GSEB Class 12 Accounts Solutions Chapter 4 Analysis of Financial Statements

 

Question 1. Which of the following analysis shows stakeholder-based classification?
(A) External analysis
(B) Horizontal analysis
(C) Short-term analysis
(D) Vertical analysis
Answer: (A) External analysis
In simple words: Analysis categorized by stakeholders identifies whether the examination of financial data is conducted by external parties or internal management.

🎯 Exam Tip: Understanding stakeholder-based classification is crucial for identifying the purpose and audience of financial analysis.

 

Question 2. How many assets are analysed in the financial statement analysis?
(A) 1
(C) 3
(D) 4
Answer: (D) 4
In simple words: Financial statement analysis typically examines all four types of assets to gain a comprehensive understanding of a company's financial position.

🎯 Exam Tip: Recall the primary categories of assets (current, non-current, tangible, intangible) typically scrutinized in financial analysis.

 

Question 3. The information regarding the use of assets gives the analysis of ..........................
(A) profitability
(B) liquidity
(C) solvency
(D) efficiency
Answer: (D) efficiency
In simple words: Information concerning how assets are utilized directly reflects the operational effectiveness of a business.

🎯 Exam Tip: The utilization of assets is a key indicator for assessing a company's operational efficiency, often measured through asset turnover ratios.

 

Question 4. The analysis of the financial statements ..........................
(A) presents only results
(B) provides historical information
(C) makes interpretation
(D) none of the above
Answer: (C) makes interpretation
In simple words: Financial statement analysis involves more than just presenting raw data; its primary function is to interpret this data to derive meaningful insights.

🎯 Exam Tip: Emphasize that financial analysis goes beyond mere data compilation, focusing on interpretation to inform decision-making.

 

Question 5. The expenses of the current year of a company is Rs. 6,00,000; and if it is increased by 20% compared to the previous year, what would be the expenses of the previous year?
(A) Rs. 1,20,000
(B) Rs. 5,00,000
(C) Rs. 7,20,000
(D) None of these
Answer: (B) Rs. 5,00,000
In simple words: To find the previous year's expenses, divide the current year's expenses by (1 + the percentage increase), which means Rs. 6,00,000 / 1.20, resulting in Rs. 5,00,000.

🎯 Exam Tip: When calculating previous year figures based on a percentage increase, remember to divide the current amount by (1 + percentage increase as a decimal).

 

2. Answer the following questions in one sentence :

 

Question 1. What is financial analysis?
Answer: Financial analysis refers to the process of interpreting information or results obtained from financial statements.
In simple words: Financial analysis means understanding what financial reports tell us.

🎯 Exam Tip: A concise definition highlighting interpretation is key here.

 

Question 2. Describe the types of financial analysis on the basis of parties.
Answer: Based on the parties involved, financial analysis is primarily categorized into two types: External analysis and Internal analysis.
In simple words: Financial analysis can be done by people outside the company (external) or by people inside the company (internal).

🎯 Exam Tip: Remember to clearly state both external and internal analysis when asked about party-based classification.

 

Question 3. Describe the types of financial analysis on the basis of time.
Answer: Based on the time horizon, financial analysis is classified into two types: Long-term analysis and Short-term analysis.
In simple words: Financial analysis is categorized by time as either long-term (over a longer period) or short-term (for a brief period).

🎯 Exam Tip: Distinguish between long-term and short-term analysis based on the duration or period covered.

 

Question 4. What is horizontal analysis?
Answer: Horizontal analysis involves the examination or comparison of financial statements over different years, typically presented by comparing figures from left to right, thus indicating trends over time.
In simple words: Horizontal analysis compares financial data across multiple years to see trends.

🎯 Exam Tip: Highlight that horizontal analysis focuses on year-to-year comparisons to identify trends.

 

Question 5. What is vertical analysis?
Answer: Vertical analysis is the comparative examination of different units within financial statements for a single year, where each item is expressed as a percentage of a base figure within the same statement.
In simple words: Vertical analysis looks at how different parts of a financial statement relate to a total amount in one year.

🎯 Exam Tip: Emphasize that vertical analysis analyzes a single period, expressing each line item as a percentage of a base figure (e.g., sales for income statement, total assets/liabilities for balance sheet).

 

3. Answer the following questions in brief :

 

Question 1. Describe the different types of financial analysis.
Answer: Various categories of financial analysis exist, classified as follows:
ℹ️ चित्र व्याख्या (Diagram Explanation): यह आरेख वित्तीय विश्लेषण के विभिन्न प्रकारों को दर्शाता है, जिसमें स्टेकहोल्डर्स के आधार पर, क्षैतिज-ऊर्ध्वाधर स्वरूप के आधार पर और अवधि के आधार पर वर्गीकरण शामिल है। यह बाहरी, आंतरिक, क्षैतिज, ऊर्ध्वाधर, दीर्घकालिक और अल्पकालिक विश्लेषण को स्पष्ट रूप से विभाजित करता है।
(1) On the Basis of Stakeholders: Financial statements of a business entity are utilized by various stakeholders, who can be categorized into two groups:

(i) External party
(ii) Internal party.

(i) External Analysis: External entities such as potential investors, financial institutions, government bodies, credit rating agencies, and researchers make investment and other decisions by analyzing financial statements; this is known as external analysis.

(ii) Internal Analysis: The management of a business entity uses financial statements for decision-making. When management analyzes financial statements for their decisions, it is termed internal analysis. The information available for this type of analysis is both precise and comprehensive.

(2) Horizontal-Vertical Form: This type of analysis can be performed in two ways:

(i) In the horizontal form and
(ii) In the vertical form.

(i) Horizontal analysis: If the process of analyzing or comparing financial statements across different years is done from a left-to-right perspective (i.e., in a horizontal format), then it is called horizontal analysis. This analysis is suitable for long-term planning, helps in understanding current trends, and is also known as time series analysis.

(ii) Vertical analysis: The comparative analysis within different units of various financial statements for a single year is termed vertical analysis. Vertical analysis is employed to compare the performance of different units or departments for a specific year using various predefined ratios.

(3) On the Basis of Duration: Financial statement analysis for a business entity can be divided into two sections based on time:

(i) Long-term analysis
(ii) Short-term analysis.

(i) Long-term analysis: Many stakeholders, including debenture holders, financial institutions, and potential investors, conduct a long-term analysis of financial statements before committing their funds to a corporate business. This analysis requires information spanning more than one year. Through this analysis, stakeholders assess the present and future long-term solvency, profitability, liquidity, and efficiency of the borrowers.

(ii) Short-term analysis: This analysis is used to determine the short-term solvency or liquidity of a business entity. Short-term lenders and raw material suppliers typically perform this type of analysis.
In simple words: Financial analysis is categorized by who does it (external or internal), how it's done over time (horizontal or vertical), and its duration (long-term or short-term) to provide different insights.

🎯 Exam Tip: Ensure you describe each type of analysis with its core purpose and the stakeholders involved, especially differentiating between time-based and party-based classifications.

 

Question 2. Discuss any three objectives of financial analysis.
Answer: Key objectives of financial analysis include:
1. Efficiency evaluation: A business entity procures various assets based on its operational nature to facilitate production, sales, and service provision. These assets should be utilized to their maximum potential, as optimal asset usage leads to higher earnings. Financial analysis enables the assessment of how efficiently assets are being employed.
2. Evaluation of earning capacity: Financial statements are typically prepared for a 12-month period. This analysis, performed using various accounting ratios, can also forecast the entity's future earning potential. Most stakeholders use this analysis to gather information on present and future earnings for their investment decisions.
3. Solvency evaluation: Solvency evaluation comprises two types: short-term and long-term solvency. Suppliers of goods and services assess the business's short-term solvency, while banks and financial institutions evaluate its long-term solvency for loan purposes.
In simple words: Financial analysis aims to check how well a business uses its assets (efficiency), how much money it can make (earning capacity), and its ability to pay off debts in the short and long run (solvency).

🎯 Exam Tip: Focus on linking each objective to a specific aspect of business performance, such as asset management for efficiency, profitability for earning capacity, and debt-paying ability for solvency.

 

Question 3. Discuss any three uses of financial analysis.
Answer: The primary uses of financial analysis are:
1. For dividend decisions: In a company, dividend decisions are analyzed by various parties, including existing investors, potential investors, and the company itself. Dividend payments are based on the company's earning capacity, which is determined through profitability analysis, making financial statements crucial for proper dividend decisions.
2. For lending decisions: Banks and financial institutions provide short-term and long-term loans and advances to business entities. Financial statement analysis helps them determine the safety of their advances.
3. For borrowing decisions: By analyzing their own financial statements, business entities can estimate their capacity to borrow funds from the market. This evaluation helps in exploring opportunities for new investments.
In simple words: Financial analysis is used to help make decisions about paying dividends to shareholders, deciding whether to lend money to a company, and for a company to assess its own borrowing capacity for future investments.

🎯 Exam Tip: Clearly state specific decisions or areas where financial analysis provides crucial insights, such as investment, lending, and operational planning.

 

Question 4. Discuss any three limitations of financial analysis.
Answer: Key limitations of financial statement analysis include:
1. Historical data: Financial accounts are prepared using past transactions, meaning financial statements are based on historical information. While financial statement analysis can be used to forecast a business entity's future, it primarily provides estimations, which is a significant limitation.
2. Absence of qualitative aspects: Factors such as the honesty and expertise of workers, their contributions to business development, and management's loyalty to the business entity are not considered. These qualitative aspects relate to business efficiency and represent another limitation.
3. Window dressing: Often, the information disclosed in financial statements is found to be inaccurate. Accounts may be prepared based on incorrect rather than correct information. Consequently, decisions made by stakeholders can be flawed, which is a major limitation.
4. Absence of Qualitative Aspect: During financial statement analysis, only quantifiable items are considered. However, factors like the contribution of workers to business development, management's loyalty, honesty, and expertise are overlooked.
5. Personal opinion: Accounting allows for various options in preparing accounts, such as inventory valuation and depreciation methods. This introduces the possibility of personal opinion, leading to subjectivity in account preparation, which hinders financial analysis.
6. Based on presentation of financial statements: There is a direct relationship between true and fair information in financial statements and effective and efficient analysis. Thus, if the information is incorrect or inadequate, a true and fair analysis cannot be performed.
In simple words: Financial analysis is limited because it uses old information, doesn't consider non-financial factors like employee morale, can be manipulated (window dressing), and personal judgments in accounting can make it biased.

🎯 Exam Tip: Focus on the inherent constraints such as reliance on past data, lack of qualitative insights, and potential for manipulation or subjectivity in accounting practices.

 

Question 5. State the users of financial analysis.
Answer: The users of financial analysis include:
1. Equity Shareholders: Equity shareholders analyze financial statements to determine the safety of their investment and whether they can expect consistent and increasing dividends on their invested capital. They also anticipate an appreciation in the market price of their shares as the company grows.
2. Preference Shareholders: Preference shareholders examine financial statements to ascertain if they will receive regular dividends, if their investment is secure, and if their capital will be returned upon the expiry of a specified term.
3. Potential Investors: Prospective or potential investors conduct analysis to decide whether to invest in a company's shares, ensuring their investment is safe, yields a regular return, and offers a probability of capital gain through company growth.
4. Debentureholders and other lenders or institutions: This group is interested in financial statement analysis to determine the security of their money and receive a regular return on their investment.
5. Creditors: Creditors analyze financial statements to determine if they can recover money owed for goods or services supplied to the company and to assess the possibility of ongoing business with the company.
6. Management: Through financial statement analysis, company management aims to evaluate its efficiency in overseeing the company's operations.
7. Employees / Trade Unions: Employees and trade unions are interested in analyzing financial statements to understand the potential for better salaries, perks, and the company's operating efficiency.
8. Society or Public: Companies are integral to society and have social obligations. Financial statement analysis provides the public with information on how the company fulfills its social responsibilities.
9. Government: The government uses financial statement analysis for taxation and planning purposes.
10. Competitors: Competitors analyze an enterprise's financial statements to understand its strategies, enabling them to formulate their own appropriate policies.
In simple words: Many groups use financial analysis, including owners (shareholders), potential investors, lenders, suppliers (creditors), internal management, employees, the public, the government, and even competitors, all for different decision-making purposes.

🎯 Exam Tip: Categorize users into internal (management, employees) and external (investors, creditors, government, public, competitors) to provide a structured answer.

 

Question 6. Explain the significance of comparative financial statements.
Answer: The importance of comparative statements can be described as follows:
1. Intra-firm Comparison: When a business entity's current year accounts are compared with those of previous years, it is known as intra-firm comparison. This also extends to evaluating the financial performance of various departments within the same business entity.
2. Inter-firm Comparison: When financial statements of different business entities are compared, it is known as inter-firm comparison. This comparison helps determine which business unit is financially strong or weak relative to others, influencing investor investment decisions.
3. Indicates Trend: By comparing financial statements from different years and various sections of a business unit, trends in financial position and profitability can be identified, aiding investment decisions.
4. Useful to creditors: Creditors of business units can be long-term and short-term. They use financial statement analysis to determine the creditworthiness of business units, making it very useful for them.
5. Simple Presentation of information: Financial statements are rearranged into a table format for simple and comparable presentation of information, making them easier to understand.
In simple words: Comparative financial statements are important because they allow for comparing a company's performance over different years (intra-firm) or against other companies (inter-firm), helping to spot trends, assess creditworthiness, and present financial information clearly.

🎯 Exam Tip: Highlight the ability of comparative statements to reveal trends (horizontal analysis) and facilitate both internal and external benchmarking.

 

Question 7. Discuss in brief the steps of financial analysis.
Answer: Financial statements are prepared according to rules and as per the Companies Act 2013. Several stages have been developed for a scientific analysis of financial statements. These stages are:
1. New structural arrangement of financial statements: Based on legal provisions, financial statements are analyzed using tools such as comparative statements, ratio analysis, and common size statements. Information from financial statements is reclassified and rearranged to effectively use these tools—for instance, by calculating the net profit rate over the last five years to identify profit trends. This analysis considers sales and profit data from the past five years.
2. Comparison: The second stage of financial analysis involves comparing reclassified and rearranged information. For example, results from the second year are compared with the third, the third with the fourth, and so on. Analysis and interpretation are then based on these comparisons.
3. Analysis and Interpretation: Analysis involves the appropriate examination or evaluation of information, categorizing it into different components and testing their relationships. Interpretation provides explanations for these relationships; for example, an increase in sales often leads to an increase in net profit.
In simple words: Financial analysis involves three main steps: first, organizing the financial data into a suitable structure; second, comparing this data over time or against benchmarks; and third, analyzing and interpreting the comparisons to understand performance and trends.

🎯 Exam Tip: The key steps are rearrangement (preparation), comparison (identification of changes/trends), and analysis/interpretation (deriving meaning and conclusions).

 

Question 8. Explain comparative statements.
Answer: Analysis using comparative statements includes both the comparative balance sheet and the comparative profit-loss statement (income statement).
(a) Comparative Profit-Loss Statement: This statement is similar to a comparative balance sheet but contains different content. It typically features six columns. This analysis compares the detailed information of two years for two components of annual accounts (profit-loss statement and balance sheet), revealing the growth of the business entity.
There are two main components of the profit and loss statement:
(1) Total revenue and total expenses. The profit-loss statement provides the results of earnings generated during the year. An increase in revenue or a decrease in expenses indicates a rise in revenue, while a decrease in revenue or an increase in expenses suggests a decline in revenue. In essence, the comparative profit-loss statement helps determine the rupee and percentage changes (increase/decrease) in total revenue and total expenses.
(b) Comparative Balance Sheet: This statement comprises two main components:

• Equity and Liabilities and
• Assets
The balance sheet provides insights into a business enterprise's solvency. A comparative balance sheet helps determine whether the business's current solvency has increased or decreased relative to previous long-term and short-term solvency positions. In summary, it reveals the rupee and percentage changes in two periods for (i) share capital, (ii) reserves and surplus, (iii) non-current liabilities, (iv) current liabilities, (v) non-current assets, and (vi) current assets. This allows for identifying trends in components of the comparative balance sheet, such as fixed, flexible, decreasing, or increasing trends.
In simple words: Comparative statements show financial data for multiple periods side-by-side to highlight changes and trends. They include both comparative profit-loss statements (to analyze revenue and expense changes) and comparative balance sheets (to track changes in assets, liabilities, and equity).

🎯 Exam Tip: Differentiate between the comparative profit-loss statement (focus on revenue/expense) and the comparative balance sheet (focus on assets/liabilities/equity), emphasizing their role in trend analysis.

 

Question 9. Explain common size statement.
Answer: In this method, the profit and loss statement and balance sheet of two or more years can be compared with the financial statements of the current year. The current year's profit and loss statement and balance sheet are compared with those of the previous year. This analysis is conducted in a vertical format.
For the profit and loss statement, net sales are used as the base, taken as 100%. The profitability of a business depends on maximizing sales and minimizing costs. This analysis helps determine the proportion of each expense relative to sales, allowing for necessary actions to be taken to achieve the objective of profit maximization.
For the balance sheet, the total balance sheet amount is considered as the base and assumed to be 100%. Similar to comparative statements, a common size statement has six columns. The first column discloses information about the different components of the profit and loss statement.
In simple words: A common size statement converts all financial statement items into percentages of a base figure (like net sales for income statements or total assets for balance sheets), allowing for easy comparison of proportions over time or across different companies.

🎯 Exam Tip: The core idea of common size statements is to express all items as a percentage of a chosen base, facilitating proportional analysis and benchmarking regardless of company size.

 

Question 4. The abridged profit and loss statement ending on 31-3-2016 and 31-3-2017 of Saman Company Limited are given as follows. Prepare comparative statement of profit and loss.

Particulars	Note No.	31-3-2017(Rs.)	31-3-2016(Rs.)
Sales revenue		33,00,000	22,00,000
Other income		2,25,000	1,50,000
Expenses		23,76,000	15,40,000

Income tax rate 30%
Answer:
Comparative Profit-Loss Statement of Saman Company Limited for the year ending on 31-3-2016 and 31-3-2017

1	Particulars	Note No.	31-3-2016 (Rs.)	31-3-2017 (Rs.)	Increase/ Decrease (Rs.) 5 (4-3)	Increase/ Decrease (%) \( \left(\frac{5}{3} \times 100\right) \)
(I)	Sales revenue		22,00,000	33,00,000	11,00,000	50.00
(II)	Other income		1,50,000	2,25,000	75,000	50.00
(III)	Total income (I + II)		23,50,000	35,25,000	11,75,000	50.00
(IV)	Expenses		15,40,000	23,76,000	8,36,000	54.29
(V)	Profit before tax (III - IV)		8,10,000	11,49,000	3,39,000	41.85
(VI)	Less: Income tax (30%)		2,43,000	3,44,700	1,01,700	41.85
(VII)	Profit after tax (V - VI)		5,67,000	8,04,300	2,37,300	41.85

In simple words: This table compares the income statement items of Saman Company Ltd. for two consecutive years, showing the absolute change and percentage change for each item like sales revenue, other income, expenses, and profit before and after tax.

🎯 Exam Tip: Pay close attention to calculating the percentage change correctly, which involves dividing the increase/decrease by the base year's amount and multiplying by 100. Ensure tax calculations are applied to profit before tax.

 

Question 5. Profit and loss statement for the year ending on 31-3-2016 and 31-3-2017 of Srushti Company Limited are given as follows. Prepare comparative statement of profit and loss :

Particulars	Note No.	31-3-2017 (Rs.)	31-3-2016 (Rs.)
Sales revenue		25,35,000	19,50,000
Other income		2,85,000	1,90,000
Cost of goods consumed		11,40,000	9,50,000
Financial cost		90,000	1,50,000
Depreciation		60,000	60,000
Other expenses		4,25,000	3,40,000

Income tax rate is 30%.
Answer:
Comparative Profit-Loss Statement of Srushti Company Limited for the year ending on 31-3-2016 and 31-3-2017

1	Particulars	Note No.	31-3-2016 (Rs.)	31-3-2017 (Rs.)	Increase/ Decrease (Rs.) 5 (4-3)	Increase/ Decrease (%) \( \left(\frac{5}{3} \times 100\right) \)
(I)	Sales revenue		19,50,000	25,35,000	5,85,000	30.00
(II)	Other income		1,90,000	2,85,000	95,000	50.00
(III)	Total income (I + II)		21,40,000	28,20,000	6,80,000	31.78
(IV)	Expenses :
	(i) Cost of goods consumed		9,50,000	11,40,000	1,90,000	20.00
	(ii) Financial expenses		1,50,000	90,000	(60,000)	(40.00)
	(iii) Depreciation		60,000	60,000	-	-
	(iv) Other expenses		3,40,000	4,25,000	85,000	25.00
	Total expenses		15,00,000	17,15,000	2,15,000	14.33
(V)	Profit before tax (III - IV)		6,40,000	11,05,000	4,65,000	72.66
(VI)	Less: Income tax (30%)		1,92,000	3,31,500	1,39,500	72.66
(VII)	Profit after tax (V - VI)		4,48,000	7,73,500	3,25,500	72.66

In simple words: This table presents a comparative analysis of Srushti Company Limited's profit and loss data for two fiscal years, detailing changes in sales, income, various expenses, and ultimately profit before and after tax, both in absolute terms and percentages.

🎯 Exam Tip: When preparing comparative statements, ensure all relevant expenses are accounted for and grouped correctly before calculating profit before tax, and always apply the tax rate to this figure.

 

Question 6. Profit and loss statement for the year ending on 31-3-2016 and 31-3-2017 of Shankar Company Limited are given as follows. Prepare comparative statement of profit and loss.

Particulars	Note No.	31-3-2017 (Rs.)	31-3-2016 (Rs.)
Sales revenue		60,75,000	45,00,000
Other income		7,00,000	10,00,000
Expenses :
Cost of goods consumed		36,00,000	30,00,000
Net purchase for resale		2,70,000	2,00,000
Changes in stock		90,000	70,000
Employee benefit expenses		5,60,000	4,00,000
Financial cost		1,35,000	90,000
Depreciation and amortized amount		1,05,000	70,000

Income tax rate 30%.
Answer:
Comparative Profit-Loss Statement of Shankar Limited for the year ending on 31-3-2016 and 31-3-2017

1	Particulars	Note No.	31-3-2016 (Rs.)	31-3-2017 (Rs.)	Increase/ Decrease (Rs.) 5 (4-3)	Increase/ Decrease (%) \( \left(\frac{5}{3} \times 100\right) \)
(I)	Sales revenue		45,00,000	60,75,000	15,75,000	35.00
(II)	Other income		10,00,000	7,00,000	(3,00,000)	(30.00)
(III)	Total Income (I + II)		55,00,000	67,75,000	12,75,000	23.18
(IV)	Expenses :
	(i) Changes in stock		70,000	90,000	20,000	28.57
	(ii) Employee benefit expenses		4,00,000	5,60,000	1,60,000	40.00
	(iii) Cost of goods consumed		30,00,000	36,00,000	6,00,000	20.00
	(iv) Net purchase for resale		2,00,000	2,70,000	70,000	35.00
	(v) Financial cost		90,000	1,35,000	45,000	50.00
	(vi) Depreciation and amortized amount		70,000	1,05,000	35,000	50.00
	Total expenses		38,30,000	47,60,000	9,30,000	24.28
(V)	Profit before tax (III - IV)		16,70,000	20,15,000	3,45,000	20.66
(VI)	Less: Income tax (30%)		5,01,000	6,04,500	1,03,500	20.66
(VII)	Profit after tax (V - VI)		11,69,000	14,10,500	2,41,500	20.66

In simple words: This table compares Shankar Company Limited's profit and loss figures for two years, highlighting changes in revenue sources and various expense categories, leading to the calculation of profit before and after income tax.

🎯 Exam Tip: Systematically list all income and expenses before calculating totals and profit figures. Double-check that all percentage changes are computed relative to the base year (31-3-2016).

 

Question 6. Explain the significance of comparative financial statements.
Answer: The significance of comparative statements is as follows:

1. Intra-firm Comparison: Comparing a business entity's current year accounts with previous years' accounts is known as intra-firm comparison. Additionally, the financial performance of different departments within the same business entity can also be evaluated.

2. Inter-firm Comparison: When financial statements of various business entities are compared with each other, it constitutes inter-firm comparison. This comparison helps in determining the financial strength or weakness of one business unit relative to others, which can influence investor decisions regarding their investments.

3. Indicates Trend: Comparing financial statements across different years and various segments of a business unit reveals trends in financial position and profitability. This information is vital for making informed investment decisions.

4. Useful to Creditors: Business unit creditors include both long-term and short-term lenders. Financial statement analysis enables creditors to assess the creditworthiness of business units, making it highly valuable for them.

5. Simple Presentation of Information: Financial statements are reorganized for straightforward and comparable information presentation. Typically, financial statement data is presented in tabular form, enhancing clarity and ease of understanding.

In simple words: Comparative financial statements help analyze a company's performance over time and against competitors by simplifying complex data into easy-to-understand trends and metrics, aiding stakeholders in making informed decisions.

🎯 Exam Tip: Focus on understanding how each point of significance contributes to informed decision-making for various stakeholders, and be prepared to explain the difference between intra-firm and inter-firm comparison.

 

Question 7. Profit and loss statement for the year ending on 31-3-2016 and 31-3-2017 of Mina Company Limited are as follows. Prepare comparative profit and loss statement.

Answer: The comparative profit and loss statement for Mina Company Limited for the years ending 31-3-2016 and 31-3-2017 is presented below.

Particulars	Note No.	31-3-2016	31-3-2017	Increase/ Decrease	Increase/ Decrease
		(₹)	(₹)	(₹)	(%)
(I) Sales revenue		45,00,000	60,75,000	15,75,000	35.00
(II) Other income		10,00,000	7,00,000	(3,00,000)	(30.00)
(III) Total Income (I + II)		55,00,000	67,75,000	12,75,000	23.18
(IV) Expenses :
(i) Changes in stock		70,000	90,000	20,000	28.57
(ii) Employees benefit expenses		4,00,000	5,60,000	1,60,000	40.00
(iii) Cost of goods consumed		30,00,000	36,00,000	6,00,000	20.00
(iv) Net purchase for resale		2,00,000	2,70,000	70,000	35.00
(v) Financial cost		90,000	1,35,000	45,000	50.00
(vi) Depreciation and amortized amount		70,000	1,05,000	35,000	50.00
Total expenses		38,30,000	47,60,000	9,30,000	24.28
(V) Profit before tax (III - IV)		16,70,000	20,15,000	3,45,000	20.66
(VI) Less: Income tax (30%)		5,01,000	6,04,500	1,03,500	20.66
(VII) Profit after tax (V - VI)		11,69,000	14,10,500	2,41,500	20.66

In simple words: This statement compares Mina Company Limited's income and expenses over two years, showing the absolute and percentage changes in each financial item, and highlighting the overall growth in profit after tax.

🎯 Exam Tip: When preparing comparative statements, ensure correct calculation of absolute change and percentage change for each item. Pay attention to negative changes, which should be clearly indicated.

 

Question 8. Find out balancing figures of comparative statement of Kalpana Company Limited.
Answer: To determine the missing figures in column No. 3, subtract the amount from column No. 5 (Increase/Decrease) from column No. 4 (31-3-2017 amount).

Necessary Calculation:
Sales revenue: \(15,00,000 - 5,00,000 = Rs. 10,00,000\)
Purchase: \(7,20,000 - 1,20,000 = Rs. 6,00,000\)
Changes in stock: No change, so previous year was also Rs. 1,50,000.
Depreciation: \(1,00,000 - 50,000 = Rs. 50,000\)
Total Expenses: \(9,70,000 - 1,70,000 = Rs. 8,00,000\)
Profit before tax: \(5,30,000 - 3,30,000 = Rs. 2,00,000\)
Income tax (30%): \(1,59,000 - 99,000 = Rs. 60,000\)
Profit after tax: \(3,71,000 - 2,31,000 = Rs. 1,40,000\)

Particulars	Note No.	31-3-2016	31-3-2017	Increase/ Decrease	Increase/ Decrease
		(₹)	(₹)	(₹)	(%)
(I) Sales revenue		10,00,000	15,00,000	5,00,000	50
(II) Expenses :
(i) Purchase		6,00,000	7,20,000	1,20,000	20
(ii) Changes in stock		1,50,000	1,50,000	-	-
(iii) Depreciation		50,000	1,00,000	50,000	100
Total Expenses		8,00,000	9,70,000	1,70,000	21.25
(III) Profit before tax		2,00,000	5,30,000	3,30,000	165
(IV) Less: Income tax (30%)		60,000	1,59,000	99,000	165
(V) Profit after tax		1,40,000	3,71,000	2,31,000	165

In simple words: To find the missing data from a previous year in a comparative statement, subtract the reported increase/decrease amount from the current year's figure. This method allows for reconstruction of historical financial figures.

🎯 Exam Tip: When dealing with balancing figures, always work backward from known totals and percentage changes. Ensure that the tax calculation (e.g., 30% of profit before tax) is applied correctly to the derived figures.

 

Question 9. Balance sheet of Small Company Ltd. as at 31-3-2016 and 31-3-2017 are as follows. Prepare comparative balance sheet.
Answer: The comparative balance sheet for Small Company Limited as of 31-3-2016 and 31-3-2017 is presented below.

Particulars	Note No.	31-3-2016	31-3-2017	Increase/ Decrease	Increase/ Decrease
		(₹)	(₹)	(₹)	(%)
(I) Equity and Liabilities :
(1) Shareholders' Funds :
(a) Share capital:
(i) Equity share capital		17,00,000	22,00,000	5,00,000	29.41
(ii) Preference share capital		12,00,000	10,00,000	(2,00,000)	(16.67)
(b) Reserves and surplus :
(i) General reserves		2,00,000	2,40,000	40,000	20.00
(ii) Profit-loss account		1,80,000	2,10,000	30,000	16.67
(2) Non-current liabilities :
10% Debentures		8,00,000	6,00,000	(2,00,000)	(25.00)
(3) Current liabilities:
(i) Short term borrowings		45,000	90,000	45,000	100
(ii) Trade payables		1,35,000	90,000	(45,000)	(33.33)
(iii) Other current liabilities		70,000	70,000	-	-
Total		43,30,000	45,00,000	1,70,000	3.93
(II) Assets :
(1) Non-current assets:
(a) Fixed assets:
(i) Tangible assets:
Machines		15,00,000	16,00,000	1,00,000	6.67
Furniture		5,00,000	6,00,000	1,00,000	20.00
(ii) Intangible assets :
Goodwill		1,00,000	80,000	(20,000)	(20.00)
Patent		7,30,000	7,50,000	20,000	2.74
(b) Non-current investments		8,00,000	9,00,000	1,00,000	12.50
(2) Current assets:
(i) Stock		1,60,000	1,80,000	20,000	12.50
(ii) Trade receivables		2,00,000	1,80,000	(20,000)	(10.00)
(iii) Current investments		2,70,000	1,40,000	(1,30,000)	(48.15)
(iv) Cash and cash equivalent		70,000	70,000	-	-
Total		43,30,000	45,00,000	1,70,000	3.93

In simple words: This comparative balance sheet shows changes in assets, liabilities, and equity of Small Company Ltd. over two years, helping to assess its financial health and growth trends.

🎯 Exam Tip: When preparing a comparative balance sheet, double-check that the total for Equity and Liabilities matches the total for Assets in both years, and that the 'Increase/Decrease' columns are calculated accurately for each line item.

 

Question 10. You are provided comparative balance sheets as at 31-3-2016 and 31-3-2017 of Shivani Company Limited ascertain balancing figures :
Answer: The missing figures are calculated based on the provided amounts and percentage changes from the previous year. The formula used is:

\[ \text{Amount of current year} = \text{Amount of previous year} \times \frac{(100 + \text{change in percentage})}{100} \]

Necessary Calculations:
(1) Equity share capital = \(24,00,000 \times \frac{100+25}{100} = Rs. 30,00,000\)
(2) Reserve and surplus = \(12,00,000 \times \frac{100+25}{100} = Rs. 15,00,000\)
(3) 10% Debentures = \(10,00,000 \times \frac{100+20}{100} = Rs. 12,00,000\)
(4) 11% Bank loan = \(12,00,000 \times \frac{100+25}{100} = Rs. 15,00,000\)
(5) Current Liabilities = \(2,00,000 \times \frac{100+5}{100} = Rs. 2,10,000\)
(6) Tangible assets - Increase/Decrease = \(32,10,000 - 30,00,000 = Rs. 2,10,000\)
(7) Intangible assets - Increase/Decrease = \(22,00,000 - 20,00,000 = Rs. 2,00,000\)
(8) Current Assets - Increase/Decrease = \(10,00,000 - 20,00,000 = (Rs. 10,00,000)\)
(9) Tangible assets - Percentage change = \(\frac{2,10,000}{30,00,000} \times 100 = 7.00\%\)
(10) Intangible assets - Percentage change = \(\frac{2,00,000}{20,00,000} \times 100 = 10.00\%\)
(11) Current assets - Percentage change = \(\frac{(10,00,000)}{20,00,000} \times 100 = (50.00)\%\)

The comparative balance sheet for Shivani Company Limited is provided below, with balancing figures ascertained:

Particulars	Note No.	31-3-2016	31-3-2017	Increase/ Decrease	Increase/ Decrease
		(₹)	(₹)	(₹)	(%)
(I) Equity and Liabilities :
(1) Shareholders' funds :
(a) Share capital
Equity share capital		24,00,000	30,00,000	6,00,000	25.00
(b) Reserves and surplus		12,00,000	15,00,000	3,00,000	25.00
(2) Non-current liabilities:
(i) 10% debentures		10,00,000	12,00,000	2,00,000	20.00
(ii) 11% bank loan		12,00,000	15,00,000	3,00,000	25.00
(3) Current liabilities		2,00,000	2,10,000	10,000	5.00
Total		60,00,000	74,10,000	14,10,000	23.50
(II) Assets :
(1) Non-current assets:
(i) Tangible assets		30,00,000	32,10,000	2,10,000	7.00
(ii) Intangible assets		20,00,000	22,00,000	2,00,000	10.00
(2) Current assets		20,00,000	10,00,000	(10,00,000)	(50.00)
Total		60,00,000	74,10,000	14,10,000	23.50

In simple words: Balancing figures in financial statements can be determined by using given percentage changes. If the percentage change and the prior year's amount are known, the current year's amount can be calculated, and vice versa.

🎯 Exam Tip: When dealing with balancing figures based on percentages, always ensure the base amount (previous year's figure) is correctly identified before applying the percentage change. Double-check calculations for both increases and decreases.

 

Question 11. Prepare common size statement of profit and loss from the following profit and loss statements of two years.
Answer: The common size statement of profit and loss for the years ending 31-3-2016 and 31-3-2017 is presented below. In this statement, all items are expressed as a percentage of sales revenue, which is taken as 100%.

Particulars	Note No.	Amount (Rs.)		Percentage in Sales (%)
		31-3-2016	31-3-2017	31-3-2016	31-3-2017
I. Sales revenue		40,00,000	48,00,000	100.00	100.00
II. Other revenue (income)		2,40,000	4,80,000	6.00	10.00
III. Total revenue (income)		42,40,000	52,80,000	106.00	110.00
IV. Expenses :
(i) Cost of goods consumed		20,80,000	26,40,000	52.00	55.00
(ii) Net purchase		1,60,000	2,40,000	4.00	5.00
(iii) Changes in stock		1,20,000	(2,40,000)	3.00	(5.00)
(iv) Employees benefit expenses		6,00,000	7,20,000	15.00	15.00
(v) Financial expenses		4,80,000	4,80,000	12.00	10.00
(vi) Depreciation		4,00,000	5,76,000	10.00	12.00
Total expenses		38,40,000	44,16,000	96.00	92.00
V. Profit before tax		4,00,000	8,64,000	10.00	18.00
VI. Less: Income tax (30%)		1,20,000	2,59,200	3.00	5.40
VII. Profit after tax		2,80,000	6,04,800	7.00	12.60

Note:
(1) Here, the percentage of other income is calculated relative to sales.
(2) A negative value for changes in stock indicates that the closing stock is higher than the opening stock.
(3) Other incomes are included when calculating profit before income tax.
(4) The total percentage of total expenses and net profit before tax does not add up to 100% because other income is also included in total revenue.

In simple words: A common size profit and loss statement expresses each line item as a percentage of sales revenue, allowing for easy comparison of operational efficiency and cost structures between different periods or companies, irrespective of their absolute size.

🎯 Exam Tip: Remember that in a common size statement, sales revenue is always 100%. Ensure all other items are correctly calculated as a percentage of sales. Pay attention to how negative values, like changes in stock, are interpreted.

 

Question 12. Find out balancing figures of common size profit and loss statements of two years :
Answer: In this problem, instead of absolute amounts, the percentages of expenses relative to sales are given. Therefore, the amounts will be determined using these percentages. The calculations are as follows:

\[ \text{Revenue/Expense amount in rupees} = \frac{\text{Net sales} \times \text{Percentage of revenue/exp./tax}}{100} \]

2016 Calculations:
1. Cost of goods consumed = \(\frac{60,00,000 \times 70}{100} = Rs. 42,00,000\)
2. Financial cost = \(\frac{60,00,000 \times 12}{100} = Rs. 7,20,000\)
3. Depreciation = \(\frac{60,00,000 \times 3}{100} = Rs. 1,80,000\)
4. Income tax (30%) = Profit before tax \(\times 30\%\) = \(9,00,000 \times 30\% = Rs. 2,70,000\)
5. Profit after tax = Profit before tax - Income tax = \(9,00,000 - 2,70,000 = Rs. 6,30,000\)

2017 Calculations:
1. Cost of goods consumed = \(\frac{45,00,000 \times 68}{100} = Rs. 30,60,000\)
2. Financial cost = \(\frac{45,00,000 \times 10}{100} = Rs. 4,50,000\)
3. Depreciation = \(\frac{45,00,000 \times 2}{100} = Rs. 90,000\)
4. Income tax (30%) = Profit before tax \(\times 30\%\) = \(9,00,000 \times 30\% = Rs. 2,70,000\)
5. Profit after tax = Profit before tax - Income tax = \(9,00,000 - 2,70,000 = Rs. 6,30,000\)

The common size profit and loss statement with balancing figures is presented below:

Particulars	Note No.	Amount (Rs.)		Percentage to Sales (%)
		31-3-2016	31-3-2017	31-3-2016	31-3-2017
I. Sales revenue		60,00,000	45,00,000	100.00	100.00
II. Expenses:
(i) Cost of goods consumed		42,00,000	30,60,000	70.00	68.00
(ii) Financial expenses		7,20,000	4,50,000	12.00	10.00
(iii) Depreciation		1,80,000	90,000	3.00	2.00
Total expenses		51,00,000	36,00,000	85.00	80.00
III. Profit before tax		9,00,000	9,00,000	15.00	20.00
IV. Less: Income tax (30%)		2,70,000	2,70,000	4.50	6.00
V. Profit after tax		6,30,000	6,30,000	10.50	14.00

In simple words: When given percentages relative to sales, one can calculate the absolute amounts for each expense or revenue item by multiplying the total sales by the given percentage. This helps in understanding the magnitude of each component.

🎯 Exam Tip: Always verify that the sum of expenses and profit before tax equals the sales revenue (if there's no other income) or total revenue (if other income exists) for each year when filling in balancing figures in a common size statement.

 

Question 13. Balance sheets of two years of Saurashtra Limited are as follows. Prepare common-size statements.
Answer: The common-size balance sheet for Saurashtra Limited as of 31-3-2016 and 31-3-2017 is presented below. In this type of statement, each asset, liability, and equity item is expressed as a percentage of the total balance sheet, which is considered 100%.

Particulars	Note No.	Amount (Rs.)		Percentage to total of balance sheet
		31-3-2016	31-3-2017	31-3-2016	31-3-2017
(I) Equity and Liabilities :
(1) Shareholders' funds :
(a) Share capital:
(i) Equity share capital		25,00,000	25,00,000	41.67	33.33
(ii) Preference share capital		-	15,00,000	-	20.00
(b) Reserve and surplus :
(i) General reserve		6,00,000	8,00,000	10.00	10.67
(ii) Profit and loss A/c		6,00,000	4,50,000	10.00	6.00
(2) Non-current liabilities :
9% bank loan		15,00,000	15,00,000	25.00	20.00
(3) Current liabilities:
(i) Short term borrowings		2,00,000	6,00,000	3.33	8.00
(ii) Other current liabilities		6,00,000	1,50,000	10.00	2.00
Total		60,00,000	75,00,000	100.00	100.00
(II) Assets:
(1) Non-current assets:
(a) Fixed assets :
(i) Tangible assets:
Machines		20,00,000	15,00,000	33.33	20.00
Land-Building		15,00,000	25,00,000	25.00	33.33
(ii) Intangible assets:
Trademark		3,40,000	5,00,000	5.67	6.67
Goodwill		-	4,50,000	-	6.00
(b) Non-current investments		15,00,000	15,00,000	25.00	20.00
(2) Current assets:
(i) Debtors		3,00,000	3,75,000	5.00	5.00
(ii) Stock		2,40,000	3,75,000	4.00	5.00
(iii) Cash and cash equivalent		1,20,000	3,00,000	2.00	4.00
Total		60,00,000	75,00,000	100.00	100.00

In simple words: A common-size balance sheet simplifies financial analysis by showing each asset, liability, and equity item as a proportion of the total balance sheet. This allows for clear visualization of the company's financial structure and how it changes over time, or for comparison with other businesses.

🎯 Exam Tip: Remember that for a common-size balance sheet, the total of both the assets side and the equity and liabilities side must always sum up to 100%. Accuracy in calculating individual percentages is key for a meaningful analysis.

 

Question 14. Balance sheets of two years of Shyam Limited are as follows. Ascertain balancing figures.
Answer: In this problem, the percentages of each item relative to the total balance sheet are given instead of the absolute amounts. Therefore, the balancing figures will be determined by calculating the amounts based on these percentages. The formula used for calculation is:

\[ \text{Amount of liability or asset of respective year} = \frac{\text{Total of balance sheet of respective year} \times \text{Percentage of respective liability / assets}}{100} \]

Necessary Calculation:

For 2016 (Total Balance Sheet: Rs. 34,00,000):
1. Equity share capital = \(\frac{34,00,000 \times 40}{100} = Rs. 13,60,000\)
2. Preference share capital = \(\frac{34,00,000 \times 20}{100} = Rs. 6,80,000\)
3. Profit and loss A/c = \(\frac{34,00,000 \times 15}{100} = Rs. 5,10,000\)
4. 10% Debentures = \(\frac{34,00,000 \times 20}{100} = Rs. 6,80,000\)
5. Trade payables = \(\frac{34,00,000 \times 3}{100} = Rs. 1,02,000\)
6. Other liabilities = \(\frac{34,00,000 \times 2}{100} = Rs. 68,000\)

For 2017 (Total Balance Sheet: Rs. 50,00,000):
1. Tangible Assets = \(\frac{50,00,000 \times 35}{100} = Rs. 17,50,000\)
2. Intangible Assets = \(\frac{50,00,000 \times 30}{100} = Rs. 15,00,000\)
3. Non-current investments = \(\frac{50,00,000 \times 22}{100} = Rs. 11,00,000\)
4. Trade payables = \(\frac{50,00,000 \times 3}{100} = Rs. 1,50,000\)
5. Stock = \(\frac{50,00,000 \times 8}{100} = Rs. 4,00,000\)
6. Cash and cash equivalent = \(\frac{50,00,000 \times 2}{100} = Rs. 1,00,000\)

The comparative balance sheet of Shyam Limited, including the ascertained balancing figures, is presented below:

Particulars	Note No.	Amount (Rs.)		Percentage to total of balance sheet
		31-3-2016	31-3-2017	31-3-2016	31-3-2017
(I) Equity and Liabilities :
(1) Shareholders' funds :
(a) Share capital:
(i) Equity share capital		13,60,000	20,00,000	40	40
(ii) Preference share capital		6,80,000	10,00,000	20	20
(b) Reserve and surplus :
Profit and loss A/c		5,10,000	8,00,000	15	16
(2) Non-current liabilities :
10% Debentures		6,80,000	10,00,000	20	20
(3) Current liabilities:
(i) Trade payables		1,02,000	1,00,000	3	2
(ii) Other liabilities		68,000	1,00,000	2	2
Total		34,00,000	50,00,000	100	100
(II) Assets:
(1) Non-current assets:
(a) Fixed assets:
(i) Tangible assets:		10,20,000	17,50,000	30	35
(ii) Intangible assets:		6,80,000	15,00,000	20	30
(b) Non-current investments		8,50,000	11,00,000	25	22
(2) Current asssets:
(i) Trade receivables		3,40,000	1,50,000	10	3
(ii) Stock		2,38,000	4,00,000	7	8
(iii) Cash and cash equivalent		2,72,000	1,00,000	8	2
Total		34,00,000	50,00,000	100	100

In simple words: When a balance sheet provides only percentages, the absolute figures for each item can be calculated by applying those percentages to the total balance sheet amount for the respective year. This technique helps in converting proportional data back into monetary values.

🎯 Exam Tip: Ensure that the total balance sheet amount is correctly identified for each year before calculating individual item values. Always re-verify that the sum of the calculated amounts equals the total balance sheet for each period.

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