Maharashtra Board Class 12 Commerce BK Chapter 9 Analysis of Financial Statements Solutions

Class 12 Commerce BK Chapter 9 Exercise Solutions

Objective Questions

A. Select the most appropriate alternative from those given below and rewrite the sentences:

Question 1.Gross Profit Ratio indicates the relationship of gross profit to the __________
(a) Net cash
(b) Net sales
(c) Net purchases
(d) Gross sales
Answer: (b) Net sales
In simple words: The Gross Profit Ratio shows how much gross profit a business makes relative to its total net sales.

🎯 Exam Tip: Remember the basic formula: Gross Profit Ratio = (Gross Profit / Net Sales) × 100, which clearly links gross profit to net sales.

Question 2.Current ratio = Current assets / Current liabilities
(a) Quick assets
(b) Quick liabilities
(c) Current assets
(d) None of these
Answer: (c) Current assets
In simple words: The current ratio evaluates a company's short-term liquidity by comparing its current assets to its current liabilities.

🎯 Exam Tip: Understanding the components of the current ratio is key; it's a fundamental measure of an entity's ability to meet short-term obligations.

Question 3.Liquid assets = __________
(a) Current assets + Stock
(b) Current assets - Stock
(c) Current assets - Stock + Prepaid Expenses
(d) None of these
Answer: (b) Current assets - Stock
In simple words: Liquid assets are current assets that can be quickly converted to cash, excluding less liquid items like stock and prepaid expenses.

🎯 Exam Tip: Quick assets are another term for liquid assets and are used in the quick ratio (or acid-test ratio) to assess immediate liquidity.

Question 4.Cost of goods sold = __________
(a) Sales - Gross profit
(b) Sales - Net profit
(c) Sales proceeds
(d) None of these
Answer: (a) Sales - Gross profit
In simple words: The cost of goods sold is derived by subtracting the gross profit from the total sales revenue.

🎯 Exam Tip: This formula highlights the direct relationship between sales, gross profit, and the cost of bringing goods to the point of sale.

Question 5.Net profit ratio is equal to __________
(a) Operating ratio
(b) Operating net profit ratio
(c) Gross profit ratio
(d) Current ratio
Answer: (a) Operating ratio
In simple words: The net profit ratio is a profitability metric that measures how much net income is generated per Rupee of sales.

🎯 Exam Tip: Be careful with terminology; while related to operations, the operating ratio is distinct from the net profit ratio. The net profit ratio is calculated as (Net Profit / Sales) × 100, whereas the operating ratio relates to operating expenses and cost of goods sold to sales.

Question 6.The common size statement requires __________
(a) common base
(b) journal entries
(c) cashflow
(d) current ratio
Answer: (a) common base
In simple words: A common size statement expresses all financial statement items as a percentage of a base figure, enabling easy comparison over periods or across companies.

🎯 Exam Tip: For an income statement, sales are typically the common base, while for a balance sheet, total assets or total liabilities plus equity are the common base.

Question 7.Bill payable is __________
(a) long-term loan
(b) current liabilities
(c) liquid assets
(d) net loss
Answer: (b) current liabilities
In simple words: A bill payable represents a short-term obligation that a company owes to others, usually within one year.

🎯 Exam Tip: Bills payable are important for assessing short-term liquidity and are a key component of current liabilities on the balance sheet.

Question 8.Generally current ratio should be __________
(a) 2:1
(b) 1:1
(c) 1:2
(d) 3:1
Answer: (a) 2:1
In simple words: A current ratio of 2:1 is generally considered ideal, indicating that a company has twice as many current assets as current liabilities to cover its short-term debts.

🎯 Exam Tip: While 2:1 is a general guideline, the optimal current ratio can vary by industry, so always consider industry benchmarks.

Question 9.From financial statement analysis the creditors are specially interested to know __________
(a) Liquidity
(b) Profits
(c) Sale
(d) Share capital
Answer: (a) Liquidity
In simple words: Creditors are primarily concerned with a company's liquidity, as it indicates the ability to pay back short-term debts on time.

🎯 Exam Tip: Creditors assess liquidity using ratios like the current ratio and quick ratio to ensure the business can meet its immediate financial obligations.

B. Give one word/term/phrase for each of the following statements.

Question 1.The statement showing the profitability of two different periods.
Answer: Comparative Income Statement
In simple words: A comparative income statement allows for easy comparison of a company's financial performance between two or more accounting periods.

🎯 Exam Tip: This statement helps in identifying trends and changes in revenue, expenses, and profits over time, which is crucial for analysis.

Question 2.The ratio measures the relationship between gross profit and net sales.
Answer: Gross Profit Ratio
In simple words: The Gross Profit Ratio indicates the percentage of sales revenue remaining after deducting the cost of goods sold.

🎯 Exam Tip: A higher gross profit ratio generally suggests better efficiency in production or purchasing, contributing directly to overall profitability.

Question 3.Critical evaluation of financial statement to measure profitability.
Answer: Analysis of Financial Statement
In simple words: Financial statement analysis involves scrutinizing a company's financial reports to assess its performance, profitability, and financial health.

🎯 Exam Tip: This analysis is vital for investors, creditors, and management to make informed decisions and understand the company's financial position.

Question 4.A particular mathematical number showing the relationship between two accounting figures.
Answer: Ratio
In simple words: A ratio is a mathematical comparison of two financial figures, used to evaluate various aspects of a business's performance and position.

🎯 Exam Tip: Ratios simplify complex financial data into easily understandable metrics, aiding in quick assessments and comparative analysis.

Question 5.An asset that can be converted into cash immediately.
Answer: Liquid Asset
In simple words: A liquid asset is an asset that can be readily converted into cash with minimal impact on its price.

🎯 Exam Tip: Cash, marketable securities, and short-term receivables are common examples of liquid assets, crucial for a company's immediate financial needs.

Question 6.The ratio measuring the relationship between net profit and ownership capital employed.
Answer: ROCE
In simple words: Return on Capital Employed (ROCE) is a profitability ratio that measures how efficiently a company uses its capital to generate profits.

🎯 Exam Tip: ROCE helps assess management's efficiency in using both equity and debt capital to create value for the business.

Question 7.The statement showing financial position for different periods of the previous year and the current year.
Answer: Comparative Balance Sheet
In simple words: A comparative balance sheet presents asset, liability, and equity accounts for multiple periods side-by-side, revealing financial trends and changes.

🎯 Exam Tip: This statement is instrumental in understanding how a company's financial structure has evolved over time, showing increases or decreases in various accounts.

Question 8.Statement showing changes in cash and cash equivalent during a particular period.
Answer: Cash Flow Statement
In simple words: A cash flow statement details the cash inflows and outflows from operating, investing, and financing activities over a period.

🎯 Exam Tip: This statement provides insights into a company's liquidity and solvency, explaining how cash is generated and used, which is often more telling than net income alone.

Question 9.Activity related to the acquisition of long-term assets and investment.
Answer: Financing Activities
In simple words: Financing activities on a cash flow statement involve transactions related to debt, equity, and dividends.

🎯 Exam Tip: This typically includes issuing shares, borrowing funds, repaying loans, and paying dividends, which affect the capital structure of the company.

Question 10.The ratio that establishes a relationship between Quick Assets and Current Liabilities.
Answer: Liquid Ratio
In simple words: The liquid ratio, also known as the quick ratio or acid-test ratio, measures a company's ability to meet its short-term obligations using its most liquid assets.

🎯 Exam Tip: This ratio provides a more conservative measure of liquidity than the current ratio by excluding inventory and prepaid expenses, which are less liquid.

C. State true or false with reasons.

Question 1.Financial statements include only the Balance Sheet.
Answer: This statement is False. Financial statements include Balance Sheet and Profit and Loss A/c. This is because financial statements are prepared by business organisations to find out the efficiency, solvency, profitability, growth, strength, and status of the business. For this, they need information from the balance sheet as well as from Profit and Loss A/c.
In simple words: Financial statements comprise more than just the Balance Sheet; they also include the Profit and Loss Account (Income Statement) and Cash Flow Statement, providing a comprehensive view of a business's financial health.

🎯 Exam Tip: It is crucial to remember that a complete set of financial statements offers insights into a company's performance, position, and cash movements, not just its assets and liabilities.

Question 2.Analysis of financial statements is a tool but not a remedy.
Answer: This statement is True. Based on analysis of the financial statement one can get an idea of the financial strength and weakness of the business. However, based on this one cannot take decisions about the business on various issues. Hence analysis of financial statements is a tool but not a remedy.
In simple words: Financial statement analysis helps identify problems and areas for improvement but doesn't automatically solve them; it's a diagnostic tool, not a cure.

🎯 Exam Tip: The analysis provides insights that guide decision-making, but management's actions based on these insights determine the actual remedies and improvements.

Question 3.Purchase of fixed assets is operating cash flow.
Answer: This statement is False. Purchase of fixed assets is cash flow from investing activities. It is not a day-to-day operations activity like office/selling/distribution finance expenses/activities.
In simple words: Buying fixed assets is considered an investing activity because it relates to long-term growth, not the routine daily operations of a business.

🎯 Exam Tip: Differentiate cash flows into operating, investing, and financing activities for a clear understanding of cash generation and utilization in a business.

Question 4.Dividend paid is not a source of funds.
Answer: This statement is True. The dividend is always paid on shares issued by a company as an expense. Shares itself is a source of funds. In payment of dividends, cash goes out from the company. It is an outflow of cash and not a source of funds.
In simple words: Paying dividends represents an outflow of cash to shareholders, meaning it uses funds rather than generating them for the company.

🎯 Exam Tip: Dividends are a distribution of profits, not a means of raising capital; therefore, they are always a use of funds, typically categorized under financing activities.

Question 5.Gross profit depends upon net sales.
Answer: This statement is True. The gross profit ratio discloses the relation between gross profit and total net sales. The gross profit ratio is an income-based ratio, where gross profit is an income. There is a direct relation between net sales and gross profit. Higher the net sales higher the gross profit.
In simple words: Gross profit directly correlates with net sales because it is calculated by subtracting the cost of goods sold from net sales.

🎯 Exam Tip: An increase in net sales, assuming cost of goods sold remains proportional or lower, will lead to a higher gross profit, reflecting better operational efficiency at the primary sales level.

Question 6.Payment of cash against the purchase of stock is the use of funds.
Answer: This statement is True. Cash payment for the purchase of stock is made from cash balance or/and from bank balance which is a part of the business fund. When stock or materials we purchase we use cash for payment.
In simple words: When a business pays cash for inventory, it uses up its liquid funds to acquire assets for future sales.

🎯 Exam Tip: Recognizing cash outflow for inventory as a use of funds is fundamental to understanding working capital management and cash flow from operations.

Question 7.Ratio Analysis is useful for inter-firm comparison.
Answer: This statement is True. The comparison of the operating performance of a business entity with the other business entities is known as an inter-firm comparison. This ratio analysis assists to know-how and to what extent a business entity is strong or weak as compared to other business entities.
In simple words: Ratio analysis allows businesses to compare their performance metrics against competitors or industry averages, providing valuable insights into their relative strengths and weaknesses.

🎯 Exam Tip: Inter-firm comparison using ratios helps in benchmarking performance, identifying best practices, and formulating competitive strategies.

Question 8.The short-term deposits are considered as cash equivalent.
Answer: This statement is True. The short-term deposits are liquid assets. It means deposits are kept for some period (usually less than one year) and they are kept with an intention to get money quickly as and when required. They are as good as cash and considered as cash equivalent.
In simple words: Short-term deposits are treated as cash equivalents because they are highly liquid investments, easily convertible to cash with minimal risk of value change.

🎯 Exam Tip: Cash equivalents are vital for managing immediate liquidity needs and are typically investments with original maturities of three months or less.

Question 9.Activity ratios and Turnover ratios are the same.
Answer: This statement is True. Turnover ratio is an efficiency ratio to check how efficiently a company is using different assets to extract earnings from them. Activity ratios are financial analysis tools used to measure a business's ability to convert its assets into cash. From both these definitions, we can say that Activity ratios and Turnover ratios are the same.
In simple words: Activity ratios and Turnover ratios are interchangeable terms referring to the same group of metrics that evaluate how efficiently a company uses its assets to generate sales.

🎯 Exam Tip: Both terms focus on assessing operational efficiency, with common examples including inventory turnover, accounts receivable turnover, and fixed asset turnover.

Question 10.The current ratio measures the liquidity of the business.
Answer: This statement is True. The current ratio shows the relationship between current assets and current liabilities. If the proportion of current assets is higher than current liabilities, the liquidity position of the business entity is considered good. More liquidity means more short-term solvency. From the above, it is proved that the current ratio measures the liquidity of the business.
In simple words: The current ratio is a primary indicator of a business's short-term liquidity, showing its ability to cover current liabilities with current assets.

🎯 Exam Tip: A healthy current ratio suggests that a company can easily meet its short-term financial obligations, providing a cushion against unexpected cash needs.

Question 11.Ratio analysis measures profitability efficiency and financial soundness of the business.
Answer: This statement is True. With the help of profitability ratios (Gross profit, Net profit, and Operating profit) one can get the idea of profitability efficiency of the firm, and with the help of liquidity ratios (Current ratio and liquid ratio) one can get the idea of solvency or financial soundness of the business.
In simple words: Ratio analysis provides a holistic view by evaluating a business's profitability, operational efficiency, and overall financial stability.

🎯 Exam Tip: By using a combination of ratios from different categories (profitability, liquidity, solvency, efficiency), a comprehensive assessment of a company's financial health can be made.

Question 12.Usually, the current ratio should be 3 : 1.
Answer: This statement is False. Usually, the current ratio should be 2 : 1. It means current assets are double of current liabilities. It shows the short-term solvency of business enterprises.
In simple words: A generally accepted healthy current ratio is 2:1, not 3:1, indicating that current assets are double the current liabilities.

🎯 Exam Tip: While higher ratios might seem better, an excessively high current ratio could indicate inefficient use of assets, such as holding too much cash or inventory.

D. Answer in one sentence only.

Question 1.Mention two objectives of the comparative statement.
Answer: Objectives of comparative statements are:
• Compare financial data at two points of time and
• Helps in deriving the meaning and conclusions regarding the changes in financial positions and operating results.
In simple words: Comparative statements aim to reveal trends and changes in financial performance and position by presenting data from different periods side-by-side.

🎯 Exam Tip: These statements are excellent tools for trend analysis, helping identify growth, decline, or stability in a business's financial health.

Question 2.State three examples of cash inflows.
Answer: Examples of cash inflows are:
• Interest received
• Dividend received
• Sale of asset/investment
• Rent received.
In simple words: Cash inflows are funds entering a business, typically from sales, interest, dividends, or asset disposals.

🎯 Exam Tip: Understanding cash inflows from various activities (operating, investing, financing) is crucial for managing a company's liquidity effectively.

Question 3.State three examples of cash-out flows.
Answer: Examples of cash outflows are:
• Interest paid
• Loss on sale of an asset
• Dividend paid
• Repayment of short-term borrowings.
In simple words: Cash outflows are funds leaving a business, often due to expenses, debt repayments, or dividend payments.

🎯 Exam Tip: Tracking cash outflows helps in budgeting and ensuring that the business maintains sufficient cash balances to meet its obligations.

Question 4.Give the formula of Gross Profit Ratio.
Answer:\[ \text{Gross profit ratio} = \frac{\text{Gross profit}}{\text{Net sales}} \times 100 \] Where Gross profit = Net sales - Cost of goods sold. Cost of goods sold = Opening stock + Purchase - Purchase return + Direct expense - Closing stock Net sales = Sales - Sales return.
In simple words: The Gross Profit Ratio formula calculates the percentage of gross profit generated from each Rupee of net sales.

🎯 Exam Tip: This ratio is a key indicator of a company's pricing strategy and cost management efficiency in its core operations.

Question 5.Give the formula of Gross profit.
Answer: Gross profit = Net sales - Cost of goods sold.
In simple words: Gross profit is the revenue left after covering the direct costs associated with producing or acquiring the goods sold.

🎯 Exam Tip: This fundamental calculation is the first step in determining a company's profitability from its primary business activities.

Question 6.Give any three examples of current assets.
Answer: Cash or cash equivalent short-term lending and advances, expenses paid in advance, taxes paid in advance, etc. are examples of current assets.
In simple words: Current assets are items a company expects to convert to cash, use, or consume within one year, such as cash, inventory, and accounts receivable.

🎯 Exam Tip: Being able to list current assets is fundamental to understanding a company's liquidity and working capital position.

Question 7.Give the formula of the current ratio.
Answer:\[ \text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}} \]
In simple words: The current ratio formula assesses a company's ability to cover its short-term debts using its short-term assets.

🎯 Exam Tip: This ratio is a quick measure of liquidity and a standard indicator watched by creditors and investors for immediate financial health.

Question 8.Give the formula of quick assets.
Answer: Quick assets = Current assets - (Stock + Prepaid expense)
In simple words: Quick assets are current assets that can be converted into cash very quickly, excluding inventory and prepaid expenses which are less liquid.

🎯 Exam Tip: The exclusion of stock and prepaid expenses makes quick assets a more stringent measure of immediate liquidity compared to total current assets.

Question 9.State the formula of Cost of goods sold.
Answer: Cost of goods sold = Opening stock + Purchase - Purchase return + Direct expense - Closing stock
In simple words: The cost of goods sold formula calculates the total expense incurred to produce or acquire the goods that a company sells during a period.

🎯 Exam Tip: This formula is essential for preparing the income statement and understanding the direct costs associated with revenue generation.

Question 10.State the formula of Average stock.
Answer:\[ \text{Average stock} = \frac{\text{Opening stock of goods} + \text{Closing stock of goods}}{2} \]
In simple words: Average stock is the average value of inventory held over a period, typically calculated by averaging the opening and closing stock values.

🎯 Exam Tip: Average stock is used in calculating inventory turnover ratio, which indicates how efficiently a company manages its inventory.

Practical Problems

Question 1.From the Balance Sheet of Amar Traders as of 31st March 2018 and 31st March 2019 prepare a Comparative Balance Sheet.
Answer:

Liabilities		31.3.2018 (Rs.)	31.3.2019 (Rs.)	Assets		31.3.2018 (Rs.)	31.3.2019 (Rs.)
Capital		60,000	72,000	Fixed Assets		1,20,000	1,50,000
Reserves and Surplus		24,000	30,000	Current Assets		28,000	27,000
Loans		34,000	51,000
Creditors		30,000	24,000
		1,48,000	1,77,000			1,48,000	1,77,000

Solution:Comparative Balance Sheet of Amar Traders as of 31st March 2018 and 31st March 2019

Particulars	(1) 31-03-2018 (Rs.)	(2) 31-03-2019 (Rs.)	(3) Absolute Change (Rs.)	(4) Percentage Change
I. Sources of Funds
(a) Capital	60,000	72,000	12,000	20% Increase
(b) Reserve and Surplus	24,000	30,000	6,000	25% Increase
(A) Net Worth	84,000	1,02,000	18,000	21.43% Increase
Borrowed Funds
(a) Loans	34,000	51,000	17,000	50% Increase
(B) Total Borrowed Funds	34,000	51,000	17,000	50% Increase
Total Funds Available (A + B)	1,18,000	1,53,000	35,000	29.66% Increase
II. Application of Funds
A. Fixed Assets	1,20,000	1,50,000	30,000	25% Increase
B. Working Capital
(1) Current Assets	28,000	27,000	(1,000)	(3.57%) Decrease
Less: (2) Current Liabilities
Creditors	30,000	24,000	(6,000)	(20%) Decrease
Working Capital (Current Assets - Current Liabilities)	(2,000)	3,000	5,000	(250%) Increase
Total Funds Applied (A + B)	1,18,000	1,53,000	35,000	29.66% Increase

\[ \text{Percentage change} = \frac{\text{Amount of absolute change}}{\text{Amount of previous year}} \times 100 \]
In simple words: A Comparative Balance Sheet shows how a company's assets, liabilities, and equity have changed over two different financial periods, highlighting growth or decline in specific areas.

🎯 Exam Tip: When preparing comparative statements, ensure each item is matched correctly across periods and that both absolute and percentage changes are accurately calculated to identify trends.

Question 2.From the Balance Sheet of Alpha Limited prepare a Comparative Balance Sheet as of 31st March 2018 and 31st March 2019: Balance Sheet as of 31st March 2018 and 31st March 2019
Answer:

Liabilities	31.3.2018 (Rs.)	31.3.2019 (Rs.)	Assets	31.3.2018 (Rs.)	31.3.2019 (Rs.)
Equity Share Capital	2,00,000	2,50,000	Land	80,000	1,00,000
12% Preference Shares	80,000	80,000	Building	60,000	90,000
Reserves and Surplus	1,00,000	1,40,000	Plant and Machinery	73,000	1,73,000
15% Debentures	60,000	51,000	Stock	1,50,000	1,10,000
Creditors	50,000	80,000	Debtors	1,28,000	1,40,000
Bills Payable	10,000	6,000	Bank	34,000	37,000
Provision for Taxation	25,000	43,000
	5,25,000	6,50,000		5,25,000	6,50,000

Solution:Comparative Balance Sheet of Alpha Limited as of 31st March 2018 and 31st March 2019

Particulars	(1) 31-03-2018 (Rs.)	(2) 31-03-2019 (Rs.)	(3) Absolute Change (Rs.)	(4) Percentage Change
I. Sources of Funds
(a) Equity Share Capital	2,00,000	2,50,000	50,000	25% Increase
(b) 12% Preference Shares	80,000	80,000	-	-
(c) Reserve and Surplus	1,00,000	1,40,000	40,000	40% Increase
(A) Net Worth	3,80,000	4,70,000	90,000	23.68% Increase
Borrowed Funds
Secured Loan - 15% Debentures	60,000	51,000	(9,000)	(15%) Decrease
(B) Total Borrowed Funds	60,000	51,000	(9,000)	(15%) Decrease
Total Funds Available (A + B)	4,40,000	5,21,000	81,000	18.41% Increase
II. Application of Funds
A. Fixed Assets - Land	80,000	1,00,000	20,000	25% Increase
Building	60,000	90,000	30,000	50% Increase
Plant and Machinery	73,000	1,73,000	1,00,000	137% Increase
	2,13,000	3,63,000	1,50,000	70.42% Increase
B. Working Capital
Current Assets - Stock	1,50,000	1,10,000	(40,000)	(26.67)% Decrease
Debtors	1,28,000	1,40,000	12,000	9.375% Increase
Bank	34,000	37,000	3,000	8.82% Increase
Less: Current Liabilities
Creditors	50,000	80,000	30,000	60% Increase
Bills Payable	10,000	6,000	(4,000)	(40%) Decrease
Provision for Taxation	25,000	43,000	18,000	72% Increase
Working Capital (Current Assets - Current Liabilities)	2,27,000	1,58,000	(69,000)	(30.40%) Decrease
Total Funds Applied (A + B)	4,40,000	5,21,000	81,000	18.41% Increase

In simple words: This Comparative Balance Sheet tracks the changes in Alpha Limited's financial position year-over-year, detailing how assets, liabilities, and equity components have shifted.

🎯 Exam Tip: When presenting comparative balance sheets, ensure that each line item's absolute and percentage change is clearly articulated, as this forms the core of the analysis.

Question 3.Prepare Comparative Balance Sheet for the year ended 31-3-18 and 31-3-19. Assets & Liabilities as follows:
Answer:

Particulars	31.3.18 (Rs.)	31.3.19 (Rs.)
1) Fixed Assets	120,000	1,50,000
2) Share Capital	60,000	72,000
3) Current Assets	28,000	27,000
4) Reserve & Surplus	24,000	30,000
5) Loan	34,000	57,000
6) Current liabilities	30,000	24,000

Solution:Comparative Balance Sheet as of 31st March 2018 and 31st March 2019

Particulars	(1) 31-03-2018 (Rs.)	(2) 31-03-2019 (Rs.)	(3) Absolute Change (Rs.)	(4) Percentage Change
I. Sources of Funds
(a) Share Capital	60,000	72,000	12,000	20% Increase
(b) Reserve and Surplus	24,000	30,000	6,000	25% Increase
(A) Net Worth	84,000	1,02,000	18,000	21.43% Increase
(B) Borrowed Funds - Loan	34,000	57,000	23,000	67.65% Increase
Total Funds Available (A + B)	1,18,000	1,59,000	41,000	34.74% Increase
II. Application of Funds
A. Fixed Assets	1,20,000	1,50,000	30,000	25% Increase
Working Capital
(1) Current Assets	28,000	27,000	(1,000)	(3.57%) Decrease
Less: (2) Current Liabilities	30,000	24,000	(6,000)	(20%) Decrease
B. Working Capital (Current Assets - Current Liabilities)	(2,000)	3,000	5,000	(250%) Increase
Total Funds Applied (A + B)	1,18,000	1,53,000	35,000	29.66% Increase

In simple words: This comparative balance sheet shows changes in the financial position, including shifts in capital, reserves, loans, fixed assets, and working capital, between two consecutive fiscal years.

🎯 Exam Tip: Ensure that all liabilities and assets are correctly categorized and that the calculation for working capital (Current Assets - Current Liabilities) accurately reflects changes year-on-year.

Question 4.Prepare Comparative Balance Sheet for the year ended 31-3-17 and 31-3-18.
Answer:

Particulars	31.3.17 (Rs.)	31.3.18 (Rs.)
1) Current liabilities	60,000	48,000
2) Fixed Assets	2,40,000	3,00,000
3) Loan	68,000	1,02,000
4) Share Capital	1,20,000	1,44,000
5) Reserve & Surplus	48,000	60,000
6) Current Assets	56,000	54,000

Solution:Comparative Balance Sheet as of 31st March 2017 and 31st March 2018

Particulars	(1) 31-03-2017 (Rs.)	(2) 31-03-2018 (Rs.)	(3) Absolute Change (Rs.)	(4) Percentage Change
I. Sources of Funds
(a) Share Capital	1,20,000	1,44,000	24,000	20% Increase
(b) Reserve and Surplus	48,000	60,000	12,000	25% Increase
(A) Net Worth	1,68,000	2,04,000	36,000	21.43% Increase
(B) Borrowed Funds - Loan	68,000	1,02,000	34,000	50% Increase
Total Funds Available (A + B)	2,36,000	3,06,000	70,000	29.66% Increase
II. Application of Funds
A. Fixed Assets	2,40,000	3,00,000	60,000	25% Increase
(1) Current Assets	56,000	54,000	(2,000)	(3.57%) Decrease
Less: (2) Current Liabilities	60,000	48,000	(12,000)	(20%) Decrease
B. Working Capital (Current Assets - Current Liabilities)	(4,000)	6,000	10,000	(250%) Decrease
Total Funds Applied (A + B)	2,36,000	3,06,000	70,000	29.66% Increase

In simple words: This Comparative Balance Sheet visually represents the year-over-year financial changes for the company, indicating the sources and applications of funds.

🎯 Exam Tip: Ensure totals for "Sources of Funds" and "Applications of Funds" match in both absolute and percentage change columns, as this confirms the balance sheet equation holds true for both periods and changes.

Question 5.Prepare Comparative Income statement of Noha Limited for the year ended 31-3-17 and 31-3-18.
Answer:

Particulars	31.3.17 (Rs.)	31.3.18 (Rs.)
Sales	2,00,000	3,00,000
Income Tax	50%	50%
Cost of Sales	1,20,000	80,000
Indirect Expenses	8,000	12,000

Solution:Comparative Income Statement of Noha Limited For the year ended 31st March 2017 and 31st March 2018

Particulars	31-03-2017 (Rs.)	31-03-2018 (Rs.)	Absolute Change (Rs.)	Percentage Change
Sales	2,00,000	3,00,000	1,00,000	50% Increase
Less: Cost of Sales	1,20,000	80,000	(40,000)	(33.33%) Decrease
Gross Profit	80,000	2,20,000	1,40,000	175% Increase
Less: Indirect Expenses	8,000	12,000	4,000	50% Increase
Net Profit before Tax	72,000	2,08,000	1,36,000	188.89% Increase
Less: Tax 50%	36,000	1,04,000	68,000	188.89% Increase
Net Profit after Tax	36,000	1,04,000	68,000	188.89% Increase

In simple words: This Comparative Income Statement details how Noha Limited's revenues, expenses, and profits have changed between 2017 and 2018, providing a clear view of its evolving profitability.

🎯 Exam Tip: For comparative income statements, meticulously calculate the absolute and percentage changes for each line item to highlight significant improvements or deteriorations in performance.

Question 6.Prepare Comparative Income Statement of Sourabh Limited for years ended 31-3-17 and 31-3-18.
Answer:

Particulars	31.3.17 (Rs.)	31.3.18 (Rs.)
Sales	4,00,000	6,00,000
Indirect Expenses	16,000	24,000
Cost of Sales	24,000	56,000
Income Tax	50%	50%

Solution:Comparative Income Statement of Sourabh Limited For the year ended on 31st March 2017 and 31st March 2018

Particulars	31-03-2017 (Rs.)	31-03-2018 (Rs.)	Absolute Change (Rs.)	Percentage (%) Change
Sales	4,00,000	6,00,000	2,00,000	50% Increase
Less: Cost of Sales	24,000	56,000	32,000	133.33% Increase
Gross Profit	3,76,000	5,44,000	1,68,000	44.68% Increase
Less: Indirect Expences	16,000	24,000	8,000	50% Increase
Net Profit before Tax	3,60,000	5,20,000	1,60,000	44.44% Increase
Less: Tax 50%	1,80,000	2,60,000	80,000	44.44% Increase
Net Profit after tax	1,80,000	2,60,000	80,000	44.44% Increase

In simple words: This statement compares Sourabh Limited's financial performance over two years, showing how sales, costs, and profits evolved.

🎯 Exam Tip: Ensure that the tax calculation (50% of Net Profit before Tax) is consistently applied across both periods for accurate comparison of Net Profit after Tax.

Question 7. Following is the Balance Sheet of Sakshi Traders for the year ended 31-3-17 and 31-3-18

Liabilities	31.3.17 (Rs.)	31.3.18 (Rs.)	Assets	31.3.17 (Rs.)	31.3.18 (Rs.)
Equity Share Capital	80,000	80,000	Fixed Assets	1,20,000	1,44,000
Pref. Share Capital	20,000	20,000	Investment	20,000	20,000
Reserve & Surplus	20,000	24,000	Current Assets	60,000	48,000
Secured Loan	40,000	16,000
Unsecured Loan	20,000	36,000
Current Liabilities	20,000	36,000
Total	2,00,000	2,12,000	Total	2,00,000	2,12,000

Prepare Common Size Balance Sheet for the years 31-03-17 and 31-03-18.
Answer:Solution: Common Size Statement of Balance Sheet of Sakshi Traders as of 31st March 2017 and 31st March 2018

Particulars	Amount (Rs.)		% to total of Balance Sheet
	31-03-2017 (Rs.)	31-03-2018 (Rs.)	31-03-2017 (Rs.)	31-03-2018 (Rs.)
I. Sources of Funds :
(1) Owner's Equity
Equity Share Capital	80,000	80,000	44.45	45.45
Preference Shares Capital	20,000	20,000	11.11	11.36
Reserve and Surplus	20,000	24,000	11.11	13.64
Net Worth	1,20,000	1,24,000	66.67	70.45
(2) Borrowed Funds
Secured Loans	40,000	16,000	22.22	9.09
Unsecured Loans	20,000	36,000	11.11	20.46
	60,000	52,000	33.33	29.55
Total Borrowed Funds	1,80,000	1,76,000	100	100
II. Application of Funds
(1) Fixed Assets	1,20,000	1,44,000	66.67	81.82
(2) Investments	20,000	20,000	11.11	11.36
	1,40,000	1,64,000	77.78	93.18
(3) Working Capital
(A) Current Assets	60,000	48,000
Less : (B) Current Liabilities	20,000	36,000
	40,000	12,000	22.22	6.82
Total Funds Applied	1,80,000	1,76,000	100	100

Note: Taking Total borrowed funds and Total Funds applied as a base (100), Calculation is done.In simple words: A common size balance sheet presents each line item as a percentage of a base figure, typically total assets or liabilities. This allows for easy comparison of financial structure over different periods or between different companies, highlighting changes in proportion rather than absolute amounts.

🎯 Exam Tip: When preparing a common size statement, always ensure that each item is expressed as a percentage of the *correct* base figure. For a balance sheet, the base is Total Assets/Liabilities; for an income statement, it's Total Sales/Revenue.

Question 8. Prepare Common Size Income Statement for the year ended 31-3-17 and 31-3-18.

Particulars	31.3.17 (Rs.)	31.3.18 (Rs.)
Sales	2,00,000	2,50,000
Cost of goods sold	1,50,000	1,70,000
Office and Administrative Expenses	4,000	6,000
Selling and Distubution Expenses	6,000	1,000

Answer:Solution: Common Size Statement for the year ended on 31st March 2017 and 31st March 2018

Particulars	Amount (Rs.)		Percentage (%)
	31-03-2017 (Rs.)	31-03-2018 (Rs.)	31-03-2017 (Rs.)	31-03-2018 (Rs.)
Sales	2,00,000	2,50,000	100	100
Less : Cost of goods sold	1,50,000	1,70,000	75	68
Gross Profit	50,000	80,000	25	32
Less: Office and Administrative Expenses	4,000	6,000	2	2.4
Less: Selling and Distribution Expenses	6,000	1,000	3	0.4
Net Profit	40,000	73,000	20	29.2

Note: Taking the amount of sales as base (100) other percentage figures are calculated.In simple words: A common size income statement expresses each line item as a percentage of total sales revenue. This helps in analyzing the profitability and efficiency of operations, revealing trends in cost structures and profit margins over time or compared to industry benchmarks.

🎯 Exam Tip: For income statements, sales revenue is typically the 100% base. Carefully calculate each expense and profit as a percentage of sales to accurately reflect the operational efficiency.

Question 9. Following is the Balance Sheet of Sakshi Limited. Prepare Cash Flow Statement:

Liabilities	31.3.17 (Rs.)	31.3.18 (Rs.)	Assets	31.3.17 (Rs.)	31.3.18 (Rs.)
Share Capital	2,00,000	3,00,000	Cash	20,000	30,000
Creditors	60,000	90,000	Debtors	1,40,000	2,50,000
Profit and Loss A/c	40,000	70,000	Stock	80,000	70,000
			Land	60,000	1,10,000
Total	3,00,000	4,60,000	Total	3,00,000	4,60,000

Answer:Solution: Cash Flow Statement For the year ended 31st March 2017 and 31st March 2018

Particulars	Amount (Rs.)	Amount (Rs.)
(A) Cash flow from Operating activities
Closing balance of Profit and Loss A/c	70,000
Less : Opening balance of Profit and Loss A/c	40,000
	30,000
Add : Decrease in Current Asset - Stock	10,000
Add : Increase in Current Liabilities - Creditors	30,000
	70,000
Less : Increase in Current Asset - Debtors	1,10,000
Net Cash from Operating activities (A)		(40,000)
(B) Cash flow from Investing activities
Purchase of Land	50,000
Net Cash used in Investing activities (B)		50,000
(C) Cash flow from Financing activities
Amount of share capital received	1,00,000
Net Cash from Financing activities (C)		1,00,000
Net increase in cash and cash equivalent (A + C - B)		10,000
Cash equivalent in the beginning of period.		20,000
Cash equivalent at the end of period		30,000

In simple words: A cash flow statement summarizes the cash inflows and outflows over a period, categorized into operating, investing, and financing activities. It provides insights into how a company generates and uses cash, crucial for assessing liquidity and solvency.

🎯 Exam Tip: Remember the three main sections of a cash flow statement: Operating (day-to-day business), Investing (asset purchases/sales), and Financing (debt/equity changes). Pay close attention to non-cash items and working capital changes.

Question 10. From the following Balance Sheet of Konal Traders prepare a Cash Flow Statement.

Liabilities	31.3.17 (Rs.)	31.3.178 (Rs.)	Assets	31.3.17 (Rs.)	31.3.18 (Rs.)
Share Capital	2,00,000	2,50,000	Cash	30,000	47,000
Creditors	70,000	45,000	Debtors	1,20,000	1,15,000
Profit and Loss A/c	10,000	23,000	Stock	80,000	90,000
			Land	50,000	66,000
Total	2,80,000	3,18,000	Total	2,80,000	3,18,000

Answer:Solution: Cash Flow Statement For the year ended on 31st March 2017 and 31st March 2018

Particulars	Amount (Rs.)	Amount (Rs.)
(A) Cash flow from Operating activities
Closing balance of Profit and Loss A/c	23,000
Less : Opening balance of Profit and Loss A/c	10,000
	13,000
Add : Decrease in Current Assets - Debtors	5,000
	18,000
Less : Increase in Current Assets - Stock	(10,000)
Less : Decrease in Current Liabilities - Creditors	(25,000)
Net Cash from Operating activities (A)		(17,000)
(B) Cash flow from Investing activities
Purchase of Land	16,000
Net Cash used in Investing activities (B)		16,000
(C) Cash flow from Financing activities
Amount of share capital received	50,000
Net Cash used in Financing activities (C)		50,000
Net increase in cash and cash equivalent (A + C - B)		17,000
Cash equivalent in the beginning of period.		30,000
Cash equivalent at the end of period.		47,000

In simple words: The cash flow statement provides a crucial summary of how cash is generated and used across a business's operations, investments, and financing activities. It helps stakeholders understand the liquidity and financial health, beyond just profit.

🎯 Exam Tip: For cash flow statements, accurately classifying each transaction into operating, investing, or financing activities is key. Remember that increases in current assets (except cash) are typically cash outflows, and increases in current liabilities are cash inflows, and vice-versa for decreases.

Question 11. A company had following Current Assets and Current Liabilities: Debtors = Rs. 1,20,000
Creditors = Rs. 60,000
Bills Payable = Rs. 40,000
Stock = Rs. 60,000
Loose Tools = Rs. 20,000
Bank Overdraft = Rs. 20,000 Calculate Current ratio.
Answer:Solution:
1. Current Assets = Debtors + Stock + Loose Tools
= 1,20,000 + 60,000 + 20,000
= Rs. 2,00,000
2. Current liabilities = Creditors + Bills payable + Bank overdraft
= 60,000 + 40,000 + 20,000
= Rs. 1,20,000
3. Current ratio = \( \frac{\text{Current assets}}{\text{Current liabilities}} \)
= \( \frac{2,00,000}{1,20,000} \)
= \( \frac{5}{3} \)
= 5:3In simple words: The current ratio is a liquidity ratio that measures a company's ability to pay off its short-term liabilities with its short-term assets. A ratio of 5:3 indicates that the company has Rs. 5 in current assets for every Rs. 3 in current liabilities, suggesting a healthy short-term financial position.

🎯 Exam Tip: Understanding the components of current assets and current liabilities is crucial. Always list all relevant items for calculation to avoid errors.

Question 12. Current assets of company Rs. 6,00,000 and its Current ratio is 2 : 1. Find Current liabilities.
Answer:Solution:
Current ratio = \( \frac{\text{Current assets}}{\text{Current liabilities}} \)
\( \frac{2}{1} = \frac{6,00,000}{\text{Current liabilities}} \)
\( 2 \times \text{Current liabilities} = 6,00,000 \times 1 \)
Current liabilities = \( \frac{6,00,000}{2} \) = Rs. 3,00,000In simple words: Given the current assets and the current ratio, we can calculate the current liabilities by rearranging the current ratio formula. This helps determine the company's short-term financial obligations.

🎯 Exam Tip: Practice cross-multiplication for ratio-based problems. Clearly state the formula before substituting values.

Question 13. Current liabilities = Rs. 3,00,000
Working capital = Rs. 8,00,000
Inventory = Rs. 2,00,000 Calculate Quick ratio.
Answer:Solution:
Current assets = Current liabilities + Working capital
= 3,00,000 + 8,00,000
= Rs. 11,00,000
Quick assets = Current assets - Inventory
= 11,00,000 - 2,00,000
= Rs. 9,00,000
Quick liability = Current liabilities - Bank O/D = Rs. 3,00,000
Quick ratio = \( \frac{\text{Quick assets}}{\text{Quick liabilities}} \)
= \( \frac{9,00,000}{3,00,000} \)
= \( \frac{3}{1} \)
= 3:1In simple words: The quick ratio, also known as the acid-test ratio, measures a company's ability to meet its short-term obligations with its most liquid assets. A ratio of 3:1 indicates strong immediate liquidity.

🎯 Exam Tip: Remember that inventory (stock) and prepaid expenses are excluded from quick assets. The quick liability calculation often involves adjusting current liabilities for bank overdraft.

Question 14. Calculate Gross Profit ratio Sales = Rs. 2,70,000
Net purchases = Rs. 1,50,000
Sales Ratio = Rs. 20,000
Closing Stock = Rs. 25,000
Operating Stock = Rs. 45,000
Answer:Solution:
Net sales = Sales - Sales return
= 2,70,000 - 20,000
= Rs. 2,50,000
Cost of goods sold = Opening stock + Net purchase - Closing stock
= 45,000 + 1,50,000 - 25,000
= Rs. 1,70,000
Gross profit = Net sales - Cost of goods sold
= 2,50,000 - 1,70,000
= Rs. 80,000
Gross Profit ratio = \( \frac{\text{Gross profit}}{\text{Net sales}} \times 100 \)
= \( \frac{80,000}{2,50,000} \times 100 \)
= 32%In simple words: The Gross Profit Ratio indicates the percentage of revenue left after deducting the cost of goods sold. A 32% ratio means 32 paise of every rupee of sales is gross profit.

🎯 Exam Tip: Pay close attention to distinguishing "Sales" from "Net Sales" (after returns) and "Operating Stock" from "Opening Stock." Be careful with additions and subtractions in the cost of goods sold formula.

Question 15. Calculate Net Profit ratio from the following: Sales = Rs. 3,80,000
Cost of goods sold = Rs. 2,60,000
Indirect expense = Rs. 60,000
Answer:Solution:
Sales = 3,80,000
Less: Cost of goods sold = Rs. 2,60,000
Gross profit = Rs. 1,20,000
Less: Indirect expense = Rs. 60,000
Net profit = Rs. 60,000
Net profit ratio = \( \frac{\text{Net profit}}{\text{Sales}} \times 100 \)
= \( \frac{60,000}{3,80,000} \times 100 \)
= 15.79%In simple words: The Net Profit Ratio measures the percentage of revenue remaining after all operating expenses, interest, and taxes have been deducted. A 15.79% ratio indicates the company's overall profitability.

🎯 Exam Tip: Remember to deduct both cost of goods sold and indirect expenses from sales to arrive at net profit before calculating the ratio. Ensure you use Sales (or Net Sales if applicable) as the denominator.

Question 16. Calculate Operating ratio: Cost of goods sold = Rs. 3,50,000
Operating expense = Rs. 30,000
Sales = Rs. 5,00,000
Sales return = Rs. 30,000
Answer:Solution:
Net sales = Sales - Sales return
= 5,00,000 - 30,000
= Rs. 4,70,000
Operating ratio = \( \frac{\text{Cost of goods sold} + \text{Operating expense}}{\text{Net sales}} \times 100 \)
= \( \frac{3,50,000 + 30,000}{4,70,000} \times 100 \)
= \( \frac{3,80,000}{4,70,000} \times 100 \)
= 80.85%In simple words: The operating ratio shows the efficiency of the business in managing its operating expenses relative to its net sales. An 80.85% ratio means that 80.85% of sales revenue is consumed by operating costs.

🎯 Exam Tip: The operating ratio includes both the cost of goods sold and all operating expenses. Always use Net Sales as the denominator for accuracy.

Question 17. Calculate Current ratio.
1. Current assets = Rs. 3,00,000
2. Current liabilities = Rs. 1,00,000
Answer:Solution:
Current ratio = \( \frac{\text{Current assets}}{\text{Current liabilities}} \)
= \( \frac{3,00,000}{1,00,000} \)
= \( \frac{3}{1} \)
= 3:1In simple words: The current ratio is a measure of a company's ability to pay short-term and long-term obligations. A ratio of 3:1 indicates that the company has three times more current assets than current liabilities, showing strong liquidity.

🎯 Exam Tip: This is a direct application of the current ratio formula. Ensure the figures used are indeed current assets and current liabilities.

Class 12 Commerce BK Textbook Solutions Digest

• 12th Bk Chapter 1 Practical Problems
• 12th Bk Chapter 2 Practical Problems
• 12th Bk Chapter 3 Practical Problems
• 12th Bk Chapter 4 Practical Problems
• 12th Bk Chapter 5 Practical Problems
• 12th Bk Chapter 6 Practical Problems
• 12th Bk Chapter 7 Practical Problems
• 12th Bk Chapter 8 Practical Problems
• 12th Bk Chapter 9 Practical Problems
• 12th Bk Chapter 10 Practical Problems