NCERT Solutions Class 12 Accountancy Company Accounts And Analysis Of Financial Statements Chapter 4

NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4

Accounting is the discipline of keeping track of, categorising, and reporting on a company's financial activities. It offers managers information on an organisation's economic outcomes and status.

Chapter 4, Analysis of Financial Statements, is essentially the study of the relationships between various financial facts and figures as presented in a set of financial statements, as well as their interpretation, to gain insight into the profitability and operational efficiency of a company to assess its financial health and prospects.

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Key Topics Covered In NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4

The following major topics are covered in NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4.

Analysis of Financial Statements
Tools of Analysis of Financial Statements
The Significance of Analysis of Financial Statements
Objectives of Analysis of Financial Statements
Limitations of Analysis of Financial Statements

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Analysis of Financial Statements

Financial statement analysis can be referred to as Examining an organisation's financial statements to make choices and understand the organisation's overall health. Financial statements include financial data that must be evaluated through financial statement analysis to make it more helpful for the shareholders, managers, investors, and other stakeholders. 

Tools of Analysis of Financial Statements

The following are the most often used financial analysis tools:

  • Comparative Statements

These statements show an enterprise's financial situation and profitability over time in a comparative format to give a sense of position across two or more periods. It generally refers to the essential financial statements, profit and loss statements, and comparative balance sheets. The direction and trend of the financial status and operating results are shown by relative numbers.

  • Common Size Statements

Standard size statements show the relationship between different items of financial information by showing each item as a percentage of the common item. These statements enable an analyst to evaluate the finance and operating characteristics of two businesses of different sizes in the same industry.

  • Cash Flow Analysis

It examines the actual movement of cash into and out of business. Cash inflow or positive cash flow flows money into a trading company, whereas negative cash flow or cash outflow is the movement of money out of the company. The net cash flow is the difference between the outflow and inflow of cash. As a result, it combines the explanations for changes in a trading concern's cash position between two balance sheet dates.

  • Ratio Analysis

It describes the critical relationship between numerous elements on a B/S (balance sheet) and an enterprise's P&L statement. Accounting ratios are a financial analysis tool that calculates the relative importance of individual items in the balance and income statements. The ratio analysis method may be used to assess a company's solvency, efficiency, and profitability.

The Significance of Analysis of Financial Statements

The financial analysis identifies a company's financial strengths and weaknesses by charting the links between various elements on the balance sheet and the profit and loss statement. Economic analysis can be started by the company's management or by outside parties such as the finance manager, trade payables, lenders, labour organisations, etc. Financial analysis is beneficial and necessary for many users in the following ways as explained by Extramarks NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4:

1. Management- Top management benefits from the financial analysis:

  • To determine if the company's resources are being used to their full potential.
  • Whether or not the company's financial situation is sound.
  • To determine the success of the company's operations.
  • Individual performance is calculated.
  • Internal control structure evaluation.
  • To investigate the company's prospects.

2. Trade Payables- Trade payables examine the financial accounts for:

  • Calculating an organisation's capacity to satisfy its short-term obligations
  • Considering the enterprise's capacity to satisfy all of its financial obligations soon
  • The capacity of an organisation to satisfy payables claims on time.
  • Evaluating the financial situation and ability to pay off the debts.

3. Lenders- Long-term debt providers are concerned about the company's long-term financial viability and existence. They examine the financial accounts of the company:

  • Determine the enterprise's profitability over a while.
  • To determine a company's capacity to get funds, repay the principal, and pay interest.
  • To assess the relationship between various capital sources (i.e.capital structure associations).
  • To assess financial documents containing historical performance data and understand it as a basis for forecasting future rates of return and evaluating risk factors.
  • For determining credit risk and the terms and conditions of a loan, such as maturity date and interest rate, if one is granted.

4. Labour Unions- Labour unions scrutinise financial statements:

  • To determine if a company's salary can be increased.
  • To see if a company can absorb a salary rise by increasing productivity or increasing the cost of services/products.

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Objectives of Analysis of Financial Statements

Financial statement analysis reveals essential data about management performance and the effectiveness of the business. To be more specific, the inspection is being carried out to achieve the following objectives:

  • To assess the company's current profitability and functional competence as a whole, as well as its many units and to determine its financial health.
  • Determine the relative importance of various aspects of the company's financial situation.
  • Recognise the reasons for the company's shift in profitability or financial situation.
  • To assess the company's capacity to repay its debt and its short and long-term liquidity status.

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Limitations of Analysis of Financial Statements

Financial analysis is instrumental in determining an organisation's financial shortcomings and strengths since it is based on facts available in financial statements. The economic analysis also examines the financial statements' limitations. As a result, the analyst must be aware of the impact of changes in cost pricing levels, changes in an enterprise's accounting practice, financial statement window dressing, personal judgement, accounting principles, traditions, etc. 

 As per Extramarks NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4 some more financial analysis’ limitations are as follows:

  • Cost price level variations are not considered in the economic analysis
  • Without previous awareness of an organisation's accounting method changes, the financial analysis may be confusing.
  • Financial analysis is the study of business reporting.
  • Only economic data is considered in financial analysis, while non-monetary aspects are ignored.
  • The financial statements are established on the premise of the accounting concept. As such, it does not match the current condition.

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NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4 Accounting for Share Capital: Important Links

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Key Features on NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4

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Q.1 Prepare a Common Size balance sheet from the following balance sheet of Aditya Ltd., and Anjali Ltd.:

Particulars Aditya Ltd Anjali Ltd.
1.Equity & Liabilities
Shareholders’ Fund
a)Equity share capital 6,00,000 8,00,000
b)Reserves & Surplus 3,00,000 2,50,000
2.)Current liabilities 1,00,000 1,50,000
Total 10,00,000 12,00,000
2.Assets
Non-current Assets
a)Fixed assets 4,00,000 7,00,000
Current assets 6,00,000 5,00,000
Total 10,00,000 12,00,000

Ans. Common Size Balance Sheet

Particulars Aditya Ltd Anjali Ltd. % of Balance Sheet total
Aditya Ltd Anjali Ltd.
1.Equity & Liabilities
Shareholders’ Funds
a)Equity share capital 6,00,000 8,00,000 60.00 66.67
b)Reserves & Surplus 3,00,000 2,50,000 30.00 20.83
2.)Current liabilities 1,00,000 1,50,000 10.00 12.50
Total 10,00,000 12,00,000 100.00 100.00
2.Assets
Non-current Assets
a)Fixed assets 4,00,000 7,00,000 40.00 58.33
Current assets 6,00,000 5,00,000 60.00 41.67
Total 10,00,000 12,00,000 100.00 100.00

% is calculated on the basis of total of equity and liabilities (or total assets) Percentage of share capital (31st March 2016) = 6,00,000 10,00,000 x100 = 60% In the same manner, other percentages may be calculted. MathType@MTEF@5@5@+= feaahqart1ev3aaatCvAUfKttLearuGu1bxzLbIrVjxyKLwyUbqedu uDJXwAKbYu51MyVXgatCvAUfeBSjuyZL2yd9gzLbvyNv2CaeHbd9wD YLwzYbItLDharyavP1wzZbItLDhis9wBH5garqqr1ngBPrgifHhDYf gasaacH8srps0lbbf9q8WrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbba9 q8WqFfea0=yr0RYxir=Jbba9q8aq0=yq=He9q8qqQ8frFve9Fve9Ff 0dmeaabaqaaiaacaGaaeqabaWaaqaafaaakqaabeqaaiabbwcaLiaa ykW7cqqGGaaicqqGPbqAcqqGZbWCcqqGGaaicqqGJbWycqqGHbqycq qGSbaBcqqGJbWycqqG1bqDcqqGSbaBcqqGHbqycqqG0baDcqqGLbqz cqqGKbazcqqGGaaicqqGVbWBcqqGUbGBcqqGGaaicqqG0baDcqqGOb aAcqqGLbqzcqqGGaaicqqGIbGycqqGHbqycqqGZbWCcqqGPbqAcqqG ZbWCcqqGGaaicqqGVbWBcqqGMbGzcqqGGaaicqqG0baDcqqGVbWBcq qG0baDcqqGHbqycqqGSbaBcqqGGaaicqqGVbWBcqqGMbGzcqqGGaai cqqGLbqzcqqGXbqCcqqG1bqDcqqGPbqAcqqG0baDcqqG5bqEcqqGGa aicqqGHbqycqqGUbGBcqqGKbazcqqGGaaicqqGSbaBcqqGPbqAcqqG HbqycqqGIbGycqqGPbqAcqqGSbaBcqqGPbqAcqqG0baDcqqGPbqAcq qGLbqzcqqGZbWCcqqGGaaiaeaacqqGOaakcqqGVbWBcqqGYbGCcqqG GaaicqqG0baDcqqGVbWBcqqG0baDcqqGHbqycqqGSbaBcqqGGaaicq qGHbqycqqGZbWCcqqGZbWCcqqGLbqzcqqG0baDcqqGZbWCcqqGPaqk cqqGGaaiaeaacqqGqbaucqqGLbqzcqqGYbGCcqqGJbWycqqGLbqzcq qGUbGBcqqG0baDcqqGHbqycqqGNbWzcqqGLbqzcqqGGaaicqqGVbWB cqqGMbGzcqqGGaaicqqGZbWCcqqGObaAcqqGHbqycqqGYbGCcqqGLb qzcqqGGaaicqqGJbWycqqGHbqycqqGWbaCcqqGPbqAcqqG0baDcqqG HbqycqqGSbaBcqqGGaaicqqGOaakcqqGZaWmcqqGXaqmcqqGZbWCcq qG0baDcqqGGaaicqqGnbqtcqqGHbqycqqGYbGCcqqGJbWycqqGObaA cqqGGaaicqqGYaGmcqqGWaamcqqGXaqmcqqG2aGncqqGPaqkcqqGGa aicqqG9aqpaeaacqqGGaaidaWcaaqaaiabbAda2iabbYcaSiabbcda WiabbcdaWiabbYcaSiabbcdaWiabbcdaWiabbcdaWiabbccaGiaayk W7aeaacqqGXaqmcqqGWaamcqqGSaalcqqGWaamcqqGWaamcqqGSaal cqqGWaamcqqGWaamcqqGWaamcqqGGaaicaaMb8UaaGPaVdaacaaMc8 UaaGPaVlabbIha4jaaykW7caaMc8UaeeymaeJaeeimaaJaeeimaaJa eeiiaaIaeeypa0JaeeiiaaIaeeOnayJaeeimaaJaeeyjauIaeeiiaa cabaGaeeysaKKaeeOBa4MaeeiiaaIaeeiDaqNaeeiAaGMaeeyzauMa eeiiaaIaee4CamNaeeyyaeMaeeyBa0MaeeyzauMaeeiiaaIaeeyBa0 MaeeyyaeMaeeOBa4MaeeOBa4MaeeyzauMaeeOCaiNaeeilaWIaeeii aaIaee4Ba8MaeeiDaqNaeeiAaGMaeeyzauMaeeOCaiNaeeiiaaIaee iCaaNaeeyzauMaeeOCaiNaee4yamMaeeyzauMaeeOBa4MaeeiDaqNa eeyyaeMaee4zaCMaeeyzauMaee4CamNaeeiiaaIaeeyBa0Maeeyyae MaeeyEaKNaeeiiaaIaeeOyaiMaeeyzauMaeeiiaaIaee4yamMaeeyy aeMaeeiBaWMaee4yamMaeeyDauNaeeiBaWMaeeiDaqNaeeyzauMaee izaqMaeeOla4Iaeeiiaacaaaa@4C9A@

Q.2 Prepare a Common size statement of profit and loss of Shefali Ltd. with the help of following information:

Particulars 2015-2016 2016-2017
Revenue from operations 6,00,000 8,00,000
Indirect expense 25% of gross profit 25% of gross profit
Cost of revenue from operations 4,28,000 7,28,000
Other Incomes 10,000 12,000
Income tax 30% 30%

Ans. Common Size Statement of Profit and Loss

Particulars 2015-2016 2016-2017 Percentage of Revenue from Operations
Revenue from operation 6,00,000 8,00,000 100.00 100.00
Other Income 10,000 12,000 1.67 1.50
Total Revenue 6,10,000 8,12,000 101.67 101.50
Expenses
Cost of Goods sold 4,28,000 7,28,000 71.33 91.00
Other Expenses 75,000 90,000 12.50 11.25
Total Expenses 5,03,000 8,18,000 83.83 102.25
Profit before tax 1,07,000 (6,000) 17.83
32,100 5.35
74,900 (6,000) 12.48 (0.75)

Working Notes:

1. Calculation of Other Expenses

Other Expenses = Indirect Expenses = % of Gross Profit

2016 = ₹6,00,000 x 50% x 25% = ₹75,000

2017 = ₹8,00,000 x 45% x 25% = ₹90,000

% is calculated on the basis of Revenue from Operations Percentage of other income (31st March 2016) = ₹10,000 ₹6,00,000 x100 = 1.67% In the same manner, other percentages may be calculted. MathType@MTEF@5@5@+=feaaguart1ev2aaatCvAUfKttLearuGu1bxzLbIrVjxyKLwyUbqeduuDJXwAKbYu51MyVXgatCvAUfeBSjuyZL2yd9gzLbvyNv2CaeHbd9wDYLwzYbItLDharyavP1wzZbItLDhis9wBH5garqqr1ngBPrgifHhDYfgasaacH8srps0lbbf9q8WrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbba9q8WqFfea0=yr0RYxir=Jbba9q8aq0=yq=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@2B49@

Q.3 Prepare Comparative Statement of Profit and Loss from the following information:

Particulars 2015-16 2016-17
Manufacturing expenses 35,000 80,000
Opening stock 30,000 60% of closing stock
Sales 9,60,000 4,50,000
Returns outward 4,000 (out of credit purchase) 6,000 (out of cash purchase)
Closing stock 150% of opening stock 1,00,000
Credit purchases 1,50,000 150% of cash purchase
Cash purchases 80% of credit purchases 40,000
Carriage outward 10,000 30,000
Building 1,00,000 2,00,000
Depreciation on building 20% 10%
Interest on bank overdraft 5,000 —–
10% debentures 2,00,000 20,00,000*
Profit on sale of copyright 10,000 20,000
Loss on sale of personal car 10,000 20,000
Other operating expenses 20,000 10,000
Tax rate 50% 40%

*There is a misprint in the book, this should be ₹2,00,000

Ans. Comparative Statement of Profit & Loss

Particulars 2015-2016 2016-2017 Absolute change % change
I. Revenue from Operations 9,60,000 4,50,000 (5,10,000) (53.12)
II. Other Income 10,000 20,000 10,000 100.00
III. Total Revenue 9,70,000 4,70,000 (5,00,000) (51.55)
IV. Expenses
Net purchases 2,66,000 94,000 (1,72,000) (64.66)
Changes in inventories (15,000) (40,000) (55,000) (366.67)
Finance cost 25,000 20,000 (5,000) (20)
Depreciation and amortisation expenses 20,000 20,000
Other expenses 30,000 40,000 10,000 33.33
Total Expenses 3,26,000 1,34,000 (1,92,000) 58.90
V Profit before Tax 6,44,000 3,36,000 (3,08,000) 47.83
VI Less: Tax 3,22,000 1,34,400 (1,87,600) 58.26
VII Profit for the year 3,22,000 2,01,600 1,20,400 37.39

Working Notes:

1. Calculation of Net Purchases and Change in Inventory

Net Purchases of stock in Trade = Cash Purchases + Credit Purchases – 2016

= ₹1,20,000 + ₹1,50,000 – ₹4,000 = ₹2,66,000

2017 = ₹40,000 + ₹60,000 – ₹60,000 = ₹94,000

Change in Inventory = Opening Stock – Closing Stock

2016 = ₹30,000 ₹- 45,000 = ₹(15,000)

2017 = ₹60,000 – ₹1,00,000 =₹(40,000)

2. Calculation of Finance Cost

Finance Cost = Interest on Bank Overdraft + Interest on Debentures

Finance Cost (2016) = ₹5,000 + ₹20,000 = ₹25,000

Finance Cost (2017) = 0 + ₹20,000 = ₹20,000

3. Calculation of Other Expenses

Other Expenses = Carriage outward + other operating expenses

Other Expenses (2016) = ₹10,000 + ₹20,000 = ₹30,000

Other Expenses (2017) = ₹30,000 + ₹10,000 = ₹40,000

Q.4 Prepare Comparative Statement of Profit & Loss from the following information:

Particulars 2015-16 2016-17
Freight Outward 20,000 10,000
Wages (office) 10,000 5,000
Manufacturing Expenses 50,000 20,000
Stock adjustment (60,000) 30,000
Cash purchases 80,000 60,000
Credit purchases 60,000 20,000
Returns inward 8,000 4,000
Gross profit (30,000) 90,000
Carriage outward 20,000 10,000
Machinery 3,00,000 2,00,000
10% depreciation on machinery 10,000 5,000
Interest on short-term loans 20,000 20,000
10% debentures 20,000 10,000
Profit on sale of furniture 20,000 10,000
Loss on sale of office car 90,000 60,000
Tax rate 40% 50%

Ans. Comparative Statement of Profit & Loss

Particulars 2015-16 2016-17 Absolute change % change
I. Revenue from Operations 2,16,000 92,000 (1,24,000) (57.4)
Other income 10,000 20,000 10,000 100.00
Total Income 2,26,000 1,12,000 (1,14,000) (50.44)
II. Expenses
Net purchases of stock-in-trade 80,000 1,40,000 60,000 75
Stock adjustment 30,000 (60,000) (90,000) (300)
Employee benefit exp. 5,000 10,000 5,000 100.00
Finance costs 21,000 22,000 1,000 4.54
Depreciation and amortisation expenses 5,000 10,000 5,000 100.00
Other expenses 80,000 1,30,000 50,000 62.5
Total Expenses 2,21,000 2,52,000 31,000 14.03
Profit before tax 5,000 (1,40,000) (83,000) 16.6
Less: Income Tax 2,500 (2,500) (100)
Profit after tax 2,500 (1,40,000) (1,37,500) 55

Working Notes:

1. Calculation of Net Sales

Net Sales = Cost of Goods Sold + Gross Profit – Sales Return

or, Net Sales = Purchases + Manufacturing Expenses + Change in Inventory + Gross Profit – Sales Return

Net Sales (2016) = 80,000 + 20,000 +30,000 + 90,000 – 4,000 = ₹2,16,000

Net Sales (2017) = 1,40,000 + 50,000 – 60,000 – 30,000 – 80,000 = ₹92,000

2. Calculation of Finance Cost

Finance Cost = Interest on short-term loans + Interest on 10% Debentures

Finance Cost (2016) = 20,000 + 1,000 = ₹21,000

Finance Cost (2017) = 20,000 + 2,000 = ₹22,000

3. Calculation of Other Expenses

Other Expenses = Freight Outward + Carriage Outward + Loss on sale of office car

Other Expenses (2016) = 10,000 + 10,000 + 60,000 = ₹80,000

Other Expenses (2017) = 20,000 + 20,000 + 90,000 = ₹1,30,000

Q.5 Following are the balance sheets of Alpha Ltd., as at March 31, 2016 and 2017. Prepare a Comparative Balance Sheet.

Particulars March 31, 2016 March 31, 2017
1.Equity & Liabilities
Shareholders’ Funds
Equity share capital 2,00,000 4,00,000
Reserves & Surplus 1,00,000 1,50,000
Non-current Liabilities
Long-term borrowings 2,00,000 3,00,000
Current Liabilities
Short-term borrowings 50,000 70,000
Trade Payables 30,000 60,000
Short-term provisions 20,000 10,000
Other current liabilities 20,000 30,000
Total 6,20,000 10,20,000
2.Assets
Fixed assets 2,00,000 5,00,000
Non-current investments 1,00,000 1,25,000
Current Investments 60,000 80,000
Inventories 1,35,000 1,55,000
Trade Receivables 60,000 90,000
Short term loans & Advances 40,000 60,000
Cash and Cash Equivalents 25,000 10,000
Total 6,20,000 10,20,000

Ans.

Comparative Balance Sheet

Particulars 31/03/16 31/03/17 Absolute change % change
1.Equity & Liabilities
Shareholders’ Funds
Equity share capital 2,00,000 4,00,000 2,00,000 100
Reserves & Surplus 1,00,000 1,50,000 50,000 50
Non-current Liabilities
Long-term borrowings 2,00,000 3,00,000 1,00,000 50
Current Liabilities
Short-term borrowings 50,000 70,000 20,000 40
Trade Payables 30,000 60,000 30,000 100
Short-term provisions 20,000 10,000 (10,000) (50)
Other current liabilities 20,000 30,000 10,000 50
Total 6,20,000 10,20,000 4,00,000 64.52
2.Assets
Fixed assets 2,00,000 5,00,000 3,00,000 150
Non-current investments 1,00,000 1,25,000 25,000 25
Current Investments 60,000 80,000 20,000 33.33
Inventories 1,35,000 1,55,000 20,000 14.81
Trade Receivables 60,000 90,000 30,000 50
Short term loans & Advances 40,000 60,000 20,000 50
Cash at Bank 25,000 10,000 (15,000) (60)
Total 6,20,000 10,20,000 4,00,000 64.52

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Q.6 Explain how common size statements are prepared giving an example.

Ans. Common size statements are the statements which indicate the relationship of different items of a financial statement with a common item by expressing each item as percentage of that common item.

Common size statements can be:

  1. Common size balance sheet
  2. Common size income statement

Common size statement is prepared in a columnar form for analysis. The following are the columns prepared in common size statements.

  1. Particulars column: This column shows the various financial items under their respective heads.
  2. Amount columns: These columns depict the amount of each items, sub totals and gross total of a particular year.
  3. Percentage or ratio columns: These columns show the proportion of each item to the common item either in terms of percentage or ratio.

Format of Common Size Balance Sheet

Common Size Balance Sheet as at 31st March, 2014 and 2015

Particulars

(1)

Absolute Amounts Percentage of Balance Sheet Total
2014 (₹)

(2)

2015 (₹)

(3)

2014

(%)

(4)

2015

(%)

(5)

I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share capital
(i) Equity share capital
(ii) Preference share capital
(b) Reserves and surplus
2. Non-Current Liabilities
(a) Long term borrowings
(b) Other long-term liabilities
(c) Long term provisions
3. Current Liabilities
(a) Short term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short term provisions
Total 100 100
II. ASSETS
(1) Non Current Assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(b) Non-current investments
(c) Long term loans and

advances

(d) Other non-current assets
(2) Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short term loans and

Advances

(f) Other current assets
Total 100 100

Let us understand common size statement with the help of given example:

Prepare a Common Size balance sheet from the following balance sheet of Aruna Ltd., and Anjali Ltd.:

Particulars 2014-15 2015-16
1.Equity & Liabilities
a)Equity share capital 3,00,000 4,00,000
b)Reserves & Surplus 1,50,000 1,25,000
c)Current liabilities 50,000 75,000
Total 5,00,000 6,00,000
2.Assets
a)Fixed assets 2,00,000 3,50,000
b)Current assets 3,00,000 2,50,000
Total 5,00,000 6,00,000

Common Size Balance Sheet

Particulars 2014-15 2015-16 % of Balance Sheet total
31st March 2015 31st March 2016
1.Equity & Liabilities
a)Equity share capital 3,00,000 4,00,000 60.00 66.67
b)Reserves & Surplus 1,50,000 1,25,000 30.00 20.83
c)Current liabilities 50,000 75,000 10.00 12.50
Total 5,00,000 6,00,000 100.00 100.00
2.Assets
a)Fixed assets 2,00,000 3,50,000 40.00 58.33
b)Current assets 3,00,000 2,50,000 60.00 41.67
Total 5,00,000 6,00,000 100.00 100.00

% is calculated on the basis of total of equity and liabilities (or total assets) Percentage of share capital (31st March 2015) = ₹3,00,000 ₹5,00,000 x100 = 60% In the same manner, other percentages may be calculted. MathType@MTEF@5@5@+=feaaguart1ev2aaatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbwvMCKfMBHbqeduuDJXwAKbYu51MyVXgaruWqVvNCPvMCG4uz3bqefqvATv2CG4uz3bIuV1wyUbqeeuuDJXwAKbsr4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=xfr=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@FD67@

Q.7 What do you understand by analysis and interpretation of financial statements? Discuss its importance.

Ans. Analysis and interpretation refers to a systematic and critical examination of the financial statements. It not only establishes cause and effect relationship among the various items of the financial statements but also presents the data in the proper format. The term financial analysis includes both analysis and interpretation. The term analysis means simplification of financial data by methodical classification given in the financial statements. Interpretation means explaining the meaning and significance of the data. These two are complimentary to each other. Analysis is useless without interpretation and interpretation without analysis is difficult.

The following are the reasons that advocate in favour of financial analysis:

  1. It helps in evaluating the profit earning capacity and financial feasibility of the business.
  2. It helps in assessing the long-term solvency of the business.
  3. It helps in evaluating the relative financial status of a firm in comparison to other competitive firms.
  4. It assists management in decision making process, drafting various plans and also in establishing an effective control system.

Q.8 What is the importance of comparative statements? Illustrate your answer with particular reference to comparative income statement.

Ans. The American Institute of Certified Public Accountants has explained the utility of preparing comparative financial statements as follows:

“The presentation of comparative financial statements in annual and other reports enhances the usefulness of such reports and brings out more clearly the nature and trends of current changes affecting the enterprise. Such presentation emphasis the fact that statements for a series of periods are far more significant than those for a single period and that the accounts for one period are but an instalment of what is essentially a continuous history.”

Importance of comparative statements is highlighted in the following points:
1. Makes data simpler and more understandable: While preparing comparative financial statements data for a number of years is presented in simpler and comparable form. It is simple to draw conclusions about the operating results and financial health of the business.
2. Indicates the trend: Comparative financial statements indicate the trend of change by putting the figures of revenue from operations, expenses and profit for two or more years side by side.
3. Indicates the weak points of the business: Comparative financial statements may indicate the weak points of the business. Management can then investigate and find out the reasons for the weakness of the business and can take corrective measures.
4. Helps in comparison: It help a concern to compare its performance with the average performance of the industry (i.e. all the firms in the same business).
5. Forecasting: Comparative study of the changes in the key figures over a period helps the management in forecasting the profitability and financial soundness of the business.
Income Statement: Statement of Profit and Loss or Income Statement shows profit earned or loss incurred during the year. Comparative Statement of Profit and Loss or Comparative Income Statement is the horizontal analysis of Income Statement which shows the operating results for more than one accounting period so that changes in absolute amounts and percentages from one period to another are known.

Q.9 Explain the usefulness of trend percentages in interpretations of financial performance of a company.

Ans. The trend analysis is a technique of studying several financial statements over a series of years. In this analysis the trend percentages are calculated for each item by taking the figure of that item for the base year taken as 100. Generally the first year is taken as a base year. The analyst is able to see the trend of figures, whether moving upward or downward and involves the computation of the percentage relationship that each item bears to the same item in the base year. For example, revenue from operations, whether they are exhibiting increasing tendency or decreasing tendency or remaining constant over the period of comparison. Generally trend analysis is done for a reasonably long period. Many companies present their financial data for a period of 5 or 10 years in various forms in their annual reports.

Q.10 Describe the different techniques of financial analysis and explain the limitations of financial analysis.

Ans. The most commonly used techniques of financial analysis are as follows:

1. Comparative Statements: These are the statements showing the profitability and financial position of a firm for different periods of time in a comparative form to give an idea about the position of two or more periods. It applies to statement of profit and loss and balance sheet. Comparative figures indicate the trend and direction of financial position and operating results.

2. Common Size Statements: A common size balance sheet shows the percentage of each asset to the total assets and that of each liability to the total liabilities. Similarly, in the common size statement of profit and loss, the items of expenditure are shown as a percentage of the net revenue from operations. Such statements allow an analyst to compare the operating and financing characteristics of two companies of different sizes in the same industry.

3. Trend Analysis: It is a technique of studying the operational results and financial position over a series of years. Using the previous years’ data of a business enterprise, trend analysis can be done to observe the percentage changes over time in the selected data.

4. Ratio Analysis: It describes the significant relationship which exists between various items of a balance sheet and a statement of profit and loss of a firm. It is possible to assess the profitability, solvency and efficiency of an enterprise through the technique of ratio analysis.

5. Cash Flow Analysis: It refers to the analysis of actual movement of cash into and out of an organisation. The flow of cash into the business is called cash inflow and flow of cash out of the business is called as cash outflow. The difference between the inflow and outflow of cash is the net flow. Cash flow statement is prepared to project the manner in which the cash has been received and has been utilised during an accounting year.

Limitations of Financial Analysis:

Though financial analysis is quite helpful in determining financial strengths and weaknesses of a firm, it is based on the information available in financial statements. Some other limitations of financial analysis are:

  1. They do not consider price level changes.
  2. Financial analysis may be misleading without the knowledge of the changes in accounting procedure followed by a firm.
  3. Monetary information alone is considered in financial analysis while non-monetary aspects are ignored.

The financial statements are prepared on the basis of accounting concept, as such; it does not reflect the current position.

Q.11 What do you mean by Common Size Statements?

Ans. These are the statements which indicate the relationship of different items of a financial statement with a common item by expressing each item as percentage of that common item. For example, a common size balance sheet shows the percentage of each asset to the total assets and that of each liability to the total liabilities.

Q.12 What are comparative financial statements?

Ans. These statements refer to the statement of profit and loss and balance sheet prepared by providing columns for the figures for both the current year as well as for the previous year and for changes during the year, both in absolute and relative terms.

Q.13 State the importance of financial analysis?

Ans. The following are the importance of financial analysis:

  1. It helps in evaluating the profit earning capacity and financial feasibility of the business.
  2. It helps in assessing the long-term solvency of the business.
  3. It helps in evaluating the relative financial status of a firm in comparison to other competitive firms.

Q.14 State the meaning of Analysis and Interpretations.

Ans. Analysis and interpretation refers to a systematic and critical examination of the financial statements. It not only establishes cause and effect relationship among the various items of the financial statements but also presents the data in the proper format.

Q.15 Distinguish between Vertical and Horizontal Analysis of financial data.

Ans.

Basis Horizontal Analysis Vertical Analysis
Purpose Its purpose is to determine the change in an item during an accounting year. The change in item is expressed either in absolute figures or in percentage or in both terms. Its purpose is to determine the proportion of items to the common item of the same accounting period. The change in item is either expressed in ratio or in percentage terms.

Q.16 List the techniques of Financial Statement Analysis.

Ans. The following are commonly used techniques of financial statement analysis:

  1. Comparative financial statements
  2. Common size financial statements
  3. Trend analysis
  4. Ratio analysis
  5. Cash flow statement

Q.17 Following are the balance sheets of Beta Ltd. at March 31, 2016 and 2017:

Particulars March 31, 2016 March 31, 2017
1.Equity & Liabilities
Shareholders’ Funds
Equity share capital 4,00,000 3,00,000
Reserves & Surplus 1,50,000 1,00,000
Non-current Liabilities
Loan from IDBI 3,00,000 1,00,000
Current Liabilities
Short-term borrowings 70,000 50,000
Trade payables 60,000 30,000
Short-term provisions 10,000 20,000
Other current liabilities 1,10,000 1,00,000
Total 11,00,000 7,00,000
2.Assets
Non-current Assets
Fixed assets 4,00,000 2,20,000
Non-current investments 2,25,000 1,00,000
Current Assets
Current investments 80,000 60,000
Inventories 1,05,000 90,000
Trade Receivables 90,000 60,000
Short-term loans & advances 1,00,000 85,000
Cash & Cash equivalents 1,00,000 85,000
Total 11,00,000 7,00,000

Ans.

Comparative Balance Sheet

Particulars 31/03/16 31/03/17 Absolute change % change
1.Equity & Liabilities
Shareholders’ Fund
Equity share capital 3,00,000 4,00,000 1,00,000 33.33
Reserves & Surplus 1,00,000 1,50,000 50,000 50
Non-current Liabilities
Loan from IDBI 1,00,000 3,00,000 2,00,000 200
Current Liabilities
Short-term borrowings 50,000 70,000 20,000 40
Trade payables 30,000 60,000 30,000 100
Short-term provisions 20,000 10,000 (10,000) (50)
Other current liabilities 1,00,000 1,10,000 10,000 10
Total 7,00,000 11,00,000 4,00,000 57.14
2.Assets
Non-current Assets
Fixed assets 2,20,000 4,00,000 1,80,000 81.82
Non-current investments 1,00,000 2,25,000 1,25,000 125
Current Assets
Current investments 60,000 80,000 20,000 33.33
Stock 90,000 1,05,000 15,000 16.67
Trade Receivables 60,000 90,000 30,000 50
Short-term loans & advances 85,000 1,00,000 15,000 17.65
Cash & Cash equivalents 85,000 1,00,000 15,000 17.65
Total 7,00,000 11,00,000 4,00,000 57.14

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