Chapter MCQ Test 2 — Analysis of Financial Statements
10 Questions • 12 min • Chapter MCQ
12:00
Question 1 of 10
Two firms, one large and one small, are best compared on cost structure using:
Common-size statements (percentages remove the size effect)
Absolute figures
Their share prices
Trial balances
Explanation: Common-size statements convert everything to percentages, neutralising the difference in scale.
Question 2 of 10
Revenue rose from 8,00,000 to 10,00,000 while profit before tax rose from 1,00,000 to 1,60,000. The percentage changes are:
Revenue +25%, PBT +60%
Revenue +20%, PBT +60%
Revenue +25%, PBT +37.5%
Revenue +60%, PBT +25%
Explanation: Revenue: 2,00,000/8,00,000 = 25%; PBT: 60,000/1,00,000 = 60%.
Question 3 of 10
A comparative balance sheet shows borrowings up 80% but fixed assets up only 5%. A reasonable inference is that:
Borrowed funds may have financed working capital or losses, not new fixed assets
The firm bought a lot of machinery
Equity increased
Profits soared
Explanation: Heavy new debt without matching asset growth suggests funds went into operations/losses, a possible warning sign.
Question 4 of 10
Why can horizontal and vertical analysis give different insights from the SAME statements?
Horizontal tracks change over time; vertical shows each item's share of a base
They use different companies
One ignores revenue
They are identical
Explanation: They answer different questions — 'how much did it change?' versus 'what proportion of the whole is it?'.
Question 5 of 10
In a common-size income statement, if PBT is 18% of revenue this year vs 22% last year, it indicates:
Profitability margin has fallen
Revenue fell
Profitability improved
No change
Explanation: A smaller share of revenue retained as profit means a lower profit margin.
Question 6 of 10
The base for % change in a comparative statement is always the:
Previous (earlier) year's figure
Current year's figure
Average of both
Total assets
Explanation: Percentage change is measured against the earlier year as the base.
Question 7 of 10
Which limitation makes inter-firm analysis risky even with common-size statements?
Firms may follow different accounting methods/policies
Percentages cannot be computed
Revenue is unknown
Statements are secret
Explanation: Different depreciation or inventory methods reduce comparability despite the common-size format.
Question 8 of 10
A common-size balance sheet shows current assets are 70% of total assets vs 50% for a rival. This suggests the firm:
Holds relatively more in current assets (possibly more liquid, or idle stock/debtors)
Has more fixed assets
Has more equity
Earns more profit
Explanation: A higher current-asset proportion points to greater liquidity or possibly excess inventory/receivables.
Question 9 of 10
Trend analysis differs from a two-year comparative statement mainly because it:
Studies several years against a base year to reveal the long-term direction
Uses only one year
Ignores time
Uses ratios only
Explanation: Trend analysis indexes many years to a base year to show the overall movement, not just one year-on-year change.
Question 10 of 10
Analysis converts data into decisions, but its conclusions must be drawn:
With judgement, allowing for the statements' own limitations
Mechanically and absolutely
Ignoring the figures
Only from share prices
Explanation: Because the inputs carry limitations, the analyst must interpret results with judgement rather than mechanically.