Financial Statement Analysis and Ratios Questions and Answers

Q: Long term solvency is indicated by ................... .

Long-term solvency is indicated by the debt/equity ratio.Long-term solvency is a firm's ability to meet its long-term obligations, interest and repayment of loans. The debt-equity ratio compares long-term debt with shareholders' funds: a high ratio means heavy reliance on borrowed funds and greater risk to lenders, a low ratio a larger cushion of owners' capital. Related solvency measures include the proprietary ratio and interest coverage.The current ratio measures short-term liquidity. The net profit ratio measures profitability, and turnover ratios measure how efficiently assets are used.

Q: ABC Ltd. has a current ratio of 1.5 : 1 and net current assets of ₹ 5,00,000. What are the current assets ?

The current assets are ₹ 15,00,000.With a current ratio of 1.5 : 1, write current liabilities as \(x\) and current assets as \(1.5x\). Net current assets (working capital) are the difference:\[ \begin{aligned} 1.5x - x &= 5{,}00{,}000 \\ x &= 10{,}00{,}000 \\ 1.5x &= 15{,}00{,}000 \end{aligned} \]₹ 10,00,000 is the current liabilities, not the assets, and ₹ 5,00,000 is the working capital itself.

Q: XYZ Ltd. has a debt-equity ratio of 1.5 as compared to 1.3 Industry average. It means that the firm has :

The firm has higher financial risk.A debt-equity ratio of 1.5 means the firm uses ₹ 1.50 of debt for every rupee of equity, more than the industry's 1.3. More debt means larger fixed interest and repayment obligations, so the risk of being unable to meet them, financial risk, is higher.The ratio says nothing directly about liquidity (which is measured by current or quick ratios), profitability or the total size of capital employed.

Which of the following are regarded as sources of information for financial statement analysis?
(i) Annual reports
(ii) Interim financial statements
(iii) Notes to accounts
(iv) Statement of cash flows

A.Only (i) and (ii)
B.Only (ii) and (iii)
C.Only (i), (ii) and (iii)
D.All (i), (ii) , (iii) and (iv)

Exam Year(s)

DSSSB - 2023,

Answer: D

All four are sources of information. Financial statement analysis draws on the annual reports of the company, its interim (quarterly or half-yearly) financial statements, the notes to accounts, which give details and accounting policies behind the figures, and the statement of cash flows. Since all of (i), (ii), (iii) and (iv) are listed in the answer key, an option with fewer items leaves out a valid source.

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The term __________ means manipulation of accounts in a way so as to conceal vital facts and present the financial statements in a way to show a better position than what it actually is

A.Silos of numbers
B.Window dressing
C.Credit analysis
D.Simulation

Exam Year(s)

DSSSB - 2023,

Answer: B

Window dressing is the manipulation of accounts to conceal vital facts and present the financial statements so that the position looks better than it actually is. 'Silos of numbers' is not a recognised accounting term in this sense. Credit analysis is the assessment of a borrower's ability to repay, and simulation is a method of modelling situations, so neither is the manipulation described.

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Which of the following is regarded as long term solvency ratio

A.Capital Turnover Ratio
B.Proprietary Ratio
C.Return on investment
D.Return on total resources

Exam Year(s)

DSSSB - 2023,

Answer: B

The proprietary ratio is a long-term solvency ratio. It compares the proprietors' (shareholders') funds with total assets, and shows how much of the assets is financed by owners, which tells about the long-term stability of the firm. The capital turnover ratio is an activity ratio, and return on investment and return on total resources are profitability ratios. So only the proprietary ratio is a solvency ratio.

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___________ ratio indicates the number of times the earning per share is covered by its market price

A.Price Earning
B.Capital Gearing
C.Dividend yield
D.Earning yield

Exam Year(s)

DSSSB - 2023,

Answer: A

The price earning ratio is the one that shows how many times the earning per share is covered by its market price. It is the market price per share divided by earnings per share, and so shows the number of times of earnings that investors pay. Capital gearing is the ratio of fixed-charge capital to equity, dividend yield is dividend divided by market price, and earning yield is earnings divided by market price, which is the inverse of the P/E ratio.

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______ ratio is determined to ascertain the proportion between the 'outsiders' funds and share-holders funds' in the capital structure of an enterprise

A.Debt-Equity
B.Capital Gearing
C.Proprietary
D.Return on total resources

Exam Year(s)

DSSSB - 2023,

Answer: A

The debt-equity ratio is determined to ascertain the proportion between outsiders' funds and shareholders' funds in the capital structure. Outsiders' funds are the long-term debts, such as debentures and term loans, and shareholders' funds are the share capital and reserves. Dividing the first by the second gives the ratio. Capital gearing compares fixed-return capital with equity capital, the proprietary ratio compares shareholders' funds with total assets, and return on total resources measures profit, so the first option fits the wording best.

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_____________ establishes relationship between the shareholders' funds and the total tangible assets

A.Debt-Equity ratio
B.Capital Gearing ratio
C.Proprietary ratio
D.Return on total resources

Exam Year(s)

DSSSB - 2023,

Answer: C

The proprietary ratio establishes the relationship between shareholders' funds and total tangible assets. It is the shareholders' funds divided by the total tangible assets, and a high value means that a larger part of the assets is financed by the owners. The debt-equity ratio compares outside funds with owners' funds, the capital gearing ratio compares fixed-return capital with equity, and return on total resources is a profitability measure.

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Gross profit is Rs 54,000
Gross profit margin is 20%
What is sales value?

A.Rs. 2,70,000
B.Rs. 2,16,000
C.Rs. 3,24,000
D.Rs. 3,08,000

Exam Year(s)

DSSSB - 2023,

Answer: A

The sales value is Rs. 2,70,000. Gross profit margin is gross profit as a percentage of sales. \[\text{Sales} = \frac{\text{Gross profit}}{\text{Margin}}\] \[= \frac{54{,}000}{0.20} = 2{,}70{,}000\] Check: 20 per cent of 2,70,000 is 54,000. The figure 2,16,000 would be 54,000 divided by 0.25, 3,24,000 is 54,000 divided by one-sixth, and 3,08,000 does not follow from the given figures.

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Long term solvency is indicated by ................... .

A.Current Ratio
B.Debt/Equity Ratio
C.Net Profit Ratio
D.Turnover Ratio

Exam Year(s)

MH SET - 2018, SET Exam - 2018,

Answer: B

Long-term solvency is indicated by the debt/equity ratio.

Long-term solvency is a firm's ability to meet its long-term obligations, interest and repayment of loans. The debt-equity ratio compares long-term debt with shareholders' funds: a high ratio means heavy reliance on borrowed funds and greater risk to lenders, a low ratio a larger cushion of owners' capital. Related solvency measures include the proprietary ratio and interest coverage.

The current ratio measures short-term liquidity. The net profit ratio measures profitability, and turnover ratios measure how efficiently assets are used.

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ABC Ltd. has a current ratio of 1.5 : 1 and net current assets of ₹ 5,00,000. What are the current assets ?

A.₹ 5,00,000
B.₹ 10,00,000
C.₹ 15,00,000
D.₹ 25,00,000

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: C

The current assets are ₹ 15,00,000.

With a current ratio of 1.5 : 1, write current liabilities as \(x\) and current assets as \(1.5x\). Net current assets (working capital) are the difference:

\[ \begin{aligned} 1.5x - x &= 5{,}00{,}000 \\ x &= 10{,}00{,}000 \\ 1.5x &= 15{,}00{,}000 \end{aligned} \]

₹ 10,00,000 is the current liabilities, not the assets, and ₹ 5,00,000 is the working capital itself.

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10.

XYZ Ltd. has a debt-equity ratio of 1.5 as compared to 1.3 Industry average. It means that the firm has :

A.Higher liquidity
B.Higher financial risk
C.Higher profitability
D.Higher capital employed

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: B

The firm has higher financial risk.

A debt-equity ratio of 1.5 means the firm uses ₹ 1.50 of debt for every rupee of equity, more than the industry's 1.3. More debt means larger fixed interest and repayment obligations, so the risk of being unable to meet them, financial risk, is higher.

The ratio says nothing directly about liquidity (which is measured by current or quick ratios), profitability or the total size of capital employed.

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Financial Statement Analysis and Ratios Questions and Answers

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