MCQs Course for SEBI Grade A 2020 - Paper 2

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1. Which of the following ratios refer to the ability of the firm to meet
the short term obligations out of its short term resources?

1. Liquidity ratio
2. Leverage ratio
3. Activity ratio
4. Profitability ratio

Ans: 1

The ratios that refer to the ability of the firm to meet the short term
obligations out of its short term resources is known as Liquidity ratio.

2. Which ratio measures the efficient use of assets resources employed

by the firm?

1. Liquidity ratio
2. Leverage ratio
3. Activity ratio
4. Profitability ratio

Ans: 3

The measure of how efficiently the assets resources are employed by the
firm is called the Activity ratio. Activity ratios are a category of financial
ratios that measure a firm's ability to convert different accounts within its
balance sheets into cash or sales.

3. What is the formula of Liquid or Quick assets?

 1. Current assets - (Stock + Work in progress)
2. Current assets + Stock + Work in progress
3. (Current assets + Stock) + Work in progress
4. (Current assets + Work in progress) - Stock

Ans: 1

Cash and cash equivalents are the most liquid current asset items included
in quick assets, while marketable securities and accounts receivable are
also considered to be quick assets. Quick assets exclude inventories,
because it may take more time for a company to convert them into cash.

Liquid or Quick assets = Current assets - (Stock + Work in progress).

4. What do you mean by lower the Debt-Equity ratio?

1. Lower the protection to creditors

2. Higher the protection to creditors
3. It does not affect the creditors
4. None of the above

Answer: 2

Lower the Debt-Equity ratio higher is the protection to creditors. Creditors

usually like a low debt to equity ratio because a low ratio (less than 1) is the
indication of greater protection to their money.

5. What indicates a higher inventory ratio?

1. Better inventory management

2. Quicker turnover
3. Both A and B
4. None of the above

Ans: 3
A higher inventory ratio indicates Better inventory management and
Quicker turnover.

6. What is the formula of Return on Investment Ratio (ROI)?

1. (Gross profit / Net sales) x 100

2. (Gross profit x Sales / Fixed assets) x 100
3. (Net profit / Sales) x 100
4. (Net profit / Total assets) x 100

Answer: 1

Return on Investment (ROI) is a performance measure used to evaluate the

efficiency of an investment or compare the efficiency of a number of
different investments.
Return on Investment Ratio (ROI) = (Net profit / Total assets) x 100.

7. What indicates a low Return on Investment Ratio (ROI)?

1. Improper utilization of resources

2. Over investment in assets
3. Both A and B
4. None of the above

Answer: 3

A low Return on Investment Ratio (ROI) indicates Improper utilization of

resources and Over investment in assets.

8. What can be revealed by the analysis and interpretations of the

financial statement?

1. The profitability
2. The financial position
3. Both
 4. None

Ans: 3

Analysis and interpretation of financial statements are an attempt to

determine the significance and meaning of the financial statement data so
that a forecast may be made of the prospects for future earnings, financial
position, ability to pay interest, debt maturities, both current as well as long
term, and profitability of sound dividend policy.

9. What will be known as the rearrangement of accounting figures and

methodical classification of data?

1. Interpretations
2. Summarization
3. Analysis
4. None

Ans: 3

Financial analysis is the process of determining the significant operating

and financial characteristics of a firm from accounting data with the help of
rearrangement of accounting figures and methodical classification of data.

The profit and Loss Account and Balance Sheet are indicators of two
significant factors- Profitability and Financial Soundness. Analysis of
statement means such a treatment of the information contained in the two
statements as to afford a full diagnosis of the profitability and financial
position of the firm concerned.

10. The process of explaining the meaning, significance, and

relationship between two financial factors is called:

1. Interpretation
2. Analysis
3. A and B
4. None
Ans: 3

The term ‘analysis’ means the simplification of financial data by methodical

classification of the data given in the financial statements, ‘interpretation’
means, ‘explaining the meaning and significance of the data so simplified.’
However, both’ analysis and interpretation’ are interlinked and
complementary to each other.

11. Which of the following is the technique of financial statement

analysis?

1. Common size statement

2. Comparative statement
3. Trend analysis
4. All of the above

Ans: 4

Several techniques are commonly used as part of financial statement

analysis. Three of the most important techniques include Common size
statement, Comparative statement, horizontal analysis, vertical
analysis, Trend analysis and ratio analysis.

12. Which of the following statement refers to figures of two or more

periods are placed side by side to facilitate easy and meaningful
comparisons?

1. Common‐size statement analysis

2. Comparative statement analysis
3. Trend percentage analysis
4. None

Ans: B

Comparative Financial Statement Analysis is also called as Horizontal

analysis. The Comparative Financial Statement provides information about
two or more years' figures as well as any increase or decreases from the
previous year's figure and it's the percentage of increase or decreases.

13. Which of the organization are required to show previous year

figures of financial statements?

1. Partnership firms
2. Cooperatives
3. Any Company
4. Government companies

Ans: 3

Financial statement analysis is the process of analyzing a company's

financial statements for decision-making purposes. External stakeholders
use it to understand the overall health of an organization (Any
Organization or company) as well as to evaluate financial performance
and business value.

14. What is shown by a comparative balance sheet?

1. Two years balance sheet figures

2. Increase or decrease in figures
3. Percentage of increase or decrease
4. All of the above

Ans: 4

A comparative balance sheet presents side-by-side information about an

entity's assets, liabilities, Percentage of increase or decrease and
shareholders' equity as of multiple points in time. For example, a
comparative balance sheet could present the balance sheet as of the end of
each year for the past three years.

15. The comparative income statement shows the increase or decrease

of which of the following components over the previous year?
 1. Sales
2. Profit
3. Expense
4. All of the above

Ans: 4

The income statement, or profit and loss statement, shows sales minus
expenses. The top line is the total amount you earned in sales before
subtracting any expenses. Then, business expenses are listed and deducted
until you reach the bottom line or net profit.

16. The technique of converting figures into a percentage in some

common base is called:

1. Ratio analysis
2. Common size statement analysis
3. Trend percentages
4. None

Ans: 1

Ratio analysis is the comparison of line items in the financial statements of

a business. Ratio analysis is used to evaluate a number of issues with an
entity, such as its liquidity, efficiency of operations, and profitability.

17. What is taken as cent percent in common-size balance sheet

analysis?

1. Total assets
2. Fixed assets
3. Total capital
4. None

Ans: 1
All percentage figures in a common-size balance sheet are percentages of
total assets while all the items in a common-size income statement are
percentages of net sales. The use of common-size statements facilitates
vertical analysis of a company's financial statements.

18. The technique of taking first-year figures as base and comparing

with subsequent years is called?

1. Ratio analysis
2. Common size statement
3. Trend analysis
4. None

Ans: 3

Trend analysis is a technique used in technical analysis that attempts to

predict the future stock price movements based on recently observed trend
data. Trend analysis is based on the idea that what has happened in the
past gives traders an idea of what will happen in the future.

19. Ratio analysis is a technique of financial statement for which of the

following purpose?

1. Analysis
2. Interpretation
3. Both
4. None

Ans: 3

Ratio analysis refers to the analysis and interpretation of various pieces of

financial information in the financial statements of a business. They are
mainly used by external analysts to determine various aspects of a
business, such as its profitability, liquidity, and solvency.

20. Which of the following is an important step in ratio analysis?

 1. Calculation of ratios
2. Comparison
3. Interpretation
4. All of the above

Ans: 4

Steps in ration analysis:-

1. An analyst should decide the objectives of ratio analysis.

2. Select th0 appropriate ratios on the basis of objectives of ratio analysis.
3. Calculation of the selected such ratios.
4. Comparison of the calculated ratios with the ratios of the same business
concern in the past.
5. Comparison of the calculated ratios with the same type of ratios of other
similar business concern.
6. Comparison of the calculated ratios with the same type of ratios of the
industry to which the business concern belongs.
7. Interpretation of the ratios.

21. Who is the user of ratio analysis?

1. Management
2. Creditors and financial institutions
3. Investors
4. All

Ans: 4

Ratio analysis of a firm's financial statements is of interest to a number of

parties, mainly, shareholders, creditors, debtors, firm's own management,
financial institutions, Investors, etc.
22. Which of the following technique shows the financial condition of a
business in a simplified manner?

1. Balance sheet
2. Ratios
3. Funds flow
4. None

Ans: 2

Ratio analysis is the comparison of line items in the financial statements

of a business. It is one of the important technique which shows the
financial condition in a very simplified manner. Ratio analysis is used to
evaluate a number of issues with an entity, such as its liquidity, efficiency of
operations, and profitability.

23. What ratios are applied to find out the efficiency of the
performance of a firm?

1. Activity ratio
2. Profitability ratio
3. Both
4. None

Ans: 3

An activity ratio is a type of financial metric that indicates how efficiently a

company is leveraging the assets on its balance sheet, to generate revenues
and cash. Commonly referred to as efficiency ratios, activity ratios help
analysts gauge how a company handles inventory management, which is
key to its operational fluidity and overall fiscal health.

Profitability ratios are a class of financial metrics that are used to assess a
business's ability to generate earnings relative to its revenue, operating
costs, balance sheet assets, and shareholders' equity over time, using data
from a specific point in time.
24. What trend is projected by profitability ratio?

1. Costs
2. Profits
3. Sales
4. All of the above

Ans: 4

Profitability ratios measure a company’s ability to earn a profit relative to

its sales revenue, operating costs, balance sheet assets, and shareholders’
equity. These financial metrics can also show how well companies use their
existing assets to generate profit and value for owners and shareholders.

25. Which of the following is the best for comparing the firms?

1. Ratios
2. Absolute figures
3. Both
4. None

Ans: 1

Ratio analysis is the comparison of line items in the financial statements of

a business. Ratio analysis is used to evaluate a number of issues with an
entity, such as its liquidity, efficiency of operations, and profitability

26. The ascertainment of trends helps in making:

1. Standards
2. Forecasts
3. Budgets
4. None

Ans: 2
Trend analysis helps the analyst to make a proper comparison between the
two or more firms over a period of time. It can also be compared with the
industry average.

27. In what way the ratio analysis helps the management?

1. Planning
2. Coordination
3. Control
4. All

Ans: 4

Ratio analysis will help validate or disprove the financing, investment, and
operating decisions of the firm. They summarize the financial statement
into comparative figures, thus helping the management to plan, coordinate,
control, direction, compare, and evaluate the financial position of the firm
and the results of their decisions.

28. On what basis can ratios be classified?

1. Financial statement
2. Function
3. Both
4. Subjective matter

Ans: 3

Generally, financial ratios are classified on the basis of function or financial

statement, on the basis of financial statements, and on the basis of
importance.

29. Liquidity ratio indicates the ability of the company to meet its:

1. Current liability
2. Tax liability
 3. Long term obligations
4. Shareholders claim

Ans: 2

Liquidity ratios are an important class of financial metrics used to

determine a debtor's ability to pay off current debt obligations without
raising external capital. Liquidity ratios measure a company's ability to pay
debt obligations and its margin of safety through the calculation of metrics
including the current ratio, quick ratio, and operating cash flow ratio.

30. The shareholder's funds consist of:

1. Preference shares
2. Equity shares
3. Reserves and surplus
4. All

Ans: 4

Shareholders' funds refer to the amount of equity shares,preference shares,

and reserves in a company, which belongs to the shareholders. The amount
of shareholders' funds yields an approximation of theoretically how much
the shareholders would receive if a business were to liquidate.