CUET UG Accountancy Booster Test 2 Tools of Analysis -

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CUET UG Accountancy Booster Test 1 Tools of Analysis

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Accountancy Booster Test 1 Tools of Analysis

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QUESTION 1 OF 20

📄 Passage

Ratio Analysis describes the significant relationship which exists between various items of a balance sheet and a statement of profit and loss of a firm. As a technique of financial analysis, accounting ratios measure the comparative significance of the individual items of the income and position statements. It is possible to assess the profitability, solvency and efficiency of an enterprise through the technique of ratio analysis.

Ratio Analysis describes the significant relationship which exists between various items of a balance sheet and a statement of profit and loss of a firm.

Answer Review

📄 Passage

Ratio Analysis describes the significant relationship which exists between various items of a balance sheet and a statement of profit and loss of a firm.

A Cash Flow Statement and Balance Sheet

B Balance Sheet and Statement of Profit and Loss

C Income Statement and Cash Flow Statement

D Statement of Changes in Equity and Reserves

💡 Short Explanation

Ratio analysis compares financial statement items. These relationships are derived from Balance Sheet and Profit & Loss data.

✅ Correct Answer Explanation

Ratio Analysis establishes meaningful relationships between various items appearing in the Balance Sheet and the Statement of Profit and Loss. These relationships help assess financial performance, liquidity, solvency, and efficiency. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Ratio analysis is not primarily based on the Cash Flow Statement.
Option C → Cash Flow Statement is not the main source for ratio analysis.
Option D → Statement of Changes in Equity is not the primary basis.

🎯 Strategy

Used: Direct Recall from Passage

🧠 Memory Trick

Ratio = Balance Sheet + P&L

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Ratio Analysis – Relationship Measures – Page X

📄 Passage

According to the passage, ratio analysis helps assess:

A Output, Input, Overheads

B Debt, Equity, Reserves

C Profitability, Solvency, Efficiency

D Cash, Bank, Debtors

💡 Short Explanation

Ratio analysis evaluates overall business performance. Three major dimensions are profitability, solvency, and efficiency.

✅ Correct Answer Explanation

The passage clearly states that ratio analysis enables assessment of profitability, solvency, and efficiency of an enterprise. These are key indicators of financial health and operational effectiveness. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Not the primary dimensions mentioned.
Option B → These are balance sheet items, not assessment areas.
Option D → These are accounting elements, not performance measures.

🎯 Strategy

Used: Passage-Based Identification

🧠 Memory Trick

PSE = Profitability, Solvency, Efficiency

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Performance Ratios – Page X

3 Assertion (A)
Comparative statements are considered a core form of horizontal analysis.
Reason (R)
They systematically study financial data over a period of time to indicate directional trends.

A Both A and R are true and R is the correct explanation

B Both A and R are true but R is not the correct explanation

C A is true, R is false

D A is false, R is true

💡 Short Explanation

Comparative statements compare multiple periods. Horizontal analysis studies changes over time.

✅ Correct Answer Explanation

Comparative statements are a form of horizontal analysis because they compare financial information across different accounting periods. This comparison helps identify trends, increases, decreases, and directional movement in financial performance. Therefore, both the Assertion and Reason are true, and the Reason correctly explains the Assertion.

❓ Why Other Options Are Incorrect

Option B → Reason directly explains Assertion.
Option C → Reason is true.
Option D → Assertion is true.

🎯 Strategy

Used: Assertion–Reason Analysis

🧠 Memory Trick

Horizontal = Across Time

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Comparative Statements – Horizontal Analysis – Page X

4 In comparative statements, if Year 1 Reserve is ₹4,00,000 and Year 2 Reserve is ₹3,00,000, what is the percentage change?

A +25%

B -33.33%

C (25%)

D +33.33%

💡 Short Explanation

Reserve decreased by ₹1,00,000. Percentage decrease is 25%.

✅ Correct Answer Explanation

Absolute Change: ₹3,00,000 − ₹4,00,000 = −₹1,00,000 Percentage Change: (-1,00,000 ÷ 4,00,000) × 100 = -0.25 × 100 = -25% Thus, the reserve decreased by 25%.

❓ Why Other Options Are Incorrect

Option A → Indicates increase.
Option B → Incorrect percentage.
Option D → Wrong direction and value.

🎯 Strategy

Used: Substitution

🧠 Memory Trick

Decrease ÷ Original × 100

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Percentage Change – Page X

5 During preparation of comparative statements, absolute change is formulated as:

A First Year − Second Year

B First Year ÷ Second Year

C Second Year + First Year

D Second Year − First Year

💡 Short Explanation

Comparative statements measure increase or decrease. Current year is compared with previous year.

✅ Correct Answer Explanation

Absolute Change is calculated by subtracting the first year's figure from the second year's figure. Absolute Change = Second Year − First Year Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Other formulas do not calculate change correctly.

🎯 Strategy

Used: Formula Recognition

🧠 Memory Trick

New − Old = Change

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Absolute Change – Page X

6 Which formula correctly calculates Percentage Increase or Decrease?

A (Absolute Change ÷ Second Year) × 100

B (Absolute Change ÷ First Year Absolute Figure) × 100

C (First Year ÷ Second Year) × 100

D (Second Year ÷ Absolute Change) × 100

💡 Short Explanation

Base year serves as denominator. Change is expressed relative to original value.

✅ Correct Answer Explanation

The formula is: Percentage Change = (Absolute Change ÷ First Year Figure) × 100 Thus, Option B is correct.

❓ Why Other Options Are Incorrect

They do not follow the standard comparative statement formula.

🎯 Strategy

Used: Formula Recognition

🧠 Memory Trick

Change ÷ Original × 100

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Percentage Change – Page X

7 Consider the protocols for preparing comparative statements:
I. List absolute figures for two points of time.
II. Same accounting principles must have been used for comparability.

A Both I and II are true

B Only I is true

C Only II is true

D Both I and II are false

💡 Short Explanation

Comparative analysis requires data from two periods. Consistent accounting principles ensure reliability.

✅ Correct Answer Explanation

Both statements are essential conditions for meaningful comparative statements. Data from multiple periods is required, and accounting principles must remain consistent to maintain comparability. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Both statements are valid requirements.

🎯 Strategy

Used: Statement Evaluation

🧠 Memory Trick

Two Years + Same Rules

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Preparation of Comparative Statements – Page X

8 Match the analytical variables with their meanings.

List 1	List 2
1. Valuing Inventory	a. Cost or market price, whichever is lower
2. Small items (like pencils)	b. Materiality convention (treated as expenditure)
3. Balance Sheet Assets	c. Cost less depreciation
4. Asset holding period expectation	d. Going concern postulate

A 1-a, 2-b, 3-c, 4-d

B 1-b, 2-c, 3-a, 4-d

C 1-d, 2-a, 3-c, 4-b

D 1-c, 2-d, 3-b, 4-a

💡 Short Explanation

Positive = Increase. Negative = Decrease. Base = Original figure. Percentage = Change relative to base.

✅ Correct Answer Explanation

The correct matching is: Positive Change → Increase Negative Change → Decrease Base Figure → Initial Figure Percentage Change → Change ÷ Base Thus, Option C is correct.

❓ Why Other Options Are Incorrect

Other pairings are incorrect.

🎯 Strategy

Used: Matching Logic

🧠 Memory Trick

Increase–Decrease–Base–Ratio

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Comparative Analysis Variables – Page X

9 Vertical analysis differs from horizontal analysis because it:

A Compares multiple years using base years

B Ignores total assets

C Establishes relationships between competing firms only

D Expresses each item as a percentage of a common base item within the same period

💡 Short Explanation

Vertical analysis studies composition. Common base is used within one period.

✅ Correct Answer Explanation

Vertical analysis expresses each item as a percentage of a common base figure in the same accounting period. This differs from horizontal analysis, which compares figures across years. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Describes horizontal analysis.
Option B → Incorrect statement.
Option C → Not the definition of vertical analysis.

🎯 Strategy

Used: Concept Recognition

🧠 Memory Trick

Vertical = Same Year Percentages

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Vertical Analysis – Page X

10 If Revenue from Operations is ₹25,00,000 and Cost of Goods Sold is ₹12,00,000, what is the vertical percentage of Cost of Goods Sold?

A 50%

B 48%

C 52%

D 40%

💡 Short Explanation

Revenue is the common base. Cost is expressed as a percentage of revenue.

✅ Correct Answer Explanation

Calculation: (12,00,000 ÷ 25,00,000) × 100 = 0.48 × 100 = 48% Therefore, Cost of Goods Sold represents 48% of Revenue from Operations.

❓ Why Other Options Are Incorrect

Based on incorrect calculations.

🎯 Strategy

Used: Substitution

🧠 Memory Trick

Cost ÷ Revenue × 100

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Common Size Statement – Percentage Base – Page X

11 While preparing a Common Size Statement of Profit and Loss, which figure is invariably taken as the 100% base?

A Revenue from Operations

B Gross Profit

C Operating Expenses

D Net Profit

💡 Short Explanation

Revenue from Operations is the standard base. All income and expense items are expressed as percentages of it.

✅ Correct Answer Explanation

In a Common Size Statement of Profit and Loss, Revenue from Operations is taken as 100%. Every other item such as Cost of Goods Sold, Operating Expenses, and Net Profit is expressed as a percentage of Revenue from Operations. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Gross Profit is derived from Revenue.
Option C → Expenses are expressed relative to Revenue.
Option D → Net Profit is an outcome, not the base.

🎯 Strategy

Used: Direct Recall

🧠 Memory Trick

P&L Common Size = Revenue = 100%

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Income Statement Base – Page X

12 Arrange the process sequence of Common Size Balance Sheet analysis:
1. Calculate percentage of each asset/liability to total
2. Choose total assets/liabilities as base 100
3. List absolute figures at two points of time

A 1, 2, 3

B 2, 3, 1

C 1, 3, 2

D 3, 2, 1

💡 Short Explanation

First list figures. Then choose the common base. Finally calculate percentages.

✅ Correct Answer Explanation

The correct sequence is: List the absolute figures. Select Total Assets/Total Liabilities as 100%. Calculate each item's percentage relative to the base. Thus, the order is: 3 → 2 → 1

❓ Why Other Options Are Incorrect

They do not follow the logical preparation procedure.

🎯 Strategy

Used: Option Grouping

🧠 Memory Trick

Figures → Base → Percentage

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Balance Sheet Base – Page X

13 Trend analysis acts as a time series analysis because it:

A Is prepared for a single isolated year

B Studies operational results and financial positions over a series of years

C Calculates proportions of liabilities only

D Restricts analysis to one firm without historical data

💡 Short Explanation

Trend analysis studies long-term movement. Multiple years are compared.

✅ Correct Answer Explanation

Trend analysis examines financial data over several years. This time-series approach helps identify growth, decline, and long-term changes in performance and financial position. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Trend analysis requires multiple years.
Option C → Not limited to liabilities.
Option D → Historical data is essential.

🎯 Strategy

Used: Concept Recognition

🧠 Memory Trick

Trend = Many Years

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Time Series Data – Page X

14 How is the trend percentage formula structured?

A (Base Year / Current Year) × 100

B (Current Year − Base Year) × 100

C (Absolute Change / Base Year) × 100

D (Current Year Item / Base Year Item) × 100

💡 Short Explanation

Trend analysis uses the base year as reference. Current values are compared with base-year values.

✅ Correct Answer Explanation

The formula for trend percentage is: Trend Percentage = (Current Year Item ÷ Base Year Item) × 100 This expresses each year's value as a percentage of the base year.

❓ Why Other Options Are Incorrect

They do not represent the standard trend percentage formula.

🎯 Strategy

Used: Formula Recognition

🧠 Memory Trick

Current ÷ Base × 100

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Trend Percentages – Page X

15 Trend analysis is important in identifying growth direction because:

A It provides short-term daily cash flow views

B It calculates real-time market capitalization

C It points to basic changes in the nature of business over a long run

D It evaluates individual employee performance

💡 Short Explanation

Trend analysis reveals long-term movement. Business direction becomes visible.

✅ Correct Answer Explanation

By comparing performance over many years, trend analysis identifies fundamental changes in operations, profitability, and financial position. This helps understand the long-term direction of the enterprise. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Concerned with cash flow analysis.
Option B → Not the purpose of trend analysis.
Option D → Employee evaluation is unrelated.

🎯 Strategy

Used: Concept Recognition

🧠 Memory Trick

Trend = Direction

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Growth Direction – Page X

16 Evaluate the statements:
I. A problem is detected if a historically positive ratio falls.
II. A constant ratio always signifies uniquely poor management.

A Only I is correct

B Only II is correct

C Both are correct

D Neither is correct

💡 Short Explanation

Falling ratios may indicate problems. Constant ratios do not always mean poor management.

✅ Correct Answer Explanation

Statement I is correct because declining ratios may indicate weakening performance. Statement II is false because a constant ratio may indicate stability and does not necessarily imply poor management. Thus, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Statement II is false.
Option C → Statement II is incorrect.
Option D → Statement I is correct.

🎯 Strategy

Used: Statement Evaluation

🧠 Memory Trick

Fall = Warning, Constant ≠ Poor

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Pattern Detection – Page X

17 Assertion (A):
Actual issue of shares for cash directly increases positive cash flow.
Reason (R):
Cash inflow is defined as the actual movement of cash into an organisation.

A A is true, R is false

B Both A and R are false

C Both A and R are true and R is the correct explanation

D A is false, R is true

💡 Short Explanation

Issue of shares brings cash into the business. Cash entering the business is cash inflow.

✅ Correct Answer Explanation

When shares are issued for cash, funds enter the organisation. This creates a positive cash flow. Since cash inflow means actual movement of cash into the organisation, the reason correctly explains the assertion.

❓ Why Other Options Are Incorrect

Both statements are true.
The reason directly explains the assertion.

🎯 Strategy

Used: Assertion–Reason Analysis

🧠 Memory Trick

Cash Comes In = Cash Inflow

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Cash Inflow – Page X

18 If gross cash inflows are ₹5,00,000 and net cash flow is ₹1,00,000 (positive), what is the cash outflow?

A ₹6,00,000

B ₹1,00,000

C ₹5,00,000

D ₹4,00,000

💡 Short Explanation

Net Cash Flow = Inflow − Outflow Rearranging gives Outflow.

✅ Correct Answer Explanation

Formula: Net Cash Flow = Cash Inflow − Cash Outflow Substituting: ₹1,00,000 = ₹5,00,000 − Cash Outflow Cash Outflow = ₹4,00,000

❓ Why Other Options Are Incorrect

They do not satisfy the net cash flow equation.

🎯 Strategy

Used: Formula Substitution

🧠 Memory Trick

Inflow − Outflow = Net Flow

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Cash Outflow – Page X

19 Inter-firm comparison is facilitated by common size statements because:

A Numbers are brought to a common base irrespective of company size

B Total assets of all firms are identical

C Annual revenues remain exactly the same

D Every item always equals 100%

💡 Short Explanation

Companies differ in size. Common size statements standardize figures.

✅ Correct Answer Explanation

Common size statements convert all items into percentages of a common base. This removes the effect of company size and makes comparison between firms easier. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Firms have different asset sizes.
Option C → Revenues vary.
Option D → Only the base item equals 100%.

🎯 Strategy

Used: Concept Recognition

🧠 Memory Trick

Common Base = Inter-Firm Comparison

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Inter-Firm Comparison – Page X

20 Intra-firm comparison using common-size analysis helps management compare:

A Current liabilities with market interest rates

B The firm's own operating and financing structure over different years

C Two different competitors simultaneously

D Industry averages against macroeconomic trends

💡 Short Explanation

Intra-firm means within the same firm. Comparisons are made across years.

✅ Correct Answer Explanation

Common-size analysis allows management to compare changes in the firm's operating and financing structure over different accounting periods. This helps identify trends and structural shifts within the same business. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Not the purpose of intra-firm comparison.
Option C → Represents inter-firm comparison.
Option D → Focuses on industry-level analysis.

🎯 Strategy

Used: Concept Recognition

🧠 Memory Trick

Intra = Within the Firm

📚 Class XII – Accountancy Part II – Chapter: Analysis of Financial Statements – Topic: Intra-Firm Comparison – Page X

CUET UG Accountancy Booster Test 1 Tools of Analysis

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