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  1. Charts

  2. Graphs

  3. Diagrams

  4. All of the above

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Correct Option: D
Explanation:

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. 

Which of the following is the limitation of financial statement analysis?

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  1. Historical analysis

  2. Ignores price level changes

  3. Not free from bias

  4. All of the above

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Correct Option: D
Explanation:

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. 

They ignore price level changes because of the historical cost concept. They are not free from personal bias, as the statements are prepared by humans personal bias being a human tendency might affect the financial statements.