Accountancy Test - 21

Ratio analysis is a financial analysis tool that involves evaluating various financial ratios to gain insights into a company's performance, financial health, and efficiency. By comparing different ratios and trends over time, ratio analysis can help identify areas of strength and weakness in a company's operations. This information can be used to determine potential areas that could be improved with focused efforts in the desired direction.

The correct answer is all of the above.

Financial Statements-

• Financial statements are documents that describe a company's operations and financial performance.
• Government organizations, accounting companies, etc. frequently audit financial statements to guarantee accuracy and for tax, financing, or investing purposes.
• Company prepares various financial statements such as profit & loss account, balance sheet, cash flow statement, etc.

​Balance sheet-

• It shows the details of assets and liabilities of a company and reflect its financial position.

Profit & loss account-

• It records the all incomes and expenses of a company during an accounting year and reflect financial performance of the company.

Cash flow statement-

• It is a statement that shows all the transactions related to cash inflows and cash outflows of a company during an accounting period.

The correct answer is All of the Above.

The comparison of financial statements highlights the trend of the financial position, performance, and profitability of a business. By analyzing the trends over time, you can gain insights into the overall health and financial stability of the company.

Here's a breakdown of how each aspect is revealed:

Financial Position:

• Balance Sheet: Comparing balance sheets across multiple periods shows changes in assets, liabilities, and shareholders' equity. This reveals the company's financial health and solvency, indicating its ability to meet short-term and long-term obligations.
• Cash Flow Statement: Analyzing cash flow trends helps understand the company's ability to generate cash from its operations, investing activities, and financing activities. This information is crucial for assessing the company's liquidity and its ability to fund future growth.
• Performance:
• Income Statement: Comparing income statements over time shows trends in revenues, expenses, and net income. This helps assess the company's operational efficiency, profitability, and overall performance.
• Key Ratios: Analyzing key financial ratios, such as profit margin, return on assets, and return on equity, helps compare the company's performance against industry benchmarks and its own historical performance. This provides insights into the company's efficiency and effectiveness in utilizing its resources.

Profitability:

• Net Income: Comparing net income trends across periods reveals the company's overall profitability and its ability to generate income for its shareholders.
• Earnings per Share (EPS): Analyzing EPS trends provides insights into the company's profitability from the perspective of shareholders. This helps assess the value of the company and its potential for future dividend payments.

Therefore, comparing financial statements is a powerful tool for understanding the overall financial health, performance, and profitability of a business. By analyzing the trends over time, investors, creditors, and other stakeholders can make informed decisions about the company's future prospects.

A) Retiring Partner’s Share of Goodwill: The retiring partner’s share is compensated by debiting the gaining partners’ capital accounts in their gaining ratio. Matches (I) "Gaining Partner's Capital A/c is Debited."

B) Goodwill Already Appearing in Books: If goodwill exists in the books, it’s written off among all partners (including retiring) in their old ratio before adjusting for retirement. Matches (II) "Written Off in Old Ratio."

C) Contribution for Goodwill: The remaining partners pay (via capital adjustment or cash) to compensate the retiring partner for goodwill. Matches (III) "Paid by Remaining Partners."

D) No Goodwill in Books: If goodwill isn’t recorded, it’s valued and adjusted through capital accounts (credited to retiring partner, debited to gaining partners). Matches (IV) "Adjusted in Capital Accounts."

A) Cash Payment: Full settlement in cash at the time of retirement. Matches (I) "Immediate Settlement."

B) Transfer to Loan Account: Amount due is transferred to a loan account, payable later with interest. Matches (II) "Delayed Payment with Interest."

C) Assets Taken by Retiring Partner: If the retiring partner takes assets, their value is deducted from the amount payable. Matches (III) "Deducted from Amount Payable."

D) Deferred Payment: Payment spread over time in installments. Matches (IV) "Paid in Installments."

A) Dissolution by Agreement: This occurs when all partners mutually agree to dissolve the partnership. It aligns with (III) "When a firm dissolves as per the mutual agreement of all partners."

B) Compulsory Dissolution: This happens when the partnership cannot continue, typically due to legal or financial reasons, such as when all or all but one partner become insolvent, making them incompetent to contract. Matches (II).

C) Dissolution by Notice: In a partnership at will, one partner can dissolve the firm by giving written notice to the others. Matches (IV) "When one partner decides to end the firm with a written notice."

D) Dissolution by Court: A court may dissolve a partnership due to reasons like a partner becoming permanently incapable (e.g., insanity). Matches (I) "When a partner becomes permanently incapable of performing their duties."

The correct answer is general reserve.

Sinking fund:

• A sinking fund may be defined as a fund, created by a charge against or an appropriation of profits represented by specific investments, which is brought into existence for a specific purpose, such as replacement of an asset at the expiration of its life or the redemption of debentures.
• A sinking fund is a fund containing money set aside or saved to pay off a debt or bond.
• A company that issues debt will need to pay that debt off in the future, and the sinking fund helps to soften the hardship of a large outlay of revenue.
• A sinking fund is established so the company can contribute to the fund in the years leading up to the bond's maturity.

Key-Points

1. The balance of the Debentures Sinking Fund after redemption of debentures is transferred to the General Reserve account.
2. It is the amount which is kept separately out of redeemed amount from debentures, that is why it is transferred to the general reserve account.

Therefore, where all the debentures are redeemed, the balance left in the debenture sinking fund account is transferable to the General Reserve account.

Additional Information

1. Debenture: In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest.
2. Capital redemption reserve account is a type of reserve maintained by a company limited by shares and as the name suggests this reserve deals with shares that are redeemable.

Convertible debentures:

• Convertible debentures are long-term debt instruments issued by a company that can be converted into equity shares of the company on a future date.
• They can be fully, partially, or optionally convertible.
• They pay a lower coupon rate (interest) than pure debt instruments.
• A debenture holder is a creditor or lender of the company.
• Investors benefit from interest payment and have the option to convert the loan into equity to participate in the growth of the company.

Therefore, Convertible debentures are those on which Equity shares may be exchanged at the option of the debenture holders.

Important Points

• The debenture holders can approach the tribunals and seek relief if the company defaults in paying the interest on its due date or fails to repay the entire amount. They can redeem their amount with the assistance of the courts.

The correct answer is equal to.

Key Points

• The intrinsic value of a bond or any fixed-income security is a fundamental concept in finance, reflecting the actual value derived from its expected cash flows.
• This value is crucial for investors seeking to assess the worth of their investments accurately.
• The intrinsic value is determined by discounting the expected future cash flows of the bond back to their present value.
• This includes all coupon payments and the principal repayment at maturity.
• It is based on the premise that the value of money today is not the same as the value of money in the future due to inflation and the opportunity cost of capital.
• The discount rate used is typically the required rate of return by the investor, which reflects the risk associated with the bond.
• An accurate calculation of intrinsic value allows investors to compare the bond's current market price with its intrinsic value, aiding in investment decisions.

The Correct Answer is Uncalled capital

Key Points

Types of Share Capital

• Subscribed Capital - It is the capital subscribed by the public.
• Called up Capital - It is the capital called up for the payment by the company
• Uncalled capital - The difference between subscribed and called up capital is uncalled capital.

Additional Information

• Paid up capital - This is the capital called up by the company and paid up by the shareholders.
• Calls in arrears - Amount called up by the company but not paid up by the shareholders.
• Calls in advance - Amount paid up by the shareholders before the company make a call.