Financial Accounting and Analysis exam top 20 sample question answers

Expert team prepared top 20 sample questions and answers for Financial Accounting and Analysis term end exam. Our top 20 sample questions cover essential topics and come with detailed explanations and examples based previous and upcoming exam. Must study book summary as well as important keywords glossary of Financial Accounting and Analysis for descriptive type question as well as MCQ.

Top 20 Question with answer for Financial Accounting and Analysis

Q1: What is accounting, and what are the users and uses of accounting information?

Answer: Accounting is a systematic process of recording, classifying, and summarizing financial transactions of an organization to provide financial information for decision-making purposes. The primary objective of accounting is to provide relevant, reliable, and timely financial information to various stakeholders of the organization.

The users of accounting information include:

Management: Managers use accounting information to make decisions related to the operation of the organization, such as budgeting, planning, and control.

Investors: Investors use accounting information to assess the profitability, liquidity, and solvency of the organization before making investment decisions.

Creditors: Creditors use accounting information to assess the creditworthiness of the organization before extending credit to them.

Government: Government agencies use accounting information to regulate the activities of the organization, ensure compliance with laws and regulations, and determine tax liabilities.

Employees: Employees use accounting information to negotiate compensation packages and assess job security.

Customers: Customers use accounting information to assess the financial stability and viability of the organization before entering into long-term contracts.

The uses of accounting information include:

Financial Reporting: Accounting information is used to prepare financial statements such as balance sheets, income statements, and cash flow statements, which provide a summary of the organization’s financial performance.

Budgeting and Planning: Accounting information is used to prepare budgets, set financial goals, and plan for future activities.

Control: Accounting information is used to monitor and control the organization’s financial activities, such as tracking expenses, managing assets, and monitoring cash flow.

Decision-Making: Accounting information is used to make decisions related to investments, financing, and operational activities of the organization.

Overall, accounting information plays a crucial role in the decision-making process of various stakeholders of an organization, and it is essential for the success of the organization.

Q2: What are the sub-fields of accounting, and what are the advantages and limitations of financial accounting?

Answer: Accounting is a field that involves the process of recording, analyzing, and interpreting financial information. The sub-fields of accounting include:

Financial Accounting: This sub-field focuses on the preparation of financial statements for external users such as investors, creditors, and government agencies.
Managerial Accounting: This sub-field focuses on the preparation of financial information for internal decision-making purposes.
Auditing: This sub-field involves the examination of financial statements and other financial information to provide an independent opinion on the accuracy and reliability of the information.
Tax Accounting: This sub-field focuses on tax-related issues, including tax planning, preparation of tax returns, and tax compliance.
Forensic Accounting: This sub-field involves the application of accounting principles and techniques to investigate financial crimes such as fraud.

Advantages of Financial Accounting:

Provides financial information to external users: Financial accounting provides information to external users such as investors, creditors, and government agencies. This information helps these users make informed decisions about investing, lending, and regulating.
Standardized reporting: Financial accounting uses standardized reporting formats and guidelines. This helps to ensure consistency and comparability of financial information across different companies and industries.
Transparency: Financial accounting promotes transparency by requiring companies to disclose information about their financial performance and position. This transparency helps to build trust and confidence in the financial markets.

Limitations of Financial Accounting:

Historical data: Financial accounting focuses on past financial data. This means that it may not provide a complete picture of a company’s current financial position and future prospects.
Limited scope: Financial accounting only captures financial data. It does not capture non-financial information that may be important for decision-making purposes, such as environmental or social impact.
Estimates and assumptions: Financial accounting requires companies to make estimates and assumptions when preparing financial statements. These estimates and assumptions can be subjective and may not always reflect the true financial position of a company.

Q3: What are the steps in the accounting cycle, and what is the analysis of accounting transactions?

Answer: The accounting cycle is the process by which accounting information is processed and recorded. The steps in the accounting cycle include:

Identifying and analyzing transactions: This involves identifying and analyzing the financial transactions that have occurred in the business.

Recording transactions in the journal: This involves recording the transactions in a chronological order in the journal.

Posting to the ledger: This involves transferring the journal entries to the ledger accounts.

Preparing an unadjusted trial balance: This involves listing all the ledger account balances to ensure that the total debits and credits are equal.

Adjusting entries: This involves making adjustments to the accounts to ensure that they reflect the correct balances.

Preparing an adjusted trial balance: This involves listing all the adjusted account balances to ensure that the total debits and credits are equal.

Preparing financial statements: This involves preparing the income statement, balance sheet, and statement of cash flows.

Closing entries: This involves closing the temporary accounts (revenue, expense, and dividend accounts) to the retained earnings account.

Preparing a post-closing trial balance: This involves listing all the permanent account balances to ensure that the total debits and credits are equal.

Analysis of accounting transactions involves breaking down a transaction into its individual parts and identifying the effects on the accounting equation. The accounting equation states that assets must equal liabilities plus equity. For example, if a business purchases inventory on credit, the analysis of the transaction would be:

Assets: Increase in inventory
Liabilities: Increase in accounts payable
Equity: No change

This analysis helps to ensure that the transaction is recorded accurately in the accounting system and that the financial statements are prepared correctly.

Q4: What are financial statements, and what is the balance sheet, assets, liabilities, and basic concepts underlying the preparation of the balance sheet?

Answer: Financial statements are documents that provide information about a company’s financial performance and position. They are used by investors, creditors, and other stakeholders to make informed decisions about the company. The three main financial statements are the income statement, the balance sheet, and the statement of cash flows.

The balance sheet is a financial statement that provides information about a company’s assets, liabilities, and equity at a specific point in time. The balance sheet is based on the accounting equation, which states that assets must equal liabilities plus equity.

Assets are resources that a company owns or controls that have the potential to provide future economic benefits. Examples of assets include cash, accounts receivable, inventory, property, plant, and equipment, and investments.

Liabilities are obligations that a company owes to others and must be paid in the future. Examples of liabilities include accounts payable, loans payable, and taxes payable.

Equity is the residual interest in the assets of a company after deducting liabilities. It represents the ownership interest of the shareholders in the company. Equity is comprised of common stock, retained earnings, and other comprehensive income.

The basic concepts underlying the preparation of the balance sheet include:

The accounting equation: The balance sheet is based on the accounting equation, which states that assets must equal liabilities plus equity.

Valuation: Assets and liabilities must be valued based on their fair market value, which is the amount that a willing buyer would pay for the asset or the amount that a willing seller would accept for the liability.

Current vs. Non-current: Assets and liabilities are classified as either current or non-current. Current assets and liabilities are those that are expected to be converted into cash or paid within one year, while non-current assets and liabilities are those that are expected to be held for more than one year.

Presentation: The balance sheet must be presented in a specific format, with assets listed in order of liquidity and liabilities listed in order of maturity. The equity section is typically presented at the bottom of the balance sheet.

Q5: What is the statement of profit and loss, and what are the basic concepts underlying its preparation?

Answer: The statement of profit and loss, also known as the income statement, is a financial statement that shows a company’s revenues, expenses, gains, and losses over a specific period of time, typically a month, quarter, or year. The income statement is used to determine a company’s net income or loss for the period.

The basic concepts underlying the preparation of the income statement include:

Revenue recognition: Revenues are recognized when they are earned, not necessarily when the cash is received. For example, if a company sells goods on credit, the revenue is recognized at the time of the sale, not when the customer pays.

Matching principle: Expenses are recognized when they are incurred, not necessarily when the cash is paid. For example, if a company incurs expenses for salaries in December but does not pay the salaries until January, the expenses are recognized in December, not January.

Accrual basis of accounting: The income statement is prepared using the accrual basis of accounting, which means that revenues and expenses are recognized when they are earned or incurred, regardless of when the cash is received or paid.

Non-operating items: Gains and losses from non-operating items, such as the sale of investments or the settlement of lawsuits, are reported separately from operating income on the income statement.

Depreciation and amortization: The cost of long-term assets, such as property, plant, and equipment, is recognized over their useful lives through depreciation or amortization expense.

Income taxes: Income taxes are reported separately from operating income on the income statement.

The income statement is structured to show a company’s revenues at the top, followed by its expenses and other deductions, resulting in its net income or loss for the period. This information is then used to calculate earnings per share (EPS), a key metric used by investors to assess a company’s profitability.

Q6: What is the trial balance, and what is the relationship between the profit and loss account and balance sheet?

Answer: The trial balance is a report that lists all of the accounts in the general ledger and their balances at a specific point in time. It is used to ensure that the total of all debits equals the total of all credits in the general ledger, which is a basic principle of double-entry accounting. If the debits and credits do not balance, it indicates that there is an error in the accounting records that needs to be corrected.

The relationship between the profit and loss account and the balance sheet is that the net income or loss from the income statement is carried over to the equity section of the balance sheet. This is done through the retained earnings account, which is a cumulative record of a company’s earnings or losses since its inception that have not been paid out as dividends.

If a company has a net income for the period, the amount is added to the retained earnings account, which increases the equity section of the balance sheet. If a company has a net loss for the period, the amount is subtracted from the retained earnings account, which decreases the equity section of the balance sheet.

In addition to the retained earnings account, other accounts on the balance sheet are affected by the income statement. For example, revenues from the income statement increase the assets in the cash and accounts receivable accounts, while expenses from the income statement decrease the assets in the inventory and prepaid expenses accounts.

Overall, the trial balance ensures the accuracy of the accounting records, and the relationship between the profit and loss account and the balance sheet shows how the income statement affects the financial position of the company.

Q7: What are adjustment entries, and what is the adjusted trial balance?

Answer: Adjusting entries are journal entries made at the end of an accounting period to update the balances of certain accounts and to ensure that the financial statements accurately reflect the company’s financial position and performance. These entries are necessary because some transactions or events are not recorded in the general ledger during the normal course of business.

Examples of adjusting entries include:

Accruals: Recording revenues or expenses that have been earned or incurred but have not yet been recorded in the general ledger. For example, an accrual for salaries and wages that have been earned but not yet paid.

Deferrals: Recording revenues or expenses that have been received or paid in advance but have not yet been earned or incurred. For example, a deferral for rent that has been paid in advance but pertains to the next accounting period.

Depreciation: Recording the cost of long-term assets, such as property, plant, and equipment, over their useful lives.

Amortization: Recording the cost of intangible assets, such as patents or trademarks, over their useful lives.

Allowances: Recording allowances for bad debts, sales returns, or warranties.

Once adjusting entries have been made, an adjusted trial balance is prepared to ensure that the total debits still equal the total credits. The adjusted trial balance lists all of the accounts in the general ledger, along with their adjusted balances, and is used to prepare the financial statements. If the adjusted trial balance does not balance, it indicates that there is an error in the accounting records that needs to be corrected.

Q8: What is the Accounting Standards Board, and what is the procedure for issuing accounting standards?

Answer: The Accounting Standards Board (ASB) is a regulatory body that is responsible for setting accounting standards in a country. The ASB’s primary objective is to develop and issue standards for financial reporting that are clear, consistent, and useful for users of financial statements.

The procedure for issuing accounting standards typically involves the following steps:

Research and consultation: The ASB undertakes research and consultation to identify accounting issues that require new or revised standards. This may involve consultations with stakeholders such as investors, auditors, preparers, and regulators.

Drafting of exposure draft: The ASB drafts an exposure draft of the proposed accounting standard, which is made available for public comment for a specified period of time, usually 60 to 120 days.

Analysis of feedback: The ASB analyzes the feedback received from stakeholders and may revise the exposure draft based on the feedback.

Issuance of the final standard: Once the exposure draft has been revised, the ASB issues the final accounting standard. The standard becomes effective on a specified date, usually after a transition period to allow companies to prepare for the new requirements.

Implementation: Companies are required to implement the new accounting standard in their financial statements. The ASB provides guidance on how to apply the new standard and may also provide training and support to companies to help them implement the new requirements.

The process of issuing accounting standards is typically a collaborative effort involving the ASB, stakeholders, and other relevant parties. The goal is to develop standards that are relevant, reliable, and useful for financial reporting purposes, and that provide a consistent framework for companies to prepare their financial statements.

Q9: What are the compliance and implementation of accounting standards in India, and what is the convergence of Indian accounting standards with IFRS?

Answer: In India, the Institute of Chartered Accountants of India (ICAI) is responsible for issuing accounting standards. The ICAI has issued a series of Accounting Standards (AS) that are mandatory for companies to follow when preparing their financial statements. The AS are based on the Generally Accepted Accounting Principles (GAAP) in India, and they provide guidance on various accounting issues such as revenue recognition, depreciation, and inventory valuation.

Companies in India are required to comply with the AS when preparing their financial statements. The Securities and Exchange Board of India (SEBI) has also mandated the use of Ind AS (Indian Accounting Standards) for listed companies from 2016 onwards. These Ind AS are largely converged with the International Financial Reporting Standards (IFRS), which are global accounting standards issued by the International Accounting Standards Board (IASB).

The convergence of Indian accounting standards with IFRS is a gradual process that began in 2011. The ICAI and the Ministry of Corporate Affairs have been working together to align Indian accounting standards with IFRS. The convergence process involves updating existing AS to bring them in line with IFRS, as well as issuing new standards that are based on IFRS.

The objective of converging Indian accounting standards with IFRS is to improve the quality of financial reporting in India and to enable Indian companies to compete globally by providing them with a consistent framework for financial reporting. Convergence will also make it easier for foreign investors and analysts to understand and compare Indian financial statements with those of other countries.

Overall, compliance with accounting standards in India is mandatory for companies, and convergence with IFRS is an ongoing process aimed at improving financial reporting and facilitating global business transactions.

Q10: What are the Generally Accepted Accounting Principles and International Financial Reporting Standards?

Answer: Generally Accepted Accounting Principles (GAAP) are a set of guidelines and standards that govern the accounting practices and financial reporting of companies in a particular country or region. GAAP is used in many countries, including the United States, India, and Australia. The primary purpose of GAAP is to ensure consistency, accuracy, and transparency in financial reporting, which helps investors, creditors, and other stakeholders to make informed decisions.

International Financial Reporting Standards (IFRS), on the other hand, are a set of global accounting standards developed by the International Accounting Standards Board (IASB). IFRS is used by companies in more than 140 countries, including many European Union countries, Canada, and Japan. The primary objective of IFRS is to provide a common framework for financial reporting that enables investors and other stakeholders to compare the financial performance of companies across different countries.

IFRS is based on the principles of transparency, relevance, reliability, and comparability. It provides guidelines on how to recognize, measure, present, and disclose financial information in a way that is consistent, accurate, and useful for stakeholders. IFRS covers a wide range of topics, including revenue recognition, lease accounting, and financial instruments.

Both GAAP and IFRS are designed to ensure that companies follow consistent and transparent accounting practices when preparing their financial statements. However, there are some differences between the two frameworks, and companies may need to make adjustments when transitioning from one framework to the other. The ongoing convergence of GAAP and IFRS is aimed at reducing these differences and creating a more harmonized global accounting framework.

Q11: What are the books of accounts to be kept by a company, and what are the financial statements, assets, equity, other equity, liabilities, contingent liabilities, and commitments?

Answer: In the world of business, keeping accurate and complete records of financial transactions is crucial for the success and sustainability of a company. These records are kept in the books of accounts, which include the cash book, journal, ledger, and trial balance. Financial statements are then prepared using these records, providing insights into a company’s financial position, performance, and cash flows. The balance sheet, income statement, and cash flow statement are the three main financial statements. Assets, equity, other equity, and liabilities are the key components of a balance sheet, while the income statement shows revenue, expenses, and profit or loss. Contingent liabilities and commitments are also important to consider when analyzing a company’s financial position. By understanding these terms and concepts, business owners and investors can make informed decisions and ensure the long-term success of their companies.

Books of Accounts:

There are four main books of accounts that a company must maintain, namely:

Cash Book – to record all transactions related to cash receipts and payments.

Journal – to record all non-cash transactions such as credit sales and purchases, depreciation, etc.

Ledger – to maintain a record of all accounts in a systematic manner.

Trial Balance – to ensure that the debit and credit entries in the ledger are equal and to prepare the financial statements.

Financial Statements:

Financial statements are a set of reports that a company prepares to show its financial position, performance, and cash flows. There are three main financial statements:

Balance Sheet – a statement of a company’s financial position at a particular point in time, showing its assets, liabilities, and equity.

Income Statement – a statement of a company’s performance over a period of time, showing its revenue, expenses, and profit or loss.

Cash Flow Statement – a statement of a company’s cash inflows and outflows over a period of time.

Assets:

Assets are the resources owned by a company that have economic value and can be used to generate future economic benefits. Examples of assets include cash, accounts receivable, inventory, property, plant, and equipment, etc.

Equity:

Equity represents the residual interest in the assets of a company after deducting its liabilities. It is the amount that shareholders would receive if all assets were sold and all liabilities were paid off. Equity includes share capital, retained earnings, and other reserves.

Other Equity: Other equity refers to any type of equity that is not common or preferred shares. Examples of other equity include convertible debt, warrants, and stock options.

Liabilities: Liabilities are the obligations of a company to pay money or provide goods or services to others in the future. Examples of liabilities include accounts payable, loans payable, and accrued expenses.

Contingent Liabilities: Contingent liabilities are potential obligations that may arise in the future, depending on the outcome of a future event. Examples of contingent liabilities include lawsuits, warranty claims, and environmental liabilities.

Commitments: Commitments are agreements that a company has entered into, which will result in future obligations. Examples of commitments include contracts to purchase goods or services or to lease property.

Q12: What is revenue from operations, other income, expenses, profit before exceptional items and tax, exceptional items, tax expense, profit (loss) for the period from continuing operations, and discontinued operations?

Answer: These terms are commonly used in financial statements to describe different aspects of a company’s financial performance. Here are brief explanations of each term:

Revenue from operations: This is the amount of money a company earns from its main business activities, such as selling products or providing services.

Other income: This includes any income a company earns that is not from its main business operations, such as interest income, dividend income, or gains from the sale of assets.

Expenses: These are the costs a company incurs in order to operate its business, such as salaries and wages, rent, utilities, and raw materials.

Profit before exceptional items and tax: This is the profit a company earns from its main business operations, before taking into account any exceptional or unusual items and before deducting taxes.

Exceptional items: These are unusual or one-time items that affect a company’s financial performance, such as restructuring costs, legal settlements, or losses from natural disasters.

Tax expense: This is the amount of taxes a company is required to pay based on its income and other factors.

Profit (loss) for the period from continuing operations: This is the profit or loss a company earns from its ongoing business activities, after deducting all expenses and taxes.

Discontinued operations: This refers to any business operations that a company has decided to sell or close down. The financial results of these operations are reported separately from the company’s continuing operations.

Note that these terms may be reported differently depending on the accounting standards used by the company and the country in which it operates.

Q13: What is the statement of cash flows, and what are the purposes of the cash flow statement?

Answer: The statement of cash flows is a financial statement that shows the cash inflows and outflows of a company during a specific period. It summarizes the sources and uses of cash for a company, including its operating, investing, and financing activities.

The purposes of the cash flow statement are:

To provide information about a company’s liquidity: The cash flow statement shows how a company is generating and using cash. This information is important for investors and creditors to assess a company’s ability to meet its short-term obligations.

To assess a company’s operating performance: The cash flow statement separates cash flows from operating activities from those related to investing and financing activities. This helps investors and creditors to better understand how much cash a company generates from its main business activities.

To help with financial planning: The cash flow statement provides information that can help a company to plan and manage its cash flow more effectively. It can help a company to identify potential cash shortages and to plan for capital expenditures or other investments.

To identify potential red flags: The cash flow statement can highlight potential issues with a company’s financial health, such as a negative cash flow from operating activities, which could indicate problems with the company’s business model, management, or financial performance.

Overall, the cash flow statement is an important tool for investors, creditors, and management to assess a company’s financial health and to make informed decisions about investing, lending, and managing cash.

Q14: What are operating activities, investing activities, financing activities, and reporting cash flows from operating, investing, and financing activities?

Answer: Cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating activities, investing activities, and financing activities. Operating activities are the primary revenue-generating activities of a company, investing activities refer to the purchase or sale of long-term assets, and financing activities refer to the issuance or repurchase of a company’s own stock or bonds, as well as any payments of dividends or interest.

Operating activities: These are the cash flows that result from a company’s primary business activities, such as the sale of goods or services, payment of salaries and wages, and payment of taxes. Cash inflows from operating activities include cash received from customers, while cash outflows include payments to suppliers, employees, and for taxes.

Investing activities: These are the cash flows that result from a company’s investments in long-term assets, such as property, plant, and equipment, and other investments. Cash inflows from investing activities include cash received from the sale of long-term assets, while cash outflows include purchases of property, plant, and equipment or investments in other companies.

Financing activities: These are the cash flows that result from a company’s financing activities, such as issuing or repurchasing stock, borrowing or repaying loans, and paying dividends to shareholders. Cash inflows from financing activities include proceeds from issuing stock or taking out loans, while cash outflows include payments to repurchase stock or repay loans.

Reporting cash flows from operating, investing, and financing activities: The cash flow statement reports the cash inflows and outflows from each of the three categories of activities separately. The net cash flows from each category are then added together to determine the net increase or decrease in cash and cash equivalents for the period. This net change in cash and cash equivalents is then added to the beginning balance of cash and cash equivalents to determine the ending balance for the period. By reporting cash flows from operating, investing, and financing activities separately, investors, creditors, and management can analyze a company’s cash flows and financial health more effectively.

Q15: What is the treatment of special items, and what is the format of the cash flow statement (direct and indirect method)?

Answer: This question pertains to two accounting topics: the treatment of special items in financial statements and the format of the cash flow statement. Special items are unique and infrequent transactions, and the cash flow statement presents a company’s cash inflows and outflows over a period of time. The statement can be prepared using the direct or indirect method.

Treatment of Special Items:

Special items are those items that are considered non-recurring or infrequent in nature, and which are not expected to occur on a regular basis. Examples of special items include gains or losses from the sale of assets, restructuring charges, and write-offs of bad debts.

The treatment of special items depends on the accounting standards used by the organization. In general, under Generally Accepted Accounting Principles (GAAP), special items are reported separately on the income statement and are excluded from operating income. This is done to provide investors and analysts with a clearer picture of the company’s ongoing operations.

Format of the Cash Flow Statement:

The cash flow statement is a financial statement that provides information about the cash inflows and outflows of a business over a specific period of time. The statement can be prepared using either the direct method or the indirect method.

Direct Method: Under the direct method, the cash flow statement starts with the company’s cash receipts from customers and other sources, such as interest and dividends. Next, the company lists its cash payments, including payments to suppliers, employees, and lenders. The net cash flow from operating activities is then calculated by subtracting the cash payments from the cash receipts.

Indirect Method: Under the indirect method, the cash flow statement starts with the company’s net income, and then adjusts for non-cash items such as depreciation and amortization. The statement then adjusts for changes in working capital accounts such as accounts receivable, accounts payable, and inventory. The net cash flow from operating activities is then calculated by adding or subtracting these adjustments to net income.

Both the direct and indirect method will ultimately provide the same net cash flow from operating activities. The difference lies in the presentation of the information. The direct method provides a more detailed view of the company’s cash inflows and outflows, while the indirect method provides a reconciliation of net income to net cash flow from operating activities.

Q16: What are the profitability measures, tests of efficiency in investment utilization (efficiency ratios), tests of financial position, and ratios involving share information?

Answer: Profitability measures are financial ratios that assess a company’s ability to generate earnings in relation to its revenue, assets, and equity. They are important indicators of a company’s financial health and can be used to evaluate its performance over time and against its competitors.

Profitability Measures:

Gross Profit Margin: Gross Profit / Total Revenue
Operating Profit Margin: Operating Profit / Total Revenue
Net Profit Margin: Net Profit / Total Revenue
Return on Assets (ROA): Net Income / Total Assets
Return on Equity (ROE): Net Income / Shareholders’ Equity
Earnings Per Share (EPS): Net Income / Number of Shares Outstanding
Price to Earnings (P/E) Ratio: Market Price per Share / Earnings Per Share

Tests of Efficiency in Investment Utilization (Efficiency Ratios):

Asset Turnover Ratio: Total Revenue / Average Total Assets
Inventory Turnover Ratio: Cost of Goods Sold / Average Inventory
Receivables Turnover Ratio: Total Revenue / Average Accounts Receivable
Payables Turnover Ratio: Total Purchases / Average Accounts Payable
Cash Conversion Cycle: (Days Inventory Outstanding + Days Sales Outstanding) – Days Payable Outstanding

Tests of Financial Position:

Current Ratio: Current Assets / Current Liabilities
Quick Ratio: (Current Assets – Inventory) / Current Liabilities
Debt-to-Equity Ratio: Total Debt / Shareholders’ Equity
Interest Coverage Ratio: Earnings Before Interest and Taxes (EBIT) / Interest Expense
Debt Service Coverage Ratio: Net Operating Income / Total Debt Service

Ratios Involving Share Information:

Price to Earnings (P/E) Ratio: Market Price per Share / Earnings Per Share
Dividend Yield Ratio: Annual Dividend Per Share / Market Price per Share
Dividend Payout Ratio: Dividends Per Share / Earnings Per Share
Book Value per Share: Shareholders’ Equity / Number of Shares Outstanding
Market to Book Ratio: Market Price per Share / Book Value per Share

Q17: What are the limitations of ratio analysis, and what are the techniques of financial analysis?

Answer:

Limitations of Ratio Analysis:

Limited scope: Ratio analysis only provides a limited view of a company’s financial performance. It cannot take into account the qualitative factors such as management quality, market trends, etc.

Historical data: Ratio analysis relies on past data, which may not accurately predict future performance.

Industry differences: Different industries have different financial ratios, making it difficult to compare companies across industries.

Different accounting methods: Different companies may use different accounting methods, which can impact the accuracy of financial ratios.

Non-financial factors: Ratio analysis does not consider non-financial factors such as brand value, customer satisfaction, and employee morale.

Techniques of Financial Analysis:

Vertical analysis: This technique involves analyzing the financial statements of a company by comparing individual items to a base value, typically sales or revenue.

Horizontal analysis: This technique involves analyzing the financial statements of a company over a period of time to identify trends and changes in financial performance.

Ratio analysis: This technique involves analyzing financial ratios to assess a company’s financial performance.

Trend analysis: This technique involves analyzing a company’s financial performance over multiple periods to identify trends and patterns.

Cash flow analysis: This technique involves analyzing a company’s cash inflows and outflows to assess its liquidity and ability to meet its financial obligations.

DuPont analysis: This technique involves analyzing a company’s return on equity (ROE) by breaking it down into its component parts, including profit margin, asset turnover, and financial leverage.

Q18: What is common-size analysis, trend analysis, percentage change analysis (comparative financial statements), and management discussion and analysis?

Answer: Common-size analysis, trend analysis, and percentage change analysis (comparative financial statements) are three tools used to analyze financial statements, while management discussion and analysis (MD&A) is a section of a company’s annual report that provides insight into the company’s financial performance, goals, and strategies.

Common-size analysis: Common-size analysis is a financial statement analysis tool that involves presenting each item on a financial statement as a percentage of a base value. For example, in a common-size income statement, each item is expressed as a percentage of revenue. This allows analysts to compare the relative sizes of different items on a financial statement and identify trends over time.

Trend analysis: Trend analysis is a financial statement analysis tool that involves comparing financial data over multiple periods to identify trends and patterns. For example, an analyst might compare a company’s revenue and net income over the past five years to see if there has been a consistent trend of growth or decline.

Percentage change analysis (comparative financial statements): Percentage change analysis involves comparing financial data for different periods and calculating the percentage change between them. This can help analysts identify areas where a company’s financial performance has improved or declined.

Management Discussion and Analysis (MD&A): MD&A is a section of a company’s annual report that provides an overview of the company’s financial performance, goals, and strategies. This section may also discuss risks and uncertainties that could impact the company’s future performance. MD&A is often used by investors and analysts to gain insight into a company’s financial position and future prospects.

Q19: What is thinking beyond numbers, quality of earnings, and sustainable income?

Answer: “Thinking beyond numbers,” “quality of earnings” and “sustainable income” are all concepts that go beyond just the financial statements of a company and require a deeper understanding of the underlying business and industry.

Thinking beyond numbers: This refers to the idea that financial statements only provide a partial view of a company’s performance and that other factors, such as customer satisfaction, employee engagement, and brand reputation, also play a role in determining the success of a business. Thinking beyond numbers requires a more holistic view of a company and an understanding of the non-financial factors that can impact its success.

Quality of earnings: Quality of earnings refers to the sustainability and reliability of a company’s reported earnings. For example, if a company is using aggressive accounting practices to inflate its earnings, those earnings may not be sustainable over the long term. Understanding the quality of earnings requires analyzing a company’s accounting practices, revenue recognition policies, and other factors that can impact the accuracy and reliability of its reported earnings.

Sustainable income: Sustainable income refers to a company’s ability to generate consistent earnings over the long term. This requires not only a strong financial position but also a solid business model, effective management, and a competitive advantage in the marketplace. Understanding sustainable income requires a deep understanding of a company’s industry, competition, and long-term growth prospects. It also involves looking beyond short-term financial results and focusing on the company’s ability to generate consistent earnings over the long term.

Q20: What are the financial reporting standards, and how are they applied in the corporate financial statements?

Answer: Financial reporting standards are a set of guidelines and rules that govern how a company’s financial information is presented in its financial statements. The standards are designed to ensure that financial information is transparent, consistent, and comparable across different companies and industries.

The most commonly used financial reporting standards are generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). GAAP is used primarily in the United States, while IFRS is used in many other countries around the world.

These standards provide guidance on how companies should recognize, measure, and report their financial transactions in their financial statements. They cover a wide range of financial transactions, including revenue recognition, asset and liability recognition and measurement, and financial statement presentation and disclosure.

In corporate financial statements, companies apply these standards by following a set of accounting policies and procedures to ensure that their financial statements are prepared in accordance with the standards. This includes using standardized formats for financial statements and disclosures, and ensuring that financial information is accurate and complete.

By following these standards, companies can provide investors, creditors, and other stakeholders with reliable and meaningful financial information that can be used to make informed decisions about the company’s financial health and performance.

Also study other exam sample paper for mba

DistPub Team

Distance Publisher (DistPub.com) provide project writing help from year 2007 and provide writing and editing help to hundreds student every year.