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 Bihar Board 12th Accountancy Important Questions Long Answer Type Part 4 in English

Bihar Board 12th Accountancy Important Questions Long Answer Type Part 4 in English

Question 1.
Write the tools of Financial Analysis.
Answer:
Tools or Techniques or Methods of Financial Analysis: There are various tools for financial analysis depending on the purpose.

The important tools or techniques of financial analysis are as follows:
1. Comparative Statements: Statement showing financial data for two or more than two years, placed side by side to facilitate comparison are called Comparative Financial Statements.

Any financial statement that reports the comparison of data of two or more consecutive accounting periods is known as a Comparative Financial Statement. Such a statement spotlights trends and establishes a relationship between items that appear on the same row of a Comparative Financial Statement. It discloses changes in items of financial statements over time in both rupees and percentage form.

Each item (such as debtors) on a row for one fiscal period is compared with the same item in a different period. The analyst calculates the absolute changes, the difference between the figures of one year and the next, and also the percentage change (increase or decrease) from one year to the next, using the earlier year as the base year.

Comparison of financial statements can be ‘intra-firm’ or ‘inter-firm’. When financial statements of two or more years of the same firm are presented and compared, it is referred to as an intra-firm comparison. When financial statements of two or more firms are compared over a number of accounting periods, it is called inter-firm comparison.

2. Common size Statements:
Meaning: Common size statements is a statement expressing all items of a financial statement as a percentage of some measure of the size of the enterprise. Thus, the Common size financial statement shows the percentage of each item to the total in each period. If the Balance Sheet and Income Statement items are shown in analytical percentage i.e., percentages or ratios to the total of appropriate items (total assets, total liabilities, and total net sales) a common base for comparison is provided.

The statements in this form are called Common size- Statements. Such statements are useful in studying the comparative financial position of two or more businesses. In common size statements, vertical analysis is required.

3. Ratio Analysis: An analysis of financial statements with the help of ratio may be termed as ratio analysis. It describes the relationship which exists between various items of a Balance Sheet and a Profit and Loss Account of a firm. In short, ratio analysis may be defined as the process of computing and presenting the relationship of items and groups of items of the financial statements.

4. Cash Flow Statement: Cash flow statements may be defined as the statement showing ‘Cash inflows’ and ‘Cash outflows’ of an organization during the specific period’. The difference between the ‘inflow’ and ‘outflow’ of cash is the ‘net cash flow’. Cash Flow Analysis summarises the causes for the changes in the cash position of a business enterprise between the dates of two balance sheets.

5. Fund Flow Statement: A fund flow Statement is basically a tool of financial analysis. This statement explains the changes in Working Capital and their effect on financial position. It indicates by what means new financing was obtained and for what purposes it was utilized.

6. Trend Analysis: Trend analysis is also an important tool for the analysis and interpretation of financial statements. The trend means tendency in general terms. Trend analysis discloses changes in the financial and operating data of financial statements over a series of years in percentage.

The trend analysis of business operations and other financial data may be done in any of the following ways

  1. Trend Percentage,
  2. Trend Ratios, and
  3. Graphic or Diagrammatic Presentation.

Question 2.
What are Cashflow statements? How it is prepared?
Answer:
A cash flow statement can be defined as a statement which summarises sources of cash inflows and uses of cash outflows of a firm during a particular period of time, say a month or a year.

A statement of changes in financial position on a cash basis is commonly known as the cash flow statement. It shows the changes in cash position from one accounting period to another, in other words, the cash flow statement summarizes the causes of changes in cash and cash equivalents position between dates of. two balance sheets. It indicates the sources and uses of cash. This statement attempts to analyze the transactions of the firm in terms of cash.

According to Account Standard-3 (revised), the cash flow statement should be presented in a manner that it reports cash flows, during the period classifying by

  1. Cash flows from operating activities.
  2. Cash flows from investing activities.
  3. Cash flows from financing activities

1. Cash flows from operating activities: Cash flows from operating activities are the cash flows from the principal revenue-producing activities are to purchase sugarcane and other inputs; payment of wages and salaries, sale of sugar, and by-products.

Examples of cash flow from operating activities: Account Standard- 3 (revised) gives the following examples of cash flows from operating activities:

  1. Cash receipts from the sale of goods and services.
  2. Cash receipts from royalty, fees, commissions, and other revenues.
  3. Cash payments to suppliers of inputs and services used.
  4. Cash payment to and on behalf of employees.
  5. Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities.
  6. Cash receipts and payment relating to ‘future contracts’ ‘option contacts’ and ‘swap contact’ when the contracts are used for dealing or trading purposes.

2. Cash flows from investing activities: Cash flows from investing activities are the cash flows from the transactions involving purchase and sale of resources i.e., long-term productive assets intended to generate future and cash flows.

Examples of cash flow from investing activities: Account Standard-3 (revised) gives the following examples of cash flows investing activities:

  1. Cash payments to acquired fixed assets including intangible assets such as goodwill, patents, and copyrights. It also includes payment made to construct fixed assets.
  2. Cash receipts from disposal of fixed assets including intangibles.
  3. Cash receipts from the sale of shares, warrants, or debts instruments and interest in joint ventures.

3. Cash flows from financing activities: Cash flows from financing activities are the cash flows from the transactions relating to providing funds (both capital and borrowings) to the company.

Examples of cash flows from financing activate: Account Standard-3 (Revista) gives the following examples of cash flows from financing activities,

  1. Cash proceeds from issuing shares or other similar instruments,
  2. Cash repayment of amounts borrowed and
  3. Cash proceeds from issuing debentures, loans, notes, bonds, and other short-term or long-term borrowings.

Question 3.
What do you mean by Accounting Ratio? What are its objectives?
Answer:
Meaning of Accounting Ratios:

  • Ratio: “A ratio is an expression of the quantitative relationship between two numbers.”
  • Analysis: Analysis means examination and interpretation of the numerical relationship of two numbers.
  • Ratio Analysis: Ratio analysis means examination and interpretation of the numerical relationship of two numbers. In financial analysis, a ratio is used as an index or yardstick for evaluating the financial position and performance of a firm. According to Myers, “Ratio analysis is a study of the relationship among the various financial factors in business.”
  • Accounting Ratios: The ratios based on financial statements are called ‘Financial Ratios’ or ‘Accounting Ratios’. In short, when “ratios are expressed on the basis of accounting information such ratios are called accounting ratios.”

“A ratio is simply one number expressed in terms of another. It is found, by dividing one number into the other Anthony

According to J. Batty, “The term ‘accounting ratios’ is used to describe the significant relationship which exists between two figures shown in Balance Sheet and Profit & Loss Account or in any part of the accounting organization.”

Objectives (or Purposes) of Accounting Ratios:
The following are the main objectives of ratio analysis:

  1. To Measure the Profitability of the Concern: The profitability can be measured by gross profit, net profit, operating profit ratios.
  2. To Determine the Operating Efficiency of the Business: Operational efficiency of the business can be judged by calculating operating/ activity ratios.
  3. To Assess the Solvency of the Business: Solvency or otherwise of the business concern may be assessed by calculating solvency ratios.
  4. To Help in Forecasting and Budgeting: Ratio analysis helps in getting knowledge of the profitability and financial position of the business undertaking. It also reveals the strength and weaknesses of the business concern. It helps in forecasting, budgeting, and making plans for the future.
  5. To Simplify and Summarise Accounting Information; Ratio analysis makes the accounting information meaningful.
  6. To facilitate Comparative Analysis,
  7. To help Management in decision-making.
  8. To help in Financial Planning.

Question 4.
Explain the importance of the Accounting Ratio.
Answer:
Importance of Accounting Ratios: The importance of accounting ratios can be understood by the following discussion:
(A) Importance for Management:

  1. Accounting ratios make the figures simple and understandable.
  2. Accounting ratios provide the basis for preparing budgets and also determining future lines of action i.e., forecasting.
  3. Accounting ratios facilitate comparative analysis of the performance.
  4. Accounting ratios help in making decisions from the information provided in the financial statements.
  5. Accounting ratios indicate efficiency and the profitability of the business concern.
  6. The financial strength and weaknesses of a firm are communicated in a more easy and understandable manner by the use of ratios.
  7. The operational efficiency of the business can be ascertained by calculating the operating ratio.
  8. Accounting ratios help in assessing the solvency position of the business.
  9. Accounting ratios help in measuring the short-term and long-term financial position of the company.

(B) Importance of Investors:
An investor in the company will like to assess the financial position of the concern where he is going to invest his funds. The investor will feel satisfied only if the concern has a sufficient amount of assets. Long-term solvency ratios will help him in assessing the financial position of the concern. Profitability ratios, on the other hand, will be useful to determine the profitability position of the concern. Thus, ratio analysis will be useful to the investor in making up his mind whether the present financial position of the concern warrants further investment or not.

(C) Importance of Short-term Creditors:
The creditors or suppliers extend short-term credit to the concern. They are interested to know whether the financial position of the concern warrants their payments at a specified time or not. The concern pays short-term creditors out of its current assets. If current assets are quite sufficient to meet current liabilities, then the creditors will not hesitate in extending credit facilities. Current and liquid ratios will give an idea about the current financial position of the concern.

(D) Importance of Employees: The employees are also interested in the financial position of the concern especially in relation to profitability. Their wages increases and the number of fringe benefits are related to the volume of profits earned by the concern. The employees make use of information available in financial statements. Various profitability ratios relating to gross profit, operating profit, net profit, etc. enable employees to put forward their viewpoint for the increase of wages and other benefits.

(E) Importance of Government: Government is interested to know the overall Strength of the industry. Various financial statements published by industrial units are used to calculate ratios for determining short-term, long- terra, and Overall financial position of the concerns. Profitability indices can also be prepared with the help of ratios. The government may base its future policies on the basis of industrial information available from various units. The ratios may be used as indicators of the overall financial strength of the public as well as the private sector. In the absence of reliable economic information, governmental plans and policies may not prove successful.

Question 5.
On the basis of the information given below, calculate any two of the following ratios:
(i) Gross Profit Ratio
(ii) Debt-Equity Ratio
(iii) Working Capital Turnover Ratio – information:
Net Sales ₹ 5,65,000, Cost of Goods Sold ₹ 3,75,000, Current Liabilities ₹ 1,75,000, Loan ₹ 1,25,000, Current Assets ₹ 3,25,000. Equity Share Capital ₹ 3,95,000 and Debentures ₹ 1,29,000.
Answer:
Gross Profit Ratio =  Gross Profit  Net Sales  × 100
Gross Profit = Net Sales – Cost of Goods Sold
= ₹ 5,65,000 – 3,75,000
= ₹ 1,90,000

Gross Profit Ratio = 1,90,0005,65,000 × 100 = 33.63%
Debt-Equity Ratio =  Debt  Equity 
We have, Debt = Debentures ₹ 1,29,000 + Loan ₹ 1,25,000
= ₹ 2,54,000

Equity = Equity Share Capital = ₹ 3,95,000
Debt-Equity Ratio = 2.54,0003,95,000 = 0.64: 1

Working Capital Turnover Ratio
Working Capital = Current Assets – Current Liabilities
= ₹ 3,25,000 – 1,75,000
= ₹ 1,50,000 .

Working Capital Turnover Ratio
=  Cost of Goeds Sold  Working Capital 
= 3,75,0001,50,000 =2.5 Times

Question 6.
Calculate the following ratio with the help of the information given below:
(i) Operating ratio,
(ii) Gross Profit ratio,
(iii) Quick ratio,
(iv) Working Capital Turnover ratio,
(v) Proprietory ratio,
(vi) Debtor Turnover ratio.
Information: Equity share capital ₹ 1,00,000,10% Preference Share Capital ₹ 80,000, 12% Debentures ₹ 60,000. General Reserve ₹ 10,000, Sales ₹ 2,00,000, Opening stock ₹ 12,000, Purchases ₹ 1,20,000, Wages ₹ 8,000 Closing Stock ₹ 18,000, Selling and Distribution expenses ₹ 2,000, Other Current Assets (including Debtors ₹ 20,000) ₹ 50,000, Fixed Assets ₹ 2,12,000 and Current Liabilities ₹ 30,000.
Answer:
(i) Operating Ratio =  Cost of Goods sold + Operating Exp.  Net Sales  × 100
Cost of Goods sold = Opening Stock + Purchase + Wages – Closing Stock
= 12,000 + 1,20,000 + 8,000 -18,000 = ₹ 1,22,000

Operating Expenses = Selling and Distribution Expenses
= ₹ 2,000
Operating Ratio = 1,22,000+2.0002,00,000 × 100 = 38%

(ii) Gross Profit Ratio =  Gross Profit  Net Sales  × 100
Gross Profit = Net Sales – Cost of Goods sold
= 2,00,000 – 1,22,000= ₹ 78,000

Gross Profit Ratio = 78.0002,00.000 × 100 = 39%

(iii) Quick Ratio =  Quick Assets  Current Liabilities 
=  Current Assets – Debtors  Current Liabilities 
= 50,000−20,00030,000=11

Quick Ratio = 1: 1

(iv) Working Capital Turnover Ratio =  Cost of Goods sold  Networking Capital 
= 1,22,000 C.A.-C.L. 
= 1,22,000(50,000+18,000)−30,000
= 1,22,00038.000 = 3.21 Times

(v) Proprietory Ratio =  Shareholder’s Funds  Net Assets 
Shareholders’ Funds = Equity Share Capital + Preference Share Capital + General Reserve .
= 1,00,000 + 80,000 + 10,000 = ₹ 1,90,000

Net Assets = Fixed Assets + Current Assets – Current Liabilities = 2,12,000 + 68,000 – 30,000= ₹ 2,50,000
Proprietary Ratio = 1,90,0002,50.000 = 0.76: 1

(vi) Debtors Turnover Ratio =  Net Sales  Average Debtors or Closing Debtors 
=2.00,00020.000 = 10 Times.

Question 7.
What is a Cash Flow Statement? What are its objectives?
Or, Describe the objectives and importance of the Cash Flow Statement.
Answer:
Meaning of Cash Flow Statement: A statement of changes in financing position on a cash basis is commonly known as the cash flow statement. It shows the changes in cash position from one accounting period to another. In other words, the cash flow statement summarises the causes of changes in cash and cash equivalents position between dates of two Balance Sheets. It indicates the sources and uses of cash. This statement attempts to analyze the transactions of the firm in terms of cash.

Thus, a Cash Flow Statement can be defined as a statement which summarises sources of cash inflows and uses of cash outflows of the firm during a particular period of time, says, a month or a year.

Objectives of Cash Flow Statement:
The main objectives of preparing a Cash Flow Statement are as follows:
1. To Throw light on Specific Sources of Cash Flow: A cash Flow Statement is prepared to highlight cash generated from various activities (i.e., inflow of Cash from Operating, Investing, and Financing Activities).

2. To Ascertain the Specific Uses: The cash Flow Statement is prepared to highlight the specific uses or outflows in various activities and projects.

3. To Ascertain the Net Change in Cash and Cash Equivalents: The cash Flow Statement is prepared to indicate the difference between total sources and total uses between the dates of two Balance Sheets.

4, To Disclose Changes in Cash Position: Cash Flow Statement discloses the reasons for low cash balance in spite of heavy operating profits or for heavy cash balance in spite of low profits.

5. To Determine Cash Requirement: A projected cash flow statement is prepared to determine cash requirements in various investment projects.

6. For Efficient Cash Management: Cash Flow Statement heals in planning the investment of surplus cash in short-term investments and to plan short-term credit in advance for the deficit.

7. To Judge Liquidity Position liquidity is the ability of the business enterprise to pay current liabilities as when it becomes due. The Cash Flow Statement helps to ascertain the liquidity in a better manner.

8. To Help in Short-term Planning: A cash Flow Statement provides information for planning the short-term needs of the firm.

9. To Analyse Financial Position: Cash Flow Statement proves to be useful for bankers and money lending institutions. It helps them in reviewing the financial position of the borrowers.

10. To Help in Dividend Decision Cash Flow Statement shows whether the company will be able to pay dividends in cash or not. It helps in taking decisions regarding the payment of dividends.

Utility/Importance or Uses of Cash Flow Statement:
There is a great importance of cash flow statements in financial management. It is an essential tool of financial analysis for short-term planning.

The main advantages of cash flow statement are as follows:

  1. Gash flow statement aims at highlighting the cash generated from operating activities.
  2. Cash flow statement helps in planning the repayment of loan schedule and replacement of fixed assets etc.
  3. Cash is the center of all financial decisions. It is used as the basis for. the projection of future investing and financing plans of the enterprise.
  4. A cash flow statement helps to ascertain the liquidity position of the firm in a better manner. Banks and financial institutions mostly prefer cash flow statements to analyze the liquidity of the borrowing firm.
  5. Cash flow statement helps in efficient and effective management of cash.
  6. The management generally looks into cash flow statements to understand the internally generated cash which is best utilized for payment of dividends.
  7. Cashflow statement is useful as a tool of historical analysis as it helps to answer questions such as given below
    1. What is the liquidity position of the firm?
    2. What are the causes of changes in the firm’s cash position?
    3. What fixed assets are acquired by the firm?
    4. Did the firm used external sources of finance to meet its needs of funds?
    5. What were the significant investments and financing activities of the firm which did not involve working capital?
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