CAIIB Paper 1 Module C Quiz 2

The balance sheet is a point-in-time statement of financial position. The profit and loss statement covers performance over a period, while the cash-flow statement explains cash movements.

The cash-flow statement separates operating, investing and financing cash flows. It helps explain why accounting profit may differ from cash generated.

Profit is accrual-based and may not translate into cash. Rising receivables, inventory accumulation, weak collections or aggressive revenue recognition may explain the divergence.

Current ratio = current assets ÷ current liabilities = 240 ÷ 160 = 1.5. It is a broad liquidity indicator and should be interpreted with asset quality and industry context.

Quick assets = current assets − inventory − prepaid expenses = ₹300 lakh. Quick ratio = 300 ÷ 250 = 1.2:1.

A rising debt-equity ratio indicates greater reliance on debt relative to equity and can increase fixed financial obligations and vulnerability to earnings shocks.

Interest coverage commonly compares earnings available for interest (often EBIT) with interest expense. A lower ratio suggests reduced capacity to service interest.

Receivables turnover = credit sales ÷ average receivables = 1,200 ÷ 200 = 6 times. A related collection-period estimate is 365 ÷ 6, subject to the data convention used.

Horizontal analysis compares amounts across periods and reveals trends. Vertical analysis expresses items as a proportion of a base within a single period.

Common-size analysis scales income-statement items to revenue, allowing comparison across periods and businesses of different sizes.

A traditional funds-flow statement explains sources and applications of funds, often with working capital as the fund concept. A cash-flow statement focuses specifically on cash and cash equivalents.

Projected statements help evaluate future profitability, cash flows, balance-sheet needs and debt service, provided assumptions are realistic and stress-tested.

Depreciation reduces accounting profit but does not itself use cash in the period, so it is added back in the indirect cash-flow reconciliation.

Related-party sales may be legitimate but require scrutiny for arm’s-length terms, collectability, timing and disclosure. Long-outstanding balances may inflate reported sales and assets.

Accrual accounting recognizes income when earned and expenses when incurred, subject to applicable standards. This can create differences between accounting profit and cash flow.

Inventory growing faster than sales may indicate overstocking, weak demand, obsolescence or inaccurate valuation, tying up cash and weakening liquidity.

Ratios are useful indicators but depend on the quality and comparability of underlying data. Qualitative context, cash-flow analysis and trend review remain necessary.

Stable gross margin with declining net margin suggests pressure below gross profit, such as higher overheads, interest, depreciation, tax or exceptional losses.

The balance sheet is a snapshot of assets, liabilities and equity; the profit and loss account summarizes income and expenses for a reporting period.

Rearrangement standardizes presentation, separates operating and non-operating items where appropriate, and supports meaningful ratio and cash-flow analysis without changing underlying facts.