CAIIB ABM Module C UNIT 18 MCQ – Analysis of Financial Statements

Correct Answer: C. The financial details of the borrower. Banks require financial information to assess the risk and viability associated with lending funds to a prospective or existing borrower.

Correct Answer: B. They form the backbone and premise for credit decisions. Financial statements provide essential data upon which banks base their assessment and decisions regarding credit proposals.

Correct Answer: C. A Balance Sheet as at the end of the financial year. The Companies Act explicitly defines a Balance Sheet as a required part of the financial statements for a company.

Correct Answer: C. Cash Flow Statement. The Companies Act provides an exemption, allowing certain types of companies, including OPCs, Small Companies, Dormant Companies, and recognised Start-up Companies, to potentially omit the cash flow statement from their financial reporting.

Correct Answer: B. A consolidated financial statement. The Act mandates that companies with subsidiaries, associate companies, or joint ventures must prepare a consolidated financial statement encompassing the parent and all its subsidiaries.

Correct Answer: C. The company’s management. While auditors provide an opinion, the responsibility for actually preparing the financial statements rests with the management of the entity.

Correct Answer: B. The Auditor. The auditor’s function is to examine the financial statements and express an opinion on whether they present a true and fair view, not to prepare them.

Correct Answer: B. The website of the Ministry of Corporate Affairs (MCA). It is recommended to verify the authenticity of audited financial statements by checking them against the filings available on the official MCA portal.

Correct Answer: C. Obtain independent confirmation directly from the Chartered Accountant firm. Direct confirmation from the auditing firm via methods like email or fax serves as an alternative verification method for the authenticity of the statements and the auditor’s certification.

Correct Answer: B. The Independent/Statutory Auditors’ Report and annexed notes. Understanding the financial statements requires considering the auditor’s opinion and any accompanying notes, which provide context and highlight compliance or quality issues.

Correct Answer: C. The Directors’ Report. The Directors’ Report is a key document accompanying financial statements of companies, containing insights into performance, future outlook, director responsibilities, and compliance matters.

Correct Answer: B. Companies (Auditor’s Report) Order, 2020 (CARO). CARO 2020 specifies a detailed format with numerous points that auditors must report on regarding legal and regulatory compliance, although it doesn’t apply to all companies.

Correct Answer: C. The Accounting Standards Board (ASB) of ICAI. The ASB, constituted by the Institute of Chartered Accountants of India (ICAI), is tasked with developing Accounting Standards to standardize practices in India.

Correct Answer: B. To reduce accounting alternatives and enhance comparability. Accounting Standards aim to limit variations in accounting practices, making financial statements more consistent and comparable across different enterprises.

Correct Answer: C. International Financial Reporting Standards (IFRS). IFRS are the accounting standards issued by the IASB, aiming for global harmonization of financial reporting.

Correct Answer: C. Indian Accounting Standards (Ind AS). India adopted IFRS but modified them to suit the local context, issuing them under the name Ind AS.

Correct Answer: B. All listed companies. The mandatory adoption of Ind AS from 1st April 2017 included all companies listed on stock exchanges, regardless of their size or net worth.

Correct Answer: C. Insurance companies, banking companies, and NBFCs. Specific sectors like insurance, banking, and Non-Banking Financial Companies (NBFCs) have their own roadmap and guidelines for Ind AS implementation.

Correct Answer: C. The Ministry of Corporate Affairs (MCA). While ICAI recommends standards to NFRA, the final notification making them legally applicable is done by the MCA, Government of India.

Correct Answer: B. The provisions of the applicable Act. In case of any contradiction between Ind AS and the governing statute (like the Companies Act), the provisions of the Act take precedence.

Correct Answer: C. Insurance, Banking, and Electricity companies. Companies governed by specific laws (like Banking Regulation Act, Insurance Act, Electricity Act) follow the formats prescribed under those respective Acts, not necessarily Schedule III of the Companies Act 2013.

Correct Answer: C. They must give a true and fair view of the state of affairs. The law mandates that financial statements should accurately represent the company’s financial position and performance, complying with accounting standards.

Correct Answer: C. The deviation, the reasons for it, and the financial effects, if any. Non-compliance requires transparent disclosure of the specific deviation from standards, the justification, and its impact on the financial figures.

Correct Answer: C. 31st March. To align with Income Tax rules, the Companies Act defines the financial year as the period ending on the 31st day of March each year, mandating a uniform accounting year.

Correct Answer: B. Yes, financial statements must be prepared regardless of activity level. The requirement to prepare financial statements exists even for companies without transactions during the period or those with ongoing, incomplete projects.

Correct Answer: C. A statement of assets and liabilities at a particular moment. A Balance Sheet provides a snapshot of what an entity owns (assets) and what it owes (liabilities) at a specific point in time.

Correct Answer: B. Because the financial position it shows is only valid for that specific moment. Since assets and liabilities can change constantly, the Balance Sheet reflects the entity’s position accurately only at the precise date mentioned.

Correct Answer: B. It is held primarily for the purpose of being traded. One of the criteria for classifying an asset as current is if its primary purpose is for trading activities.

Correct Answer: D. Current Asset. Assets expected to be converted into cash or consumed within twelve months from the balance sheet date meet one of the key criteria for classification as current assets.

Correct Answer: C. Non-Current Assets. Assets that do not satisfy the conditions for being classified as current (related to operating cycle, trading purpose, realisation within 12 months, or being unrestricted cash) are categorised as non-current.

Correct Answer: C. It is expected to be settled in the company’s normal operating cycle. Liabilities expected to be paid or settled as part of the regular business operations cycle are classified as current liabilities.

Correct Answer: C. When it does not meet any of the criteria for a current liability. Liabilities that are not expected to be settled within the normal operating cycle or twelve months, are not held for trading, and where the company has a right to defer settlement beyond twelve months, are classified as non-current.

Correct Answer: C. An amount due on account of goods sold or services rendered in the normal course of business. Trade receivables specifically relate to amounts owed by customers arising from the primary business activities of selling goods or providing services.

Correct Answer: B. Classified into specific categories like Capital Reserves, Securities Premium Reserve, etc. Disclosure requirements mandate the segregation of Reserves and Surplus into distinct components for clarity.

Correct Answer: C. As a negative figure under the sub-head “Surplus”. A loss is represented as a negative amount within the Surplus component of Reserves and Surplus, potentially resulting in a negative overall figure for Reserves and Surplus.

Correct Answer: B. Secured and Unsecured borrowings. Long-term borrowings must be further categorised based on whether they are secured by any assets or are unsecured, with the nature of security specified for secured loans.

Correct Answer: C. Unpaid dividends. The detailed classification for other current liabilities explicitly includes amounts related to dividends declared but not yet paid to shareholders.

Correct Answer: B. Separately specified under each class of tangible asset. Assets held under lease must be identified separately within their respective categories (e.g., Buildings, Plant & Equipment) in the tangible assets disclosure.

Correct Answer: C. Brands / trademarks. The prescribed classification for intangible assets includes items like goodwill, brands, software, patents, copyrights, and other similar non-physical assets.

Correct Answer: B. Secured-good, Unsecured-good, and Doubtful. Long-term loans and advances provided by the company must be categorised based on security status and recoverability (considered good or doubtful).

Correct Answer: B. Under the relevant sub-head of inventories (e.g., Raw Materials, Finished Goods). Goods that have been purchased but not yet received are included within the appropriate inventory category they belong to.

Correct Answer: B. The aggregate amount should be separately stated. The total value of receivables that are overdue for more than six months needs to be highlighted separately in the disclosures.

Correct Answer: B. Disclosed separately under Cash and cash equivalents. Bank balances specifically earmarked as margin money or security must be shown distinctly from other readily available cash equivalents.

Correct Answer: C. Claims against the company not acknowledged as debt. Contingent liabilities represent potential obligations dependent on future events, such as disputed claims that the company does not accept as definite debts.

Correct Answer: B. A note indicating how the unutilised amounts have been used or invested. Transparency requires disclosing the status and temporary deployment (use or investment) of funds raised for a specific project but not yet spent on it.

Correct Answer: B. The income and expenditure of an entity for a specific accounting period. The P&L Account, or income statement, summarises revenues earned and expenses incurred during a defined period to show the resulting profit or loss.

Correct Answer: B. Separately showing revenue from sale of products, sale of services, and other operating revenues. Non-finance companies are required to break down their operating revenue by major activity type in the notes.

Correct Answer: C. Interest income and revenue from other financial services. The primary operating revenue for finance companies stems from interest earned and fees generated from providing financial services.

Correct Answer: C. Interest expense on borrowings. Finance costs specifically relate to the costs incurred for borrowing funds, including interest payments and other associated borrowing costs.

Correct Answer: C. To evaluate the enterprise’s ability to generate cash and cash equivalents. The CFS helps users assess how effectively a company generates and uses cash, including the timing and certainty of these flows.

Correct Answer: C. Short-term, highly liquid instruments readily convertible into cash with insignificant risk of value change. Cash equivalents are assets that are almost as liquid as cash, typically held for meeting short-term cash commitments rather than for investment.

Correct Answer: C. Investing Activities. Transactions involving the acquisition and disposal of long-term assets and investments not held as cash equivalents are classified as investing activities.

Correct Answer: C. Financing Activities. Financing activities include transactions that affect the equity and debt structure of the company, such as issuing shares, paying dividends, and repaying loans.

Correct Answer: B. As an additional source of funds. An increase in a liability signifies that more funds have been made available to the enterprise from that source (e.g., taking a new loan).

Correct Answer: C. The additional sources and uses of funds between two balance sheet dates. By comparing two balance sheets, the Funds Flow Statement analyses how the net changes in assets and liabilities reflect the flow of financial resources during the intervening period.

Correct Answer: C. NWC will decrease. When funds generated from long-term sources are insufficient to cover long-term uses (like buying fixed assets), the shortfall is met by using short-term funds, thus reducing the NWC and potentially indicating diversion.

Correct Answer: C. Because actual statements are historical, and decisions require anticipating future performance and position. Credit assessment involves evaluating future repayment capacity and viability, which requires projections based on anticipated operations, not just past results.

Correct Answer: C. For the entire duration of the proposed bank loan. Projections covering the loan’s life help establish the project’s long-term viability and determine appropriate disbursal and repayment schedules.

Correct Answer: B. Comparing the company’s growth and profitability trends against industry benchmarks. Bankers analyse trends in performance and financial position relative to the industry to gauge management efficiency and business health.

Correct Answer: B. To know the direction of the business and identify any deterioration in financial health early. Analysing trends and ratios can reveal warning signs of financial trouble, allowing the bank to take preventive measures.

Correct Answer: B. To ensure bank funds were used for intended purposes and identify potential diversion. Funds flow analysis helps track how resources were generated and applied, ensuring that borrowed funds supported the intended business activities and weren’t used inappropriately, potentially weakening liquidity.

Correct Answer: C. Into distinct groups like Current/Non-Current Assets and Liabilities, and Tangible Net Worth. Bankers rearrange the balance sheet into analytical categories to facilitate ratio calculation and assessment of financial structure and liquidity.

Correct Answer: B. The format prescribed under the erstwhile Credit Monitoring Arrangement (CMA). The CMA format provides a structured way to group P&L items like sales, cost of sales, operating expenses, interest, and profits, facilitating analysis.

Correct Answer: C. Should be examined and potentially reclassified under current liabilities. For analytical purposes, the portion of a long-term loan maturing within the next year is considered a short-term obligation and typically moved to current liabilities.

Correct Answer: B. Because changes in valuation methods can significantly impact reported profit and asset values. The method used to value inventory (e.g., FIFO, Weighted Average) affects the Cost of Goods Sold and the closing inventory value, thereby influencing profitability and balance sheet figures.

Correct Answer: B. Funds Flow Analysis, Trend Analysis, Ratio Analysis. The text explicitly lists these three as the main techniques employed by bankers for financial statement analysis.

Correct Answer: B. No, it is often a requirement specifically requested by lenders. The Funds Flow statement is usually prepared for analytical purposes, particularly by lenders to trace fund movements, rather than being a mandatory, audited component of standard financial reports.

Correct Answer: C. By analysing the last two submitted balance sheets. The Funds Flow statement is derived by comparing the changes in asset and liability accounts between two consecutive balance sheet dates.

Correct Answer: C. Potential diversion of working capital funds towards long-term uses. When short-term sources exceed short-term uses, it implies that long-term uses must have exceeded long-term sources, suggesting short-term funds may have been used for long-term purposes (diversion).

Correct Answer: B. If the diversion does not negatively impact the company’s required liquidity position. While diversion needs scrutiny, it might be acceptable if it involves utilising genuinely idle funds for productive purposes without compromising the company’s ability to meet its short-term obligations.

Correct Answer: B. Arranging financial items vertically over multiple periods and showing year-on-year percentage changes. Trend analysis involves tracking the movement of specific financial items over time, often highlighting the percentage increase or decrease from the previous period.

Correct Answer: B. To express the relationship of various items to one key item in percentage terms. Common size statements convert absolute financial figures into percentages of a base figure (like total assets or net sales), facilitating comparison over time or between companies of different sizes.

Correct Answer: C. Percentages make comparisons between business enterprises of different sizes more meaningful. By converting figures to percentages of a common base, common size statements allow for better comparison of operating and financing characteristics, regardless of the absolute size of the companies.

Correct Answer: D. As a percentage, a number, or a proportion. Ratios provide flexibility in expression depending on the context, whether showing a margin (percentage), a coverage level (number), or a structural relationship (proportion).

Correct Answer: C. The liquidity position, i.e., the ability to meet short-term commitments. The Current Ratio compares current assets to current liabilities to assess if the company has sufficient liquid resources to cover its immediate obligations.

Correct Answer: C. Total Current Assets / Total Current Liabilities. The Current Ratio is calculated by dividing the sum of all current assets by the sum of all current liabilities.

Correct Answer: D. Net Working Capital (NWC). A current ratio above 1 signifies that current assets exceed current liabilities. The excess, represented by the 0.33 in the 1.33 benchmark, corresponds to the Net Working Capital, which is the surplus of long-term sources over long-term uses funding current assets.

Correct Answer: B. The proportion of Total Current Assets financed by long-term sources (margin). The NWC ratio (NWC/TCA × 100) indicates the extent to which current assets are supported by long-term funds, reflecting the safety margin.

Correct Answer: B. The sensitivity of production costs to changes in raw material prices. This ratio highlights the significance of raw material cost within the total cost of producing goods.

Correct Answer: C. PBT Ratio. The Profit Before Tax (PBT) Ratio specifically measures the profit generated relative to net sales before accounting for income tax expense.

Correct Answer: C. The unit’s operating performance before interest, taxes, depreciation, and amortisation. EBIDTA margin is a key indicator of operational profitability, excluding financing costs, taxes, and non-cash expenses like depreciation and amortisation.

Correct Answer: B. PAT + Interest + Depreciation + Tax + Amortisation. The formula provided explicitly defines EBIDTA as Profit After Tax (PAT) with Interest, Depreciation, Tax, and Amortisation added back.

Correct Answer: B. The operating performance in relation to the total capital employed in the business. ROCE assesses how effectively the company is using its entire asset base (total capital employed) to generate operating earnings (EBIDTA).

Correct Answer: B. To determine the true profitability of the core business operations by excluding non-operative income and expenses. This ratio focuses solely on profits generated from primary business activities, removing potentially non-recurring or unrelated items.

Correct Answer: C. A discount rate that makes the net present value (NPV) of all future cash flows from an investment equal to zero. IRR is a capital budgeting metric used to estimate the profitability of potential investments by finding the discount rate at which the present value of expected cash inflows equals the initial investment outflow.

Correct Answer: C. Net Worth – Intangible Assets. For calculating leverage ratios like TOL/TNW, intangible assets (like goodwill) are typically deducted from the total net worth to arrive at the tangible net worth, considered a more conservative measure of owners’ equity.

Correct Answer: C. Leverage or Solvency. This ratio compares the funds provided by creditors (outsiders) to the funds contributed by owners (tangible equity), indicating the degree of financial leverage or gearing and the firm’s long-term solvency risk.

Correct Answer: C. Deduct loans, advances, and investments in Group/Associate/Subsidiary Companies. This adjustment removes funds that have effectively left the reporting entity’s system (invested in related parties) from the equity base for a stricter solvency assessment.

Correct Answer: C. Debt Component in Means of Finance / Margin Component of Means of Finance. For a specific project, the D/E ratio refers to the proportion of debt financing relative to equity (margin) contribution within the project’s funding plan.

Correct Answer: A. Long Term Debt / Net Worth. Comparing long-term borrowings specifically to the owners’ equity (net worth) is a common measure used to assess a company’s long-term financial stability and ability to meet its long-term obligations.

Correct Answer: B. The ability of a unit to service its payment obligations (instalments and/or interest) related to term debts out of its earnings. DSCR assesses whether the cash generated by the business is sufficient to cover its mandatory term loan repayments.

Correct Answer: B. Net DSCR assesses the ability to service instalments only, while Gross DSCR assesses the ability to service both instalments and interest. Gross DSCR considers the coverage for the total debt service obligation (principal + interest), whereas Net DSCR focuses only on the principal repayment part relative to cash accrual.

Correct Answer: B. (Cash Accrual + Interest on all term loans) / (Term Loan Instalments + Interest on all term loans). Gross DSCR compares the cash available for debt servicing (Cash Accrual + Interest added back) to the total term debt obligation (Instalments + Interest).

Correct Answer: B. The number of years it would take to wipe off the entire long-term debt using the current level of EBIDTA. The Vanquish Ratio (Long Term Debt / EBIDTA) provides an estimate of how quickly a company could theoretically eliminate its long-term debt if all operating earnings (before interest, tax, depreciation, amortisation) were directed towards it.

Correct Answer: C. The relationship between operating earnings (EBIDTA) and interest payments on all borrowings. This ratio indicates how many times the company’s operating earnings can cover its total interest expense, showing the cushion available to pay interest.

Correct Answer: C. The extent to which the term loan is secured by the value of fixed assets under charge. FACR (WDV of Fixed Assets / Outstanding TL) measures the value of the pledged fixed assets relative to the loan amount, indicating the security cover for the lender.

Correct Answer: B. The cushion of security available in the charged fixed assets over and above the outstanding term loan. This ratio ((WDV of FA – TL outstanding) / WDV of FA × 100) calculates the margin or excess value in the secured assets as a percentage of the asset value.

Correct Answer: C. The length of the operating cycle and the amount of Working Capital Gap. These ratios help analyse how long funds are tied up in different components of working capital (inventory, receivables) and estimate the net funding requirement (TCA – OCL).

Correct Answer: B. The number of days’ consumption of raw material typically held in stock. This ratio (Average RM Stock / RM Consumed × 365) helps determine the average period for which raw materials are stored before being used in production.

Correct Answer: C. Cost of Production. Work-in-process inventory represents goods currently undergoing the production process where direct costs are being incurred. Therefore, the relevant base for comparison is the Cost of Production during the period.

Correct Answer: C. Because the amount owed by debtors includes the sales tax (like GST/VAT) component, which is part of Gross Sales. Since the receivable amount on the balance sheet includes the tax collected on behalf of the government, the ratio uses Gross Sales (which also includes this tax) for a correct comparison.

Correct Answer: B. The number of days’ credit received from suppliers on purchases. This ratio (Average Sundry Creditors / Purchases × 365) measures the average time the company takes to pay its suppliers for goods or services purchased on credit.

Correct Answer: C. Faster movement (churn) of inventory into sales. A higher ratio (Net Sales / Average Inventory) suggests that inventory is being sold and replenished more quickly, which is usually a sign of efficiency.

Correct Answer: B. The P&L covers a period, while the Balance Sheet is at a point in time, creating a potential mismatch. Comparing a flow figure (like sales from P&L) with a stock figure (like debtors from Balance Sheet) requires using averages for the stock figure, which may not fully address issues like seasonality.

Correct Answer: B. By artificially inflating Current Assets and deflating Current Liabilities specifically on the Balance Sheet date. Companies might engage in window dressing activities (like aggressively collecting receivables or delaying payments) right around the reporting date to present a temporarily improved Current Ratio.

Correct Answer: C. As the available best way globally to find relations between financial statement variables. Notwithstanding its limitations, ratio analysis remains a widely accepted and standard tool for interpreting financial statements and assessing performance and position.

Correct Answer: B. The average level of Raw Material stock held. The holding ratio represents the number of days’ consumption held; multiplying this by the daily consumption amount logically yields the average stock level.

Correct Answer: C. Finished Goods Holding Ratio. Finished goods are valued based on the cost of sales, hence the Finished Goods Holding Ratio compares the average stock of finished goods to the Cost of Sales for the period.

Correct Answer: B. The Total Current Assets (TCA). The holding periods determined through turnover ratios help estimate the average level of investment required in each type of current asset; their sum approximates the Total Current Assets needed.

Correct Answer: C. The amount of Sundry Creditors (an Other Current Liability – OCL). This calculation estimates the average amount owed to suppliers based on the average credit period received on purchases.

Correct Answer: C. Funds Flow Analysis. A core purpose of Funds Flow Analysis, particularly for lenders, is to track whether short-term funds have been inappropriately used for long-term purposes (diversion) by comparing the balance between sources and uses in both categories.

Correct Answer: B. Common Size Statement Analysis (within Trend Analysis). Expressing an expense item like raw material consumption as a percentage of a base figure like sales, and comparing this percentage over time, is characteristic of common size analysis used for trend evaluation.

Correct Answer: C. Return on Capital Employed (ROCE). ROCE (specifically using the formula EBIDTA / Total Assets provided) measures the return generated from operations relative to the total investment in assets.

Correct Answer: C. Ratios comparing a P&L figure to a Balance Sheet figure (e.g., Inventory Turnover). When comparing a flow item (like Sales or Cost of Sales from P&L) to a stock item (like Inventory or Debtors from Balance Sheet), averaging the balance sheet figure is needed to get a representative value for the period covered by the P&L.

Correct Answer: C. Ratio Analysis (specifically involving Balance Sheet date figures). Ratios calculated using balance sheet figures (like the Current Ratio) are susceptible to manipulation through transactions executed solely to influence the figures on that specific reporting date.

Correct Answer: B. Adding imagination, creativity, colour, and flavour to bare facts and figures. Creative accounting refers to the practice of using accounting rules and regulations in a way that presents financial statements in an overly favourable light, essentially ‘dressing up’ the numbers.

Correct Answer: B. No, it often involves playing with existing rules favourably rather than explicitly breaking them. Creative accounting typically operates within the letter of the law or accounting standards but manipulates them to achieve a desired presentation, distinct from outright fraud which involves clear violations.

Correct Answer: C. Most frauds involve creative accounting, although not all creative accounting is fraud. While creative accounting might bend rules, fraud breaks them; however, fraudulent schemes often employ creative accounting methods to conceal the wrongdoing.

Correct Answer: C. Booking advance payments received from customers for future sales as current year income. Recognizing revenue before it is earned (like treating customer advances for future services/goods as current income) is cited as a typical creative accounting tactic to inflate current performance.

Correct Answer: B. It artificially increases turnover, profit, and net worth, potentially improving various financial ratios. Such a practice distorts the true financial picture by inflating revenues and profits, which in turn affects net worth and can misleadingly improve profitability, liquidity, and solvency ratios.

Correct Answer: B. The notes on Accounting Policies accompanying the financial statements. The accounting policies note reveals the specific principles and methods chosen by the company, and careful reading can highlight unusual or aggressive choices that might indicate creative accounting.

Correct Answer: C. A change of Independent/Statutory Auditors without any apparent statutory requirement. An unexplained change in auditors can sometimes be a red flag, potentially indicating disagreements over accounting treatments or an attempt by management to find auditors more amenable to certain practices.

Correct Answer: C. A transfer of resources, services, or obligations between a reporting entity and a related party, irrespective of whether a price is charged. The definition is broad, covering any exchange between related parties, even if no money changes hands.

Correct Answer: C. A person or another entity that meets specific criteria defined in the standard. A related party is defined based on specific relationships involving control, joint control, significant influence, or key management positions, applicable to both individuals and other entities.

Correct Answer: C. Control, joint control, or significant influence over the reporting entity. These levels of influence or control are key criteria for establishing a related party relationship for an individual.

Correct Answer: B. Being a member of the key management personnel (KMP) of the reporting entity or its parent. Holding a KMP position, due to the authority and responsibility involved, also establishes a related party relationship.

Correct Answer: B. If they are members of the same group (parent, subsidiary, fellow subsidiary). Entities under common control within a corporate group structure are inherently considered related parties.

Correct Answer: C. An associate or joint venture. Relationships involving significant influence (associates) or joint control (joint ventures) between entities establish a related party connection.

Correct Answer: C. The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control implies the ability to direct the entity’s key policies and activities for one’s own benefit.

Correct Answer: B. The contractually agreed sharing of control over an economic activity. Joint control exists when multiple parties have contractually agreed to share the power to govern an activity, requiring consent from the sharing parties.

Correct Answer: C. Persons having authority and responsibility for planning, directing, and controlling the entity’s activities (including directors). KMP includes those individuals, including directors, who have the top-level authority to manage the entity’s operations and strategy.

Correct Answer: B. The power to participate in financial and operating policy decisions, but not control over those policies. Significant influence is a lower level of influence than control, allowing participation in decisions but not unilateral direction.

Correct Answer: B. Through share ownership, statute, or agreement. The ability to exercise significant influence can arise from various sources, including holding a substantial block of shares, specific legal rights granted by statute, or contractual arrangements.

Correct Answer: D. The Notes on Accounting Policies. This section details the specific accounting choices made by management, and subtle wording or choices can sometimes signal attempts at creative accounting.

Correct Answer: B. Because they are often used as avenues for creative accounting, diversions, or frauds. Transactions between related parties are not always at arm’s length and can be misused to manipulate financial statements or improperly move funds, requiring close scrutiny.