Test: Financial Statement Analysis - UGC NET MCQ

Assertion Correctness: The assertion is incorrect. While short-term solvency is important, long-term solvency is crucial for a company's sustainability.

Reason Correctness: The reason is false. Long-term stability is equally significant as it ensures the company's survival and growth over time.

Explanation of Correct Option: Option C is correct because although short-term solvency is essential for operational continuity, long-term solvency is equally crucial for a business's overall health and longevity.

The Comparative Statement in financial statement analysis compares financial data over two years, calculating differences in both absolute and percentage terms. This form of horizontal analysis helps analysts and investors assess the company's performance and trends over time.

• Assertion Correctness: The assertion is correct. Liquidity analysis does indeed focus on a company's ability to meet its short-term financial obligations.
• Reason Correctness: The reason is correct. Liquidity ratios, such as the current ratio and quick ratio, are used to evaluate a company's ability to pay off its short-term debts.
• Explanation: The reason provides a logical explanation for the assertion. Liquidity ratios directly assess a company's ability to cover its short-term liabilities with its current assets. Therefore, the reason is the correct explanation for the assertion.

• Assertion is true as Financial Statement Analysis is indeed conducted to evaluate a company's profitability and solvency.
• Reason is true as Financial Statement Analysis involves organizing financial records into sections that facilitate understanding.
• The Reason is the correct explanation of the Assertion because organizing financial records in a comprehensible manner aids in assessing a company's financial health effectively.

Ratio Analysis is a quantitative tool used in financial statement analysis to evaluate the relationships between different financial statement items. It helps in understanding the financial health, operational efficiency, and profitability of a company by analyzing ratios like liquidity, profitability, leverage, and efficiency ratios.

Investors use financial statement analysis to assess the business's earning capacity, future growth prospects, and the safety and reliability of their investment returns. By analyzing financial statements, investors can make informed decisions about investing in a company based on its financial health and potential for growth.

Creditors rely on financial statement analysis to evaluate the business's liquidity and solvency position. By analyzing financial statements, creditors can assess the company's ability to repay its debts and make informed decisions about extending credit or loans to the business.

Financial statement analysis is essential for management to evaluate profitability, liquidity, and solvency, measure decision-making effectiveness, and take corrective actions. By analyzing financial statements, management can make informed decisions to improve the company's performance and financial health.

• Assertion is true because Financial Statement Analysis indeed involves breaking down financial records according to a specific plan.
• Reason is false because Financial Statement Analysis is not solely about assessing operational efficiency and growth prospects; it also evaluates profitability and solvency.
• The Reason is not a correct explanation of the Assertion as it does not directly correlate with the process of breaking down financial records.

Assertion Correctness: The assertion is partly correct. While profitability is a significant factor, it is not the sole indicator of a business's financial health.

Reason Correctness: The reason is incorrect. Profitability is important, but financial health depends on various other factors.

Explanation of Correct Option: Option A is correct because profitability is indeed crucial in assessing financial health, but it is not the sole determinant. Other factors like solvency, liquidity, and efficiency also play vital roles.