Question

Given below are two statements:
Statement (I): The income generated through self-liquidating loans is sufficient to clear off the entire loan amount in the same accounting year.
Statement (II): Net income \& net operating income can be calculated from the balance sheet. In light of the above statements, choose the most appropriate answer from the options given below:

• A. Both Statement (I) and Statement (II) are correct.
• B. Both Statement (I) and Statement (II) are incorrect.
• C. Statement (I) is correct but Statement (II) is incorrect.
• D. Statement (I) is incorrect but Statement (II) is correct.

Hint:

Self-liquidating loans: Repaid from project income in one year. Income calculations come from the income statement, not the balance sheet.

Answer 1

The Correct Option is C

Statement (I) is correct: Self-liquidating loans are short-term loans designed to finance activities (e.g., purchasing inventory or seeds) that generate income sufficient to repay the loan, including principal and interest, within the same accounting period, typically a year. For example, a farmer may take a loan to buy seeds, harvest crops, sell them, and repay the loan from the proceeds.
- Statement (II) is incorrect: Net income and net operating income are derived from the {income statement (profit and loss statement), which details revenues, expenses, and profits over a period. The {balance sheet, however, provides a snapshot of assets, liabilities, and equity at a specific point in time and does not directly provide income calculations. Thus, option (3) is correct, as Statement (I) is true, but Statement (II) is false.

Answer 2

Distinguishing the two financial statements:
A self-liquidating loan is, by definition, structured so that the very activity it finances generates enough cash within the same accounting cycle to repay both principal and interest, for example, a crop loan repaid from that season's harvest sale. This matches the definition exactly, so Statement (I) is correct. For Statement (II), recall what each financial statement actually reports: the income statement (profit and loss account) records revenues earned and expenses incurred over a period, from which net income and net operating income are calculated. The balance sheet, in contrast, is a static snapshot at one point in time, listing assets, liabilities, and net worth, it contains no revenue or expense entries and therefore cannot be used to compute income figures. Since income measures come from the income statement and not the balance sheet, Statement (II) is incorrect, giving option (3).