NISM Series XV Chapter 8: Company Analysis – Financial Analysis Practice Questions

Question 1

In India, which regulatory frameworks govern the list and format of financial statements that listed companies need to maintain and publish?

Accepted Answer

Schedule III of the Companies Act 2013 and IndAS 1. The text states: 'In India, the list of financial statements and its format that listed companies need to maintain and publish are governed by Schedule III of the Companies Act 2013 and IndAS 1.'

Question 2

Which specific balance sheet line item represents the share of equity of shareholders other than the parent in a subsidiary company, and is *only* present in consolidated financial statements?

Accepted Answer

Minority Interest or Non-controlling Interest. The text defines: 'Minority interest or non-controlling interest: Represents the share of equity of shareholders other than the parent, in a subsidiary company. This line item is present only in consolidated financial statement.'

Question 3

While consolidated statements are generally preferred, in which specific scenario would it also be important for an analyst to analyze the stand-alone financial position of the parent company?

Accepted Answer

When the subsidiary company is prevented from distributing dividends to the parent due to capital controls or debt covenants.. The text explains: 'However, sometimes there may be situation that prevents a subsidiary company from distributing dividends to the parent company. This can arise when the subsidiary company is in geography that has strict capital controls or where the subsidiary company has agreed under a debt covenant to not pay any dividend to its shareholders. In such scenario, it is also important to analyze the stand-alone financial position of the parent company to understand whether it can fend for itself in times of crisis.'

Question 4

How is inventory (raw material, work-in-progress, and unsold finished goods) typically valued and presented on the balance sheet at the end of the reporting period?

Accepted Answer

At cost price or market value, whichever is lower.. The text specifies: 'These are shown at cost price or market value, whichever is lower.'

Question 5

In the context of business acquisitions, what is the accounting treatment if a company pays an amount *lower* than the fair value of net assets taken over?

Accepted Answer

The difference is taken to Capital Reserves on the liability side of the balance sheet under equity.. The text states, 'In case if a company pays an amount lower than the fair value of asset taken over, that difference is taken to capital reserves on the liability side of the balance sheet under the broad heading of equity.'

Question 6

When does Goodwill typically arise in a company's financial statements?

Accepted Answer

When a company acquires another business and pays consideration over and above the fair value of net assets taken over.. The text states, 'Goodwill arises when a company acquires another business. It represents the amount of consideration paid by a company over and above the fair value of net assets taken over.'

Question 7

According to the text, a company controls another company for consolidation purposes if it meets which of the following criteria?

Accepted Answer

Having the right to appoint majority of the board of directors, regardless of ownership percentage.. The text explicitly states: 'one company can control another company by owning more than 50% of the voting rights or by having the right to appoint majority of the board of directors.' It also clarifies that 'it is not necessary that a holding company should have greater than 50% of the ownership control over the subsidiary' if it has de-facto control

Question 8

According to the text, why do equity analysts generally prefer consolidated financial statements over stand-alone financials for analyzing a company with subsidiaries?

Accepted Answer

Consolidated statements provide a more holistic picture of the entire group's performance.. The text states: 'In general, while analysing a company from the perspective of an equity analysis, consolidated statements are generally preferred over stand-alone financials. That is because the later provides a more holistic picture of the group performance.'

Question 9

As per Ind AS 110, which of the following is *not necessarily* a prerequisite for a company to be considered a holding company that controls a subsidiary and therefore needs to present consolidated financial statements?

Accepted Answer

Holding a majority ownership control (greater than 50%) over the subsidiary.. The text states, 'Therefore, it is not necessary that a holding company should have greater than 50% of the ownership control over the subsidiary. If it has the power to control the strategy and operations of the subsidiary... then it is de-facto controlling the subsidiary'

Question 10

Which of the following self-generated assets can generally NOT be recognized on a company's balance sheet, according to the provided text?

Accepted Answer

A company's own brand name.. The text states: 'In general, an entity cannot recognize self-generated assets such as own brand name.' It also clarifies that 'internally developed software programs can be recognized as asset,' and acquired patents are intangible assets

Question 11

IndAS 1 requires the Statement of Profit and Loss to include Other Comprehensive Income (OCI). What does OCI primarily consist of?

Accepted Answer

Certain gains or losses on account of changes in fair value of assets and liabilities that are required/permitted to be not recognized as part of income and expense.. The text defines OCI as 'certain gains or losses on account of changes in fair value of assets and liabilities that are required/permitted to be not recognized as part of income and expense'

Question 12

According to generally accepted accounting principles mentioned, which of the following self-generated assets cannot typically be recognized on a company's balance sheet?

Accepted Answer

Own brand name. The text states: 'In general, an entity cannot recognize self-generated assets such as own brand name.' It also differentiates by saying: 'It is important to note that self-generated assets cannot be shown in the balance sheet. However, internally developed software programs can be recognized as asset.'

Question 13

A company is considered to control another company, requiring consolidated financial statements as per Ind AS 110, if it has the power to control the strategy and operations of the subsidiary in a way that can change the returns and its timings, and the flows which can also benefit itself. This scenario refers to:

Accepted Answer

A de-facto control situation, regardless of whether ownership control is greater than 50%.. The text clarifies that 'it is not necessary that a holding company should have greater than 50% of the ownership control over the subsidiary. If it has the power to control the strategy and operations of the subsidiary... then it is de-facto controlling the subsidiary, and hence such a holding company needs to present the consolidated financial statements as per Ind AS 110.'

Question 14

How is inventory, which includes raw material, work-in-progress, and unsold finished goods, typically shown at the end of the reporting period?

Accepted Answer

At cost price or market value, whichever is lower.. The text states: 'These are shown at cost price or market value, whichever is lower.'

Question 15

Under which condition would a company be required to present consolidated financial statements as per Ind AS 110, even if it does not own more than 50% of the voting rights of another company?

Accepted Answer

If the company has the right to appoint the majority of the board of directors of the other company.. The text clarifies control: 'It is important to note that one company can control another company by owning more than 50% of the voting rights or by having the right to appoint majority of the board of directors.' This is a specific criterion for control that mandates consolidation

Question 16

In a business acquisition, if a company pays an amount lower than the fair value of net assets taken over, where is that difference recognized in the financial statements?

Accepted Answer

It is taken to capital reserves on the liability side of the balance sheet under the broad heading of equity.. The text states: 'In case if a company pays an amount lower than the fair value of asset taken over, that difference is taken to capital reserves on the liability side of the balance sheet under the broad heading of equity.'

Question 17

Goodwill arises when a company acquires another business. How is it specifically defined in the context of the acquisition?

Accepted Answer

The amount of consideration paid by a company over and above the fair value of net assets taken over.. The text states, 'Goodwill arises when a company acquires another business. It represents the amount of consideration paid by a company over and above the fair value of net assets taken over.'

Question 18

As per IndAS 1, the Statement of Profit and Loss Account is required to also include Other Comprehensive Income (OCI). What does OCI primarily consist of?

Accepted Answer

Certain gains or losses on account of changes in fair value of assets and liabilities not recognized as part of income and expense.. The text states: 'OCI includes certain gains or losses on account of changes in fair value of assets and liabilities that are required/permitted to be not recognized as part of income and expense'

Question 19

What does 'Retained earnings' represent in a company's financial statements?

Accepted Answer

The total profit and other comprehensive income earned that has not been distributed as dividends or set aside.. The text defines Retained earnings as: 'Refers to the total amount of profit and other comprehensive income earned by a company that has not been distributed as dividend or set aside for any other specific purpose.'

Question 20

As per generally accepted accounting principles mentioned, which of the following is generally *not* recognized as an asset on a company's balance sheet?

Accepted Answer

Self-generated brand name. The text states: 'In general, an entity cannot recognize self-generated assets such as own brand name.' It also mentions 'internally developed software programs can be recognized as asset.'

Question 21

According to SEBI regulations, what is the mandatory frequency for listed companies to publish stand-alone financial results?

Accepted Answer

Quarterly. The text explicitly states: 'SEBI regulations require listed companies to publish consolidated financial statements on an annual basis. Further, it also mandates listed companies to publish stand-alone financial results on a quarterly basis.'

Question 22

Why might stand-alone financial statements be considered misleading for large groups operating globally, such as Toyota Motor Corporation?

Accepted Answer

They only reflect the sales and performance of the independent parent entity, excluding subsidiaries' global operations.. The text uses Toyota as an example: 'If we look at the stand-alone financial statement of Toyota Motor corporation, it will only show sales of that independent entity i.e., sales in Japan. Thus, sales of Toyota group in rest of the world including China, India or North America or any other part of the world done through the subsidiary will not reflect in their sales.'

Question 23

Which statement, as per IndAS 1, provides information about a company's financial performance, including income, expenses, and profits for a given period?

Accepted Answer

Statement of Profit and Loss Account. The text mentions: '(ii) Statement of profit and loss account: It provides information about the company’s financial performance i.e., income, expense and profits for a given period.'

Question 24

As per IndAS 1, what additional component is required to be included in the Statement of Profit and Loss Account, alongside income, expense, and profits?

Accepted Answer

Other Comprehensive Income (OCI). The text mentions: 'IndAS 1 requires the statement [of profit and loss account] to also include other comprehensive income (OCI)'

Question 25

Goodwill arises in which of the following scenarios?

Accepted Answer

When a company acquires another business and pays more than the fair value of net assets taken over.. The text states: 'Goodwill arises when a company acquires another business. It represents the amount of consideration paid by a company over and above the fair value of net assets taken over.'

Question 26

In an acquisition scenario, if a company pays an amount *lower* than the fair value of net assets taken over, how is this difference recognized on the balance sheet?

Accepted Answer

It is taken to capital reserves on the liability side under the broad heading of equity.. The text states: 'In case if a company pays an amount lower than the fair value of asset taken over, that difference is taken to capital reserves on the liability side of the balance sheet under the broad heading of equity.'

Question 27

In India, which two primary regulations govern the financial statements and their format for listed companies?

Accepted Answer

Schedule III of the Companies Act 2013 and IndAS 1. The text explicitly states: 'In India, the list of financial statements and its format that listed companies need to maintain and publish are governed by Schedule III of the Companies Act 2013 and IndAS 1.'

Question 28

According to IndAS 1, which statement provides information on a company's financial position at the end of the financial reporting period, detailing assets, liabilities, and equity?

Accepted Answer

Statement of Financial Position. The text states, '(i) Statement of Financial Position or Balance sheet: It provides information on the financial position i.e., assets, liabilities, and equity at the end of the financial reporting period.'

Question 29

Which financial statement provides information on the financial position, including assets, liabilities, and equity, at the end of the financial reporting period?

Accepted Answer

Statement of Financial Position or Balance Sheet. The text defines the Statement of Financial Position or Balance sheet as providing 'information on the financial position i.e., assets, liabilities, and equity at the end of the financial reporting period.'

Question 30

In India, which regulatory frameworks primarily govern the list and format of financial statements that listed companies need to maintain and publish?

Accepted Answer

Schedule III of the Companies Act 2013 and IndAS 1. The text explicitly states, 'In India, the list of financial statements and its format that listed companies need to maintain and publish are governed by Schedule III of the Companies Act 2013 and IndAS 1.'

Question 31

For which of the following industries does the Companies Act 2013's prescribed balance sheet format NOT apply, as they follow a different format specified by their respective regulators?

Accepted Answer

Banking, Insurance, and Utility companies.. The text states: 'The format prescribed by Companies Act is applicable for all industries except those that have separate requirement as per the regulators of the respective industry. Thus, banking, insurance and utility companies follow a different format prescribed by the respective industry regulators.'

Question 32

In the context of non-current assets, what does 'Goodwill' typically represent?

Accepted Answer

The amount of consideration paid by a company over and above the fair value of net assets taken over in an acquisition.. The text defines Goodwill as: 'It represents the amount of consideration paid by a company over and above the fair value of net assets taken over.'

Question 33

In which type of financial statement would you expect to find the line item 'Minority interest or non-controlling interest'?

Accepted Answer

Consolidated financial statements only. The text explicitly states: 'Minority interest or non-controlling interest: ... This line item is present only in consolidated financial statement.'

Question 34

Beyond owning more than 50% of the voting rights, what other criterion can establish 'control' for a holding company over a subsidiary, necessitating consolidated financial statements as per Ind AS 110?

Accepted Answer

Having the right to appoint the majority of the board of directors.. The text states: 'It is important to note that one company can control another company by owning more than 50% of the voting rights or by having the right to appoint majority of the board of directors.'

Question 35

As per SEBI regulations mentioned in the text, what is the mandatory frequency for listed companies to publish consolidated financial statements and stand-alone financial results?

Accepted Answer

Consolidated annually, Stand-alone quarterly.. The text specifies: 'SEBI regulations require listed companies to publish consolidated financial statements on an annual basis. Further, it also mandates listed companies to publish stand-alone financial results on a quarterly basis.'

Question 36

In general, why do equity analysts prefer consolidated financial statements over stand-alone financials when analyzing a company?

Accepted Answer

Consolidated statements provide a more holistic picture of the group's overall performance.. The text states: 'In general, while analysing a company from the perspective of an equity analysis, consolidated statements are generally preferred over stand-alone financials. That is because the later provides a more holistic picture of the group performance.'

Question 37

According to generally accepted accounting principles mentioned in the text, which of the following is generally *not* recognized as an asset on a company's balance sheet?

Accepted Answer

Self-generated brand name. The text states, 'In general, an entity cannot recognize self-generated assets such as own brand name.' It also mentions 'However, internally developed software programs can be recognized as asset.'

Question 38

As per IndAS 1, Other Comprehensive Income (OCI) includes which of the following?

Accepted Answer

Certain gains or losses on account of changes in fair value of assets and liabilities that are required/permitted to be not recognized as part of income and expense.. The text defines OCI as 'certain gains or losses on account of changes in fair value of assets and liabilities that are required/permitted to be not recognized as part of income and expense'

Question 39

From the perspective of an equity analysis, why are consolidated financial statements generally preferred over stand-alone financials?

Accepted Answer

Consolidated statements offer a more holistic picture of the entire group's performance.. The text states: 'In general, while analysing a company from the perspective of an equity analysis, consolidated statements are generally preferred over stand-alone financials. That is because the later provides a more holistic picture of the group performance.'

Question 40

What does Other Comprehensive Income (OCI) typically include, as per IndAS 1?

Accepted Answer

Certain gains or losses on account of changes in fair value of assets and liabilities not recognized as part of income and expense.. The text defines OCI as 'certain gains or losses on account of changes in fair value of assets and liabilities that are required/permitted to be not recognized as part of income and expense'

Question 41

What regulations primarily govern the list and format of financial statements that listed companies in India need to maintain and publish?

Accepted Answer

Schedule III of the Companies Act 2013 and IndAS 1. The text states: 'In India, the list of financial statements and its format that listed companies need to maintain and publish are governed by Schedule III of the Companies Act 2013 and IndAS 1.'

Question 42

According to IndAS 1, which financial statement provides information on a company's financial position, specifically its assets, liabilities, and equity at the end of a financial reporting period?

Accepted Answer

Statement of Financial Position or Balance Sheet. The text states, '(i) Statement of Financial Position or Balance sheet: It provides information on the financial position i.e., assets, liabilities, and equity at the end of the financial reporting period.'

Question 43

As per IndAS 1, what information does the Statement of Financial Position (Balance Sheet) primarily provide?

Accepted Answer

Assets, liabilities, and equity at the end of the financial reporting period.. The text states: 'Statement of Financial Position or Balance sheet: It provides information on the financial position i.e., assets, liabilities, and equity at the end of the financial reporting period.'

Question 44

Which of the following best defines a 'current asset' as per the text?

Accepted Answer

Assets that are likely to benefit the organization within one operating cycle, typically taken as one year or less.. The text defines: 'Current asset represents assets that are likely to benefit the organization within one operating cycle. In most cases, the tenure of the operating cycle is taken as one year, or less too.'

Question 45

If a company pays an amount *lower* than the fair value of net assets taken over during an acquisition, how is this difference typically recognized in the financial statements?

Accepted Answer

It is taken to capital reserves on the liability side of the balance sheet under the broad heading of equity.. The text explicitly states, 'In case if a company pays an amount lower than the fair value of asset taken over, that difference is taken to capital reserves on the liability side of the balance sheet under the broad heading of equity.'

Question 46

In India, which regulatory frameworks primarily govern the list and format of financial statements that listed companies need to maintain and publish?

Accepted Answer

Schedule III of the Companies Act 2013 and IndAS 1. The text states: 'In India, the list of financial statements and its format that listed companies need to maintain and publish are governed by Schedule III of the Companies Act 2013 and IndAS 1.'

Question 47

While the format for the balance sheet is prescribed under Schedule 3 of the Companies Act 2013, which specific industries are mentioned as following a different format prescribed by their respective regulators?

Accepted Answer

Banking, Insurance, and Utility companies.. The text specifies: 'Thus, banking, insurance and utility companies follow a different format prescribed by the respective industry regulators.'

Question 48

When presenting financial information, for how many prior periods are companies typically required to provide comparable information?

Accepted Answer

At least one prior period. The text mentions: 'While presenting the financial information, companies will have to provide comparable information for at least one prior period.'

Question 49

Property, Plant and Equipment (PPE) are generally shown at historical cost (net of accumulated depreciation) on the balance sheet. However, what alternative valuation model does IndAS 16 allow, and how must it be applied?

Accepted Answer

Revaluation-based model, applied for an entire asset class.. The text states, 'IndAS 16 allows a company to use a revaluation-based model, where the assets are periodically revalued and shown at revised value. The choice to apply revaluation method should be applied for an entire asset class.'

Question 50

A company enters into a lease agreement for an asset for a period of two years. Based on the text, how should this be recognized on the balance sheet?

Accepted Answer

It must be recognized as a lease liability, representing the fair value of the lease minus the amount repaid (excluding the interest component).. The text states under 'Lease liability': 'Whenever a company acquires the right to use any asset, under a lease agreement, for a period that is more than one year, the company must recognize a lease liability. This represents the fair value of the lease minus the amount repaid (excluding the interest component).' A two-year lease clearly falls under 'more than one year.'

Ch.8: Company Analysis – Financial Analysis

What You Will Learn in This Chapter

Multiple Choice Questions (60)

Case-Based Questions (3 sets)

Most candidates guess their way through XV.
BullWiser makes you prove it.

Ch.8: Company Analysis – Financial Analysis

What You Will Learn in This Chapter

Multiple Choice Questions (60)

Case-Based Questions (3 sets)

Most candidates guess their way through XV.BullWiser makes you prove it.

Most candidates guess their way through XV.
BullWiser makes you prove it.