CBSE Class 12 Accountancy Partnership Common Size And Comparative Statements Notes

Hint: Direct expenses are ignored since they are already included in the cost of goods sold.

Prepare a Comparative Income Statement from the following information

Question--

Solution 3.

Comparative Income Statement

for the years ended on 31st March 2009 and 2010

Note: Wages is a direct expense. It is ignored because it is already included in the cost of goods sold.

1. From the following details make out a comparative and common size statements:

Particulars                                  2011 `         2012 `

Revenue from operations           16,00,000      20,00,000

Cost of Goods Sold                    8,00,000        10,00,000

Indirect Expenses                     2,00,000         1,00,000

Tax rate 40%

Solution:

Comparative Income Statement

2. Prepare a comparative and common size income statement with the help of the following information:

Particulars                            2011 `           2012 `

Revenue from operations       8,00,000        10,00,000

Cost of material                     4,00,000       6,00,000

Employee benefit expense      1,50,000        2,00,000

Provision for Tax                   1,00,000         1,30,000

Solution:

Comparative Income Statement 

For Financial Analysis

Basic Concepts

Analysis of Financial Statements: An analysis of financial statement means a thorough, systematic, comprehensive and critical examination of the information contained in the financial statements in order to understand them better, base decisions on them after drawing meaningful conclusions, take planned steps towards development and secure the future of the organisation.

Objectives of Financial Statements Analysis

• Financial Statements Analysis presents financial data in a simplified and understandable form, so that meaningful conclusions can be drawn from it.
• Financial analysis helps in assessing the profitability position and operational efficiency of the firm as a whole as well as its various departments so as to judge the financial health of the organisation.
• Financial analysis helps in ascertaining the relative importance of different components of financial position (such as assets, liabilities, owners' equity, etc.) of the firm.
• It helps in making intra-firm and inter-firm comparisons.
• It helps in identifying the causes of change in profitability or financial positions of the firm.
• Financial Statements Analysis helps in assessing future trends and thus helps in forecasting and preparation of budgets.

Limitations of Financial Statements Analysis

• The financial statements analysis suffers from such limitations as financial statements suffer. This ignores the qualitative informations like quality of management and labour force, public relations, etc.
• The analysis of financial statements do not disclose the current worth of the business. The financial statements of the company are prepared on cost principle.
• In many situations, accountant has to make a choice out of various alternatives available. He may choose that alternative which may be beneficial to the company. In such case, the financial statements are not free from bias.
• Different firms may follow different accounting policies. This may create difficulty in comparing the results of two companies.

Tools for Analysis of Financial Statements: Analysis of Financial Statements can be carried out by using the following tools:

• Comparative Statements (Horizontal Analysis)
• Common-size Statements (Vertical Analysis)
• Ratio Analysis
• Cash Flow Statement

Comparative Statement: Comparative statements compare financial data at two points of time and help in deriving meaningful conclusions regarding the changes in financial position and operating results. Statements showing financial data for two or more than two years, placed side by side to facilitate comparison are called 'Comparative Financial Statements.'

(A) Comparative Balance Sheet

According to Faulke, "Comparative Balance Sheet analysis is the study of the trend of the same items or group of items and computed items in two or more Balance Sheets of the same business enterprise of different dates."

The Comparative Balance Sheet shows increase and decrease in absolute terms as well as in percentages, in various assets, liabilities and capital and thus provides information regarding progress of the business firm.

Format of Comparative Balance Sheet

Comparative Balance Sheet of ............... Ltd.
as at 31st March, 2018 and 2019

(B) Comparative Statement of Profit and Loss or Comparative Income Statement: Comparative Statement of Profit and Loss is the income statement which is prepared in such a form so as to reflect the operating activities of the business for two or more accounting periods. It helps in assessing and reviewing the operational efficiency, deciding future course of action and formulating effective planning. The generally accepted format of the Comparative Income Statement is given below:

Format of Comparative Statement of Profit and Loss

Comparative Statement of Profit and Loss
for the years ended 31st March, 2018 and 2019

Note: If current year's value has decreased, show the absolute change and percentage change in brackets to reflect negative item.

Common Size Statements: According to Kohler, "Common Size Statements are accounting statements expressed in percentages of some base rather than rupees."

(A) Common Size Balance Sheet: In a Common Size Balance Sheet each item of assets is converted into percentages to total assets (i.e., 100) and each item of equity and liabilities is converted into percentages to total equity and liabilities (i.e., 100). Thus, the Balance Sheet is converted into percentage form and the converted Balance Sheet is called as 'Common Size Balance Sheet'.

Format of Common Size Balance Sheet

Common Size Balance Sheet
as at 31st March, 2018 and 2019

(B) Common Size Statement of Profit and Loss: In a Common Size Statement of Profit and Loss or Income Statement each item is shown as percentage to Revenue from Operations (Net Sales). It reflects as to what part of revenue from operations has been absorbed by each individual item of expense.

Format of a Common Size Statement of Profit and Loss

Common Size Statement of Profit and Loss
for the years ended 2018 and 2019