Tag: uses, importance, and limitation of financial statements

Questions Related to uses, importance, and limitation of financial statements

User of Financial Statements are ____________.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. creditor

  2. employee

  3. owner

  4. all of the above

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Correct Option: D
Explanation:
Users of financial statements are the people who refer the financial statements for various reasons. Creditors, employees and owners are some of the users of financial statements. Creditors use the financial statements to ascertain whether the company to whom they are lending money are capable to repay the same. The employees use the financial statements to understand the business better which will ensure active participation. The owners use the financial statements to understand whether their business is profitable or not. 

 Financial statements contain only_____information.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. monetary

  2. non-monetary

  3. qualitative

  4. all of the above

Show answer
Correct Option: A
Explanation:

The financial statements show only the monetary/quantitative information and ignores the impact of a qualitative information on the financial statements. Qualitative information like efficiency of the management, employer employee relationship, customer satisfaction, loyalty of customers etc. are ignored by the financial statements. However, these are equally important to understand the financial position of an organisation.

Financial statements does not provide _____information.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. monetary

  2. qualitative

  3. both

  4. none

Show answer
Correct Option: B
Explanation:

The financial statements show only the monetary/quantitative information and ignores the impact of a qualitative information on the financial statements. Qualitative information like efficiency of the management, employer employee relationship, customer satisfaction, loyalty of customers etc. are ignored by the financial statements. However, these are equally important to understand the financial position of an organisation.

Credit granting institutions take decisions based on the________ performance of the undertakings.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. managarial

  2. financial

  3. social

  4. economical

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Correct Option: B
Explanation:

Credit gaining institutions take decisions based on the financial performance of the undertakings. They refer the financial statements to analyse the performance of the business. Credit gaining institutions need to check whether the company is capable of repaying the credit they are taking or not. 

Profit and loss account discloses the profit/loss for a ___________period.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. over time

  2. specified

  3. not specified

  4. none of the above

Show answer
Correct Option: B
Explanation:

Profit and loss account discloses the profit/loss for a specified period. The period can be for a year or for a quarter. The Statement of Profit and loss shows the revenues and expenses of the business earned or incurred during the accounting year. The statement helps in understanding the financial position of the business.

Financial statements show ____information but not __information.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. correct,detailed

  2. aggregate,detailed

  3. detailed,correct

  4. detailed,aggregate

Show answer
Correct Option: B
Explanation:

Financial statements of a company show the aggregate information. By aggregate we mean that all the transactions that have taken place in the business during the whole year. The financial statements do not show detailed information regarding about every transaction only recording of transaction takes place, not all details of the same are disclosed in the statements.

Balance sheet does not disclose information relating to ___________.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. asset

  2. loss of markets

  3. liabilties

  4. investment

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Correct Option: B
Explanation:

Financial statements of the company record the assets at historical cost and not at market price. They fail to record the profit/loss that arise from the fluctuations in the market price of the assets. Hence, we can say that the financial statements do not show the complete picture of the business.  

Financial statements provide information to _________ in taking important decision related to the value of investment.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. owners

  2. managers

  3. shareholders

  4. directors

Show answer
Correct Option: C
Explanation:

Shareholders of companies are interested in knowing the status, safety and return on their investment. 

They may also need information to take decision about continuation or discontinuation of their investment in the business. Financial statements provide information to the shareholders in taking such important decisions.

Pooling of interest method is applicable for amalgamation in the nature of _____.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. Merger

  2. Consolidation

  3. Reconstruction

  4. Realization

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Correct Option: A
Explanation:

Pooling of interest method is applicable for amalgamation in nature of merger, because Amalgamation in nature of merger is the former method where the two balance sheets are consolidated and a new balance sheet is made. Thereby said as in nature of merger. This method considers historical costs and doesn't take into account intangible assets like Goodwill.

 Financial statements, provide the necessary information about the performance of the ____________.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. owner

  2. management

  3. emplyoee

  4. none of the above

Show answer
Correct Option: B
Explanation:

Financial statements provide necessary information about the performance of management. The financial statements show the financial position of an organisation, thereby telling if the policies, procedures and methods used by the management were useful or not.