Financial statement analysis

1. Which financial statement is the most important?

2. Discuss the meaning of financial statements.

3. Discuss the limitations of financial statements

4. Define the term inter firm comparison.

5. Discuss the Various tools of Financial Analysis.

6 .What are the Profitability Ratios?

7. Discuss the Ratio analysis concept.
8. Elaborate the concept of Analysis of segmental information.

Case Study
When a loss-making company creates a deferred tax asset, it is a signal that the company’s management is optimistic of an early turnaround. This is because conservative accounting requires that a company recognise the tax savings from carry-forward losses only if there is reasonable certainty that the company will actually have book profits in the near future. However, investors should make an independent assessment of the company’s financials to see if the losses are from one-time factors, which may be rectified in the future. A good approach to reporting deferred tax liabilities and assets is the one adopted by some Indian companies in their balance sheet. It provides detailed disclosures on the opening balance of each component of deferred tax liability or asset, takes the reader through the additions and deductions during the year, and arrives at the closing balance as reported in the financial statements. In addition, companies may be asked to provide a statement that explains why the taxation provision reported to shareholders differs from the standard tax rate applicable to them. This may leave investors much wiser about the sources of a company’s tax savings than is the case with deferred tax accounting, with all its complexities For instance, Nagarjuna Fertilisers made a loss of Rs. 191 crore before taxes in the March 2015 quarter. But it created a deferred tax asset of Rs. 4.75 crore for the quarter. The company’s profits for the quarter took a knock from large-scale provisioning to meet the liability arising from a revision in subsidy realised from the government in the earlier years. The deferred tax asset suggests that the company believes that the losses are of a one-time nature, resulting from the provisioning.

1.    Analyse this information and write down the case facts.

2.      How should the investors make an independent assessment of the company’s financials to interpret the losses?

3.    Should the companies be required to explain the source of deferred tax provisions or credits in their interim financial statements just as they do in their balance sheets?

Assignment C

1. A …………. also referred to as a statement of financial position, reports on a company assets, liabilities, and owner’s equity at a given point in time.

Options

balance sheet

cash flow statement

income statement

Profit and loss statement

Question No.  2 Marks

2. A ………….. reports on a company cash flow activities, particularly its operating, investing and financing activities.

Options

Income statement

cash flow statement

Balance Sheet

Profit and loss statement

3. A………….. , also known as equity statement or statement of retained earnings, reports on the changes in equity of the company during the stated period.

Options

Balance Sheet

cash flow statement

Statement of changes in equity  

Profit and loss statement

4.  ………… plays an integral role in the capital markets and economic stability and growth, and efforts to enhance its quality are vital.

Options

Profit and loss statement

Balance Sheet

cash flow statement  

Financial reporting

5. ……………. are those which provide either goods or services with the basic objective of profit earning.

Options

Business organizations

Government Organisation

Private Organisation 

None of these

6. A ……………. provides information on the operation of the enterprise. These include sales and the various expenses incurred during the stated period.

Options

Income statement

Profit and loss statement

Balance Sheet  

Financial reporting

7. An……………, also known as a statement of comprehensive income, statement of revenue & expense, P&L or profit and loss report, reports on a company's income, expenses, and profits over a period of time.

Options

Financial reporting

Profit and loss statement

Income statement  

Balance Sheet

8. The ……………. represents a record of a company assets, liabilities and equity at a particular point in time.

 

Options

Income statement

Profit and loss statement

Financial reporting  

Balance sheet

9. ……….. represent the resources that the business owns or controls at a given point in time.

Options

Assets

Liability

Non Liability  

None of these

10. A …………..is an obligation that a business owes to someone and its settlement involves the transfer of cash or other resources.

Options

Assets

Liability

Non Liability  

None of these

11. A common problem with …………… is that the aggregation of information in the financial statements may have changed over time, due to ongoing changes in the chart of accounts, so that revenues, expenses, assets, or liabilities may shift between different accounts and therefore appear to cause variances when comparing account balances from one period to the next.

Options

Horizontal analysis

Proportion analysis

Vertical analysis  

Financial statement analysis

12. The most common use of …………. in an income statement is to show the various expense line items as a percentage of sales, though it can also be used to show the percentage of different revenue line items that make up total sales.
Options

Financial statement analysis

Vertical analysis

Proportion analysis  

Horizontal analysis

13. …………..is the process of reviewing and analyzing a company financial statements to make better economic decisions

Options

Horizontal analysis

Vertical analysis

Financial statement analysis  

Proportion analysis

14. ………… is the proportional analysis of a financial statement, where each line item on a financial statement is listed as a percentage of another item.

Options

Horizontal analysis

Financial statement analysis

Proportion analysis  

Vertical analysis

15. ……………. is the comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information.

Options

Horizontal analysis

Vertical analysis

Proportion analysis  

Financial statement analysis

16. In this ……………., an array of ratios is available for discerning the relationship between the size of various accounts in the financial statements.

 

Options

Vertical analysis

Proportion analysis

Financial statement analysis  

Horizontal analysis

17. ………….. create trend lines for key items in the financial statements over multiple time periods, to see how the company is performing.

 Options

Horizontal;

Vertical

Trends  

None of these

18. A financial statement, which expresses the different values in form of percentage, is called a…………….. .

 Options

Proportion analysis

Horizontal analysis

Vertical analysis  

Common size financial statement

19. The main purpose of …………..is improvement of efficiency by showing the management of participating firm its present achievements and possible weaknesses

 Options

IFC

Intra firm comparison

Costing system  

None of these

20. Inter-firm comparison is a natural outcome of uniform…………....

 Options

Budget system

Costing system

Budget Control System  

None of these

21. The …………. of a company determines its ability to utilise the Assets employed in the company efficiently and effectively to earn a good return.

 Options

Return on Assets

Analysis Ratio analysis

Dividend Coverage Ratio  

Analysis Ratio analysis

22. ………….states the number of times an organization is capable of paying dividends to shareholders from the profits earned during an accounting period.

Options

Working capital turnover ratio

Dividend Coverage Ratio

Analysis Ratio analysis  

Profitability Ratios

23. The ……………… measures how well a company is utilizing its working capital to support a given level of sales. Working capital is current assets minus current liabilities.

Options

Analysis Ratio analysis

Price earnings ratio

Working capital turnover ratio  

Profitability Ratios

24. The ……………. of a company determines its ability to withstand competition and adverse conditions like rising costs, falling prices or declining sales in the future.

Options

Return on Assets

Ratio calculation

Ratios  

Profit Margin

25. ………… are the means of presenting information, in the form of a ratio or percentage, which enables a comparison to be made between one significant figure and another.

 Options

Profit Margin

Return on Assets

Ratio calculation  

None of these

26. The purpose of ………….. is to evaluate the various aspects of a company’s operations. It can be calculated from any couple of numbers.

 Options

Return on Assets

Ratio calculation

Profit Margin  

None of these

27. …………… is indispensable part of interpretation of results revealed by the financial statements. It provides users with crucial financial information and points out the areas which require investigation.

Options

Price earnings ratio

Working capital turnover ratio

Analysis Ratio analysis  

Profitability Ratios

28. …………….. refers to activity of assessing financial statements to judge the performance of company.

Options

Analysis Ratio analysis

Working capital turnover ratio

Price earnings ratio  

Financial analysis

29. …………….. show how successful a company is in terms of generating returns or profits on the Investment that it has made in the business.

 Options

Profitability Ratios

Price earnings ratio

Analysis Ratio analysis  

Working capital turnover ratio

30. The…………….. , often called the P/E ratio or price to earnings ratio, is a market prospect ratio that calculates the market value of a stock relative to its earnings by comparing the market price per share by the earnings per share.

Options

Profitability Ratios

Price earnings ratio

Analysis Ratio analysis  

Working capital turnover ratio

31. A ……………..is a business segment or a geographical segment identified on the basis of foregoing definitions for which segment information is required to be disclosed by this Standard.

Options

reportable segment

business segment

Segment assets  

geographical segment

32. ………… are those operating liabilities that result from the operating activities of a segment and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis.

Options

Reportable segment

Segment liabilities

Business segment  

Segment assets

33. …………are those operating assets that are employed by a segment in its operating activities and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis

 Options

Business segment

Geographical segment

Segment assets  

Reportable segment

34. ………….. is revenue from sales to external customers as reported in the statement of profit and loss.

Options

Business segment

Geographical segment

Segment assets  

Enterprise revenue

35. …………… is the aggregate of the portion of enterprise revenue that is directly attributable to a segment,

 Options

Segment revenue

Segment assets

Geographical segment  

Business segment

36. A …………… is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments..

Options

Business segment

Geographical segment

Segment revenue  

Segment assets

37. A …………..is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments

 Options

Segment revenue

Geographical segment

Business segment  

Segment assets

38. ………………established a relationship between total assets and long debts. Debt- Equity Ratio

Options

Solvency Ratio

Debt Equity Ratio

Quick ratio  

Total Assets to Debt Ratio

39. …………. establishes the relationship between quick/ liquid assets and current liabilities.

 Options

Quick ratio

Total Assets to Debt Ratio

Debt Equity Ratio  

Solvency Ratio

40. ………….. measures the relationship between long-term debt and shareholders’ funds. Quick Ratio / Acid test ratio/Liquid ratio

Options

Total Assets to Debt Ratio

Debt Equity Ratio

Quick ratio  

Solvency Ratio