CBSE Class 12 Accountancy Analysis of Financial Statement and Tools Important Questions Set 02

Very Short Answer Questions (1 Mark)

Question 1. Mention any four techniques or tools used for the analysis of Financial Statements.
Answer:
(i) Comparative Statements, (ii) Common Size Statements, (iii) Ratio Analysis, (iv) Cash Flow Statement.

Teacher's Note:
1. Trend analysis is also a tool, but these four are the ones in the CBSE syllabus.

Question 2. Write down two main objectives of preparing Comparative Financial Statements?
Answer:
(i) To analyse financial information in absolute rupees, (ii) To identify magnitude and direction of changes in percentage form.

Teacher's Note:
1. Comparative statements show both absolute change (₹) and percentage change.

Question 3. What do you mean by Comparative Balance Sheet?
Answer:
When the assets, liabilities and share capital are shown in comparative form to know the increase or decrease in these items then it is called comparative balance sheet.

Teacher's Note:
1. A Comparative Balance Sheet has columns for previous year, current year, absolute change and percentage change.

Question 4. Give any one advantage of comparative balance sheet.
Answer:
Comparative balance sheet is helpful in knowing the trend of change and the direction of change.

Teacher's Note:
1. Direction of change (increase or decrease) is as important as its size.

Question 5. Give any one objective of Comparative Income Statement.
Answer:
We can know the increase or decrease in cost of revenue from operations, profit and expenses.

Teacher's Note:
1. Compare the rate of growth of expenses with that of revenue to judge efficiency.

Question 6. Give any two limitations of comparative statements.
Answer:
(i) Lack of vertical analysis,
(ii) Lack of two or more business firms’ comparison.

Teacher's Note:
1. Comparative statements compare years, so they do not show each item's share of the total.

Question 7. What is the utility of Common Size Statements?
Answer:
Common Size Statements are of immense use while comparing business enterprises which differ substantially in size, because both the enterprises reduce to a common size, i.e., 100.

Teacher's Note:
1. Percentages remove the effect of size, so big and small firms become comparable.

Question 8. What do you know about Common Size Statement of Profit and Loss or Income Statement?
Answer:
Common Size Statement of Profit and Loss or Income Statement is a statement in which figures reported in the Income Statement, i.e., ‘Statement of Profit and Loss’ are converted into percentages to revenue from operations (net sales). It is a vertical analysis.

Teacher's Note:
1. The base is revenue from operations (net sales), taken as 100.

Question 9. Give any one advantage of common size balance sheet.
Answer:
Change in individual items of balance sheet can be analysed.

Teacher's Note:
1. Each item is seen as a share of total assets, so changes in structure are easy to spot.

Question 10. Give any one advantage of common size income statement.
Answer:
Change in individual items of income statement can be analysed in relation to revenue from operations.

Teacher's Note:
1. A rising expense percentage signals falling efficiency even if revenue grows.

Question 11. Give any one limitation of common size statements analysis.
Answer:
Common size statements analysis can’t be used where different concerns use the different accounting methods.

Teacher's Note:
1. Comparisons are meaningful only when firms follow similar accounting policies.

Question 12. Which item is assumed to be 100 in case of common size statement of profit and loss?
Answer:
Generally revenue from operations (sales) figure is assumed to be 100 in case of common size income statement.

Teacher's Note:
1. Do not take total revenue (which includes other income) as the base.

Question 13. How is the solvency of business assessed by financial statements?
Answer:
With the help of liquidity position of business.

Teacher's Note:
1. Short-term solvency is judged from current assets against current liabilities.

Question 14. Why are Comparative Financial Statements considered an efficient tool for financial analysis?
Answer:
Comparative financial statements are considered as efficient tool for financial analysis because they (i) analyse financial information in absolute amount, (ii) identify magnitude and direction of changes in percentage form, (iii) indicate strength and weakness of firm, (iv) make inter-firm and intra-firm comparison smoothly.

Teacher's Note:
1. Use the four points as a checklist when this is asked for 3 marks.

Question 15. A company has Trade Receivables amounted to ₹ 8,80,000 on 31st March, 2016 and ₹ 9,90,000 on 31st March, 2017. Compute the percentage changes. [HOTS]
Answer:
Increased by 12.50%.
(Change = 9,90,000 − 8,80,000 = ₹ 1,10,000; 1,10,000 ÷ 8,80,000 × 100 = 12.50%)

Teacher's Note:
1. The base for percentage change is the 2016 figure (earlier year).

Question 16. How are ‘Comparative Statement of Profit and Loss’ useful in forecasting and planning?
Answer:
Analysing the changes in the Statement of Profit and Loss of previous years helps the management in forecasting and planning.

Teacher's Note:
1. Trends from past years are used to estimate future revenue and expenses.

Question 17. How can ‘Analysis of Historical Records’ be considered a limitation of Comparative Statements? [HOTS]
Answer:
Comparative Statements provide an analysis of past financial statements. It is not reflective of future which is more relevant and useful.

Teacher's Note:
1. Decisions concern the future, but the data is of the past; that is the core of this limitation.

Question 18. What is meant by intra-firm comparison?
Answer:
When the financial statements of a firm for two or more years are compared, it is called intra-firm comparison.

Teacher's Note:
1. Intra = within the same firm; inter = between firms.

Question 19. If a Company has Fixed Assets ₹ 6,00,000; Non-current Investments ₹ 1,00,000 and Current Assets ₹ 3,00,000, then find out the percentage of Current Assets to Total Assets. [HOTS]
Answer:
Total Assets = 6,00,000 + 1,00,000 + 3,00,000 = ₹ 10,00,000
Current assets are 30% of total assets (3,00,000 ÷ 10,00,000 × 100).

Teacher's Note:
1. Do not forget non-current investments while totalling assets.

Question 20. If a Company has Fixed Assets worth ₹ 390 crores and Current Assets ₹ 260 crores, then find out the percentage of Current Assets to Total Assets.
Answer:
Total Assets = 390 + 260 = ₹ 650 crores
Current assets are 40% of total assets (260 ÷ 650 × 100).

Teacher's Note:
1. The base is total assets, not fixed assets.

Question 21. Why are common size statements also known as 100% statements? [HOTS]
Answer:
Common size statements are also known as 100% statements because in these statements, all items are expressed as percentage of the base item which is 100.

Teacher's Note:
1. Check: in a common size Balance Sheet each side must add up to exactly 100%.

Question 22. If a company has total equity and liabilities of worth ₹ 9,00,000 and shareholders’ funds of ₹ 3,00,000, then find out the percentage of shareholders’ funds to total equity and liabilities?
Answer:
Shareholders’ funds are 33.33% of total equity and liabilities (3,00,000 ÷ 9,00,000 × 100).

Teacher's Note:
1. Round percentages to two decimal places, as in board answers.

Short Answer Questions (2 Marks)

Question 23. Briefly explain the significance of ‘Analysis of financial statements’ to (a) The Finance Manager, and (b) Trade Payables. [CBSE (F) 2017]
Answer:
(a) Significance to the Finance Manager: Finance Manager can make policies and decisions keeping in mind the liquidity, solvency, efficiency and profitability position of the terms of the firm.
(b) Significance to Trade Payables: Trade payables can know whether the firm is able to pay their debts on time or not.

Teacher's Note:
1. Trade payables are short-term creditors, so link their interest to liquidity, not to long-term solvency.

Short Answer Questions (3 Marks)

Teacher's Note:
1. A decrease (Reserves and Surplus) is shown in brackets in both the absolute and the percentage column.
2. The percentage change of the Total must be the same on both sides (60%) - a quick check of your work.

Teacher's Note:
1. Find the missing base first (revenue from operations 2016 = purchases ÷ 72%); every other blank then follows.
2. Check: the expense items must add up to the given Total Expenses in each year.

Teacher's Note:
1. Each percentage is the item divided by that year's revenue from operations, so 2015 and 2016 use different bases.

Teacher's Note:
1. Get 2019 Equity Share Capital from the change (6,00,000 + 1,20,000); the intangible assets show no change, so the 2019 figure equals 2018.
2. Both totals must agree in each year (14,80,000 and 17,70,000) - use this to check the missing current liabilities.

Teacher's Note:
1. Find cost of materials consumed first; revenue and other expenses are percentages of it, not of revenue.

Teacher's Note:
1. A fall in other expenses is shown as a negative change in brackets.

Teacher's Note:
1. Total income includes other incomes, so its percentage change lies between those of its two parts.

Teacher's Note:
1. With the same tax rate in both years, profit after tax changes by exactly the same percentage as profit before tax.

Teacher's Note:
1. Cost of revenue from operations = purchases of stock-in-trade + change in inventories; other expenses are a percentage of this, not of revenue.

Teacher's Note:
1. Use 20,00,000 as the base for 2017 and 25,00,000 for 2018; each side then totals 100%.

Teacher's Note:
1. Expenses grew more slowly than revenue, which is why profit rose by a higher percentage than revenue.

Teacher's Note:
1. Other expenses fall even though materials rise, because the rate drops from 25% to 15%; work out the rupee amounts before comparing.

Teacher's Note:
1. When every item is a fixed percentage of revenue, every item changes by the same percentage as revenue.

Long Answer Questions (5 Marks)

Teacher's Note:
1. Put 2016 in column A even though the question lists 2017 first; the base year is always the earlier year.

Teacher's Note:
1. The base changes each year (60,00,000 in 2011 and 50,00,000 in 2012), so compare percentages, not rupee amounts.
2. Check: the four liabilities items and the four asset items each add up to 100% for every year.