Chapter Notes - Analysis of Financial Statements

# Analysis of Financial Statements Chapter Notes - Accountancy Class 12 - Commerce

Tools for financial statement analysis

The various tools used for analysis of financial statements are :

Comparative Statement : Financial Statements of two years are compared and changes in absolute terms and in percentage terms are calculated. It is a form of Horizontal Analysis.

Common Size statement : Figures of Financial statements are converted it to percentage with respect to some common base.

In Common size Income Statement Sales/Revenue from Operations is taken is common base where as in Common size Balance Sheet Total assets or Total Equity and Liabilities are taken as common base.

Ratio Analysis : It is a technique of Study of relationship between various items in the Financial Statements.There are mainly four types of ratios-

1) liquidity ratio

2) solvency ratio

3) activity ratio

4) profitability ratio

Cash Flow Statement : It is a statement that shows the inflow and outflow of cash and cash equivalents during a particular period which helps in finding out the causes of changes in cash position between the two balance sheet dates.It is prepared under accounting standard 3

Comparative Statements

It is a statement that shows changes in each item of the financial statement in absolute amount and in percentage, taking the amounts of the preceding as counting period as the base.

Types of Comparative Statements :

1. Comparative Balance Sheet; and

2. Comparative Statement of Profit and Loss.

Comparative Balance Sheet: It shows the increases and decreases in various items of assets, equity and liabilities in absolute term and in percentage term by taking the corresponding figures in the previous year’s balance sheet as a base.

Format for a Comparative Balance Sheet

Comparative Balance Sheet of............ Ltd.

As at 31st March 2014 and 2015

 Particulars 2014Rs.(previousyear) 2015Rs(currentyear). AbsoluteChangeRs.(currentyear-previousyear) PercentageChange% 1. EQUITY AND LIABILITIES A. Shareholders’ fundsShare capitalReserves and surplus B. Non-current LiabilitiesLong-term borrowingsOther Long term liabilitiesLong-term provisions C. Current liabilitiesShort-term borrowingsTrade payablesOther Current liabilitiesShort-term provisions
 Total II. ASSETS A. Non-current assetsFixed assetsNon-current investmentsLong-term loans and advances B. Current AssetsCurrent investmentsInventoriesTrade receivablesCash and cash equivalentsShort term loans and advancesOther current assetsTotal

*Percentage change = absolute change/ previous year *100

for example -

 pariculars note no 2016 (A) 2017(B) absolute changeC= B-A percentageC/A*100 share holder fund 500000 300000 200000 40 current liabilities 30000 20000 10000 50 total liabilities 530000 320000 210000 40.38 assets fixed assets 220000 200000 20000 9.09 current assets 310000 120000 190000 61.29 total assets 530000 320000 210000 40.38

COMPARATIVE STATEMENT OF PROFIT AND LOSS/COMPARATIVE INCOME STATEMENT

Comparative Income Statement: It shows the increases and decreases in various items of income Statement in absolute amount and in percentage amount by taking the  corresponding figures in the previous year’s Income Statement as a base.

Format for a Comparative Statement of Profit and Loss Comparative Statement of Profit and Loss

For the years ended on 31st March, 2014 and 2015

 Particulars 2014Rs.(previousyear) 2015Rs.(currentyear) AbsoluteChangeRs.(currentyear-previousyear) PercentageChange% I. Revenue form operations II. Other Income III. Total Revenue (I+II)  IV. Expenses :Cost of Material consumedPurchases of Stock-in-TradeChanges in Inventories of Finished Goods, Work-in-progress and Stock-in-tradeEmployees Benefit ExpensesFinance CostDepreciation & Amortisation ExpensesOther ExpensesTotal ExpensesV. Profit before Tax (III-IV)Less : Income TaxVII. Profit after Tax

percentage = absolutechange/ previous year*100

Importance of Comparative Statement

To make the data simple and more understandable.

To indicate the trend with respect to the previous year.

To compare the firm performance with the performance of other firm in the same business.

 PARTICULARS 2016(A) 2017(B) ABSOLUTE CHANGE(B-A) PERCENTAGEC/A*100 revenue from operation 10,00,000 30,00,000 20,00,000 200 total income (A) 10,00,000 30,00,000 20,00,000 200 cost of production 2,00,000 3,00,000 1,00,000 50 other expenses 1,00,000 2,00,000 1,00,000 100 total expenses(B) 3,00,000 5,00,000 2,00,000 66.7 profit (A-B) 7,00,000 25,00,000 18,00,000 257.14 -TAX (1,00,000) (5,00,000) 4,00,000 400 PROFIT AFTER TAX 6,00,000 20,00,000 14,00,000 233.3

Common Size Statement

Common Size Financial Statements are the statements in which amounts of the various items of financial statements are converted into percentages to a common base.

Types of Common Size statements :

1. Common Size Balance sheet; and

2. Common Size Statement of Profit and Loss.

Common Size Balance sheet : It is a statement in which every item of assets, equity and liabilities is expressed as a percentage to the total of all assets or to the total of Equity and Liabilities.

Format for a Common Size Balance Sheet :

Common Size Balance Sheet of................. Ltd.

As at 31st March, 2014 and 2015

 Percentage of Balance Particulars Absolute Amounts
 Sheet Total 2014 2015 2014 2015 Rs. Rs. % % 1. EQUITY AND LIABILITIES(1) Shareholders’ fundsShare capitalReserves and surplus(3)Non-current LiabilitiesLong-term borrowingsOther Long term liabilitiesLong-term provisions(4)Current liabilitiesShort-term borrowingsTrade payablesOther Current liabilitiesShort-term provisions Total II. ASSETS(1)Non-current assetsFixed assetsNon-current investmentsLong-term loans and advances(2)Current AssetsCurrent investmentsInventoriesTrade receivablesCash and cash equivalentsShort term loans and advancesOther current assets Total

note - all the items are divided by the total of balance sheet to calculate the percentage.
 pariculars noteno 2016(A) 2017(B) PERCENTAGE 2016(divide by total530000) percentage2017(divide by total320000) share holderfund 500000 300000 94.3 93.75 currentliabilities 30000 20000 5.7 6.25 total liabilities 530000 320000 100 100 assets fixed assets 220000 200000 41.50 62.5 current assets 310000 120000 58.49 37.5 total assets 530000 320000 100 100

Common Size Income Statement or Statement of Profit and Loss: It is a statement in which every item of Statement of Profit and Loss is expressed as a percentage to the amount of Revenue from Operations.

Format for a Common Size Statement of Profit and Loss: Common Size Statement of Profit and Loss

For the years ended on 31st March, 2014 and 2015

 Particulars Absolute Amounts Percentage of Revenuefrom operation (NetSales) 2014 2015 2014 2015 Rs. Rs. Rs. Rs. Revenue from operationsAdd : Other Income

III. Total Revenue (I+II)

IV. Expenses :

a. Cost of Material consumed

c. Changes in Inventories of Finished Goods, Work-in-progress and Stock-in­trade

d. Employees Benefit Expenses

e. Finance Cost

f.  Depreciation

g. Other Expenses Total Expenses

V.  Profit before Tax (III-IV)

Less : Income Tax

VII. Profit after Tax

note- all the items are divided by revenue from operations of that year to calculate the percentages.

 PARTICULARS 2016(A) 2017(B) PERCENTAGE2016(divide by 10,00,000) PERCENTAGE2017(divide by 30,00,000) revenue from operation 10,00,000 30,00,000 100 100 total income (A) 10,00,000 30,00,000 100 100 cost of production 2,00,000 3,00,000 20 10 other expenses 1,00,000 2,00,000 10 6.67 total expenses(B) 3,00,000 5,00,000 30 16.67 profit (A-B) 7,00,000 25,00,000 70 83.3 -TAX (1,00,000) (5,00,000) 10 16.67 PROFIT AFTER TAX 6,00,000 20,00,000 60 66.67
The document Analysis of Financial Statements Chapter Notes | Accountancy Class 12 - Commerce is a part of the Commerce Course Accountancy Class 12.
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## FAQs on Analysis of Financial Statements Chapter Notes - Accountancy Class 12 - Commerce

 1. What is the purpose of analyzing financial statements?
Ans. Analyzing financial statements helps businesses and investors gain insights into the financial health and performance of a company. It allows them to assess profitability, solvency, liquidity, and efficiency, and make informed decisions regarding investments, acquisitions, or operational improvements.
 2. What are the key components of financial statements?
Ans. The key components of financial statements include the income statement, balance sheet, and cash flow statement. The income statement shows a company's revenues, expenses, and net income over a specific period. The balance sheet provides a snapshot of a company's assets, liabilities, and shareholders' equity at a given point in time. The cash flow statement records the cash inflows and outflows from operating, investing, and financing activities.
 3. How can financial ratios be used to analyze financial statements?
Ans. Financial ratios are used to analyze financial statements by comparing different components to assess a company's performance and financial health. For example, profitability ratios, such as return on assets or gross profit margin, measure a company's ability to generate profits. Liquidity ratios, such as the current ratio or quick ratio, indicate a company's ability to meet short-term obligations. Debt ratios, such as debt-to-equity or interest coverage ratio, measure a company's financial leverage and ability to repay debt.
 4. What are the limitations of analyzing financial statements?
Ans. Analyzing financial statements has some limitations. Firstly, financial statements are based on historical data and may not reflect a company's current or future performance accurately. Secondly, financial statements may be subject to manipulation or errors, which can distort the analysis. Moreover, financial statements may not capture all relevant information, such as intangible assets or contingent liabilities. Lastly, comparing financial statements across different companies or industries may not be meaningful due to varying accounting policies and industry-specific factors.
 5. How can financial statement analysis help in decision-making?
Ans. Financial statement analysis helps in decision-making by providing valuable insights into a company's financial performance, strengths, and weaknesses. Investors can use this analysis to make informed decisions about buying, selling, or holding stocks. Lenders can assess a company's creditworthiness and decide on loan approvals. Management can identify areas of improvement and make strategic decisions based on the analysis. Overall, financial statement analysis aids in evaluating risks and opportunities, supporting decision-making processes.

## Accountancy Class 12

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