EEFA-UNIT 5 SHORT QUESTIONS & ANSWERS

1. What are fixed assets? Give examples.

In the ordinary course of business, the fixed assets are acquired and to be retained in the
business on a long-run basis. All fixed assets are grouped into two:
(i)

Tangible assets and Intangible assets.

(i)Tangible Assets
Tangible assets are those, which have physical existence and generate goods and
services. It can be seen, touched and has market value. It includes plant, machinery, land,
buildings, furniture and fittings.
(ii)Intangible Assets
They have no physical existence but they reflect the legal rights of and economic
benefits for the company. Patents, copyrights musical and artistic work, franchises,
trademarks and goodwill are the examples of intangible assets.
2. What are Long-term liabilities?

Long-term liabilities represent obligation of the company or sources of funds, which could
be used over a period of time. They include the following sources:
(a)
(b)
(c)
(d)

Shareholders fund
Secured loan
Unsecured loan
Mortgages

3. What are Current liabilities?

Current liabilities are:

Bills payables
Sundry creditors
Bank overdraft
Short term advances
Dividends payables
Provision for taxation
4. What are Current assets?

Current Assets are:

Cash in hand
Cash at bank
Bills receivable
Sundry debtors
Temporary investments
Stocks / inventories
Prepaid expenses
Accrued incomes

5. Write short notes on Share Capital.

Share capital
It shows the paid-up equity and preference share capital of the company. In the balance
sheet the share capital consists of the following:
(a) Authorized capital: It represents the maximum total share capital, which the
company is legally authorized to raise during the lifetime of the company. If the
company needs to increase the share capital, it can do so only by following statutory
procedures, includes approval by shareholders.
(b) Issued capital: This represented that portion of the authorized capital, which the
company has actually issued to its shareholders.
(c) Subscribed capital: It reveals how much of the issued capital has been subscribed to
by shareholders.
(d) Paid-up capital: It is the share capital actually paid by shareholders. For examples,
ABC company Ltd. Invites applications for 1, 00,000 shares of RS.10 each. But if the
company has demanded only RS, 7.50 for each share, now the paid-up capital of the
company is only RS. 7,50,000.
6. What is Working Capital?

Working capital = Current Assets Current Liabilities. (Write details)

7. What is Gross Profit?

Gross profit= Net sales - Cost of goods sold.

Alternatively, gross profit= Net sales + Closing stock Net Purchase opening stock
Net sales= Gross sales- sales return Trade discount Duties and allowance on sales
Net purchase = Total purchase (both cash and credit) during the year purchase Return
Discounts & Allowances + Transport & Handling Charges+ Government Levies
8. What is a Cash Flow Statement?

Cash flow statements signify the changes in the cash and cash equivalents of the
business due to the business operations in one time period.
It explains the inflows (receipts) and outflows (disbursements) of cash over a period of time.
The inflows of cash may occur from sale of goods, sale of assets, receipts from debtors,
interest, dividend, rent, issue of new shares and debentures, raising of loans, short-term
borrowing, etc. The cash outflows may occur on account of purchase of goods, purchase of
assets, payment of loans loss on operations, payment of tax and dividend, etc.
9. What is a Fund Flow Statement?

Funds Flow statement states the changes in the working capital of the business in relation
to the operations in one time period.

Net working capital is the total change in the business's working capital, calculated as
total change in current assets minus total change in current liabilities.
Funds flow statement shows the sources of Funds and the Applicatons of Funds.
10. What do you understand by Financial Ratio Analysis?

Financial ratios are tools used to assess the relative strength of companies by performing
simple calculations on items on income statements, balance sheets and cash flow statements.
Ratios measure companies operational efficiency, liquidity, stability and profitability, giving
investors more relevant information than raw financial data. Investors and analysts can gain
profitable advantages in the stock market by using the widely popular, and arguably
indispensable, technique of ratio analysis.
11. What are ROA, ROE and ROI?

There are two measures of profitability common in the financial community, return on
assets (ROA) and return on equity (ROE). ROI stands for Return on Investment.
ROA = net income / total average assets
ROE = net income / total stockholders equity
ROI = net income / total average investment
Assets and equity, as used in these two common indexes, are both measured in terms of
book value. Thus, if assets were acquired some time ago at a low price, the current
performance of the organization may be overstated by the use of historically valued
denominators. As a result, the accounting returns for any investment generally do not
correlate well with the true economic internal rate of return for that investment.
12. What do you understand by Horizontal Analysis?

Horizontal analysis (also known as trend analysis) is a financial statement analysis

technique that shows changes in the amounts of corresponding financial statement
items over a period of time. It is a useful tool to evaluate the trend situations.
The statements for two or more periods are used in horizontal analysis. The earliest
period is usually used as the base period and the items on the statements for all later
periods are compared with items on the statements of the base period.
13. What do you understand by Vertical Analysis?

Vertical analysis, is the proportional expression of each item on a financial statement in a

given period to a base figure.
The income statement is a statement of earnings that shows managers and investors whether
the company made money over the period of time being reported. This statement details the
revenues of the firm as well as the expenses incurred to achieve them, and transforms this
into net income. The conclusion of the statement is to show the firm's gains or losses for the
period.

14. What are Long term investments?

'Long-Term Investments is an account on the asset side of a company's balance sheet that
represents the investments that a company intends to hold for more than a year. They may
include stocks, bonds, real estate and cash.
The long-term investments account differs largely from the short-term investments account in
that the short-term investments will most likely be sold, whereas the long-term investments
may never be sold.
15. What are Short term investments?

'Short-Term Investments' is an account in the current assets section of a company's balance

sheet. This account contains any investments that a company has made that will expire within
one year. For the most part, these accounts contain stocks and bonds that can be liquidated
fairly quickly.
Most companies in a strong cash position have a short-term investments account on
the balance sheet. This means that a company can afford to invest excess cash in
stocks and bonds to earn higher interest than what would be earned from a normal
savings account.
16. What do you understand by Risk & return on investment?

Risk
Risk is the likelihood that actual returns will be less than historical and expected
returns. Risk factors include market volatility, inflation and deteriorating business
fundamentals. Financial market downturns affect asset prices, even if the
fundamentals remain sound. Inflation leads to a loss of buying power for your
investments and higher expenses and lower profits for companies.
Return on Investment
Historical return on investment is the annual return of an asset over several years.
Research analysts and professional investors use historical returns, along with
industry and economic data, to estimate future rates of return.
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Part B Questions:
Explain the contents of a Balance Sheet.
Differentiate cash flow and fund flow statements.
Why comparison of financial statements has to be done? How it is done?
Explain the following: (a) Liquidity ratios (b) Leverage Ratios.
ii) What do you understand by NPV, ARR & IRR

Refer HANDOUT