Accountancy Question and Answer for Class 12th NCERT
Categories: Freshers Intermediate class NCERT Accountancy
Accountancy Question and Answer for Class 12th NCERT
Company Accounts and Analysis of Financial Statements
Q1: List the techniques of Financial Statement Analysis.
Answer: The following are the commonly used techniques of Financial Statement Analysis:
- Comparative Financial Statements
- Common Size Financial Statements
- Trend Analysis
- Ratio Analysis
- Cash Flow Statement
- Fund Flow Statement
Q2: Describe the different techniques of financial analysis and explain the limitations of financial analysis.
Answer: The various techniques used in financial analysis are as follows:
- Comparative Statements: These statements depict the figures of two or more accounting years simultaneously that help to access the profitability and financial position of a business. The Comparative Statements help us in analyzing the trend of the financial position of the business. These statements also enable us to undertake various types of comparisons like inter-firm comparisons and intra-firm comparisons. It presents the change in the financial items both in absolute as well as percentage terms. Therefore, these statements help in measuring the efficiency of the business in relative terms. The analyses based on these statements are known as Horizontal Analysis.
- Common Size Statements: These statements depict the relationship between various items of financial statements and some common items (like Net Sales and the Total of Balance Sheet) in percentage terms. In other words, various items of Trading and Profit and Loss Account such as Cost of Goods Sold, Non-Operating Incomes and Expenses are expressed in terms of percentage of Net Sales. On the other hand, different items of Balance Sheet such as Fixed Assets, Current Assets, Share Capital, etc. are expressed in terms of percentage of Total of Balance Sheet. These percentage figures are easily comparable with that of the previous years' (i.e. inter-firm comparison) and with that of the figures of other firms in the same industry (i.e. inter-firm comparison) as well. The analyses based on these statements are commonly known as Vertical Analysis.
- Trend Analysis: This analysis undertakes the study of trend in the financial positions and the operating performance of a business over a series of successive years. In this technique, a particular year is assumed to be the base year and the figures of all other years are expressed in percentage terms of the base year's figures. These trends (or the percentage figures) not only help in assessing the operational efficiency and the financial position of the business but also helps in detecting the problems and inefficiencies.
- Ratio Analysis: This technique depicts the relationship between various items of Balance Sheet and the Income Statements. It helps in ascertaining the profitability, operational efficiency, solvency, etc of a firm. The analysis expresses financial items in terms of percentage, fraction, proportion and as number of times. It enables budgetary controls by assessing the qualitative relationship among different financial variables. This analysis provides vital information to different accounting users regarding the financial position, viability and performance of a firm. It also facilitates decision-making and policy designing process.
- Cash Flow Analysis: This analysis is presented in the form of a statement showing inflows and outflows of cash and cash equivalents from operating, investing and financing activities of a company during a particular period of time. It helps in analysing the reasons of receipts and payments in cash and change in the cash balances during an accounting year in a company.
Q3: Explain the usefulness of trend percentages in the interpretation of financial performance of a company.
Answer: The Trend Analysis presents each financial item in percentage terms for each year. These Trend Analyses not only help the accounting users to assess the financial performance of the business but also assist them to form an opinion about various tendencies and predict the future trend of the business.
Usefulness and Importance of Trend Analysis The following are the various importance of Trend Analysis:
1. Assists in forecasting
The trends provided by Trend Analysis help the accounting users to forecast the future trend of the business.
2. Percentage Terms
The trends are expressed in percentage terms. Analysing the percentage figures is easy and also less time consuming.
3. User Friendly
As the trends are expressed in percentage figures, so it is the most popular financial analysis to analyse the financial performance and operational efficiency of the company. In other words, one need not to have an in-depth and sophisticated knowledge of accounting in order to analyse these percentage trends.
4. Presents a Broader Picture
The trend analysis presents a broader picture about the financial performance, viability and operational efficiency of a business. Generally, companies prefer to present their financial data for a period of 5 or 10 years in forms of percentage trends, whereas the other techniques of Financial Analysis lack this popularity.
Q4: Explain the meaning of Analysis and Interpretation.
Answer: Analysis and Interpretation refers to a systematic and critical examination of the financial statements. It not only establishes cause and effect relationships among the various items of the financial statements but also presents the financial data in a proper manner. The main purpose of Analysis and Interpretation is to present the financial data in such a manner that is easily understandable and self-explanatory. This not only helps the accounting users to assess the financial performance of the business over a period of time but also enables them in decision
making and policy and financial designing process.
Q5: What is the importance of comparative statements? Illustrate your answer with particular reference to comparative income statement.
Answer: The following are the importance of Comparative Statements.
1. Simple Presentation
The Comparative Statements present the financial data in a simpler form. Moreover, the yearwise data of the same items are presented side-by-side, which not only makes the presentation clear but also enables easy comparisons (both intra-firm and inter-firm) conclusive.
2. Easy for Drawing Conclusion
The presentation of comparative statement is so effective that it enables the analyst to draw conclusion quickly and easily and that too without any ambiguity
3. Easy to Forecast
The comparative analysis of profitability and operational efficiency of a business over a period of time helps in analysing the trend and also assists the management to forecast and draft various future plans and policy measures accordingly.
4. Easy Detection of Problems
By comparing the financial data of two or more years, the financial management can easily detect the problems. While comparing the data, some items may have increased while others have decreased or remained constant. The comparative analysis not only enables the management in locating the problems but also helps them to put various budgetary controls and corrective measures to check whether the current performance is aligned with that of the planned targets.