NCERT Solutions Class 12 Accountancy Company Accounts And Analysis Of Financial Statements Chapter 4

Q.1 Prepare a Common Size balance sheet from the following balance sheet of Aditya Ltd., and Anjali Ltd.:

Ans. Common Size Balance Sheet

\begin{array}{l}\text{\%}\text{is calculated on the basis of total of equity and liabilities}\\ \text{(or total assets)}\\ \text{Percentage of share capital (31st March 2016) =}\\ \frac{\text{6,00,000}}{\text{10,00,000}\text{}}\text{x}\text{100 = 60\%}\\ \text{In the same manner, other percentages may be calculted}\text{.}\end{array}

Q.2 Prepare a Common size statement of profit and loss of Shefali Ltd. with the help of following information:

Ans. Common Size Statement of Profit and Loss

Working Notes:

1. Calculation of Other Expenses

Other Expenses = Indirect Expenses = % of Gross Profit

2016 = ₹6,00,000 x 50% x 25% = ₹75,000

2017 = ₹8,00,000 x 45% x 25% = ₹90,000

\begin{array}{l}\text{\%}\text{is calculated on the basis of Revenue from Operations}\\ \text{Percentage of other income (31st March 2016) =}\\ \frac{\text{₹10,000}}{\text{₹6,00,000}\text{}}\text{x}\text{100 = 1}\text{.67\%}\\ \text{In the same manner, other percentages may be calculted}\text{.}\end{array}

Q.3 Prepare Comparative Statement of Profit and Loss from the following information:

*There is a misprint in the book, this should be ₹2,00,000

Ans. Comparative Statement of Profit & Loss

Working Notes:

1. Calculation of Net Purchases and Change in Inventory

Net Purchases of stock in Trade = Cash Purchases + Credit Purchases – 2016

= ₹1,20,000 + ₹1,50,000 – ₹4,000 = ₹2,66,000

2017 = ₹40,000 + ₹60,000 – ₹60,000 = ₹94,000

Change in Inventory = Opening Stock – Closing Stock

2016 = ₹30,000 ₹- 45,000 = ₹(15,000)

2017 = ₹60,000 – ₹1,00,000 =₹(40,000)

2. Calculation of Finance Cost

Finance Cost = Interest on Bank Overdraft + Interest on Debentures

Finance Cost (2016) = ₹5,000 + ₹20,000 = ₹25,000

Finance Cost (2017) = 0 + ₹20,000 = ₹20,000

3. Calculation of Other Expenses

Other Expenses = Carriage outward + other operating expenses

Other Expenses (2016) = ₹10,000 + ₹20,000 = ₹30,000

Other Expenses (2017) = ₹30,000 + ₹10,000 = ₹40,000

Q.4 Prepare Comparative Statement of Profit & Loss from the following information:

Ans. Comparative Statement of Profit & Loss

Working Notes:

1. Calculation of Net Sales

Net Sales = Cost of Goods Sold + Gross Profit – Sales Return

or, Net Sales = Purchases + Manufacturing Expenses + Change in Inventory + Gross Profit – Sales Return

Net Sales (2016) = 80,000 + 20,000 +30,000 + 90,000 – 4,000 = ₹2,16,000

Net Sales (2017) = 1,40,000 + 50,000 – 60,000 – 30,000 – 80,000 = ₹92,000

2. Calculation of Finance Cost

Finance Cost = Interest on short-term loans + Interest on 10% Debentures

Finance Cost (2016) = 20,000 + 1,000 = ₹21,000

Finance Cost (2017) = 20,000 + 2,000 = ₹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 = ₹80,000

Other Expenses (2017) = 20,000 + 20,000 + 90,000 = ₹1,30,000

Q.5 Following are the balance sheets of Alpha Ltd., as at March 31, 2016 and 2017. Prepare a Comparative Balance Sheet.

Ans.

Comparative Balance Sheet

\text{Percentage change =}\frac{\text{Absolute change}}{\text{Figure of base year}\text{}}\text{x}\text{100}

Q.6 Explain how common size statements are prepared giving an example.

Ans. Common size statements are the statements which indicate the relationship of different items of a financial statement with a common item by expressing each item as percentage of that common item.

Common size statements can be:

1. Common size balance sheet
2. Common size income statement

Common size statement is prepared in a columnar form for analysis. The following are the columns prepared in common size statements.

1. Particulars column: This column shows the various financial items under their respective heads.
2. Amount columns: These columns depict the amount of each items, sub totals and gross total of a particular year.
3. Percentage or ratio columns: These columns show the proportion of each item to the common item either in terms of percentage or ratio.

Format of Common Size Balance Sheet

Common Size Balance Sheet as at 31^st March, 2014 and 2015

Let us understand common size statement with the help of given example:

Prepare a Common Size balance sheet from the following balance sheet of Aruna Ltd., and Anjali Ltd.:

Common Size Balance Sheet

\begin{array}{l}\text{\%}\text{is calculated on the basis of total of equity and liabilities}\\ \text{(or total assets)}\\ \text{Percentage of share capital (31st March 2015) =}\\ \frac{\text{₹3,00,000}}{\text{₹5,00,000}\text{}}\text{x}\text{100 = 60\%}\\ \text{In the same manner, other percentages may be calculted}\text{.}\end{array}

Q.7 What do you understand by analysis and interpretation of financial statements? Discuss its importance.

Ans. Analysis and interpretation refers to a systematic and critical examination of the financial statements. It not only establishes cause and effect relationship among the various items of the financial statements but also presents the data in the proper format. The term financial analysis includes both analysis and interpretation. The term analysis means simplification of financial data by methodical classification given in the financial statements. Interpretation means explaining the meaning and significance of the data. These two are complimentary to each other. Analysis is useless without interpretation and interpretation without analysis is difficult.

The following are the reasons that advocate in favour of financial analysis:

1. It helps in evaluating the profit earning capacity and financial feasibility of the business.
2. It helps in assessing 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 assists management in decision making process, drafting various plans and also in establishing an effective control system.

Q.8 What is the importance of comparative statements? Illustrate your answer with particular reference to comparative income statement.

Ans. The American Institute of Certified Public Accountants has explained the utility of preparing comparative financial statements as follows:

“The presentation of comparative financial statements in annual and other reports enhances the usefulness of such reports and brings out more clearly the nature and trends of current changes affecting the enterprise. Such presentation emphasis the fact that statements for a series of periods are far more significant than those for a single period and that the accounts for one period are but an instalment of what is essentially a continuous history.”

Importance of comparative statements is highlighted in the following points:
1. Makes data simpler and more understandable: While preparing comparative financial statements data for a number of years is presented in simpler and comparable form. It is simple to draw conclusions about the operating results and financial health of the business.
2. Indicates the trend: Comparative financial statements indicate the trend of change by putting the figures of revenue from operations, expenses and profit for two or more years side by side.
3. Indicates the weak points of the business: Comparative financial statements may indicate the weak points of the business. Management can then investigate and find out the reasons for the weakness of the business and can take corrective measures.
4. Helps in comparison: It help a concern to compare its performance with the average performance of the industry (i.e. all the firms in the same business).
5. Forecasting: Comparative study of the changes in the key figures over a period helps the management in forecasting the profitability and financial soundness of the business.
Income Statement: Statement of Profit and Loss or Income Statement shows profit earned or loss incurred during the year. Comparative Statement of Profit and Loss or Comparative Income Statement is the horizontal analysis of Income Statement which shows the operating results for more than one accounting period so that changes in absolute amounts and percentages from one period to another are known.

Q.9 Explain the usefulness of trend percentages in interpretations of financial performance of a company.

Ans. The trend analysis is a technique of studying several financial statements over a series of years. In this analysis the trend percentages are calculated for each item by taking the figure of that item for the base year taken as 100. Generally the first year is taken as a base year. The analyst is able to see the trend of figures, whether moving upward or downward and involves the computation of the percentage relationship that each item bears to the same item in the base year. For example, revenue from operations, whether they are exhibiting increasing tendency or decreasing tendency or remaining constant over the period of comparison. Generally trend analysis is done for a reasonably long period. Many companies present their financial data for a period of 5 or 10 years in various forms in their annual reports.

Q.10 Describe the different techniques of financial analysis and explain the limitations of financial analysis.

Ans. The most commonly used techniques of financial analysis are as follows:

1. Comparative Statements: These are the statements showing the profitability and financial position of a firm for different periods of time in a comparative form to give an idea about the position of two or more periods. It applies to statement of profit and loss and balance sheet. Comparative figures indicate the trend and direction of financial position and operating results.

2. Common Size Statements: A common size balance sheet shows the percentage of each asset to the total assets and that of each liability to the total liabilities. Similarly, in the common size statement of profit and loss, the items of expenditure are shown as a percentage of the net revenue from operations. Such statements allow an analyst to compare the operating and financing characteristics of two companies of different sizes in the same industry.

3. Trend Analysis: It is a technique of studying the operational results and financial position over a series of years. Using the previous years’ data of a business enterprise, trend analysis can be done to observe the percentage changes over time in the selected data.

4. Ratio Analysis: It describes the significant relationship which exists between various items of a balance sheet and a statement of profit and loss of a firm. It is possible to assess the profitability, solvency and efficiency of an enterprise through the technique of ratio analysis.

5. Cash Flow Analysis: It refers to the analysis of actual movement of cash into and out of an organisation. The flow of cash into the business is called cash inflow and flow of cash out of the business is called as cash outflow. The difference between the inflow and outflow of cash is the net flow. Cash flow statement is prepared to project the manner in which the cash has been received and has been utilised during an accounting year.

Limitations of Financial Analysis:

Though financial analysis is quite helpful in determining financial strengths and weaknesses of a firm, it is based on the information available in financial statements. Some other limitations of financial analysis are:

1. They do not consider price level changes.
2. Financial analysis may be misleading without the knowledge of the changes in accounting procedure followed by a firm.
3. Monetary information alone is considered in financial analysis while non-monetary aspects are ignored.

The financial statements are prepared on the basis of accounting concept, as such; it does not reflect the current position.

Q.11 What do you mean by Common Size Statements?

Ans. These are the statements which indicate the relationship of different items of a financial statement with a common item by expressing each item as percentage of that common item. For example, a common size balance sheet shows the percentage of each asset to the total assets and that of each liability to the total liabilities.

Q.12 What are comparative financial statements?

Ans. These statements refer to the statement of profit and loss and balance sheet prepared by providing columns for the figures for both the current year as well as for the previous year and for changes during the year, both in absolute and relative terms.

Q.13 State the importance of financial analysis?

Ans. The following are the importance of financial analysis:

1. It helps in evaluating the profit earning capacity and financial feasibility of the business.
2. It helps in assessing 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.

Q.14 State the meaning of Analysis and Interpretations.

Ans. Analysis and interpretation refers to a systematic and critical examination of the financial statements. It not only establishes cause and effect relationship among the various items of the financial statements but also presents the data in the proper format.

Q.15 Distinguish between Vertical and Horizontal Analysis of financial data.

Ans.

Q.16 List the techniques of Financial Statement Analysis.

Ans. The following are 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

Q.17 Following are the balance sheets of Beta Ltd. at March 31, 2016 and 2017:

Ans.

Comparative Balance Sheet

\text{Percentage change =}\frac{\text{Absolute change}}{\text{Figure of base year}\text{}}\text{x}\text{100}