(a) Which of the following is a financial statement of a company ? (A) Common Size Statement of Profit and Los

Question

Q. (a) Which of the following is a financial statement of a company ? (A) Common Size Statement of Profit and Loss (B) Statement of Profit and Loss (C) Comparative Balance Sheet (D) Comparative Statement of Profit and Loss

(OR)

(b) Which of the following is not a Solvency Ratio ? (A) Debt-Equity Ratio (B) Return on Investment (C) Interest Coverage Ratio (D) Proprietary Ratio

CBSECBSE Class XII Board 2026MCQ· 1mImportance★★★★★

🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

Part (a)Concept understanding — Meaning Of Financial Statements

Let’s begin with something you already know. Suppose you run a small tuck shop in your school. At the end of the month, you want to know: Did I make a profit? How much cash do I have? How much do I owe my supplier? To answer these questions, you need a summary of your shop’s financial affairs — that summary is what accountants call financial statements.

Everyday Intuition

Think of financial statements as a report card for a business. Just as your report card shows your marks in each subject, financial statements show the business’s performance (profit or loss) and its financial position (what it owns and what it owes). Without them, you’d be guessing — and guessing is dangerous when real money is involved.

Precise Meaning (as per NCERT Class 12 Accountancy)

Financial statements are the final output of the accounting process. They are prepared at the end of an accounting period (usually a year) to present the financial results and position of a business in a structured, standardised way.

The two main financial statements for a sole proprietorship or partnership are:

Trading and Profit & Loss Account – shows the gross profit/loss from trading and the net profit/loss for the period.
Balance Sheet – shows the assets, liabilities, and capital of the business on a specific date.

Note

For a company, financial statements also include a Statement of Profit and Loss (instead of a simple P&L) and a Balance Sheet in the format prescribed by the Companies Act. But for Class 12, you focus on the sole proprietorship/partnership format.

Why It Matters

Financial statements are not just a formality. They serve several critical purposes:

For the owner – to know whether the business is making money and how much capital is safe.
For lenders and creditors – to decide whether to give a loan or extend credit.
For tax authorities – to verify income and tax payable.
For comparison – to see if the business is improving year after year.

In short, financial statements are the language of business. Without them, no one can understand the financial health of an enterprise.

Accounting Treatment: How They Are Prepared

Financial statements are not journal entries. They are summaries drawn from the ledger accounts. So there is no “debit/credit” for the statements themselves. Instead, you transfer balances from ledger accounts into the statements.

Here’s the step-by-step process:

Close all revenue and expense accounts to the Trading and Profit & Loss Account.
- Debit all expenses and losses, credit all incomes and gains.
- The balancing figure is Net Profit (credit side bigger) or Net Loss (debit side bigger).
Transfer the Net Profit/Loss to the Capital Account (for sole proprietorship) or to the Partners’ Capital Accounts (for partnership).
Prepare the Balance Sheet by listing all assets (debit balances) on one side and all liabilities + capital (credit balances) on the other side. The two sides must always be equal.

Watch out

A common mistake: students think financial statements are “accounts” that are debited/credited. They are not. They are statements — you don’t journalise them. You only journalise the closing entries that feed into them.

Format: Trading and Profit & Loss Account (as per NCERT)

Here is the standard format for a sole proprietorship. Note that the Trading Account is the top part, and the Profit & Loss Account is the bottom part — but they are often combined in one statement.

Trading and Profit & Loss Account of [Business Name] for the year ended [Date]
Particulars	Amount (₹)	Particulars
To Opening Stock	xxx	By Sales
To Purchases	xxx	Less: Sales Returns
Less: Purchase Returns	(xxx)	By Closing Stock
To Direct Expenses (Wages, Carriage, etc.)	xxx
To Gross Profit c/d	xxx
Total	xxx	Total

To Salaries	xxx	By Gross Profit b/d
To Rent & Taxes	xxx	By Commission Received
To Depreciation	xxx	By Discount Received
To Interest on Loan	xxx	By Miscellaneous Income
To Net Profit (transferred to Capital A/c)	xxx
Total	xxx	Total

Part (b)Concept understanding — Financial Ratio Analysis

Financial Ratio Analysis — A First Look

Think of a friend who runs a small shop. You want to know: Is the shop doing well? You could ask, "How much profit did you make?" But that single number doesn't tell you much. A profit of ₹50,000 sounds good — but what if the shop owner invested ₹10,00,000 of their own money? Suddenly that profit looks small. What if the shop owes ₹8,00,000 to suppliers? That changes the picture too.

This is where ratio analysis comes in. It takes two numbers from the financial statements and compares them. A ratio is simply one number divided by another. That comparison gives you a relative measure — not just "how much profit" but "profit relative to investment" or "profit relative to sales."

What Exactly Is Financial Ratio Analysis?

Financial ratio analysis is the process of calculating and interpreting ratios using data from the Balance Sheet and Statement of Profit and Loss (the P&L). These ratios help you evaluate a business's performance, financial health, and efficiency.

The NCERT Class 12 Accountancy textbook (Part II, Chapter 5) defines it as: "the process of establishing meaningful relationship between items of the financial statements."

There are four main categories of ratios you will study:

Category	What it measures	Example
Liquidity ratios	Ability to pay short-term debts	Current ratio
Solvency ratios	Ability to pay long-term debts	Debt-equity ratio
Activity ratios	How efficiently assets are used	Inventory turnover ratio
Profitability ratios	How much profit relative to sales/investment	Gross profit ratio

Why Does It Matter?

A single absolute number — say, Net Profit of ₹2,00,000 — is almost meaningless without context. Ratio analysis gives you that context. It lets you:

Compare performance across years (trend analysis)
Compare one company with another in the same industry
Judge whether the business can meet its obligations
Identify strengths and weaknesses before they become crises

For example, if Current Assets are ₹5,00,000 and Current Liabilities are ₹2,50,000, the Current Ratio is 2:1. That is considered healthy. But if Current Liabilities were ₹5,00,000, the ratio would be 1:1 — a warning sign.

Accounting Treatment — What Gets Debited and Credited?

Here is a critical point: Ratio analysis itself does not involve any journal entry. You are not recording a transaction. You are analysing existing data. No account is debited or credited when you calculate a ratio.

However, the data used in ratio analysis comes from accounts that were debited and credited when transactions occurred. For instance:

Gross Profit Ratio uses Gross Profit (from the P&L) and Revenue from Operations (Net Sales). Gross Profit itself is the result of closing entries — debit Trading Account, credit P&L.
Current Ratio uses Current Assets (like Cash, Debtors) and Current Liabilities (like Creditors, Bills Payable). These balances exist because of past journal entries.

So while ratio analysis has no direct debit/credit, it draws entirely from the ledger balances that do.

Formats and Proformas You Need to Know

The NCERT textbook provides specific formats for the financial statements from which ratios are calculated. Here is the Statement of Profit and Loss format (as per Schedule III of the Companies Act, 2013) that you will use:

Particulars	Note No.	Amount (₹)
I. Revenue from Operations		xxx
II. Other Income		xxx
III. Total Revenue (I + II)		xxx
IV. Expenses:
Cost of Materials Consumed		xxx
Purchases of Stock-in-Trade		xxx
Changes in Inventories		xxx
Employee Benefit Expenses		xxx
Finance Costs		xxx
Depreciation and Amortisation		xxx
Other Expenses		xxx
Total Expenses		xxx
V. Profit before Tax (III – IV)		xxx
VI. Tax Expense		xxx
VII. Profit for the Period (V – VI)		xxx

And the Balance Sheet format (abbreviated):

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital		xxx
(b) Reserves and Surplus		xxx
2. Non-Current Liabilities		xxx
3. Current Liabilities		xxx
Total		xxx
ASSETS

Start your 14-day free trial to unlock the full solution →

Part (a): (B) Statement of Profit and Loss is a financial statement; the others are analytical tools. Part (b): (B) Return on Investment is a profitability ratio, not a solvency ratio.

Part (a)

Under the Companies Act, 2013 the financial statements are the primary, statutory statements: the Balance Sheet, the Statement of Profit and Loss, and the Cash Flow Statement. Common Size and Comparative statements are analytical statements prepared from the financial statements for interpretation.

Option	Nature
(A) Common Size Statement of P&L	Analytical tool
(B) Statement of Profit and Loss	Financial statement ✓
(C) Comparative Balance Sheet	Analytical tool

Start your 14-day free trial to unlock the full solution →

Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 121 on this concept.

CBSE 2026Set 67/4/11 markMCQ
$Q. The Debt-Equity Ratio of a company is 2 : 1. Which of the following transactions will increase the Debt-Equity Ratio ? (A) Issue of Shares ₹ 2,00,000 (B) Issue of 8% Debentures ₹ 5,00,000 (C) Issue of Bonus shares ₹ 4,00,000 (D) Payment to Creditors ₹ 1,00,000$
›Reveal solutionSolution
Option (B) — Issue of 8% Debentures ₹5,00,000 — will increase the Debt-Equity Ratio from 2:1.

Concept: Debt-Equity Ratio

The Debt-Equity Ratio measures the relationship between a company's external liabilities (debt) and shareholders' funds (equity):
$\text{Debt-Equity Ratio} = \frac{\text{Total Debt (External Liabilities)}}{\text{Shareholders' Funds (Equity)}}$
A ratio of 2:1 means for every ₹1 of equity, the company has ₹2 of debt.

To increase this ratio, we need a transaction that either:

Increases debt while keeping equity constant, or

Decreases equity while keeping debt constant, or

Increases debt proportionately more than equity increases.

Let us assume the company currently has Debt = ₹2,00,000 and Equity = ₹1,00,000 (giving the 2:1 ratio). We will test each option.

Analysis of Each Transaction

(A) Issue of Shares ₹2,00,000

Accounting Treatment:

When shares are issued, Bank/Cash A/c is debited and Share Capital A/c (part of equity) is credited.

Effect:

Debt remains ₹2,00,000

Equity increases to ₹1,00,000 + ₹2,00,000 = ₹3,00,000

New Ratio:
$\frac{2,00,000}{3,00,000} = \frac{2}{3} = 0.67:1$
The ratio decreases from 2:1 to 0.67:1.

(B) Issue of 8% Debentures ₹5,00,000

Accounting Treatment:

When debentures are issued, Bank/Cash A/c is debited and Debentures A/c (a long-term liability, part of debt) is credited.

Effect:

Debt increases to ₹2,00,000 + ₹5,00,000 = ₹7,00,000

Equity remains ₹1,00,000

New Ratio:
$\frac{7,00,000}{1,00,000} = 7:1$
The ratio increases from 2:1 to 7:1.

Tip

Any issue of debentures, bonds, or long-term loans increases debt without affecting equity, thereby raising the Debt-Equity Ratio.

(C) Issue of Bonus Shares ₹4,00,000

Accounting Treatment:

Bonus shares are issued by capitalising reserves. General Reserve/Profit & Loss A/c is debited and Share Capital A/c is credited. Both accounts are part of shareholders' funds (equity).

Effect:

Debt remains ₹2,00,000

Equity remains ₹1,00,000 (internal transfer within equity — reserves decrease, share capital increases by the same amount)

New Ratio:
$\frac{2,00,000}{1,00,000} = 2:1$
The ratio remains unchanged at 2:1.

Watch out

Bonus shares do NOT bring in fresh capital. They merely convert one component of equity (reserves) into another (share capital). Total equity is unaffected, so the Debt-Equity Ratio does not change.

--- …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 mark
$Q. State whether True or False: Financial statements are prepared on a particular date.$
›Reveal solutionSolution

The statement is True in respect of the Balance Sheet.

The Balance Sheet is a statement of assets, liabilities and capital as on a particular date (the last day of the accounting period). In this sense financial statements are prepared on a particular date. (The Statement of Profit & Loss …

Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 mark
$Q. Answer in one word/sentence: Financial statements ignores which aspect?$
›Reveal solutionSolution

Answer: Qualitative (non-monetary) aspects.

Financial statements record only those facts that can be expressed in money (money-measurement concept). They ignore qualitative or non-monetary factors - such as the skill of management, employee morale, and customer s …

Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 markMCQ
$Q. Which of the following is not a salient feature of a computerised accounting system?$
(a) Simple and integrated
(b) Accuracy and speed
(c) Complex
(d) Transparent
(a) Simple and integrated
(b) Accuracy and speed
(c) Complex
(d) Transparent
›Reveal solutionSolution
'Complex' is NOT a salient feature of a Computerised Accounting System.

A Computerised Accounting System (CAS) is designed to make accounting work easier, faster, and more reliable than manual bookkeeping. Its genuine salient features include:

Simple and Integrated — a single data entry (voucher) automatically updates all related books of account (ledger, trial balance, financial statements) — this is INTEGRATION, and the system is meant to be simple to operate, not complicated.

Accuracy and Speed — computations (totals, balances, ratios) are done by the software itself, eliminating manual calculation errors and producing reports quickly.

Transparency — any authorised user can view/verify any transaction and trace it to its source, improving reliability and audit-readiness. …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 markMCQ
$Q. Which command reverses the last action performed in the spreadsheet?$
(a) CUT
(b) UNDO
(c) REDO
(d) DELETE
(a) CUT
(b) UNDO
(c) REDO
(d) DELETE
›Reveal solutionSolution
UNDO reverses the last action performed in a spreadsheet.

In an electronic spreadsheet (such as MS Excel), several edit commands help manage changes made to a worksheet:

UNDO (Ctrl+Z) — reverses/cancels the most recently performed action, restoring the worksheet to its state just before that action. Most spreadsheet programs allow undoing multiple recent steps, not just one.

REDO (Ctrl+Y) — reverses an UNDO, i.e. re-applies the action that was just undone.

CUT (Ctrl+X) — removes the selected content from its current location and places it on the clipboard, for pasting elsewhere. …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 mark
$Q. What is the shortcut key to select the entire worksheet?$
›Reveal solutionSolution
Ctrl + A selects the entire worksheet.

In electronic spreadsheet software (such as MS Excel), several keyboard shortcuts speed up selection and navigation. To select the ENTIRE worksheet (every cell currently in use, or the whole sheet if pressed from an empty area):

Shortcut: Ctrl + A

If the active cell is within a continuous range of data, pressing Ctrl+A once selects that entire data range (a 'Select All' within the contiguous block); pressing it a second time extends the selection to the whole worksheet. …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 mark
$Q. Which function is used to calculate depreciation using the straight line method in Excel?$
›Reveal solutionSolution
The SLN() function calculates straight-line depreciation in Excel.

Spreadsheet programs such as MS Excel provide built-in financial functions to calculate depreciation using different methods. For the straight-line method (where the same amount of depreciation is charged every year over the asset's useful life), the function used is:

SLN(cost, salvage, life)

where:

cost = the original purchase cost of the asset

salvage = the estimated value of the asset at the end of its useful life (scrap/residual value)

life = the number of periods (years) over which the asset is being depreciated

The function computes a constant annual depreciation = (cost − salvage) / life, and returns the same value for every period.

…
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 markMCQ
$Q. Profit before Interest and Tax is ₹ 3,00,000 and Interest ₹ 75,000. The Interest coverage Ratio is _______.$
(a) 4 : 1
(b) 3 : 1
(c) 2 : 1
(d) 1 : 1
(a) 4 : 1
(b) 3 : 1
(c) 2 : 1
(d) 1 : 1
›Reveal solutionSolution

Interest Coverage Ratio = 4 : 1 (Option A).

Interest Coverage Ratio = Profit before Interest and Tax (PBIT) ÷ Interest on Long-term Debt

= 3,00,000 / 75,000 = 4 times, i.e. 4 : 1

…

Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 markMCQ
$Q. Or. Which of the following statements shows the financial position of a company?$
(a) Income statement
(b) Cash flow statement
(c) Balance Sheet
(d) All of the above
›Reveal solutionSolution
The Balance Sheet alone shows a company's financial position (assets, liabilities, and equity as on a date) — the Income Statement shows performance, and the Cash Flow Statement shows cash movement, neither of which is "position."

Each financial statement serves a distinct purpose:

Income Statement (Statement of Profit & Loss) — shows the financial performance/results of operations over a period of time (revenue earned, expenses incurred, net profit or loss).

Cash Flow Statement — shows the movement of cash (inflows and outflows) over a period of time, classified into operating, investing, and financing activities. …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 mark
$Q. State one limitation of financial statement of a company.$
›Reveal solutionSolution
Financial statements show only monetary facts, so they cannot capture important non-monetary/qualitative aspects of a business.

Financial statements (the Balance Sheet and Statement of Profit & Loss) are prepared strictly on the money measurement concept — only those transactions and events that can be expressed in terms of money are recorded. This gives rise to several genuine limitations; one important one is:

Ignore Qualitative Elements: Financial statements completely leave out important factors that have no direct monetary measure but can significantly affect the firm's real worth and future performance — for example:

the skill, efficiency, and morale of employees and management,

the quality of customer relationships and brand reputation,

market conditions and competitive position,

the loyalty and satisfaction of customers.

A company could have excellent financial ratios on paper while its management is weak or its workforce is demoralised — and the financial statements alone would never reveal this.

…
Start your 14-day free trial to see the full solution →
CBSE 2025Set 67/4/11 markMCQ
$Q. (a) The tool of 'Analysis of Financial Statements' which indicates the trend and direction of financial position and operating results is : (A) Ratio Analysis (B) Cash Flow Analysis (C) Common Size Statements (D) Comparative Statements$
(OR)
$(b) While preparing Common Size Statement of Profit and Loss of a company, each item is expressed as a percentage of _________. (A) Revenue from operations (B) Total liabilities (C) Total expenses (D) Total assets$
›Reveal solutionSolution

Part (a): (D) Comparative Statements. Part (b): (A) Revenue from operations.

Part (a)

Comparative statements set out each item for two or more periods with the absolute and percentage change, revealing the trend and direction of both financial position (Balance Sheet) and operating results (Statement of Profit & Loss). Ratio analysis, cash flow analysis and common-size statements each serve other purposes and do not, on their own, show period-over-period trend and direction. …
Start your 14-day free trial to see the full solution →
CBSE 2025Set MARCH1 markMCQ
$Q. Which of the following is not required to be prepared under the Companies Act?$
(a) a) Fund flow statement
(b) b) Balance sheet
(c) c) Report of directors and auditors
(d) d) Statement of profit and loss
›Reveal solutionSolution

A Fund Flow Statement is NOT required under the Companies Act. Correct option: (a).

Under the Companies Act, 2013 every company must prepare and present a Balance Sheet, a Statement of Profit and Loss, and the Board of Directors' report along with the Auditors' report; a Cash Flow Statement is also required for most companies. A Fund Flow St …

Start your 14-day free trial to see the full solution →

Q.(a) Which of the following is a financial statement of a company ? (A) Common Size Statement of Profit and Loss (B) Statement of Profit and Loss (C) Comparative Balance Sheet (D) Comparative Statement of Profit and Loss

Part (a)

🎓Unlock everything free for 14 days

Unlock everything free for 14 days