Tag: general instructions for preparation of balance sheet

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Multiple choice elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

The gaps between the management performance and ownership expectations are understood through _________.

  1. cash flow statements

  2. financial statements

  3. fund flow statement

  4. income statement
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The financial statements show the financial position of an organisation, thereby telling if the policies, procedures and methods used by the management were useful or not. They show the gap between the actual performance by the management and the owner's expectation.  

Multiple choice elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

 Importance of financial statements are _________.

  1. basis for granting of credit

  2. report on stewardship function

  3. basis for prospective investors

  4. all of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The financial statements of a company show the financial position of an organisation and helps in comparison with the past results. The financial statements helps the credit lending institutions to understand the liquidity, solvency of the company and thereby helping them with the decision to whether grant credit or not. The steward is a person who manages the resources and financial statements helps to understand if resource utilisation was useful or not. The investors of the company want to know whether the company will be profitable or not. 

Multiple choice elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

 Following are limitations of financial information ________________.

  1. Helps stock exchanges

  2. Report on stewardship function

  3. Assets may not realise

  4. Aids trade associations in helping their members
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Financial statements have a lot of limitations one being that the financial statements show the assets at the historical cost and not the current market price. They do not record the fluctuations in the price, there by the profit or loss from the same is not taken into account. 

Multiple choice elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

 From the following __________ limitations of financial statements.

  1. bias

  2. assets may not realise

  3. vital information missing

  4. all of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Financial statements are very important for a business but it has many limitations being personal bias, assets may not realise, vital or qualitative information missing. The financial statements may be affected by personal bias as the person making the statements is a human being. Financial statements do not show detailed information about every transaction and they also do not record the qualitative information. The statements only record quantitative information.

Multiple choice elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

 Financial statements help the investors to assess __________solvency.

  1. fixed

  2. immediate

  3. current

  4. long term
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Investors are the owners of the company. Financial statements help them to assess the long term solvency of the business in which they have invested. They asses whether they will get fair returns or not for the money they have invested in the business.  

Multiple choice elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

The financial statements enable the stock brokers to take decisions about the ______________.

  1. cost to be charge

  2. prices to be quoted

  3. both of the above

  4. none of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The financial statements help the investors to calculate market price of the shares. Market price of shares is determined by the net income of the company for equity share holder. This income is basically after deducting all interest, tax, dividend of preference shareholders etc,. divided by the number of equity shares. 

Multiple choice elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

Two primary qualitative characteristics of financial statements are _________.

  1. understandability and materiality

  2. relevance and reliability

  3. relevance and understandability

  4. materiality and reliability
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Two primary qualitative characteristics are: - 1. relevance and reliability. 
Secondary qualitative characteristics are:- 1. Understandability 2. Verifiability 3. Timeliness 4. Comparability. 
Relevance refers to how useful the information is for financial decision making processes. 
Reliability refers to the extent to which information accurately reflects company's resources. 
Relevance and reliability are primary characteristics because if information is not helpful for decision making or not providing accurate information then understandability , timeliness of information is of no use.  

Multiple choice elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

Which of the following is a limitation of financial statements?

  1. Does not reflect current situation

  2. Assets may not realise

  3. Bias

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which show the financial position of business concern in an organised manner.

Some of limitations of financial statements are as follows

Accounting information is sometimes based on estimates which may be unrealistic.

Window dressing may lead to faulty results. Window dressing means manipulation of accounts and Show easy picture of financial statements

Accounting ignores the effect of price level changes. Transactions recorded on historical cost. Examples, fixed assets recorded at historical cost.

Accounting information can be manipulated and thus cannot be considered as the true test of performance.

Accounting information may be Biased accounting information is not without personal influences or bias of accountant.

Multiple choice elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

Financial statements can be used by ___________.

  1. Owners

  2. Creditors

  3. Investors

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs and charts to the users who need it in different decision situations. There are two main user group viz. internal users, mainly management, who needs timely information on cost of sales, profitability, etc. for plaining, controlling and decision making and external users who have limited authority, ability and resources to obtain the necessary information and have to rely on financial statements (Balance sheet, profit and loss account)

Multiple choice elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

Financial statements are prepared on the basis of _________ cost.

  1. marlet

  2. historical

  3. material

  4. net realizable
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

As per “Generally Accepted Accounting Principles (GAAP)” one of the important rule is to record all transactions on the basis of historical cost, which is verifiable from the documents such as cash receipt for the money paid. This brings in objectivity in the process of recording and makes the accounting statements more acceptable to various users.