(a) The process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the various items of Balance Sheet and the Statement of Profit and Loss is called :

(A) Comparative Statement Analysis

(B) Cash Flow Analysis

(C) Financial Analysis

(D) Common Size Analysis

OR

(b) Ratios calculated to measure the ability of the business to pay the amount due to stakeholders as and when it is due are known as :

(A) Solvency ratios

(B) Liquidity ratios

(C) Activity ratios

(D) Profitability ratios

Q: (a) The process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the various items of Balance Sheet and the Statement of Profit and Loss is called : (A) Comparative Statement Analysis (B) Cash Flow Analysis (C) Financial Analysis (D) Common Size Analysis OR (b) Ratios calculated to measure the ability of the business to pay the amount due to stakeholders as and when it is due are known as : (A) Solvency ratios (B) Liquidity ratios (C) Activity ratios (D) Profitability ratios

This is an **OR** question — attempt only ONE part, (a) or (b). **(a) Correct option: (C) Financial Analysis.** - Financial (statement) analysis is the process of critically examining the relationship between various items of the Balance Sheet and Statement of Profit and Loss to identify the financial strengths and weaknesses of the firm. **(b) Correct option: (A) Solvency ratios.** - Solvency ratios are calculated to determine the ability of the business to meet its long-term obligations and pay the amount due to stakeholders (lenders, debenture-holders, creditors) as and when it becomes due.

Analysis of Financial Statements / Accounting Ratios

Meaning of Financial Statement Analysis / Solvency Ratios

Options

(A)Comparative Statement Analysis

(B)Cash Flow Analysis

(C)Financial Analysis

(D)Common Size Analysis

Official Answer

This is an OR question — attempt only ONE part, (a) or (b).

(a) Correct option: (C) Financial Analysis.

Financial (statement) analysis is the process of critically examining the relationship between various items of the Balance Sheet and Statement of Profit and Loss to identify the financial strengths and weaknesses of the firm.

(b) Correct option: (A) Solvency ratios.

Solvency ratios are calculated to determine the ability of the business to meet its long-term obligations and pay the amount due to stakeholders (lenders, debenture-holders, creditors) as and when it becomes due.

financial statement analysissolvency ratiosliquidity ratioslong-term obligationsfinancial strengths and weaknessesaccounting ratios

Marking Scheme

11 mark for selecting (C) Financial Analysis in part (a), OR (A) Solvency ratios in part (b) — only the part attempted is evaluated.

Hint

(a) Think of the overall analytical process, not a specific technique. (b) The keyword 'ability to pay amounts due' (long-term obligations) signals Solvency, not Liquidity.

Quick Oral Answer

(a) The overall process of studying Balance Sheet and P&L relationships to find strengths/weaknesses is Financial Analysis. (b) Ratios measuring ability to meet long-term dues to stakeholders are Solvency Ratios.

Analysis & Explanation

(a) Why (C) is correct

The definition given verbatim matches 'Financial Analysis' — establishing relationships between Balance Sheet and Statement of Profit and Loss items to reveal strengths/weaknesses.

Why the distractors are wrong (a)

(A) Comparative Statement Analysis only compares figures of two or more years side by side; it is one specific tool of financial analysis, not the overall process itself.
(B) Cash Flow Analysis studies only cash inflows/outflows across operating, investing and financing activities.
(D) Common Size Analysis expresses each item as a percentage of a common base (e.g. revenue or total assets); again, a specific technique, not the whole analytical process.

(b) Why (A) is correct

Solvency measures the firm's capacity to honour both interest and principal repayment obligations to long-term stakeholders when due — this is the textbook NCERT definition.

Why the distractors are wrong (b)

(B) Liquidity ratios measure short-term ability to meet current obligations (current liabilities), not the general obligation to 'stakeholders' as due.
(C) Activity ratios measure efficiency of asset utilisation (e.g. inventory turnover), unrelated to debt repayment ability.
(D) Profitability ratios measure earning capacity, not the ability to discharge dues.

Common Mistakes

1In (a), selecting 'Comparative Statement Analysis' or 'Common Size Analysis', mistaking a specific technique for the overall process of financial analysis.
2In (b), confusing Solvency ratios (long-term obligations) with Liquidity ratios (short-term/current obligations) — a very common mix-up.

Interesting Facts

Financial analysis techniques include comparative statements, common-size statements, trend analysis, ratio analysis, and cash flow analysis — Comparative and Common-size statements are only two of the several tools falling under the broader umbrella of Financial Analysis.

The Debt-Equity Ratio and Proprietary Ratio are the two most commonly tested Solvency Ratios in CBSE Class 12 board exams.

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Frequently Asked Questions

What is the difference between Comparative Statement Analysis and Financial Analysis?

Financial Analysis is the overall process of examining relationships between financial statement items to assess a firm's strengths and weaknesses. Comparative Statement Analysis is just one specific technique used within that broader process, comparing figures across two or more periods.

Why are Solvency ratios different from Liquidity ratios?

Solvency ratios assess a firm's ability to meet its long-term obligations (like repaying debentures or long-term loans) and are of interest to long-term lenders. Liquidity ratios assess the ability to meet short-term (current) obligations and are of interest to short-term creditors and suppliers.