Test: Financial Statements And Their Analysis - 2 - Commerce MCQ

Titles and Mastheads are shown under the heading of Intangible assets.

1. Section 129 of companies act 2013, provides for preparation of financial statements. 
2. 2(40) to include balance sheet, profit and loss account/income and expenditure account, cash flow statement, statement of changes in equity and any explanatory note annexed to the above.

Computer software is an intangible asset. It shown under the heading of Fixed Assets and sub heading Intangible Assets.

Prepaid expenses are those expenses which paid in advance by the firm. These expenses are shown under other current assets.

Work in progress is shown under the heading of current assets and sub heading Inventories. But capital work in progress is shown under the fixed assets.

Stores and spares comes in balance sheet under the heading Inventories. Following items do not take place in Balance Sheet:
•Sales
•Purchase
•Expenses

Sales appear in the Statement of Profit and Loss and the following items are shown in the balance sheet:
•Creditors
•Goodwill 
•Trade Payables

Information available from the analysis of financial statement will serve the following:
•Potential Investors
•Economist and Researchers 
•Stock Exchange

When analysis is made on the basis of Published statements, reports and information it is known as External Analysis.

Following parties are interested in the Financial statement analysis: 
Creditors
Government
Investors

The main objective of analysis of financial statement is to measure the financial strength of the firm.

Following are the limitations of financial statement analysis: 
•Don't reflect changes in price level.
•Affected by the personal ability and bias of the Analyst
•Single years' Analysis of financial statement have limited use.

When single set of statements of two firms is compared, it is known as Cross Sectional Analysis.

Window dressing is the limitation of accounting which is directly concerned with: 
hide some vital information
show items at incorrect value to portray better profitability
may overvalue closing stock to show higher profits

Shareholders are interested in the analysis of financial statement because they want to judge the present and future earning capacity of the business.

Horizontal analysis is a time series analysis because it shows comparison of financial data for several years.

Comparative financial statement is an example of Horizontal analysis because it requires comparative financial statements of two or more accounting periods.

Interpretation of accounts is the:
A: Art and science of translating the figures
- It involves analyzing and understanding the financial information presented in a company's accounts.
- It requires expertise in financial reporting standards, accounting principles, and financial analysis techniques.
- The goal is to accurately interpret the figures and present them in a meaningful way to stakeholders.
B: To know financial strengths and weaknesses of a business
- Interpreting accounts allows businesses to assess their financial health and identify areas of strength and weakness.
- It helps in understanding the profitability, liquidity, and solvency of a business.
- By analyzing the accounts, businesses can make informed decisions regarding investments, budgeting, and future growth strategies.
C: To know the causes for the prevailing performance of business
- Through interpretation of accounts, businesses can identify the factors that have influenced their financial performance.
- It helps in understanding the reasons behind changes in revenues, expenses, and profitability.
- By analyzing the accounts, businesses can assess the impact of various factors such as market conditions, competition, and internal operations on their performance.
D: All of the above
- Interpretation of accounts encompasses all the aspects mentioned above.
- It involves translating the figures, understanding financial strengths and weaknesses, and identifying the causes for the prevailing performance of a business.
- It is a comprehensive process that combines both the art and science of analyzing financial information.
Therefore, the correct answer is d. All of the above.

Analysis conducted by the Investors and Creditors is known as External Analysis because they both are treated as outsiders.

Break-even point is a point where total of sales is exactly equal to the total of cost to the total of cost of sales.