Assertion Reason MCQs of Financial Statement Analysis Accountancy Class 12
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We have compiled very important assertion reason multiple-choice questions of financial statement analysis of Accountancy class 12
Assertion Reason Multiple Choice Questions of Financial Statement Analysis of class 12 Accountancy
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Read the following statements: Assertion and Reason. Choose one of the correct alternatives given below:
Assertion (A): Financial Statement Analysis is a systematic process of analyzing the financial data for its easy understanding and decision making
Reason (R): Financial statements are analyzed using analytical tools such as comparative statements, common-size statements, ratios, and cash flow statements.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Assertion (A) is False but Reason (R) is True.
Ans – a)
Assertion (A): Financial analysis is a systematic process of analysing the financial statements for presenting them in a understandable form for the purpose of decision making.
Reason (R): Various tools for analysing the financial statements are Comparative Statements, Common-Size Statements, Accounting Ratios, Cash Flow Statements etc.
Options:
(a) Both (A) and (R) are correct and (R) is the correct reason of (A)
(b) Both (A) and (R) are correct but (R) is not the correct reason of (A)
(c) Only (R) is correct
(d) Both (A) and (R) are wrong
Ans – (b)
Assertion (A): Financial statement Analysis is undertaken by investors, lenders, and creditors for assessing the safety of the amount invested in the company.
Reason (R): Investors, lenders, and creditors undertake the analysis of the financial statements because they have invested their money in the company and have either indirect control or no control over the affairs of the company.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Assertion (A) is False but Reason (R) is True.
Ans – (a)
Assertion (A): Horizontal analysis can be done by preparing Comparative Statements:
Reason (R): In Horizontal analysis figures of two or more years are placed side-by-side to facilitate comparison. As such, Comparative Statements are Horizontal Analysis.
Options:
(a) Both (A) and (R) are true, but (R) is not correct explanation of (A)
(b) Both (A) and (R) are true and (R) is the correct explanation of (A)
(c) Both (A) and (R) are false
(d) (A) is false, but (R) is true
Ans – (b)
Assertion (A): Vertical Analysis provides information in absolute and percentage form.
Reason (R): Vertical Analysis is useful in making inter-firm comparison.
In the context of above two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion (A).
(b) Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A)..
(c) Only Assertion (A) is correct.
(d) Assertion (A) is not correct but the Reason (R) is correct.
Ans – (d)
Assertion (A): In vertical Analysis figures of a single year are analysed and it can be done by preparing Common-Size Statements.
Reason (R): In Horizontal Analysis figures of two or more years are analysed and it can be done by preparing Comparative Statements.
Options:
(a) Both (A) and (R) are true, but (R) is not the correct explanation of (A)
(b) Both (A) and (R) are true and (R) is the correct explanation of (A)
(c) Both (A) and (R) are false
(d) (A) is false, but (R) is true
Ans – (a)
Assertion (A): Comparative Statement is an analytical tool to compare individual items of the Balance Sheet and/or Statement of Profit and Loss of the company for two or more years.
Reason (R): Comparative Statement is prepared to compare individual items of Balance Sheet and/or statement of Profit and Loss and thus, the difference is ascertained both in amount and percent.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Assertion (A) is False but Reason (R) is True.
Ans – a)
Assertion (A): Common Size statement is a statement in which individual items of financial statements of two or more years are converted into a percent of a common base for comparison.
Reason (R): Common size Balance Sheet is prepared to place each item thereof and to convert them into percent of Total of Liabilities part or Assets Part.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Assertion (A) is False but Reason (R) is True.
Ans – (b)
Assertion (A): With the help of financial analysis, short term lenders are interested in knowing the liquidity of the company.
Reason (R): With the help of financial analysis, investors assess the profitability of the Company.
Options:
(a) Both (A) and (R) are correct and (R) is the correct reason of (A)
(b) Both (A) and (R) are correct but (R) is not the correct reason of (A)
(c) Only (R) is correct
(d) Both (A) and (R) are wrong
Ans – (b)
Assertion (A): Limitations of Financial Statements, such as influence of accounting concept, disclosure of only monetary fact, etc. are also the limitation of financial analysis.
Reason (R): Financial Statements are used as basis of financial analysis.
In the context of above two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion (A).
(b) Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
(c) Only Assertion (A) is correct.
(d) Both Assertion (A) and Reason (R) are not correct.
Ans – (a)
Assertion (A): Financial analysis suffer from the limitation of ignoring price level changes.
Reason (R): Financial analysis is based upon financial statements which do not show price level changes because all items in financial statements are recorded at cost and value of money in the latest year is not the same as it was in the previous years.
Options:
(a) (A) and (R) both are correct and (R) correctly explains (A)
(b) Both (A) and (R) are correct but (R) does not explain (A)
(c) Both (A) and (R) are incorrect
(d) (A) is correct but (R) is incorrect
Ans – (a)
Assertion (A): Ratio analysis is an analytical tool for analyzing two inter-dependent components of the Balance Sheet.
Reason (R): Ratio analysis is an analytical tool for the analysis of two interdependent components of financial statements, i.e., Balance Sheet and/or Statement of Profit and Loss. For example, the return on Investment Ratio is computed to determine Return on Capital Employed. Capital employed is known from the Balance Sheet while Profit before interest and tax is known from the statement of Profit and Loss.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Assertion (A) is False but Reason (R) is True.
Ans – (d)
Assertion (A): Cash Flow statement is an analytical tool to determine the inflow and outflow of Cash and Cash Equivalents during a financial year under appropriate heads.
Reason (R): Cash Flow Statement is prepared to show inflow and outflow under operating activities, investing activities, and financing activities. Thus, it shows the sources and uses of funds under these heads.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Assertion (A) is False but Reason (R) is True.
Ans – (a)
Assertion (A): Financial Analysis is affected by the personal ability and bias of the analyst.
Reason (R): There is scope for diversity of opinion as to what constitutes shareholder’s equity, debt, assets profit and so on.
In the context of above two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion (A).
(b) Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
(c) Only Assertion (A) is correct.
(d) Both Assertion (A) and Reason (R) are not correct.
Ans – (b)
Assertion (A): Financial analysis is affected by window-dressing.
Reason (R): Window-dressing refers t the presentation of a better financial position than the actual position by manipulating the books of accounts. Since financial analysis is based upon financial statements it is also affected by window-dressing.
Options:-
(a) (A) and (R) both are correct and (R) correctly explains (A).
(b) Both (A) and (R) are correct but (R) does not explain (A)
(c) Both (A) and (R) are incorrect.
(d) (A) is correct but (R) is incorrect
Ans – (a)
Assertion (A): Quality of management and staff, firm’s ability to develop new products, customer satisfaction etc. are ignored in financial analysis.
Reason (R): Since financial statements do not record qualitative elements of the business and consider only those items which can be measured in terms of money, financial analysis also ignores qualitative factors.
Options:
(a) (A) and (R) both are correct and (R) correctly explains (A)
(b) Both (A) and (R) are correct but (R) does not explain (A)
(c) Both (A) and (R) are incorrect
(d) (A) is correct but (R) is incorrect
Ans – (a)
Assertion (A): Horizontal Analysis is generally useful in Cross-sectional Analysis.
Reason (R): Horizontal Analysis provides information in absolute and percentage form.
In the context of above two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion (A).
(b) Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
(c) Only Assertion (A) is correct.
(d) Assertion (A) is not correct but the Reason (R) is correct.
Ans – (d)
Assertion (A): Since financial analysis is strictly based upon financial statements, there is no scope of effect of personal ability and bias of analyst on such analysis.
Reason (R): Financial analysis suffers from personal ability and bias of analyst because analysis is based on financial statements.
Options:
(a) Both (A) and (R) are correct and (R) is the correct reason of (A)
(b) Both (A) and (R) are correct but (R) is not the correct reason of (A)
(c) Only (R) is correct
(d) Both (A) and (R) are wrong
Ans – (c)
Assertion (A): ‘Vertical Analysis’ is also known as ‘Static Analysis’.
Reason (R): Vertical Analysis is based on the data of a single year.
In the context of above two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion (A).
(b) Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
(c) Only Assertion (A) is correct.
(d) Assertion (A) is not correct but the Reason (R) is correct.
Ans – (b)
Assertion (A): Intra-firm analysis means comparing the financial data of the same firm for two or more accounting periods.
Reason (R): Inter-firm analysis means comparing the financial data of two or more enterprises for the same accounting period.
Options:
(a) Both (A) and (R) are true, but (R) is not the correct explanation of (A)
(b) Both (A) and (R) are true and (R) is the correct explanation of (A)
(c) Both (A) and (R) are false
(d) (A) is false, but (R) is true
Ans – (a)
Assertion (A): Tools for financial analysis include Comparative Statements, Common-Size Statements, Balance Sheet, Statement of Profit & Loss etc.
Reason (R): Tools for financial analysis include Comparative Statements, Common-Size Statements and Balance Sheet.
Options:
(A) Both (A) and (R) are correct and (R) is the correct reason of (A)
(b) Both (A) and (R) are correct but (R) is not the correct reason of (A)
(c) Only (R) is correct
(d) Both (A) and (R) are wrong
Ans – (d)
Assertion (A): Analysis of Financial Statements helps to assess the current profitability and operational efficiency of the business as a whole as well as its different departments.
Reason (R): Financial Analysis considers the impact of price level changes on the business.
Options:
(a) Both (A) and (R) are correct, but (R) is not the correct reason of (A)
(b) Both (A) and (R) are correct and (R) is the correct reason of (A)
(c) Both (A) and (R) are incorrect
(d) (A) is correct, but (R) is incorrect
Ans – (d)
Assertion (A): ‘Horizontal Analysis’ is also known as ‘Dynamic Analysis’.
Reason (R): Horizontal Analysis is based on data of two or more years rather than only one year.
In the context of above two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion (A).
(b) Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
(c) Only Assertion (A) is correct.
(d) Both Assertion (A) and Reason (R) are not correct.
Ans – b)
Assertion (A): Comparative Statement is a vertical analysis while a common size statement is a horizontal analysis.
Reason (R): Comparative Statement is a vertical analysis because an item of two years is compared. A common size statement is a horizontal analysis because an item of the financial statement is converted into a percent of the common base of the same year.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Both Assertion (A) and Reason (R) are False.
Ans – (d)
Assertion (A): Intra firm comparison means comparing the financial data of the same firm while inter-firm comparison means comparing financial data of two or more firms or industry standards.
Reason (R): Intra firm comparison is of financial variables taken from two independent financial statements of two firms or entities while Inter-firm comparison is that of financial data of two or more years of the same firm.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Both Assertion (A) and Reason (R) are False.
Ans – (c)
Assertion (A): The process of financial statement analysis involves re-arranging the financial information, comparison of financial data, application of analytical tools, and interpreting the data of financial analysis.
Reason (R): Financial statement analysis is carried out using the analytical tools, i.e., comparative and common-size statements, Ratio Analysis, and Cash Flow Statement.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Both Assertion (A) and Reason (R) are False.
Ans – (a)
Assertion (A): The objective of financial statement analysis is to assess profitability, managerial efficiency, solvency, inter-firm comparison, forecasting, and making the information easily understandable.
Reason (R): Financial statement analysis is carried out using Ratio Analysis to assess profitability, solvency, and understandability, comparative and common size statements to compare and understandability while cash flow statement to forecast the flow of cash and cash equivalents and understandability.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Both Assertion (A) and Reason (R) are False.
Ans – (a)
Assertion (A): Analysis of financial statements suffer from the limitation of ignoring price level changes.
Reason (R): Transactions are recorded at the value transacted on the date they are entered. The value of currency keeps changing and therefore, financial statements do not give the current position and as a result, analysis of financial statements take the value to be static.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Both Assertion (A) and Reason (R) are False.
Ans – (a)
Assertion (A): Analysis of Financial Statements helps in assessing the present earning capacity as well as the future earning capacity.
Reason (R): With the help of Financial Statement analysis profitability can be assessed with reference to sales as well as capital invested in the business.
In the context of above two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion (A).
(b) Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
(c) Assertion (A) is correct but the Reason (R) is not correct.
(d) Both Assertion (A) and Reason (R) are not correct.
Ans – b)
Assertion (A): Analysis of financial statements ignores the qualitative aspect of the enterprise.
Reason (R): Financial statements are concerned with transactions with monetary value and based on evidence, the Quality aspect can not be measured in money terms and therefore are not recorded in the books. As a result, analysis of financial statements also has this limitation.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Both Assertion (A) and Reason (R) are False.
Ans – a)
Assertion (A): Analysis of financial statements using an inter-firm comparison is meaningful even if the companies follow different accounting policies.
Reason (R): Financial statements prepared on the basis of different accounting policies are comparable in spite of the financial information being not on the same basis.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Both Assertion (A) and Reason (R) are False.
Ans – (d)
Assertion (A): Analysis of financial statements suffers from the limitation of not being free from personal bias.
Reason (R): Preparation of financial statements involves personal bias (e.g., choosing depreciation method) and therefore analysis of financial statements also has this limitation.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is False
d) Both Assertion (A) and Reason (R) are False.
Ans – a)
Given below are two statements:
Statement I: In ‘Vertical Analysis’ figures of two or more years are analyzed and it can be done by preparing ‘Comparative Statements’.
Statement II: In ‘Horizontal Analysis’ figures of a single year are analyzed and it can be done by preparing ‘Common-Size Statements.
Options:
(a) Both Statement I and Statement II are correct
(b) Both Statement I and Statement II are incorrect
(c) Statement I is correct but Statement II is incorrect
(d) Statement I is incorrect but Statement II is correct
Ans – (b)
Given below are two statements:
Statement I: The process of critical evaluation of Financial Inforamtion contained in the financial statements in order to understand and make decisions regarding the operations of the firm is called ‘Financial Analysis’
Statement II: The term ‘Financial Analysis’ means only the ‘Analysis’ of financial statements using various tools like Accounting Ratio and ‘Cash Flow’ etc.
Options:
(a) Both Statement I and Statement II are correct
(b) Both Statement I and Statement II are incorrect
(c) Statement I is correct but Statement II is incorrect
(d) Statement I is incorrect but Statement II is correct
Ans – (a)
