Chapter 18: Analysis of Financial Statements (CAIIB – Paper 1)
1. Which of the following is NOT considered a primary financial statement?
A. Balance Sheet
B. Profit & Loss Account
C. Marketing Report
D. Cash Flow Statement
The primary financial statements are Balance Sheet, Profit & Loss Account, and Cash Flow Statement. Marketing Reports are internal management documents, not financial statements.
2. Which financial statement shows the financial position of a company at a specific point in time?
A. Profit & Loss Account
B. Balance Sheet
C. Cash Flow Statement
D. Income Statement
The Balance Sheet presents a company’s assets, liabilities, and equity at a particular point in time, reflecting its financial position.
3. Who are the primary external users of financial statements?
A. Investors, Creditors, and Regulators
B. Internal Managers only
C. Production Staff
D. Marketing Department
External users such as investors, creditors, and regulators rely on financial statements to assess the company’s performance and creditworthiness.
4. Which financial statement summarizes revenues and expenses over a period?
A. Balance Sheet
B. Cash Flow Statement
C. Statement of Changes in Equity
D. Profit & Loss Account
The Profit & Loss Account (Income Statement) summarizes revenues and expenses to calculate net profit or loss over a specific period.
5. Which of the following is NOT a typical use of financial statements by bankers?
A. Assessing creditworthiness
B. Monitoring financial stability
C. Designing marketing campaigns
D. Determining loan covenants
Bankers use financial statements for credit analysis, monitoring stability, and setting loan covenants. Marketing campaigns are unrelated to financial statement analysis.
6. Internal users of financial statements include:
A. Shareholders and Creditors
B. Managers and Employees
C. Tax Authorities
D. Investors
Internal users such as managers and employees use financial statements to make operational and strategic decisions.
7. The Cash Flow Statement primarily helps in assessing:
A. Liquidity and cash management
B. Long-term profitability
C. Shareholder satisfaction
D. Employee performance
The Cash Flow Statement provides details of cash inflows and outflows, helping users assess liquidity and cash management.
8. Which of the following is a fundamental accounting concept used in preparation of financial statements?
A. Marketing Concept
B. Accrual Concept
C. Management Concept
D. Production Concept
The Accrual Concept states that transactions should be recorded when they occur, not when cash is received or paid. This is fundamental in preparing accurate financial statements.
9. The Going Concern Concept assumes that:
A. The company will be liquidated immediately
B. Assets will always be sold at market price
C. The business will continue its operations indefinitely
D. Shareholders will receive all profits as dividends
The Going Concern Concept assumes that the business will continue operations for the foreseeable future and not be forced to liquidate.
10. Which accounting concept states that financial statements should present a consistent view over periods?
A. Consistency Concept
B. Prudence Concept
C. Materiality Concept
D. Matching Concept
The Consistency Concept requires that accounting policies and methods should remain consistent over periods to allow comparability of financial statements.
11. Accounting Standards (AS) are primarily issued to:
A. Increase taxes for companies
B. Restrict company operations
C. Determine dividend policy
D. Ensure uniformity and transparency in financial reporting
Accounting Standards provide guidelines to ensure that financial statements are prepared consistently, transparently, and can be compared across companies.
12. Which Accounting Standard deals with the “Revenue Recognition” principle?
A. AS 9
B. AS 2
C. AS 3
D. AS 10
AS 9 deals with revenue recognition and provides guidance on when and how revenue should be recorded in financial statements.
13. Which accounting concept ensures that all expenses incurred to earn revenue are recorded in the same period as the revenue?
A. Accrual Concept
B. Matching Concept
C. Conservatism Concept
D. Cost Concept
The Matching Concept ensures that expenses are recorded in the same accounting period as the revenue they help generate, providing an accurate profit figure.
14. The Prudence Concept in accounting emphasizes:
A. Recording only actual cash transactions
B. Ignoring potential losses
C. Not overstating assets or income
D. Ensuring rapid growth of company
The Prudence Concept (Conservatism) requires that accountants do not overstate assets or income and provide for all known liabilities to avoid misleading financial statements.
15. Under Indian law, who is primarily responsible for the preparation of financial statements of a company?
A. Auditors
B. Board of Directors
C. Shareholders
D. Reserve Bank of India
The Board of Directors is legally responsible for the preparation and presentation of financial statements under the Companies Act, ensuring they are accurate and comply with applicable standards.
16. Which statutory provision requires companies to maintain books of accounts and prepare financial statements?
A. RBI Act, 1934
B. Income Tax Act, 1961
C. Companies Act, 2013
D. Negotiable Instruments Act, 1881
The Companies Act, 2013 requires every company to maintain proper books of accounts and prepare financial statements that give a true and fair view of the company’s financial position.
17. What is the primary purpose of a Balance Sheet?
A. To record all transactions of a company
B. To show profit or loss for a period
C. To track cash flows only
D. To present the financial position of the company at a specific point in time
A Balance Sheet provides a snapshot of a company’s assets, liabilities, and shareholders’ equity at a particular date, showing its financial position.
18. Which of the following is considered a liability in the Balance Sheet?
A. Bank Loan
B. Machinery
C. Cash in Hand
D. Share Capital
A Bank Loan represents an obligation to repay, making it a liability on the Balance Sheet. Assets like machinery or cash are not liabilities.
19. Shareholders’ equity in a Balance Sheet represents:
A. Total liabilities of the company
B. Owners’ residual interest after liabilities are deducted from assets
C. Cash available for operations
D. Total revenue earned during the year
Shareholders’ equity represents the residual interest in assets after deducting liabilities, reflecting the owners’ stake in the company.
20. Which of the following is typically shown under current assets in a Balance Sheet?
A. Land
B. Buildings
C. Inventories
D. Patents
Current assets are assets expected to be converted into cash within a year, such as inventories, receivables, and cash equivalents. Land and buildings are fixed assets.
21. The Profit & Loss Account primarily shows:
A. Revenue earned and expenses incurred during a period
B. Assets and liabilities of the company
C. Cash inflows and outflows
D. Shareholders’ equity movements
The Profit & Loss Account summarizes the revenues earned and expenses incurred during a specific period to determine net profit or loss.
22. Which of the following items is typically NOT included in the Profit & Loss Account?
A. Sales revenue
B. Operating expenses
C. Fixed assets value
D. Interest income
Fixed assets are recorded in the Balance Sheet, not the Profit & Loss Account. The P&L Account includes revenues, expenses, and other income items to calculate net profit or loss.
23. The Cash Flow Statement primarily helps in assessing:
A. Long-term profitability
B. Liquidity and cash management
C. Shareholder satisfaction
D. Asset utilization efficiency
The Cash Flow Statement details cash inflows and outflows from operating, investing, and financing activities, helping assess liquidity and cash management.
24. Which of the following is NOT a section of the Cash Flow Statement as per AS 3?
A. Operating Activities
B. Investing Activities
C. Marketing Activities
D. Financing Activities
The Cash Flow Statement is divided into Operating, Investing, and Financing activities. Marketing activities are not a section of the Cash Flow Statement.
25. Net profit as per the Profit & Loss Account differs from net cash flow because:
A. Non-cash expenses like depreciation are included in P&L but do not affect cash
B. Cash inflows always equal revenue
C. Profit & Loss Account ignores all expenses
D. Cash flow statement does not include operating cash flows
Net profit includes non-cash items like depreciation, provisions, or accrued expenses, which affect profit but not actual cash flow, leading to differences between P&L and cash flow.
26. Which of the following cash flows is considered an operating activity?
A. Purchase of machinery
B. Payment to suppliers for raw materials
C. Issuance of shares
D. Loan repayment to banks
Operating activities include cash transactions related to core business operations, such as payments to suppliers, collection from customers, and operating expenses.
27. Financing activities in a Cash Flow Statement include:
A. Purchase of inventory
B. Payment of salaries
C. Interest received from debtors
D. Issuance of shares and repayment of loans
Financing activities include cash inflows and outflows related to borrowing, repayment of loans, issuing or buying back shares, and dividend payments.
28. The primary purpose of a Funds Flow Statement is to:
A. Show cash inflows and outflows
B. Analyze changes in financial position between two balance sheet dates
C. Record daily transactions
D. Compute net profit for a period
A Funds Flow Statement shows sources and uses of funds, helping analyze changes in a company’s financial position between two balance sheet dates. It is different from a cash flow statement.
29. Which of the following is a source of funds in a Funds Flow Statement?
A. Issuance of shares
B. Purchase of machinery
C. Payment of dividends
D. Repayment of bank loan
Issuance of shares brings in fresh capital and is considered a source of funds. Purchases, dividends, and loan repayments are uses of funds.
30. In a Funds Flow Statement, the purchase of fixed assets is shown as:
A. Source of funds
B. Revenue expenditure
C. Application of funds
D. Capital receipt
The purchase of fixed assets uses company funds, so it is recorded as an application of funds in the Funds Flow Statement.
31. A decrease in long-term liabilities would be classified as:
A. Source of funds
B. Revenue expenditure
C. Operating activity
D. Application of funds
A decrease in long-term liabilities, such as repayment of loans, reduces available funds and is recorded as an application of funds.
32. Which of the following is the main difference between Cash Flow Statement and Funds Flow Statement?
A. Cash Flow Statement is optional, Funds Flow Statement is mandatory
B. Cash Flow Statement shows cash movements only, Funds Flow Statement shows changes in working capital and financial position
C. Funds Flow Statement ignores investments
D. Cash Flow Statement excludes operating activities
A Cash Flow Statement focuses on actual cash inflows and outflows, while a Funds Flow Statement analyzes sources and uses of funds and changes in working capital and financial position.
33. Which of the following would be shown as a source of funds?
A. Sale of investments
B. Purchase of fixed assets
C. Payment of dividends
D. Repayment of bank loan
Sale of investments releases funds, making it a source of funds. Purchases and repayments are applications of funds.
34. Projected financial statements are primarily prepared to:
A. Record past transactions
B. Estimate future financial performance and position
C. Comply with tax filings only
D. Audit historical data
Projected financial statements are forward-looking statements that estimate a company’s future revenues, expenses, assets, and liabilities, helping in planning and decision-making.
35. Which of the following is a key purpose for bankers analyzing a company’s financial statements?
A. To determine the company’s advertising budget
B. To prepare management reports
C. To calculate employee bonuses
D. To assess creditworthiness and repayment capacity
Bankers analyze financial statements to evaluate a borrower’s creditworthiness, repayment capacity, and financial stability before sanctioning loans.
36. Projected financial statements typically include:
A. Projected Balance Sheet, Profit & Loss Account, and Cash Flow Statement
B. Past audited Balance Sheet only
C. Marketing plans
D. Employee performance reports
Projected financial statements usually consist of projected Balance Sheet, Profit & Loss Account, and Cash Flow Statement to estimate future financial performance and position.
37. A banker reviewing a company’s financial statements would focus on which of the following ratios primarily?
A. Employee productivity ratios
B. Liquidity, solvency, and profitability ratios
C. Marketing effectiveness ratios
D. Inventory turnover only
Bankers focus on liquidity (short-term repayment capacity), solvency (long-term stability), and profitability ratios to assess financial health before lending.
38. Which of the following is NOT a purpose of analyzing financial statements by bankers?
A. Evaluating repayment capacity
B. Monitoring financial stability
C. Deciding company’s internal HR policies
D. Identifying potential financial risks
Bankers analyze financial statements to assess creditworthiness, repayment capacity, and potential risks. Internal HR policies are unrelated to banking analysis.
39. Projected financial statements are especially useful for:
A. Loan appraisal and future planning
B. Recording historical transactions
C. Auditing past financial statements only
D. Marketing promotions
Projected financial statements help bankers and management in evaluating future financial position, planning funds requirements, and appraising loans effectively.
40. Rearranging financial statements is primarily done to:
A. Comply with tax regulations only
B. Facilitate better analysis and understanding of financial position
C. Avoid auditing requirements
D. Increase reported profits
Rearranging financial statements organizes the data in a format suitable for analysis, making it easier to assess liquidity, profitability, and solvency.
41. Vertical analysis of financial statements involves:
A. Comparing current year figures with previous year only
B. Tracking cash inflows and outflows
C. Expressing each item as a percentage of a base figure
D. Forecasting future financial statements
Vertical analysis presents each item in the financial statement as a percentage of a base figure (like total assets or sales) to understand the relative significance of each component.
42. Horizontal analysis is used to:
A. Compare ratios with industry standards
B. Analyze trends by comparing financial data over multiple periods
C. Determine net cash flows
D. Evaluate marketing efficiency
Horizontal analysis compares financial data across periods to identify trends, growth patterns, and changes in financial position over time.
43. Ratio analysis primarily helps in:
A. Auditing financial statements
B. Preparing cash flow statements
C. Computing taxes only
D. Evaluating liquidity, solvency, and profitability of a company
Ratio analysis is a key tool for assessing a company’s liquidity (short-term solvency), solvency (long-term stability), and profitability, aiding decision-making for bankers and management.
44. Which of the following is a technique used for analyzing financial statements?
A. Statistical sampling
B. Trend analysis
C. Marketing segmentation
D. Production planning
Trend analysis is a technique used in financial analysis to identify patterns and changes over time, helping in forecasting and decision-making.
45. Common-size statements are prepared by:
A. Recording only cash transactions
B. Comparing company with other companies only
C. Expressing each item as a percentage of a total figure
D. Ignoring liabilities
Common-size statements convert all items to percentages of a base figure, such as total assets or sales, facilitating comparison across periods or with other companies.
46. Which of the following statements about financial analysis techniques is TRUE?
A. Ratio analysis ignores profitability
B. Both vertical and horizontal analyses provide insights into financial performance
C. Funds flow statement replaces the need for ratio analysis
D. Trend analysis is irrelevant for banking decisions
Vertical analysis, horizontal analysis, and ratio analysis collectively provide insights into liquidity, solvency, profitability, and trends, aiding bankers in credit evaluation.
47. Rearranging financial statements helps in:
A. Filing tax returns faster
B. Highlighting key items for ratio and trend analysis
C. Increasing reported profits
D. Avoiding audit requirements
Rearranging financial statements organizes accounts in a manner suitable for analysis, enabling clearer insights for decision-making and ratio evaluation.
48. Comparative financial statements are useful because they:
A. Show only the current year figures
B. Ignore past financial data
C. Are only used for tax purposes
D. Allow comparison of financial data across different periods
Comparative statements help identify trends, growth patterns, and variations by showing financial data for multiple periods side by side.
49. Common techniques used for analysis of financial statements include:
A. Only cash flow review
B. Horizontal analysis, vertical analysis, and ratio analysis
C. Only inventory check
D. Marketing and HR reviews
Horizontal, vertical, and ratio analyses are commonly used to evaluate financial performance, position, and trends for managerial or banking decisions.
50. Trend analysis involves:
A. Converting all items to percentages of total assets
B. Focusing on a single financial statement item
C. Comparing financial data over multiple periods to detect growth or decline
D. Recording only cash transactions
Trend analysis studies changes in financial statement items over time, helping identify patterns, growth trends, and anomalies for better decision-making.
51. Which of the following is an advantage of using ratio analysis?
A. Eliminates the need for cash flow statements
B. Simplifies interpretation of financial statements and highlights key relationships
C. Avoids the requirement of financial statements altogether
D. Automatically forecasts profits
Ratio analysis simplifies large volumes of financial data, allows easy comparison between periods or companies, and highlights critical relationships like liquidity, solvency, and profitability.
52. Vertical analysis is most useful for:
A. Comparing multiple years’ trends
B. Analyzing cash inflows and outflows
C. Understanding the proportion of each item relative to a base figure in a single period
D. Calculating projected financial statements
Vertical analysis expresses each financial statement item as a percentage of a total base figure (like total assets or sales) in a single period to evaluate its relative importance.
53. A company has current assets of ₹5,00,000 and current liabilities of ₹2,50,000. What is the current ratio?
A. 0.5
B. 2:1
C. 1:2
D. 1
Current Ratio = Current Assets / Current Liabilities = 5,00,000 / 2,50,000 = 2:1. It measures short-term liquidity.
54. A company has net sales of ₹12,00,000 and average receivables of ₹1,50,000. What is the receivables turnover ratio?
A. 4 times
B. 6 times
C. 8 times
D. 10 times
Receivables Turnover = Net Sales / Average Receivables = 12,00,000 / 1,50,000 = 8 times. It indicates how efficiently receivables are collected.
55. A bank is analyzing a company with total debt of ₹10,00,000 and total equity of ₹5,00,000. What is the debt-equity ratio?
A. 2:1
B. 1:2
C. 1:1
D. 0.5:1
Debt-Equity Ratio = Total Debt / Total Equity = 10,00,000 / 5,00,000 = 2:1. It measures financial leverage and risk.
56. A company has net profit of ₹3,00,000 and shareholders’ equity of ₹10,00,000. What is the return on equity (ROE)?
A. 15%
B. 30%
C. 25%
D. 20%
ROE = Net Profit / Shareholders’ Equity × 100 = 3,00,000 / 10,00,000 × 100 = 30%. It measures profitability from shareholders’ perspective.
57. A company has inventory of ₹2,00,000 and cost of goods sold of ₹6,00,000. What is the inventory turnover ratio?
A. 2 times
B. 3 times
C. 3 times
D. 4 times
Inventory Turnover = Cost of Goods Sold / Average Inventory = 6,00,000 / 2,00,000 = 3 times. It shows how quickly inventory is sold.
58. A company has current assets of ₹8,00,000 and current liabilities of ₹4,00,000. Its quick assets are ₹5,00,000. What is the quick ratio?
A. 1:1
B. 1.25:1
C. 2:1
D. 0.75:1
Quick Ratio = Quick Assets / Current Liabilities = 5,00,000 / 4,00,000 = 1.25:1. It measures short-term liquidity excluding inventory.
59. A company has operating profit of ₹4,00,000 and interest expense of ₹1,00,000. What is the interest coverage ratio?
A. 2 times
B. 3 times
C. 4 times
D. 5 times
Interest Coverage Ratio = Operating Profit / Interest Expense = 4,00,000 / 1,00,000 = 4 times. It indicates the ability to meet interest obligations.
60. A bank is evaluating a borrower whose net profit is ₹2,00,000 and total assets are ₹10,00,000. What is the return on assets (ROA)?
A. 5%
B. 20%
C. 25%
D. 15%
ROA = Net Profit / Total Assets × 100 = 2,00,000 / 10,00,000 × 100 = 20%. It measures overall asset efficiency in generating profits.
