Financial Statement Analysis MCQ Quiz in मल्याळम - Objective Question with Answer for Financial Statement Analysis - സൗജന്യ PDF ഡൗൺലോഡ് ചെയ്യുക

The correct answer is Operating

Key Points

 Cash Flow Statement: 

• A cash flow statement (CFS) is a financial statement that shows how much cash and cash equivalents are coming in and going out of a business.
• The CFS assesses a company's ability to manage its cash position, or how successfully it generates cash.
• The CFS is a useful addition to the balance sheet and income statement.
• Cash is the most important component of the CFS, and it comes from three sources: operating, investing, and financing activities.

Important Points

 Investments made by a financial enterprise with the purpose to resell after the expiry of three months:

• This amount will be qualified as current assets since, it is sold within 12 months. 
• All the cash flows from current assets are recorded as cash flows from operating activities.
• Hence, Investments made by a financial enterprise with the purpose to resell after the expiry of three months will be considered as Operating Activities.

The answer is Solvency.

Key PointsFinancial statements - Financial statements are written documents that describe a company's operations and financial performance. 

Important PointsSolvency Ratio-  Solvency of business is determined by its ability to meet its contractual obligations towards stakeholders, particularly towards external stakeholders, and the ratios calculated to measure solvency position are known as ‘Solvency Ratios’. These are essentially long-term in nature.

Before approving any loan, the creditor performs an investigation to determine the borrower's credit risk and repayment potential and solvency ratio shows business credit risk and capacity to payback. Thus, the area of interest for a creditor while analysing financial statement is solvency.

Additional InformationLiquidity Ratio- The ability of the business to pay the amount due to stakeholders as and when it is due is known as liquidity, and the ratios calculated to measure it are known as ‘Liquidity Ratios’. These are essentially short-term in nature.

Profitability Ratio- It refers to the analysis of profits in relation to revenue from operations or funds (or assets) employed in the business and the ratios calculated to meet this objective are known as ‘Profitability Ratios’

Proprietary Ratio- The proprietary ratio compares how much money investors have put into a company's capital to how much money the company needs to run its operations.

Current Ratio: The current ratio is a liquidity ratio that assesses a company's capacity to pay short-term or one-year obligations. It explains to investors and analysts how a firm might use current assets on its balance sheet to pay off current debt and other obligations.

Important Points

Types of Profitability Ratio:

 1. Return on Investment (ROI):

• ROI is the most common profitability ratio.
• There are several ways to determine ROI, but the most frequently used method is to divide net profit by total assets.
• Return on investment isn't necessarily the same as profit.
• ROI deals with the money you invest in the company and the return you realize on that money based on the net profit of the business. 

 2. Earning Per Share (EPS):

• This ratio measures profitability from the point of view of the ordinary shareholder.
• A high ratio represents the better the company is.
• Formula: Net Profit ÷ Total no of shares outstanding

3. Interest Coverage Ratio:

• The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt.
•  Lenders, investors, and creditors often use this formula to determine a company's riskiness relative to its current debt or for future borrowing.

Current Ratio:

• The current ratio is a liquidity ratio.
• It is calculated by dividing the value of current assets by current liabilities.
• In many circumstances, a company with a current ratio of less than 1.00 may not have the capital on hand to cover all of its short-term obligations at once, whereas a current ratio greater than 1.00 suggests that the company has the financial resources to stay solvent in the short term.

Therefore, the Current ratio is not an example of profitability ratios.

Assertion (A): A high operating ratio indicates a favorable position.

Explanation: 

1. In finance, the Operating ratio is a company's operating expenses as a percentage of revenue.
2. This financial ratio is most commonly used for industries that require a large percentage of revenues to maintain operations, such as railroads. In railroading, an operating ratio of 80 or lower is considered desirable. 
3. Operating Ratio refers to a metric used by a company to determine how efficient a company’s management is at keeping operating costs low while at the same time generating revenues or sales, by comparing the total operating expenses of a company to that of its net sales. 
4. A higher ratio would indicate that expenses are more than the company’s ability to generate sufficient revenue and may be considered inefficient.
5. Similarly, a relatively low ratio would be considered a good sign as the company’s expenses are less than that of its revenue.

​Thus, the assertion is incorrect.

Reasoning (R): A high operating ratio leaves a high margin to meet non-operating expenses.

Explanation:

1. Operating Ratio = (Operating Expenses / Net Sales) * 100.
2. The operating ratio is used to measure the operational efficiency of the management.
3. It shows whether or not the cost component in the sales figure is within the normal range.
4. A low operating ratio means a high net profit ratio (i.e., more operating profit) and vice versa. 
5. A high operating ratio leaves less margin to meet non-operating expenses.

Thus, the reason is incorrect.

Both Assertion And Reason Are Incorrect.

The correct answer is 20%

Key Points

Gross Profit Ratio:

Gross Profit Ratio is a profitability ratio that measures the relationship between the gross profit and net sales revenue. When it is expressed as a percentage, it is also known as the Gross Profit Margin.

Formula = Gross Profit Ratio = (Gross Profit/Net Revenue of Operations) × 100 

Important Points Cost of Revenue from Operation is ₹2,00,000 (Given)

Gross Profit = 25% on Cost of Revenue from Operations

Gross Profit = 25% x 200000

Gross Profit = ₹ 50,000
 

Net Revenue from Operation = Cost of revenue from operations + Gross Profit

Net Revenue from Operation = 2,00,000 + 50,000 = 2,50,000
 

Gross Profit Ratio = (Gross Profit/Net Revenue of Operations) × 100 

Gross Profit Ratio = (50,000/2,50,000) × 100 

Gross Profit Ratio = 20%

The correct answer is Only (ii) and (iii).

Key Points

 Current Ratio: The current ratio assesses a company's capacity to pay its payments in the short term. It is a standard metric for a company's short-term liquidity. Analysts use the ratio to decide whether to invest in or lend money to a company. Divide the sum of all current assets by the total of all current liabilities to get the current ratio.

Formula: Current Ratio = Current Assets / Current Liabilities 

Important Points

(i) He can repay bank overdraft : 

Bank overdraft is a current liability and for repayment of current liability , current assets will be needed. Suppose current assets is 2,50,000 and current liability is 1,00,000. If we repay the current liability i.e., bank overdraft, the current assets will be needed it means there will be decrease in current assets and current liability both. That means the ratio will improve.

For Example, the bank overdraft of 50,000 have to repay , hence

2,50,000 - 50,000 / 1,00,000 - 50,000 = 2,00,000 / 50,000

Hence,  the new ratio will be 4: 1 that's why this is not included in answer.

(ii) He can purchase fixed assets of Rs. 50,000 : 

For purchase of fixed assets cash will be needed which means the current ratio will be decrease, but there will not be any change in current liability. Hence, if he purchases fixed assets of Rs. 50,000 which means current assets will reduce by 50,000.

Suppose current assets is 2,50,000 and current liability is 1,00,000,

2,50,000-50,000/ 1,00,000 = 2,00,000/ 1,00,000 = 2:1, hence this is included in answer.

(iii) He can take short term loan : 

Short term loan is current asset , because when short term loan is taken there will be increment in cash but on the other side current liability will also increase. Hence , if we suppose current assets is 2,50,000 and current liability is 1,00,000 , and short term loan is x, then current ratio will be

2,50,000 + x / 1,00,000 + x = 2/1

2,50,000 + x =2,00,000 + 2x

2,50,000 - 2,00,000 =2x - x

hence, x = 50,000

it means if there will be short term loan of 50,000, the current ratio will be 2 :1.

The stock turnover ratio is a relation between the stock or the inventory of a company and its cost of goods sold and calculates how many times an average stock is being converted into sales.  

Stock Turnover Ratio = Cost of Goods Sold/Average Inventory

Cost Of Goods Sold = Sales - Gross Profit

= 440000 - (440000 × 25%)

= 440000 - 110000

= Rupees 3,30,000

Average Stock = (Opening Stock + Closing Stock) / 2

= (32000 + 34000) / 2

= Rupees 33,000.

Stock Turnover Ratio = Cost Of Goods Sold / Average Stock

= 330000 / 33000

∴ Stock Turnover Ratio = 10 Times.

Cash flows from Investing Activities:

• It is the section of the company's cash flow statement that displays how much money has been generated from or used in making investments during a specific period of time.
• Investing activities include the purchase of long-term fixed assets like plant, property, equipment, etc., acquisition of other businesses, and investments in marketable securities like stocks and bonds.

​Cash flows included and not included from Investing activities are listed below:

• There are more items that can be included in this list; the only sure way to know what's included is to look at the balance sheet and analyze any difference between non-current assets over the two periods.
• Any changes in the value of these long-term assets (other than depreciation) mean there will be investing items to display on the cash flow statement. 

Therefore, according to the accounting profession, Cash outflow to acquire fixed assets would be considered a cash-flow item from an "investing" activity.

An activity ratio is a type of financial metric that indicates how efficiently a company is leveraging the assets on its balance sheet, to generate revenues and cash. Commonly referred to as efficiency ratios, activity ratios help analysts gauge how a company handles inventory management, which is key to its operational fluidity and overall fiscal health.

Activity Ratio = Capacity Ratio x Efficiency Ratio

Efficiency Ratio = Activity Ratio / Capacity Ratio

∴ Efficiency Ratio = 80 / 120

∴ Efficiency Ratio = 66.67%

Thus, option 4 is the correct answer.

The correct answer is 21.5%

Key Points First, we need to calculate the amount of sales tax:

Sales Tax = 7% of Gross Sales = 7/100 * 20,00,000 = Rs 1,40,000

Next, we need to calculate the net sales:

Net Sales = Gross Sales - Sales Tax = 20,00,000 - 1,40,000 = Rs 18,60,000

Then, we can calculate the profit before income tax:

Profit Before Tax = Rs 4,00,000

Finally, we can calculate the net profit before tax ratio:

Net Profit Before Tax Ratio = (Profit Before Tax / Net Sales) * 100
= (4,00,000 / 18,60,000) * 100
= 21.5%

Therefore, the net profit before tax ratio is 21.5%.