Q.1 Which of the following is the primary objective of financial statement analysis?
To maintain accounts
To record transactions
To assess financial performance
To calculate tax liability
Explanation - Financial statement analysis helps stakeholders assess the financial health and performance of a company.
Correct answer is: To assess financial performance
Q.2 Which ratio indicates the ability of a company to meet its short-term obligations?
Liquidity ratio
Profitability ratio
Solvency ratio
Turnover ratio
Explanation - Liquidity ratios, such as current ratio and quick ratio, measure a company's ability to meet short-term debts.
Correct answer is: Liquidity ratio
Q.3 The comparison of financial statements of two or more years is called:
Trend analysis
Vertical analysis
Horizontal analysis
Ratio analysis
Explanation - Horizontal analysis involves comparing financial data across multiple periods to identify changes.
Correct answer is: Horizontal analysis
Q.4 Which ratio is calculated as Net Profit / Sales × 100?
Gross Profit Ratio
Net Profit Ratio
Operating Ratio
Current Ratio
Explanation - Net Profit Ratio shows the percentage of net profit earned on sales revenue.
Correct answer is: Net Profit Ratio
Q.5 A high current ratio usually indicates:
Efficient inventory use
Strong liquidity
High profitability
Low solvency
Explanation - A high current ratio suggests that the firm can easily meet its short-term obligations.
Correct answer is: Strong liquidity
Q.6 Which of the following is NOT a limitation of financial statement analysis?
Use of historical data
Quantitative nature
Comparability issues
Future projections
Explanation - Financial statement analysis is based on historical data, not future projections.
Correct answer is: Future projections
Q.7 In vertical analysis of the Balance Sheet, assets are usually expressed as a percentage of:
Total Liabilities
Total Assets
Current Assets
Equity
Explanation - In vertical analysis, each asset item is expressed as a percentage of total assets.
Correct answer is: Total Assets
Q.8 Which of the following ratios measures the efficiency of credit collection?
Debtors Turnover Ratio
Creditors Turnover Ratio
Inventory Turnover Ratio
Current Ratio
Explanation - Debtors Turnover Ratio indicates how quickly credit sales are converted into cash.
Correct answer is: Debtors Turnover Ratio
Q.9 Common-size statements are also called:
Trend statements
Comparative statements
Component percentage statements
Consolidated statements
Explanation - Common-size statements express each item as a percentage of a base figure, hence also called component percentage statements.
Correct answer is: Component percentage statements
Q.10 Which profitability ratio measures the return on owners’ investment?
Gross Profit Ratio
Net Profit Ratio
Return on Equity
Operating Ratio
Explanation - Return on Equity (ROE) shows how much profit is earned on shareholders’ equity.
Correct answer is: Return on Equity
Q.11 The analysis of financial statements from the viewpoint of management is called:
External analysis
Internal analysis
Horizontal analysis
Vertical analysis
Explanation - Internal analysis is done by management for planning and decision-making.
Correct answer is: Internal analysis
Q.12 Which ratio indicates the long-term financial stability of a firm?
Liquidity ratio
Solvency ratio
Activity ratio
Profitability ratio
Explanation - Solvency ratios measure a firm’s ability to meet long-term obligations.
Correct answer is: Solvency ratio
Q.13 Which tool of analysis helps in identifying year-to-year changes in financial items?
Comparative statements
Common-size statements
Cash flow analysis
Ratio analysis
Explanation - Comparative statements allow comparison of financial data across different years.
Correct answer is: Comparative statements
Q.14 Operating Ratio is calculated as:
Operating Expenses / Sales
(COGS + Operating Expenses) / Net Sales × 100
Net Profit / Net Sales × 100
Gross Profit / Net Sales × 100
Explanation - Operating Ratio shows the proportion of sales consumed by operating costs.
Correct answer is: (COGS + Operating Expenses) / Net Sales × 100
Q.15 Which of the following users is least interested in financial statement analysis?
Investors
Employees
Government
Customers
Explanation - Customers generally have minimal interest compared to investors, employees, and government.
Correct answer is: Customers
Q.16 Inventory Turnover Ratio indicates:
Liquidity position
Efficiency of sales
Profitability
Speed of inventory conversion
Explanation - It shows how many times the inventory is sold and replaced in a year.
Correct answer is: Speed of inventory conversion
Q.17 Which analysis method expresses items in terms of a common base year?
Common-size analysis
Trend analysis
Comparative analysis
Ratio analysis
Explanation - Trend analysis shows financial data changes over time using a base year as 100%.
Correct answer is: Trend analysis
Q.18 The Quick Ratio excludes which current asset?
Cash
Debtors
Inventory
Bills Receivable
Explanation - Quick ratio excludes inventory as it is the least liquid current asset.
Correct answer is: Inventory
Q.19 Return on Investment (ROI) is primarily concerned with:
Profitability of sales
Efficiency of capital employed
Liquidity position
Debt management
Explanation - ROI measures the return generated on total capital employed in the business.
Correct answer is: Efficiency of capital employed
Q.20 Which statement is used to assess cash generation ability?
Balance Sheet
Profit and Loss Account
Cash Flow Statement
Common-size Statement
Explanation - Cash Flow Statement shows inflow and outflow of cash and highlights liquidity position.
Correct answer is: Cash Flow Statement
Q.21 High debt-equity ratio indicates:
More owner’s capital
More reliance on debt
More liquidity
More profitability
Explanation - A high debt-equity ratio suggests the company is financed more by debt than equity.
Correct answer is: More reliance on debt
Q.22 Which of the following is an example of a profitability ratio?
Current Ratio
Quick Ratio
Operating Ratio
Debt Ratio
Explanation - Operating ratio measures profitability by comparing operating costs with sales.
Correct answer is: Operating Ratio
Q.23 Which tool of analysis eliminates the impact of size of business?
Common-size statements
Comparative statements
Ratio analysis
Cash flow statement
Explanation - Common-size statements present figures in percentage terms, making comparison possible across different-sized firms.
Correct answer is: Common-size statements
Q.24 Which analysis compares financial performance with other firms in the same industry?
Intra-firm analysis
Inter-firm analysis
Horizontal analysis
Vertical analysis
Explanation - Inter-firm analysis involves comparing performance across companies within the same industry.
Correct answer is: Inter-firm analysis
Q.25 Which of the following ratios is calculated as Net Credit Sales / Average Debtors?
Current Ratio
Debt Ratio
Debtors Turnover Ratio
Inventory Turnover Ratio
Explanation - Debtors Turnover Ratio measures how efficiently receivables are collected.
Correct answer is: Debtors Turnover Ratio