Accountancy Test - 26

The correct answer is Employee stock option scheme.

Key Points

Employees' Stock Option Plan

• Under this plan, the company provides employees with an option to take shares at a future date.
• ​It is a grant to an employee giving the right to buy a certain number of shares in the company's stock for a set price.
• These shares are purchased by employees at price below market price, or in other words, at discounted price.
• It motivates the employee to be committed to the company for the long term.
• The employees have to wait for a certain time period which is known as the vesting period to claim the benefits.

Gearing ratio

• it is the ratio between fixed income bearing funds and equity shareholders' funds.
• Gearing ratio are calculated to find out leverage in the company i.e. how much debt and how much equity is employed in the company and in which proportion.
• It is useful for risk assessment by the management of the company.
• Gearing ratio is related to equity and debt proportion of the firm.

The correct answer is ​A, B, C, D.

Key Points

A common-size income statement expresses each line item as a percentage of net sales. Here's the breakdown of the ratios in the correct sequence:

• A. Gross profit margin: Gross profit margin is calculated by dividing gross profit by net sales and represents the percentage of revenue left after deducting the cost of goods sold. It is typically presented as one of the first ratios on a common-size income statement, hence it appears at the top.
• B. Operating profit margin: Operating profit margin is calculated by dividing operating profit by net sales. It indicates the profitability of the company's core operations before considering interest and taxes. It appears after the gross profit margin.
• C. Net profit margin: Net profit margin is calculated by dividing net income by net sales. It represents the percentage of revenue that remains as profit after accounting for all expenses, including taxes and interest. It appears after the operating profit margin.
• D. Earnings per share: Earnings per share (EPS) represents the portion of the company's profit allocated to each outstanding share of common stock. It is not a ratio that directly appears on a common-size income statement, as it relates to the number of shares outstanding rather than the percentage of revenue.

Therefore, the correct sequence is A (Gross profit margin), B (Operating profit margin), C (Net profit margin), and D (Earnings per share), making option B the correct answer.

The correct answer is Outflow Investing activity ₹(2,50,000)

Key Points

• Outflow Investing activity ₹(2,50,000):
  • When machinery is acquired for ₹5,00,000 with 50% paid by cheque, the cash outflow under the cash flow statement is ₹2,50,000.
  • This transaction is classified under investing activities because it involves the purchase of a fixed asset, which is a long-term investment in the business.
  • The remaining 50% of the cost not paid immediately but through executing a bond indicates a financing activity for the unpaid portion but does not impact the cash flow statement immediately as a cash outflow.

The balance sheet provides a snapshot of a company's financial position, showing assets, liabilities, and equity at a specific moment.

Assets on the balance sheet are classified into current and non-current categories, based on how quickly they are expected to be converted into cash.

Shareholders' equity represents the ownership interest in the company, indicating the value of the shareholders' stake after all liabilities are subtracted from assets.

The balance sheet is key to evaluating the company's financial stability and liquidity, helping users understand its ability to meet obligations.

Revenue is reported in the Statement of Profit and Loss, not in the balance sheet, which focuses on assets, liabilities, and equity.

The primary goal of financial statement analysis is to predict future conditions by analyzing the firm's past and current financial data.