1.

Debtors turnover ra o is calculated by:

Credit sales/Average debtors
Total sales/average debtors
Credit sales/debtors*days in the year
Cash sales/total debtors
Explanation : The most appropriate answer is A. Debtor turnover ratio is the relationship between net sales and
average debtors. It is also called account receivable turnover ratio because bill receivables's total or credit sales is
used in the formula.
2. A higher debtors turnover ra o means:
The business is not able to recover the accounts receivables in a timely manner
The business is able to recover the accounts receivables quickly
The accounts receivables and debtors turnover ratio has no relationship
The business is highly profitable
Explanation : The most appropriate answer is B. For example, if net credit sales are Rs. 50000 and average debtors
are Rs 10000, then debtor turnover ratio is 5 times. It means, net sales is 5 times of total debtors. It means, on an
average debtors are converted into cash 5 times. Since the collected cash can be used in the business high debtor
turn out ratio is good indicator for the business
3. DU PONT Analysis deals with:
Analysis of Current Assets
Analysis of Profit
Capital Budgeting
Analysis of Fixed Assets
Explanation : The most appropriate answer is B.
4. On the basis of Modus operandi, the analysis and interpreta on of financial statements may be classified
into:
External analysis and internal analysis
General analysis and Specific analysis
Government analysis and Board analysis
Horizontal and vertical analysis
Explanation : On the basis of Modus operandi, the analysis and interpretation of financial statements may be
classified into a) Horizontal Analysis and b) Vertical Analysis. Horizontal Analysis is also termed as Dynamic Analysis.
Under this type of analysis, comparison of the trend of each item in the financial statements over the number of
years are reviewed or analyzed. This type of comparison helps to identify the trend in various indicators of
performance. In this type of analysis, current year figures are compared with base year for figures are presented
horizontally over a number of columns. Vertical Analysis is also termed as Static Analysis. Under this type of
analysis, a number of ratios used for measuring the meaningful quantitative relationship between the items of
financial statements during the particular period. This type of analysis is useful in comparing the performance
efficiency and profitability of several companies in the same group or divisions in the same company.
5. Which of the following term refers to the financial statement analysis carried out mainly using the published
financial statement informa on?
Public analysis
External analysis
Internal analysis
Investment review
Explanation : The most appropriate answer is B. On the basis of materials used the analysis and interpretations of
financial statements may be classified into a) External Analysis and b) Internal Analysis. External analysis is meant
for the outsiders of the business firm. Outsiders may be investors, creditors, suppliers, government agencies,
shareholders etc. These external people have to rely only on these published financial statements for important
decision making. This analysis serves only a limited purpose due to non-availability of detailed information. On the
other hand internal analysis is performed by the persons who have access to the books of accounts and other
information related to the business. Such analysis can be done for the purpose of assisting managerial personnel to
take corrective action and appropriate decisions.
6. For analyzing the changes in financial posi on, companies prepare
Profit & Loss Account
Balance Sheet
Funds Flow Statement & Cash Flow Statement.
Statement of changes in working capital.
Explanation : The most appropriate answer is C.
7. Which of the following is NOT a common tool employed in financial statement analysis?
Comparative Financial Statements.
Common Size Statements.
Trend Analysis.
Investor Analysis
Explanation : The most appropriate answer is D. All the other tools except investor analysis are tools employed in
financial statement analysis.
8. The current ra o of a Firm is given as 3:1. The working capital of the Firm is Rs.1,00,000. Calculate the Current
Assets and Current Liabili es
Current Assets- Rs.2,50,000 and Current Liabilities-Rs.1,50,000
Current Assets- Rs.1,50,000 and Current Liabilities-Rs.50,000
Current Assets- Rs.2,50,000 and Current Liabilities-Rs.10,000
Current Assets- Rs.1,50,000 and Current Liabilities-Rs.2,50,000
Explanation :

Current Ratio =
Current Assets
Current Liabli es

Working Capital=Current Assets-Current Liabilities

9. Comparison of the financial statements of two or more firms for drawing inferences is called:
Dynamic comparison
Sector level comparison
Inter firm comparison
Industrial comparison
Explanation : The most appropriate answer is C. Inter firm comparision is the technique of evaluating the
performance efficiency, costs and profits of firms in an industry. Such a comparison will be possible where relatively
uniform accounting practices are is in operation in different firms of the same industry.
10. The immediate solvency ra o is
Quick ratio
Current Ratio
Stock Turnover Ratio
Debtors Turnover ratio
Explanation : The most appropriate answer is A. Acid-test or quick ratio or liquid ratio measures the ability of a
company to use its cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include
those current assets that presumably can be quickly converted to cash at close to their book values. A quick ratio of
1 is considered appropriate. A company with a Quick Ratio of less than 1 cannot currently pay back its current
liabilities
11. In Ra o Analysis, the term Capital Employed refers to:
Equity Share Capital
Net worth
Shareholders' Funds
None of the above
Explanation : The most appropriate answer is D. In ratio analysis capital employed means
1. The total amount of capital used for the acquisition of profits.
2. The value of all the assets employed in a business.
3. Fixed assets plus working capital
4. Total assets less current liabilities.
12. 'net worth' of business means
Equity capital
Total assets
Total assets minus total liabilities
Fixed assets minus current assets
Explanation : The most appropriate answer is C. For a company, total assets minus total liabilities. Net worth is an
important determinant of the value of a company, considering it is composed primarily of all the money that has
been invested since its inception, as well as the retained earnings for the duration of its operation. Net worth can be
used to determine creditworthiness because it gives a snapshot of the company's investment history. also called
owner's equity, shareholders' equity, or net assets.
For an individual, the value of a person's assets, including cash, minus all liabilities. The amount by which the
individual's assets exceed their liabilities is considered the net worth of that person.
13. Which of the following items is not an opera ng expense?
Advertising.
Depreciating of the office equipment
General management salaries
Loss on the sale of motor van
Explanation : The most appropriate answer is D. A category of expenditure that a business incurs as part of
performing its normal business operations. For example, the payment of employees' wages and funds allocated
toward research and development are operating expenses. In business, an operating expense is a day-to-day
expense such as sales and administration, or research & development, as opposed to production, costs, and pricing.
14. Compara ve financial statements prepared for financial statement analysis normally reveal which of the
following:
A side by side presentation of figures for two or more years.
Absolute data in money value for two or more years
Increase or Decrease between the absolute figures in money value for two or more years
All of the above
 Explanation : The most appropriate answer is D. Comparative financial statement is a tool adopted for financial
statement analysis. Such comparative statements are prepared not only to the comparison of the vanous figures of
two or more periods but also the relationship between various elements embodied in profit and loss account and
balance sheet. It enables to measure operational efficiency and financial soundness of the concern for analysis and
interpretations. In a comparative financial statement figures are presented in the comparative statements side by
side for two or more years. It would contain absolute data in money value, increase or decrease between the
absolute figures in money value and also changes or trend in various figures in terms of percentage.
15. Which of the following is not a source of fund?
Purchase of a machinery
Profit earned during the year
Issue of share capital
Long term loan raised
Explanation : The most appropriate answer is A. Purchase of machinery is an application of fund.
16. Capital gearing ra o would take into account the rela onship between
Assets and capital
Loans and capital
Equity share holder's funds and long term borrowed funds
Debentures and equity capital
Explanation : The most appropriate answer is D. Capital gearing ratio is mainly used to analyze the capital structure
of a company. The term "capital gearing" or "leverage" normally refers to the proportion of relationship between
equity share capital including reserves and surpluses to preference share capital and other fixed interest bearing
funds or loans or debentures. In other words it is the proportion between the fixed interest or dividend bearing
funds and non fixed interest or dividend bearing funds. Equity share capital includes equity share capital and all
reserves and surpluses items that belong to shareholders. Fixed interest bearing funds includes debentures,
preference share capital and other long-term loans.
17. A company adopts same accoun ng principles, policies, methods and prac ces from year to year. Such a prac ce
is said to follow:
Vertical consistency
Horizontal consistency
Dynamic consistency
Third dimensional consistency
Explanation : The most appropriate answer is B. When figures of one financial year are compared with the figures of
another financial year of the same organization it will be a case of horizontal consistency. Horizontal consistency
implies that the firm employs the same principles year after year making the comparison of one year financial
statement with another year meaningful
18. Which of the following items result in cash flows
Issue of shares
Transfer to general reserve
Goodwill written off
Salaries outstanding.
Explanation : The most appropriate answer is A.
19. A company is highly geared when it raised-
Finance by one equity capital
Finance by only debentures
More finance by debentures than by preference shares
More finance by debentures than by equity shares
Explanation : The most appropriate answer is D.
20. In preparing the common size profit and loss account which of the following is generally taken as a common
base?
Sales
Net profit
Net capital assets
Total value of shares
Explanation : The most appropriate answer is A. while preparing a common size profit and loss account while
preparing the Common Size Profit and Loss Account, total sa!es is taken as common base and other items are
expressed as a percentage of sales. Similarly, in order to prepare the Common Size Balance Sheet, the total assets
or total liabilities are taken as common base and all other items are expressed as a percentage of total assets and
liabilities.
21. Which of the following is an applica on of fund?
Purchase of machinery
Repayment of loan
Payment of dividend
All of these
Explanation : The most appropriate answer is D. All the options are application of fund
22. A method of financial statement analysis where figures shown in the financial statements are converted into per
centages so as to establish each element to the total figure of the statement is:
 Comparative financial statement
Common size statements
Trend ratios
Parallel statement
Explanation : The most appropriate answer is B. A common size financial statement in which each account is
expressed as a percentage of a total value. This type of financial statement can be used to allow for easy analysis
between companies or between time periods of a company. For example, in a common size income statement each
account is expressed as a percentage of the value of sales.
23. Rashi Limited has a current ra o of 4:1 and quick ra o of 3:1. If the value of the stock is Rs.40,000, find the
current assets and current liabili es.
Current Assets-Rs.50,000 and Current Liabilities-Rs.1,50,000
Current Assets-Rs.1,50,000 and Current Liabilities-Rs.50,000
Current Assets-Rs.1,60,000 and Current Liabilities-Rs.40,000
Current Assets-Rs.1,50,000 and Current Liabilities-Rs.4,50,000
Explanation :

Current Ratio =
Current Assets
Current Liabli es

Quick Ratio = Quick Assets

Current Liabli es

Stock=Current Assets-Quick Assets

24. For preparing a funds flow statement, unexpired insurance is treated as a
Current asset
Non-current asset
Current liability
Non-current liability
Explanation : The most appropriate answer is A. unexpired insurance forms part of the current assets
25. Cash flow statement is mandatory in
All stock companies
All listed companies
All commercial and industrial businesses
All commercial and industrial businesses whose turnover for the accounting period is 25 crores
Explanation : The most appropriate answer is B.
26. Income tax paid is concerned with
Operating activities
Investing activities
Financing activities
None of these
Explanation : The most appropriate answer is A
27. Cash payment to employees is a cash flow rela ng to:
Operating activities
Investing activities
Financing activities
All of the above
Explanation : The most appropriate answer is A.
28. Dividend Payout Ra o is:
Profit After Tax/Dividend paid
DPS/EPS
Preference Dividend/Profit After Tax
Preference Dividend/Equity Dividend
Explanation : The most appropriate answer is B. It measures the relationship between the earnings belonging to the
equity shareholders and the dividends paid to them. It shows what percentage shares of the earnings are available
for the ordinary shareholders are paid out as dividend to the ordinary shareholders. It can be calculated by dividing
the total dividend paid to the equity shareholders by the total earnings available to them or alternatively by dividing
dividend per share by earnings per share
29. In Net Profit Ra o, the denominator is:
Net Purchases
Net Sales
Credit Sales
Cost of goods sold
Explanation : The most appropriate answer is B. How much money the company is making per every rupee of sales.
This ratio measures the company's ability to cover all operating costs including indirect costs
30. Accoun ng Ra os are important tools used by:
Managers
 Researchers
Investors
All of the above
Explanation : The most appropriate answer is D
31. The financial statement of M/s Rashi technologies is given below. The current ra o will be

Liabili es Rs. Assets Rs.

Share capital 1,50,000 Fixed Assets(Net) 80,000
Reserve 60,000 Current Assets
Profit&Loss A/c 24,000 Stock 1,88,000
Debentures 60,000 Debtors 1,64,000
Current Liabili es 1,52,000 Cash 14,000
4,46,000 4,46,000

4.5:1
2.41:1
5.4:1
3.3:1
Explanation :
32. The term 'EVA' is used for
Extra Value Analysis
Economic Value Added
Expected Value Analysis
Engineering Value Analysis
Explanation : The most appropriate answer is B. In corporate finance, Economic Value Added or EVA, is an estimate
of a firm's economic profit, being the value created in excess of the required return of the company's investors
33. A so ware company adopts same accoun ng principles, policies, methods and prac ces which are generally
followed by other companies in the so ware industry. Adop on of such similar prac ces and policies would
promote:
Vertical consistency
Horizontal consistency
Dynamic consistency
Third dimensional consistency
Explanation : The most appropriate answer is D. Third dimensional consistency will arise when financial statements
of two different organizations, in the same industry, are compared.
34. When preliminary expenses are wri en off
Source of fund
Application of fund
No flow of fund
Outflow of fund
Explanation : The most appropriate answer is C. Non-cash expenses such as depreciation and amortization of
intangible assets do not result in actual fund outflow. These expenses matter while ascertaining the business
income, but are irrelevant in determining the funds from operations.
35. A company employs one method of deprecia on for one class of assets and employs another method of
deprecia on for another class of assets in the same accoun ng year. Adop on of such different methods of
deprecia on for different class of assets would be a case of:
Vertical inconsistency
Horizontal inconsistency
Third dimensional inconsistency
Dynamic inconsistency
Explanation : The most appropriate answer is A. The vertical consistency is maintained within inter-related financial
statements of the same period. If a change has been made in dealing with two aspects of the same statement then
it will be vertical inconsistency. For example, if one method of depreciation is used while preparing profit and loss
account and another method is followed while preparing balance sheet, it will be a case of vertical inconsistency
36. Working Capital Turnover measures the rela onship of Working Capital with:
Fixed Assets
Sales
Purchases
Stock
Explanation : The most appropriate answer is B. A measurement comparing the depletion of working capital to the
generation of sales over a given period. This provides some useful information as to how effectively a company is
using its working capital to generate sales.
37. A process of evalua ng the rela onship between component parts of a financial statement to obtain a be er
understanding of a firm's posi on and performance is generally referred to as:
Financial statement analysis
 Issue analysis
Performance analysis
Income statement analysis
Explanation : The most appropriate answer is A. The financial statement analysis and interpretation refer to the
process of establishing the meaningful relationship between the items of the financial statements with the objective
of identifying the financial and operational strengths and weaknesses
38. On the basis of the material used for analysis and interpreta on of the financial statement analysis, the financial
statement analysis could be classified as:
External analysis and internal analysis
Public analysis and private analysis
General analysis and Specific analysis
Government analysis and Board analysis
Explanation : The most appropriate answer is A. On the basis of materials used the analysis and interpretations of
financial statements may be classified into a) External Analysis and b) Internal Analysis. External analysis is meant
for the outsiders of the business firm. Outsiders may be investors, creditors, suppliers, government agencies,
shareholders etc. These external people have to rely only on these published financial statements for important
decision making. This analysis serves only a limited purpose due to non-availability of detailed information. On the
other hand internal analysis is performed by the persons who have access to the books of accounts and other
information related to the business. Such analysis can be done for the purpose of assisting managerial personnel to
take corrective action and appropriate decisions.
39. Inventory Turnover measures the rela onship of inventory with:
Average Sales
Cost of Goods Sold
Total Purchases
Total Assets
Explanation : The most appropriate answer is B. A ratio showing how many times a company's inventory is sold and
replaced over a period
40. Net Profit Ra o Signifies:
Operational Profitability
Liquidity Position
Big-term Solvency
Profit for Lenders
Explanation : The most appropriate answer is D. It measures the relationship between net profit and sales of a firm.
It indicates management's efficiency in manufacturing, administrating, and selling the products. It is calculated by
dividing net profit after tax by sales
41. Which of the following is not a cash inflow?
Purchase of a fixed asset
Sale of fixed asset
Issue of debentures
Cash from business operations
Explanation : The most appropriate answer is A. Purchase of a fixed assets leads to cash outflow
42. Calculate the Current Ra o from the following informa on:

Total Assets 3,00,000

Long Term Liabili es 80,000
Share Holder funds 2,00,000
Fixed Assets 1,60,000
Investments 1,00,000
Fic ous Assets Nil

3 :1
1 :1
2 :1
3 :5
Explanation :

Current Ratio = Current Assests

Current Liabili es
Total Assets=Fixed Assets + Investments + Current Assets
3,00,000=1,60,000+1,00,00+Current Assets
Therefore, Current Assets = 3,00,000 - Rs.2,60,000
Current Assets= 40,000
Total Assets=Total Liabilities
Total Liabilities=Rs.3,00,000
Total Liabilities=Share holder funds+Long Term Liabilities+Current Liabilities
3,00,000=2,00,000+80,000+Current Liabilities
 Therefore, Current Liabilities=3,00,000-2,80,000
Current Liabilities=20,000 Applying the data of current assets and current liabilities in the formula given above,

Current Ratio =
Rs.40,000
Rs.20,000

This will give the answer 2 :1

43. In a financial statement analysis, the figures of a series of years are collected and the first year figures are taken
as the base year. A erwards, the items in the base year are taken as 100 and based on this base the corresponding
figures of financial statements in the other years are concluded. Such an analysis is generally called as:
Ratio analysis
Trend analysis
Cash Flow analysis
Dynamic Ratio
Explanation : The most appropriate answer is B. Trend Analysis is one of the important technique which is used for
analysis and interpretations of financial statements. While applying this method, it is necessary to select a period for
a number of years in order to ascertain the percentage relationship of various items in the financial statements
comparing with the items in base year. When a trend is to be determined by applying this method, earliest year or
first year is taken as the base year. The related items in the base year are taken as 100 and based on this,
percentage of corresponding figures of financial statements in the other years are concluded. This analysis is useful
in framing suitable policies and forecasting in future.
44. An important financial analysis technique which is used to measure and establish a rela onship between the
two interrelated accoun ng figures in a financial statement is referred to as:
Fund Flow Analysis
Cash Flow Analysis
Trend Analysis
Ratio Analysis
Explanation : The most appropriate answer is D. Ratio Analysis is one of the important technique which is used to
measure the establishment of relationship between the two interrelated accounting figures in financial statements.
This analysis helps to Management for decision making. Ratio Analysis is an effective tool which is used to ascertain
the liquidity and operational efficiency of the concern.
45. Find the Debt Equity Ra o from the following informa on

Long Term Debt 4,00,000

Current Liabili es 1,00,000
Total Assets 10,00,000
Shareholder fund 5,00,000

3:1
4:1
4:5
3:5
Explanation :

Debt Equity Ratio = Long Term Debt

Share holder fund

Debt Equity Ratio = 4,00,000

5,00,000

This will give the answer 4:5

46. Find out the quick ra o using the following informa on taken out from the financial statements of a company
Land Rs.180000
Cash Rs.5000
Trade debtors Rs.95000
Other debtors Rs.30000
Inventory Rs.20000
Trade creditors Rs.90000
Other creditors Rs.10000
Share Capital Rs.100000

1.50
1.30
1.80
1.60
 Explanation : The quick ratio reflects the liquidity of a business and its ability to meet its short term liabilities and
debts. It is calculated by dividing current assets less inventory by current liabilities. It is also known as the Acid Test
Ratio or Liquidity Ratio. It is similar to the current ratio except inventory is excluded from current assets in the
calculation as inventory can sometimes be difficult to convert into cash.
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Current assets are given in the balance sheet and includes cash, debtors, and inventory. Current liabilities are also
found in the balance sheet and includes trade creditors and short term (due in less than 1 year) debt. Land is not a
current asset and Share Capital is not a current liability.
In the above example the current assets are Rs. 150,000, inventory is Rs.20,000 and the current liabilities are
Rs.100,000. The quick ratio is given by using the formula Quick Ratio = Current Assets – Inventory / Current
Liabilities = 150,000 – 20,000 / 100,000 = 1.30
A quick ratio in the region of 1:1 is normally considered acceptable. The higher the ratio the more liquidity the
business has. However a ratio which is too high implies a lot of money tied up in debtors or as cash sitting in the
bank.
47. Which of the following assets is not a quick current asset for the purpose of calcula ng acid test ra o?
Short term bills receivable
Cash
Stock or inventory
Debtors
Explanation : The most appropriate answer is C. Acid test ratio is a stringent indicator that determines whether a
firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is
far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion
of inventory assets where as the acid test ratio does not allow inclusion of inventory or stock of goods
48. Patents and copy rights fall under
Current asset.
Liquid asset
Intangible asset
Normal asset
Explanation : The most appropriate answer is C. Assets that are not physical in nature but are saleable are termed
as intangible assets.
49. Same accoun ng principles should be used for preparing financial statements for different periods. This
conven on in preparing the financial statement is called
Convention of consistency
Convention of reciprocity
Convention of equality
Convention of equivalency
Explanation : The most appropriate answer is A. The convention of consistency means that same accounting
principles should be used for preparing financial statements for different periods. It enables the management to
draw important conclusions regarding the working of the concern over a longer period. It allows a comparison in the
performance of different periods. If different accounting procedures and processes are used for preparing financial
statements of different years then the results will not be comparable because these will be based on different
postulates. The concept of consistency does not mean that no change should be made in accounting procedures.
There should always be a scope for improvement but the changes should be notified in the statements. The impact
of changes of procedures should be clearly stated. It will enable the readers to analyze information according to new
procedures. In the absence of any information regarding the change, it will be presumed that old methods have
been used this time also. Whenever, consistency is not followed this fact may be fully disclosed. For example, if a
change in the method of charging depreciation is made or a change is made in the method of allocating overhead
expenses to different products, a foot note to the financial statements should be given indicating the extent of
change. If possible, net monetary effect of these changes should also be given.
50. Return on Investment may be improved by
Increasing Turnover
Reducing Expenses
Increasing Capital Utilization
All of the above
Explanation : The most appropriate answer is D