Dibrugarh University BCOM 6th Sem Financial Statement Analysis Solved Question Paper 2023
COMMERCE (Discipline Specific Elective)
Paper: DSE-602 (GR-I)
Full Marks: 80
Pass Marks: 32
Time: 3 hours.
The figures in the margin indicate full marks for the questions
1. Write True or False: 1x4=4
(a) Financial statements disclose only monetary facts.
Ans:- False.
(b) Current ratio is calculated to compute current assets and fixed liabilities.
Ans:- False.
(c) IFRS 4 is associated with insurance contracts.
Ans:- True
(d) The Corporate Governance Rules were notified on 25th March 2014 under the Companies Act, 2013.
Ans:- True
2. Fill in the blanks: 1x4=4
(a) Profit & Loss A/c is also known as an Income Statement.
(b) CRR stands for Cash Reserve Ratio.
(c) Common-size statement analysis is also known as Vertical Analysis.
(d) Reporting of corporate governance reflects Transparency and Accountability.
3. Write short notes on (any four): 4x4=16
(a) Comparative Income Statement.
(b) Value-added Statement.
(c) Balance Sheet Ratio.
(d) Non-Banking Financial Company.
(e) Corporate Governance.
(a) Comparative Income Statement: A comparative income statement is a financial statement that gives details about a company’s revenues, expenditures, and profitability for many periods, generally two or more consecutive accounting years. It sets out the data for the current period and compares it to one or more previous periods, so as to enable stakeholders to know trends, variations, and performances over time. This aids in estimating an enterprise's rate of growth, effectiveness, and financial condition by assessing figures from different years.
(b) Value-added Statement: A value-added statement is a financial statement that measures the value added by an organization during a specific period. It highlights the contribution of different stakeholders, including employees, suppliers, and shareholders, to the creation of value within the company. The statement typically includes information on revenue, costs, and value-added activities such as production, distribution, and marketing. Value-added statements are useful for assessing a company's efficiency, productivity and overall economic impact.
(c) Balance Sheet Ratio: Financial ratios that evaluate the interrelation between various balance sheet items are called balance sheet ratios. These ratios give a clue about the financial position, liquidity position, solvency and efficiency of a company. Examples of balance sheet ratios include current ratio, the debt-to-equity ratio and return on assets. By comparing different rates at different times in history analysts can assess whether the company’s financial performance has improved or not; eventually they can make meaningful choices regarding investing, lending or managing strategies.
(d) Non-Banking Financial Company (NBFC): A non-banking finance company (NBFC) is a type of financial intermediary that offers a variety of banking products and services but lacks a banking license. They play an essential role in the economy by providing services that include loan provision, assets financing, investment advisory and wealth management. Unlike conventional banks, NBFCs are not allowed to take demand deposits from general public but they can use various avenues to raise funds including issuing debentures, taking deposits from other financial institutions and also engaging in lease and hire-purchase activities.
(e) Corporate Governance: When it comes to a company, corporate governance is the combination of policies, practices, processes and structures that are in place for governing or directing its activities. This involves interactions that exist within shareholders, the board of directors, senior management teams and other top level executives, employees, customers, suppliers and communities. Corporate governance works like a check on poor decision making by creating transparency, accountability and fairness thus protecting stakeholders’ interests. It includes disclosure requirements; risk management systems; compliance with statutory laws; control and oversight mechanisms as well as ethical standards among others. It is therefore imperative for any business to have good corporate governance because it ensures trust building exercise; maintaining reputation over long periods and enhancing long-term value creation for both firms and their stakeholders.
4. (a) What constitutes financial statements? Explain the limitations of financial statements. 7+7=14
Ans:- Formal financial statements are official books that record the financial activities and status of a business, person, or other entity. They usually incorporate:
1. Profit and Loss Statement (Income Statement) : These present revenues and expenses over a given period mainly per month, quarter or one year. The statement is used to find out the net income/ loss by deducting expenses from revenue.
2. Balance Sheet: This is a snapshot of the company’s financial position at any particular time. It includes liabilities, equity shareholders’ funds and company resources in form of assets amongst others. In brief, Assets = Liabilities + Shareholders Equity.
3. Cash Flow Statement: This shows how changes in either balance sheet accounts or income affect cash and cash equivalents by separating the analysis into three sections; operating activities, investing activities, financing activities.
4. Statement of Retained Earnings (or Equity Statement) : This statement explains changes in retained earnings aka shareholder’s equity for some period through displaying effects of dividends paid out and net income including any other adjustments made on it during that period
Limitations of financial statements:
1. Historical Information : Financial statements mainly contain historical information which is useful for examining past performance and trends but may not be a true reflection of existing or future conditions.
2. Estimations and Judgments : Often, financial statements involve estimates and judgments such as depreciation methods or provisions for doubtful debts that can differ among firms thus affecting the reliability of the information presented.
3. Scope Limitations : For instance, financial statements are likely to exclude off-balance-sheet items, contingent liabilities, or non-financial factors like management quality or brand reputation.
4. Complexity and Interpretation : Financial statements can be complicated requiring expertise in finance in order to accurately interpret them. Furthermore, different accounting standards and methods make comparison between firms difficult.
5. Lack of Timeliness: Financial Statements are generated at the close of certain reporting periods that might not fit those who need real-time information for decision-making purposes
6. Not Comprehensive : Financial statements do not provide a complete picture of a company's operations, particularly regarding non-financial factors such as quality of management or brand reputation.
Or
(b) What is financial statement analysis? Explain the various techniques of financial statement analysis. 4+10=14
Ans:- Financial statement analysis is a process that involves the analysis of financial statements in order to assess the business’s financial performance, health and future prospects. In this case, data on financial statements is analyzed through a series of logical steps to provide an informed basis for decisions on investment, lending and other business dealings. Financial statement analysis enables stakeholders to find out how effectively a company is using its assets, generating profits, managing risks as well as creating value for shareholders.
Some common techniques used in financial statement analysis are:
Horizontal or trend analysis: This kind of analysis compares line items on one statement over time with corresponding line items on earlier statements. It provides information about how each line item such as revenues, expenses and assets has changed over a specific period. The form of horizontal analysis usually appears as either percentage changes or absolute dollar changes from one period to another.
Vertical or common-size analyses: Here each item on a financial statement is expressed as a percentage of an anchor total revenue or total assets. Through this method analysts can evaluate the relative proportion of different elements within the financial statements and then identify any potential areas that may be problematic or strong ones.
Ratio Analysis: Ratio analysis involves calculating and interpreting various financial ratios to evaluate different aspects of a company's performance and financial condition. Commonly used ratios include liquidity ratios (e.g., current ratio, quick ratio), profitability ratios (e.g., return on assets, return on equity), leverage ratios (e.g., debt-to-equity ratio, interest coverage ratio), and efficiency ratios (e.g., inventory turnover, asset turnover). Ratio analysis allows analysts to benchmark a company's performance against industry peers, historical data, or industry averages.
Trend Analysis: Trend analysis involves examining financial data over multiple periods to identify patterns and detect changes in performance indicators. It helps analysts understand whether a company's financial performance is improving, deteriorating, or remaining stable over time. Trend analysis is particularly useful for forecasting future performance and identifying potential areas of concern or opportunity.
Common-Size Analysis: Common-size analysis involves expressing each line item on a financial statement as a percentage of a base amount, usually total revenue or total assets. This technique standardizes the presentation of financial data, making it easier to compare the relative importance of different components across companies or periods.
DuPont Analysis: DuPont analysis decomposes return on equity (ROE) into its component parts, namely net profit margin, asset turnover, and financial leverage. By analyzing these components individually, analysts can identify the drivers of a company's ROE and assess the effectiveness of its operating and financial strategies.
Cash Flow Analysis: Cash flow analysis involves examining a company's cash flow statement to assess its ability to generate cash from operating activities, invest in capital expenditures, and finance debt obligations. It helps analysts evaluate a company's liquidity, solvency, and ability to sustain its operations in the long term.
Comparative Analysis: Comparative analysis involves comparing a company's financial performance and ratios with those of its competitors or industry peers. This allows analysts to assess the company's relative strengths and weaknesses, identify industry trends, and benchmark its performance against industry standards.
Regression Analysis: Regression analysis is a statistical technique used to identify and quantify the relationship between one or more independent variables and a dependent variable, such as sales or profitability. Analysts can use regression analysis to assess the impact of various factors, such as economic indicators or marketing expenditures, on a company's financial performance.
Scenario Analysis: Scenario analysis involves evaluating the impact of different scenarios or potential events on a company's financial statements and performance. Analysts can model various scenarios, such as changes in interest rates, exchange rates, or market conditions, to assess the company's resilience and sensitivity to different risk factors.
Quality of Earnings Analysis: Quality of earnings analysis involves assessing the sustainability and reliability of a company's reported earnings. Analysts examine factors such as the consistency of earnings, the quality of revenue and expense recognition, the presence of non-recurring items or accounting adjustments, and the transparency of financial disclosures to evaluate the integrity of the company's financial reporting.
5. (a) A company has owner’s equity of Rs. 1,00,000 and the following accounting ratios:
Short-term debt to total debt = 0.40
Total debt to owner’s equity = 0.60
Fixed assets to owner’s equity = 0.60
Total assets turnover = 2 times.
Inventory turnover = 8 times.
On the basis of the above data prepare the Balance Sheet:
ANS; Given ratios:
1. Short-term debt to total debt = 0.40
2. Total debt to owner’s equity = 0.60
3. Fixed assets to owner’s equity = 0.60
4. Total assets turnover = 2 times
5. Inventory turnover = 8 times
Let’s calculate the missing values step by step:
1. Total Debt:
o Total debt = Total debt to owner’s equity × Owner’s equity
o Total debt = 0.60 × Rs. 1,00,000 = Rs. 60,000
2. Short-term Debts:
o Short-term debt = Short-term debt to total debt × Total debt
o Short-term debt = 0.40 × Rs. 60,000 = Rs. 24,000
3. Long-term Debts:
o Long-term debts = Total debt - Short-term debts
o Long-term debts = Rs. 60,000 - Rs. 24,000 = Rs. 36,000
4. Fixed Assets:
o Fixed assets = Fixed assets to owner’s equity × Owner’s equity
o Fixed assets = 0.60 × Rs. 1,00,000 = Rs. 60,000
5. Total Assets:
o Total assets = Total assets turnover × Owner’s equity
o Total assets = 2 × Rs. 1,00,000 = Rs. 2,00,000
6. Inventories:
o Inventory turnover = Cost of Goods Sold / Inventories
o Cost of Goods Sold = Total assets - Owner’s equity
o Cost of Goods Sold = Rs. 2,00,000 - Rs. 1,00,000 = Rs. 1,00,000
o Inventories = Cost of Goods Sold / Inventory turnover
o Inventories = Rs. 1,00,000 / 8 = Rs. 12,500
7. Cash:
o Cash = Total current assets - Inventories
o Total current assets = Total assets - Fixed assets
o Total current assets = Rs. 2,00,000 - Rs. 60,000 = Rs. 1,40,000
o Cash = Rs. 1,40,000 - Rs. 12,500 = Rs. 1,27,500
Now let’s prepare the balance sheet:
Now let’s prepare the balance sheet:
Or
(b) Explain the following (any four): 3½ x 4 = 14
(1) Ratio Analysis.
(2) Liquidity ratio.
(3) Return on investment.
(4) Operating profit ratio.
(5) Debtors turnover ratio.
Ans:- 1. Ratio Analysis : Ratio analysis involves the calculation and interpretation of various financial ratios to evaluate a company's performance, financial health, efficiency, and profitability. These ratios are computed using data from financial statements such as the balance sheet, income statement, and cash flow statement. Ratio analysis helps stakeholders, including investors, creditors, and management, to make informed decisions by providing insights into the company's operational efficiency, liquidity, solvency, profitability, and overall financial performance.
2. Liquidity Ratio : Liquidity ratios measure a company's ability to meet its short-term obligations with its short-term assets. These ratios assess the company's liquidity and its ability to convert assets into cash quickly to cover its current liabilities. Common liquidity ratios include the current ratio and the quick ratio. A higher liquidity ratio indicates a better ability to meet short-term obligations without facing financial difficulties.
3. Return on Investment (ROI) : Return on Investment is a financial metric used to evaluate the profitability of an investment relative to its cost. It is calculated by dividing the net profit (or gain) from the investment by the initial cost of the investment and expressing the result as a percentage. ROI provides insight into the efficiency and profitability of an investment, helping investors assess the attractiveness of different investment opportunities.
4. Operating Profit Ratio : The operating profit ratio, also known as operating margin, measures the efficiency of a company's core business operations in generating profit. It is calculated by dividing the operating profit (or operating income) by the total revenue and expressing the result as a percentage. The operating profit ratio indicates how much of each dollar of revenue is left after covering operating expenses. A higher operating profit ratio signifies better operational efficiency and profitability.
5. Debtors Turnover Ratio : Debtors turnover ratio, also called accounts receivable turnover ratio, measures how efficiently a company collects payments from its customers on credit sales. It is calculated by dividing the total credit sales by the average accounts receivable during a specific period. A higher debtor turnover ratio indicates that the company is collecting payments from its customers more quickly, which is favorable as it reduces the risk of bad debts and improves cash flow.
6. (a) Define financial reporting. What are the benefits derived from financial reporting. 4+10=14
Ans:- Financial reporting refers to the process of presenting financial information of a company to internal and external stakeholders, including investors, creditors, regulatory authorities, and management. The purpose of financial reporting is to provide transparent, accurate, and relevant information about the financial performance, position, and cash flows of the organization. This information is typically presented in financial statements such as the balance sheet, income statement, cash flow statement, and statement of changes in equity, along with accompanying notes and disclosures.
The following are benefits derived from financial reporting:
1. Transparency : Financial reporting promotes transparency by providing stakeholders with comprehensive and reliable information about the company's financial performance and position.
2. Accountability : It holds management and executives accountable for the company's financial results and decisions by disclosing relevant information to stakeholders.
3. Decision-making : Financial reporting assists investors, creditors, and other stakeholders in making informed decisions regarding investment, lending, and other financial transactions related to the company.
4. Investor Confidence : Transparent and accurate financial reporting builds investor confidence and trust in the company's operations and management.
5. Risk Assessment : It helps stakeholders assess the financial risks associated with the company, including liquidity risk, credit risk, and market risk.
6. Comparability : Financial reporting facilitates the comparison of the company's financial performance and position over time and with its peers in the same industry.
7. Compliance : It ensures compliance with regulatory requirements and accounting standards, enhancing the credibility and reliability of the financial information presented.
8. Creditworthiness : Financial reporting influences the company's creditworthiness and borrowing capacity by providing creditors with insights into its financial health and ability to repay debts.
9. Resource Allocation : It assists management in allocating resources efficiently by identifying areas of strengths and weaknesses in the company's operations and performance.
10. Strategic Planning : Financial reporting supports strategic planning and decision-making by providing insights into the company's financial capabilities and constraints.
11. Performance Evaluation : It enables stakeholders to evaluate the company's financial performance against predefined goals, targets, and industry benchmarks.
12. Stakeholder Communication : Financial reporting serves as a communication tool for stakeholders, fostering transparency, trust, and accountability between the company and its investors, creditors, employees, and regulatory authorities.
Or
(b) What is a corporate social responsibility reporting? Explain the present legal provisions of corporate social responsibility and its reporting practice in India. 4+10=14
Ans:- Corporate Social Responsibility (CSR) reporting refers to the disclosure of a company's social and environmental initiatives, activities, and impacts in addition to its financial performance. CSR reporting provides stakeholders, including investors, employees, customers, and communities, with information about the company's commitment to sustainability, ethical business practices, and contributions to society.
In India, CSR reporting is governed by legal provisions outlined in the Companies Act, 2013. The Act mandates certain companies to spend a specified amount on CSR activities and disclose their CSR initiatives in their annual reports. Key provisions related to CSR reporting in India include:
1. Mandatory Spending : Section 135 of the Companies Act, 2013 mandates that companies meeting specific financial thresholds must spend at least 2% of their average net profits over the preceding three years on CSR activities.
2. Applicability : The CSR provisions apply to companies meeting any of the following criteria:
- Companies with a net worth of Rs. 500 crore or more.
- Companies with a turnover of Rs. 1,000 crore or more.
- Companies with a net profit of Rs. 5 crore or more.
3. Constitution of CSR Committee : Companies covered under the CSR provisions must constitute a CSR Committee consisting of three or more directors, including at least one independent director.
4. CSR Policy : The CSR Committee is responsible for formulating and recommending a CSR policy to the Board of Directors. The policy should outline the company's CSR objectives, activities, and implementation mechanisms.
5. CSR Activities : The Act provides a broad framework for CSR activities, including promoting education, eradicating hunger and poverty, ensuring environmental sustainability, and supporting social welfare projects.
6. Reporting Requirements : Companies are required to include a CSR report in their annual reports, disclosing details of CSR initiatives undertaken during the financial year. The report should include information about the CSR policy, activities planned and implemented, amount spent on CSR, and impact assessment, among other details.
7. Monitoring and Compliance : The CSR Committee is responsible for monitoring the implementation of CSR activities and ensuring compliance with the CSR provisions. Non-compliance may result in penalties and other legal consequences.
8. Partnerships and Collaboration: Many companies engage in CSR activities through partnerships and collaborations with non-governmental organizations (NGOs), government agencies, community groups, and other stakeholders. These partnerships help leverage resources, expertise, and networks to maximize the impact of CSR initiatives.
9. Stakeholder Engagement: Effective CSR reporting involves engaging with stakeholders to understand their needs, priorities, and expectations regarding social and environmental issues. Companies often conduct stakeholder consultations, surveys, and feedback mechanisms to inform their CSR strategies and reporting practices.
10. Materiality Assessment: Companies prioritize CSR initiatives based on materiality assessment, which identifies the most significant social, environmental, and governance issues relevant to the company and its stakeholders. Materiality assessment helps focus resources on areas where the company can create the most value and impact.
11. Innovation and Technology: Companies increasingly leverage innovation and technology in their CSR initiatives to address complex social and environmental challenges. This includes initiatives such as technology-enabled education, renewable energy projects, and digital healthcare solutions.
12. Supply Chain Sustainability: Companies extend their CSR efforts to supply chain management by promoting ethical sourcing, fair labor practices, and environmental sustainability throughout the supply chain. CSR reporting may include disclosures related to supply chain initiatives and performance.
13. Impact Assessment and Reporting: Companies are encouraged to conduct impact assessments to evaluate the outcomes and effectiveness of their CSR activities. Impact assessment involves measuring and reporting the social, environmental, and economic benefits or changes resulting from CSR initiatives.
In practice, companies in India engage in various CSR activities, including education and skill development programs, healthcare initiatives, environmental conservation projects, and community development programs. CSR reporting allows companies to demonstrate their commitment to sustainable and responsible business practices while fostering transparency and accountability in their operations. Additionally, CSR reporting helps stakeholders evaluate the social and environmental impact of companies, influencing investor decisions and enhancing corporate reputation.
7. (a) Write a brief note on IRDA. Discuss the impacts of IFRS on the Insurance Industry in India. 14
Ans:- Insurance Regulatory and Development Authority of India (IRDA) : The Insurance Regulatory and Development Authority of India (IRDA) is the regulatory body responsible for overseeing and regulating the insurance sector in India. Established under the Insurance Regulatory and Development Authority Act, 1999, IRDA aims to protect the interests of policyholders, promote transparency, and ensure the stability and growth of the insurance industry. Some key functions of IRDA include licensing and regulation of insurance companies, framing regulations and guidelines, promoting innovation, and resolving disputes.
Impacts of International Financial Reporting Standards (IFRS) on Insurance Industry in India :
The adoption of International Financial Reporting Standards (IFRS) in the insurance industry in India brings significant changes and impacts on various aspects of financial reporting, operations, and governance. Here are ten impacts of IFRS on the insurance industry in India:
1. Standardization : IFRS facilitates global standardization of accounting practices in the insurance sector, improving comparability and consistency across international markets.
2. Enhanced Transparency : IFRS requires detailed disclosures and transparent reporting of insurance contracts, risk exposures, and financial performance, enhancing transparency for investors, regulators, and other stakeholders.
3. Complexity : Transitioning to IFRS introduces complexities due to the need to understand and implement new accounting principles, methodologies, and measurement techniques specific to insurance contracts.
4. Valuation of Liabilities : IFRS introduces new methodologies for valuing insurance liabilities, such as the use of discounted cash flows and probability-weighted estimates, impacting the measurement and recognition of insurance contract liabilities.
5. Financial Performance : IFRS may impact the reported financial performance of insurance companies, affecting key metrics such as revenue, profitability, and reserves due to changes in accounting treatments and assumptions.
6. Impact on Capital Management : Adoption of IFRS may influence capital management strategies, risk assessments, and capital adequacy calculations, as financial metrics and ratios may change under the new accounting standards.
7. Regulatory Compliance : Insurance companies need to ensure compliance with both IFRS and local regulatory requirements, which may entail additional costs, resources, and complexities in reporting and governance.
8. Data and Systems : Implementing IFRS necessitates upgrades to data systems, processes, and controls to capture and report information required under the new accounting standards accurately.
9. Training and Skills Development : Insurance professionals require training and upskilling to understand and apply IFRS principles effectively, including actuaries, accountants, auditors, and risk managers.
10. Impact on Financial Statements : Adoption of IFRS results in changes to the presentation and format of financial statements, including the balance sheet, income statement, and cash flow statement, reflecting new accounting requirements and disclosures for insurance contracts.
In summary, the adoption of IFRS in the insurance industry in India brings significant changes to accounting practices, financial reporting, and governance, impacting various stakeholders and requiring careful planning, implementation, and compliance efforts by insurance companies.
Or
(b) Discuss the important provisions need to be taken into consideration for the financial reporting of NBFCs. 14
Ans:- Non-Banking Financial Companies (NBFCs) play a crucial role in the financial system by providing a variety of financial services such as loans, advances, investments, and asset financing. NBFCs are regulated entities governed by the Reserve Bank of India (RBI) in India. Financial reporting for NBFCs is subject to specific regulatory requirements and accounting standards. Here are some important provisions that need to be taken into consideration for financial reporting of NBFCs:
1. RBI Regulations : NBFCs are required to comply with the regulations and guidelines issued by the Reserve Bank of India (RBI) regarding financial reporting, capital adequacy, asset classification, provisioning, and other prudential norms.
2. Accounting Standards : NBFCs are required to follow accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI) or the National Financial Reporting Authority (NFRA). These standards govern the recognition, measurement, presentation, and disclosure of financial transactions and events.
3. Prudential Norms : NBFCs need to adhere to prudential norms prescribed by the RBI regarding income recognition, asset classification, provisioning for bad and doubtful debts, capital adequacy, liquidity, and other regulatory requirements.
4. Asset Quality and Classification : NBFCs are required to classify their assets into various categories based on their quality and credit risk. Assets are typically classified as standard assets, non-performing assets (NPAs), restructured assets, and impaired assets, and specific provisioning is required for NPAs and other impaired assets.
5. Capital Adequacy : NBFCs need to maintain adequate capital levels to support their risk profile and operations. They are required to calculate their capital adequacy ratio (CAR) based on regulatory guidelines issued by the RBI, which typically require NBFCs to maintain a minimum level of capital relative to their risk-weighted assets.
6. Income Recognition : NBFCs need to follow the RBI guidelines for income recognition, which typically require income to be recognized on an accrual basis, taking into account the effective interest rate and the collectability of receivables.
7. Risk Management : NBFCs need to have robust risk management systems and processes in place to identify, assess, monitor, and mitigate various risks, including credit risk, market risk, liquidity risk, operational risk, and compliance risk.
8. Disclosure Requirements : NBFCs are required to provide comprehensive and transparent disclosures in their financial statements, including information about their business activities, financial performance, risk profile, capital structure, related party transactions, and other material matters.
9. Corporate Governance : NBFCs need to adhere to corporate governance principles and practices, including the composition and functioning of their board of directors, audit committee, risk management committee, and other governance structures.
10. Regulatory Reporting : NBFCs are required to submit various regulatory reports and returns to the RBI and other regulatory authorities on a periodic basis, providing detailed information about their financial condition, operations, and compliance with regulatory requirements.
In summary, financial reporting for NBFCs involves compliance with specific regulatory requirements, accounting standards, prudential norms, and disclosure obligations prescribed by the RBI and other regulatory authorities. It is essential for NBFCs to maintain transparency, accuracy, and integrity in their financial reporting practices to ensure investor confidence, regulatory compliance, and sound risk management.
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