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# Class 12-commerce NCERT Solutions Accountancy Chapter 4 - Analysis of Financial Statements

NCERT Solutions for CBSE Class 12 Commerce Accountancy Chapter Analysis of Financial Statements at TopperLearning help students understand the topics from this chapter. These solutions not only explain every unit but also provide solutions to the exercises. The detailed notes can help students perform well in the CBSE board exams as well as the competitive exams. For better learning, revision and practice, students can refer to our revision notes, video lessons, textbook solutions, past years’ papers, sample papers, MCQs, MIQs etc.

## Analysis of Financial Statements Exercise 186

### Solution SA 1

Commonly used techniques of Financial Statement Analysis:

1. Comparative Financial Statements
2. Common Size Financial Statements
3. Trend Analysis
4. Ratio Analysis
5. Cash Flow Statement
6. Fund Flow Statement

The above listed techniques can be classified on the following basis:

A. On the basis of Comparison

1. Inter-firm Comparison
1. Comparative Statement (Balance Sheet, Profit and Loss Account) a
2. Common Size Statement (of the same period)
3. Ratio of Two or More Competitive Firms (of the same period)
4. Cash Flow Statement of Two or More Competitive Firms
5. Polygon, Bar Diagram
2. Intra-firm  Comparison
1. Comparative Statement (Balance Sheet, Profit and Loss Account) a
2. Common Size Statement (of the same period)
3. Ratio of Two or More Competitive Firms (of the same period)
4. Cash Flow Statement of Two or More Competitive Firms
5. Polygon, Bar Diagram
3. Horizontal Comparison
4. Vertical Comparison

B. On the basis of Time

1. Inter-period Comparison
1. Comparative Statement (two or more periods)
2. Cash Flow Statement (two or more periods)
2. Cross Sectional (Intra period) Comparison
1. Common Size Statement
2. Ratio Analysis

C. Horizontal Analysis

1. Time Series
2. Bar Diagram
3. Polygon
4. Comparative Statement
5. Ratio Analysis

D. Vertical Analysis

1. Common Size Statement
2. Pie Diagram

### Solution SA 2

 Basis of Difference Horizontal Analysis Vertical Analysis Meaning It is a comparison of an item of the financial statement of one period or periods to its corresponding item of the base accounting period. It is a comparison of items of the financial statement to the common item of the same accounting period. Purpose Its purpose is to find out the change in an item during an accounting period. The change is expressed either in absolute figures or in percentage or in both. Its purpose is to determine the proportion of item/items to the common item of the same accounting period. The change is expressed either in ratio or in percentage. Usefulness It shows growth or decline of the item. It helps in predicting and determining the future relative proportion of an item to the common item.

### Solution SA 3

Analysis and interpretation refers to a critical and detailed examination of financial statements. The main purpose of analysis and interpretation is to present financial data in a manner which is easily understandable and self-explanatory. This not only helps accounting users to assess the financial performance of the business over a period of time but also helps them in decision making and policy and financial designing process.

 Vaibhavi Ltd. Comparative Statement as on 31 March 2013 and 2014 Particulars 2012-13 2013-14 Absolute Change % Change Sales Less: Cost of Goods Sold 1,00,000 60,000 1,50,000 78,000 50,000 18,000 50 30 Gross Profit 40,000 72,000 32,000 80 Less: Operating Expenses: Office and Administrative Exp. 8,000 10,000 2,000 25 Selling and Distribution Exp. 5,000 6,000 1,000 20 Operating Profit 27,000 56,000 29,000 107.4 Add: Other Income 3,000 4,800 1,800 60 Less: Non-operating Expenses 4,000 4,800 800 20 Profit Before Interest and Tax 26,000 56,000 30,000 115.38 Interest 2,000 1,800 (200) (10) Profit before Tax 24,000 54,200 30,200 125.83 Less: 50% Income Tax 12,000 27,100 15,100 125.83

Interpretation:

1. Sales of the company has increased by 50% during the year 2013-14, whereas the cost of goods sold has also increased but at a lesser rate. From this, we can conclude that the company has followed an efficient sales strategy, consequent of which the gross profit of the company has increased by 80% compared to the previous year (2012-13).
2. In 2013-14, operating expenses have also increased, but on the contrary, operating profit has increased at a higher rate than the rate of operating expenses.
3. Profit before interest and tax has also increased by 115.38% during these two years. This indicates the improvement in the operating efficiency of the company.

### Solution SA 4

Financial analysis has a vast importance to various accounting users on various matters. Income statements, balance sheets and other financial data provide information about expenses, sources of income, profit or loss and help in examining the financial position of a business. These financial data are of no use until they are analysed. There are various tools and methods to analyse financial data such as ratio analysis and cash flow statements which make financial data to cater to the varying needs of various accounting users. Reasons in favour of financial analysis:

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

### Solution SA 5

Financial statements which enable intra-firm and inter-firm comparisons of financial statements over a period of time are called comparative financial statements. These statements help accounting users to evaluate financial progress in relative terms. Comparative financial statements present financial data in a manner that is easily understandable and can be analysed without any ambiguity. Comparative financial statements enable meaningful comparisons only if the accounting policies and practices for the treatment of the items are the same over the period of study. Two comparative financial statements which are commonly prepared are

1. Comparative Balance Sheet
2. Comparative Income Statement

### Solution SA 6

A common size statement represents the relationship between various items of financial statements and some common items (Net Sales and Total of Balance Sheet) in terms of percentage. Various items of trading and profit and loss account such as cost of goods sold, non-operating incomes and expenses are expressed in terms of percentage of net sales. Likewise, different items of the Balance Sheet such as Fixed Assets, Current Assets, Share Capital etc. are expressed in terms of percentage of Total of Balance Sheet. These percentage figures are easily comparable with those of previous years (i.e. intra-firm comparison) and with the figures of other firms in the same industry (i.e. inter-firm comparison) as well. Analyses based on these statements are commonly known as Vertical Analyses.

Commonly prepared common size statements are

1. Common Size Balance Sheet
2. Common Size Income Statement

## Analysis of Financial Statements Exercise 188

### Solution NUM 1

 Comparative Balance Sheet as on March 31,2016 and 2017 Particulars 2016 Rs. 2017 Rs. Absolute Change Percentage Change I. Equity and Liabilities 1. Shareholder's Fund a. Equity Share Capital 2,00,000 4,00,000 2,00,000 100 b. Reserves and Surplus 1,00,000 1,50,000 50,000 50 2. Non-Current Liabilities a. Long term Borrowings 2,00,000 3,00,000 1,00,000 50 3. Current Liabilities a. Short Term Borrowings 50,000 70,000 20,000 40 b. Trade Payables 30,000 60,000 30,000 100 c. Short Term Provisions 20,000 10,000 (10,000) (50) d. Other Current Liabilities 20,000 30,000 10,000 50 Total 6,20,000 10,20,000 4,00,000 64.5 II. Assets 1. Non-Current Assets a. Fixed Assets 2,00,000 5,00,000 3,00,000 150 b. Non Current Investments 1,00,000 1,25,000 25,000 25 2. Current Assets a. Current Investments 60,000 80,000 20,000 33.3 b. Inventories 1,35,000 1,55,000 20,000 14.8 c. Trade Receivables 60,000 90,000 30,000 50 d. Short term Loans and Advances 40,000 60,000 20,000 50 e. Cash and Cash Equivalents 25,000 10,000 (15,000) (60) Total 6,20,000 10,20,000 4,00,000 64.5

### Solution NUM 2

 Comparative Balance Sheet as on March 31,2016 and 2017 Particulars 2016 (Rs.) 2017 (Rs.) Absolute Change Percentage Change I. Equity and Liabilities 1. Shareholder's Fund a. Equity Share Capital 3,00,000 4,00,000 1,00,000 33.3 b. Reserves and Surplus 1,00,000 1,50,000 50,000 50 2. Non-Current Liabilities a. Long term Borrowings (Loan from IDBI) 1,00,000 3,00,000 2,00,000 200 3. Current Liabilities a. Short Term Borrowings 50,000 70,000 20,000 40 b. Trade Payables 30,000 60,000 30,000 100 c. Short Term Provisions 20,000 10,000 (10,000) (50) d. Other Current Liabilities 1,00,000 1,10,000 10,000 10 Total 7,00,000 11,00,000 4,00,000 57.14 II. Assets 1. Non-Current Assets a. Fixed Assets 2,20,000 4,00,000 1,80,000 81.8 b. Non Current Investments 1,00,000 2,25,000 1,25,000 125 2. Current Assets 60,000 80,000 a. Current Investments 20,000 33.3 b. Inventories (stock) 90,000 1,05,000 15,000 16.6 c. Trade Receivables 60,000 90,000 30,000 50 d. Short term Loans and Advances 85,000 1,00,000 15,000 17.65 e. Cash and Cash Equivalents 85,000 1,00,000 15,000 17.65 Total 7,00,000 11,00,000 4,00,000 57.14

## Analysis of Financial Statements Exercise 189

### Solution NUM 3

 Comparative Income Statement as on March 31,2016 and 2017 Particulars Note No. 2014 Rs. 2015 Rs. Absolute Change Percentage Change 1. Revenue from Operations 2,16,000 92,000 (1,24,000) (57.4) 2. Other Income 10,000 20,000 10,000 100 3. Total Revenue (I + 2) 2,26,000 1,12,000 (1,14,000) (50.44) 4. Expenses a. Purchase of Stock- in- Trade 80,000 1,40,000 60,000 75 b. Change in Inventories 30,000 (60,000) (90,000) (300) c. Employee Benefit Expenses 5,000 10,000 5,000 100 d. Finance Costs 21,000 22,000 1,000 4.54 e. Depreciation and Amortization Expenses 5,000 10,000 5,000 100 f. Other Expenses 80,000 1,30,000 50,000 62.5 Total Expenses 2,21,000 2,52,000 31,000 14.03 5. Profit before Tax (3-4) 5,000 (1,40,000) (83,000) 16.6 Less: Income Tax 2,500 - (2,500) (100) 6. Profit After Tax 2,500 (1,40,000) (1,37,500) 55

Working Notes:

1. Calculation of Net Sales
Net Sales= Cost of Goods Sold + Gross Profit-Sales Returns
Or
Net Sales= Purchase + Manufacturing Expenses + Change in Inventory + Gross Profit - Sales Returns
Net Sales (2016)=80,000+20,000+30,000+90,000-4,000
Rs.2,16,000
Net Sales (2017)=1,40,000+50,000-60,000-30,000-8,000
Rs.92,000
2. Calculation of Finance Cost
Finance Cost = Interest on short-term loans + Interest on 10% Debenture
Finance Cost (2016)=20,000+1,000=Rs.21,000
Finance Cost (2017)=20,000+2,000=Rs.22,000
3. Calculation of other Expenses
Other Expenses=Freight Outward+ Carriage Outward +Loss on sale of office car
Other Expenses(2016)=10,000+10,000+60,000=Rs.80,000
Other Expenses(2017)=20,000+20,000+90,000=Rs.1,30,000

### Solution NUM 4

 Comparative Income Statement For the year ended March 31,2016 and 2017 Particulars Note No. 2016 Rs. 2017 Rs. Absolute Change Percentage Change 1. Revenue from operations 9,60,000 4,50,000 (5,10,000) (53.13) 2. Other Income 10,000 20,000 10,000 100 3. Total Revenue (1+2) 9,70,000 4,70,000 (5,00,000) (51.55) 4. Expenses a. Purchases of stock-in- Trade 2,66,000 94,000 (1,72,000) (64.7) b. Change in Inventories (15,000) (40,000) (55,000) (366.7) c. Finance Costs 25,000 20,000 (5,000) (20) d. Depreciation and Amortization Expenses 20,000 20,000 - - e. Other Expenses 30,000 40,000 10,000 33.33 Total Expenses 3,26,000 1,34,000 (1,92,000) 58.90 5. Profit before Tax (3-4) 6,44,000 3,36,000 (3,08,000) 47.83 Less: Income Tax 3,22,000 1,34,400 (1,87,600) 58.26 6. Profit After Tax 3,22,000 2,01,600 1,20,000 37.39

1. Calculation of Net Purchases and Change in Inventory
Net Purchase of Stock in Trade = Cash Purchase + Credit Purchase - Purchase Returns
2016=1,20,000+1,50,000-4,000=Rs.2,66,000
2017=40,000+60,000-60,000=Rs.94,000
Change in Inventory=Opening Stock-Closing Stock
2016=30,000-45,000=Rs.(15,000)
2017=60,000-1,00,000=Rs.(40,000)
2. Calculation of Finance Cost
Finance Cost = Interest on Bank Overdraft + Interest on Debentures
Finance Cost (2016) = 5,000+20,000=Rs.25,000
Finance Cost (2017)=0+20,000=Rs.20,000
3. Calculation of Other Expenses
Other Expenses=Carriage outward + other operating expenses
Other Expenses(2016)=10,000+20,000=Rs.30,000
Other Expenses(2017)=30,000+10,000=Rs.40,000

## Analysis of Financial Statements Exercise 190

### Solution NUM 5

 Comparative Income Statement For the year ended March 31,2016 and 2017 Particulars Note No. 2016 Rs. 2017 Rs. Percentage of Sales 2014 2015 1. Revenue from operations 6,00,000 8,00,000 100 100 2. Other Income 10,000 12,000 1.67 1.5 3. Total Revenue (1+2) 6,10,000 8,12,000 101.67 101.5 4. Expenses a. Cost of Goods Sold 4,28,0000 7,28,000 71.33 91 b. Other Expenses 75,000 90,000 12.50 11.25 Total Expenses 5,03,000 8,18,000 83.83 102.25 5. Profit before Tax (3-4) 1,07,000 (6,000) 17.83 (0.75) Less: Income Tax 32,100 - 5.53 - 6. Profit After Tax 74,900 (6,000) 12,48 (0.75)

Working Notes:

### Solution NUM 6

 Common Size Balance Sheet Particulars Aditya Ltd. Rs. Anjali  Ltd. Rs. % of Sales Aditya Ltd. Anjali  Ltd. I. Equity and Liabilities 1. Shareholder's Fund a. Equity Share Capital 6,00,000 8,00,000 60 66.67 b. Reserves and Surplus 3,00,000 2,50,000 30 20.83 2. Current Liabilities 1,00,000 1,50,000 10 12.5 Total 10,00,000 12,00,000 100 100 II. Assets 1. Non - Current Assets a. Fixed Assets 4,00,000 7,0,000 40 58.33 2. Current Assets 6,00,000 5,00,000 60 41.67 Total 10,00,000 12,00,000 100 100