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FAQs on PPT - Analysis of Financial Statements - Accountancy Class 12 - Commerce

1. What are financial statements and why are they important in commerce?
Ans. Financial statements are formal records of the financial activities and position of a business, person, or other entity. They provide valuable information about the financial performance, profitability, liquidity, and solvency of an organization. Financial statements are important in commerce as they help stakeholders, such as investors, lenders, and suppliers, to assess the financial health and viability of a company before making business decisions.
2. How can financial statements be analyzed to evaluate a company's performance?
Ans. Financial statements can be analyzed using various techniques and ratios to evaluate a company's performance. Some common methods include: - Ratio analysis: This involves calculating financial ratios like profitability ratios, liquidity ratios, and solvency ratios to assess different aspects of a company's performance. - Trend analysis: By comparing financial data over multiple periods, trends can be identified to understand if the company's performance is improving or deteriorating. - Comparative analysis: This involves comparing the financial performance of a company with its industry peers or competitors to evaluate its relative position in the market.
3. What are the key components of financial statements that need to be analyzed?
Ans. The key components of financial statements that need to be analyzed include: - Income statement: This statement shows the revenue, expenses, and profit or loss generated by a company during a specific period. - Balance sheet: It presents the assets, liabilities, and shareholders' equity of a company at a specific point in time, providing a snapshot of its financial position. - Cash flow statement: This statement tracks the inflow and outflow of cash from operating, investing, and financing activities, highlighting the company's ability to generate and manage cash. - Statement of changes in equity: It reflects the changes in shareholders' equity over a specific period, including contributions, distributions, and retained earnings.
4. What are the limitations of financial statement analysis?
Ans. Financial statement analysis has certain limitations that should be considered, including: - Historical data: Financial statements primarily provide historical information and may not reflect the current or future performance of a company accurately. - Subjectivity: The interpretation of financial statements involves subjective judgments, and different analysts may have varying opinions. - Incomplete information: Financial statements may not capture all relevant information about a company, such as non-financial factors and qualitative aspects. - Manipulation: Companies can manipulate financial statements through creative accounting practices, making it challenging to rely solely on the reported numbers.
5. How can financial statement analysis assist in decision-making for investors and lenders?
Ans. Financial statement analysis helps investors and lenders make informed decisions by providing insights into the financial health and performance of a company. It assists in assessing the profitability, liquidity, and solvency of a company, which are crucial factors for investment and lending decisions. By analyzing financial statements, investors and lenders can evaluate the company's ability to generate profits, repay debts, and generate cash flows. This analysis also helps in identifying potential risks and opportunities, enabling better decision-making for investors and lenders.
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