NCERT Solutions Class 12th Accountancy. FREE Flip-BOOK by Study Innovations

Debenture Holders Dr. 50,
To 15% Debentures A/c

(15% Debentures issued to Debenture Holders in
lieu of 1000 12% Debentures @ 100 each)

Working Notes:-
Number of Debentures to be issued

NCERT Solutions for Class 12 Accountancy
Company Accounts and Analysis of Financial
Statements Chapter 3

Financial Statements of a Company Class 12

Chapter 3 Financial Statements of a Company Exercise Solutions

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Statements >>

Short answerslong answers : Solutions of Questions on Page Number : 181
Q1 :
What is public company?

Answer :

A public company is defined as a company that offers a part of its ownership in the form
of shares, debentures, bonds, securities to the general public through stock market.
There must be atleast seven members to form a public company. As per the section 3
(1) (iv) of Companies Act 1956, public company means a company which:

a) is not a private company,

b) has a minimum paid up capital of Rs 5,00,000 or such higher paid up capital, as may
be prescribed,

c) is a private company, being a subsidiary of a company which is not a private
company.

A public company should not be mistakenly understood as a publicly-owned company,
as the latter is exclusively owned and controlled by the government. A public company
issues its share to general public without any restriction on maximum number of
persons. A public company can be segmented into two types:

1. Listed Company- A Company whose shares are listed and traded in the stock
exchange like, Tata Motors, Reliance, etc.

2. Unlisted Company- A Company whose shares are not listed in the stock exchange
and thereby these shares cannot be traded in the stock exchange.

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Q2 :
Explain the nature of the financial statements.

Answer :

The financial statements are the end-products of the accounting process. The financial
statements not only reveal the true financial position of the company but also help
various accounting users in decision making and policy designing process. The nature
of the financial statements depends upon the following aspects like recorded facts,
conventions, concepts, and personal judgment

1. Recorded facts- The items recorded in the financial statements reflect their original
cost i.e. the cost at which they were acquired. Consequently, financial statements do
not reveal the current market price of the items. Further, financial statements fail to
capture the inflation effects.

2. Conventions- The preparation of financial statements is based on some accounting
conventions like, Prudence Convention, Materiality Convention, Matching Concept, etc.
The adherence to such accounting conventions makes financial statements easy to
understand, comparable and reflects the true and fair financial position of the company.

3. Accounting Assumptions - These basic accounting assumptions like Going
Concern Concept, Money Measurement Concept, Realisation Concept, etc are called
as postulates. While preparing financial statements, certain postulates are adhered to.
The nature of these postulates is reflected in the nature of the financial statements.

4. Personal Judgments- Personal value judgments play an important role in deciding
the nature of the financial statements. Different judgments are attached to different
practices of recording transactions in the financial statements. For example, recording
stock either at market value or at the cost requires value judgment. Similarly, provision
on various assets, method of charging depreciation, period related to writing off
intangible assets depends on personal judgment. Thus, personal judgments determine
the nature of the financial statements to a great extent.

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Q3 :
What is private limited company?

Answer :

Private limited company is a company that is limited by shares or by guarantee by its
members. A private company is defined as a company that has a minimum paid up
share capital of Rs 1,00,000. As defined by the Section 3 (1) (iii) of Companies Act
1956, private limited company is defined by the following characteristics.

a) It restricts the right to transfer its shares.

b) There must be atleast two and a maximum of 50 members (excluding current and
former employees) to form a private company.

c) It cannot invite application from the general public to subscribe its shares, or
debentures.

d) It cannot invite or accept deposits from persons other than its members, Directors
and their relatives.

Unlike public company, a private company cannot issue its shares or debentures to
general public at large as shares of these companies are not traded in the stock
exchange, for example, Coca-Cola India Private limited, etc.

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Q4 :
Explain in detail about the significance of the financial statements.

Answer :

The importance of financial statements is mentioned below.

1. Provides Information- Financial statements provide information to various
accounting users both internal as well as external users. It acts as a basic platform for
different accounting users to derive information according to varying needs. For
example, the financial statements on one hand help the shareholders and investors in
assessing the viability and return on their investments, while on the other hand, the
financial statements help the tax authorities in calculating the amount of tax liability of
the company.

2. Cash Flow- Financial statements provide information about the cash flows of the
company. The financial statements help the creditors and other investors in determining
solvency of company.

3. Effectiveness of Management- The comparability feature of the financial statements
enables management to undertake comparisons like inter-firm and intra-firm
comparisons. This not only helps in assessing the viability and performance of the
business but also helps in designing policies and drafting policies. The financial
statements enhance the effectiveness and efficacy of the management.

4. Disclosure of Accounting Policies- Financial statements provide information about
the various policies, important changes in the methods, practices and process of
accounting by the company. The disclosure of the accounting policies makes financial
statements simple, true and enables different accounting users to understand without
any ambiguity.

5. Policy Formation by Government- It needs information to determine national
income, GDP, industrial growth, etc. The accounting information assist the government
in the formulation of various policy measures and to address various economic
problems like employment, poverty etc.

6. Attracts Investors and Potential Investors- They invest or plan to invest in the
business. Hence, in order to assess the viability and prospectus of their investment,
creditors need information about profitability and solvency of the business.

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Q5 :
Define Government Company?

Answer :

As per the Section 617 of Company Act of 1956, a Government Company means any
company in which not less than 51% of the paid up share capital is held by the Central
Government, or by any State Government or Governments, or partly by the Central
Government and partly by one on more State Governments and includes a company
which is a subsidiary of a Government Company as thus defined.

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Q6 :
Explain the limitations of financial statements.

Answer :

The following are the limitations of financial statements.

1. Historical Data- The items recorded in the financial statements reflect their original
cost i.e. the cost at which they were acquired. Consequently, financial statements do
not reveal the current market price of the items. Further, financial statements fail to
capture the inflation effects.

2. Ignorance of Qualitative Aspect- Financial statements does not reveal the
qualitative aspects of a transaction. The qualitative aspects like colour, size and brand
position in the market, employee's qualities and capabilities are not disclosed by the
financial statements.

3. Biased- Financial statements are based on the personal judgments regarding the
use of methods of recording. For example, the choice of practice in the valuation of
inventory, method of depreciation, amount of provisions, etc. are based on the personal
value judgments and may differ from person to person. Thus, the financial statements
reflect the personal value judgments of the concerned accountants and clerks.

4. Inter- firm Comparisons- Usually, it is difficult to compare the financial statements of
two companies because of the difference in the methods and practices followed by their
respective accountants.

5. Window dressing- The possibility of window dressing is probable. This might be
because of the motive of the company to overstate or understate the assets and
liabilities to attract more investors or to reduce taxable profit. For example, Satyam
showed high fixed deposits in the Assets side of its Balance Sheet for better liquidity
that gave false and misleading signals to the investors.

6. Difficulty in Forecasting- Since the financial statements is based on historical data,
so they fail to reflect the effect of inflation. This drawback makes forecasting difficult.

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Q7 :
What do you mean by a listed company?

Answer :

Those public companies whose shares are listed and can be traded in a recognised
stock exchange for public trading like, Tata Motors, Reliance, etc are called Listed
Company. These companies are also called Quota Companies. The listing of securities
(shares) helps the investor to determine the increase/decrease in value of their
investment in a concerned listed company. This provides ample indication to the
potential investors about the goodwill of the company and facilitates them to take
various investment decisions and also to assess the viability of their investment in a
company.

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Q8 :
Prepare the format of income statement and explain its elements.

Answer :

Vertical Form of Income Statement

Particulars Current Previous Absolute Change %
Increase or Change
Net Sales Year Year Decrease
Less: Cost of Goods Sold
****
Gross Profit ***
Less: Operating Expenses ****
***
Net Operating Profit ****
Add: Non Operating Income ***
Less: Non Operating Expenses ***
****
Profit before Interest and Tax ***
Less: Interest ****
***
Profit before Tax
Less: Provision for Tax/Tax Paid

Net Profit ****

Elements of Income Statement:-
1. Net Sales- Net Sales are derived as:

Cash Sales
Add: Credit Sales

Gross Sales
Less: Sales Return

Net Sales

2. Cost of Goods Sold- It is derived as:

Opening Stock
Add: Purchases
Add: Wages
Add: Manufacturing Expenses
Add: Any other direct Expenses

Closing Stocks
Cost of Goods sold

3. Operating Expenses- It is derived as:

Administrative Expenses
Add: Selling Expenses
Add: Distribution Expenses
Add: Depreciation

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Q9 :
What are the uses of securities premium?

Answer :

As per the Section 78 of the Companies Act of 1956, the amount of securities premium
can be used by the company for the following activities.

1. For paying up un issued shares of the company to be issued to members
(shareholders) of the company as fully paid bonus share,

2. For writing off the preliminary expenses of the company,

3. For writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares or debentures of the company,

4. For paying up the premium that is to be payable on redemption of preference shares
or debentures of the company.

5. Further, as per the Section 77A, the securities premium amount can also be utilised
by the company to Buy-back its own shares.

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Q10 :
Prepare the format of balance sheet and explain the various elements of balance
sheet.

Answer :

Vertical Form of Balance Sheet

Particulars Schedule Figure for the Figure for th
No. Current Year Previous Yea

I. Sources of Funds -
(1) Shareholder's Funds -
(a) Capital
(b) Reserve and Surplus
(2) Loan Funds
(a) Secured Loan
(b) Unsecured Loans

II. Application of Funds
(1) Fixed Assets
(a) Gross Block
(b) Less: Depreciation
(c) Net Block
(d) Capital Work in Progress
(2) Investments
(3) Current Assets, Loans and Advances
(a) Inventories
(b) Sundry Debtors
(c) Cash and Bank Balance
(d) Loan and Advances
(e) Other Current Assets
Less: Current Liabilities and Provisions
(i) Liabilities
(ii) Provisions

Net Current Assets
(4) (a) Miscellaneous Expenditures

(to the extent not written off)
(b) Profit and Loss Account
Dr. Balance (Loss)

Total

Elements of Balance Sheet

1. Share Capital: It is the first item on the Liabilities side. It consists of the following items:
a) Authorised Capital
b) Issued Capital: Equity share and preference share.
c) Subscribed Capital less Call in Arrears add Forfeited Shares

2. Reserve and Surplus: As per the Schedule VI, it consists of the following items:
a) Capital Reserve
b) Capital Redemption Reserve
c) Security Premium
d) Other Reserve less Debit balance of P & L A/c
e) Surplus: Credit balance of P & L A/c
f) Proposed Additions
g) Sinking Fund

3. Secured Loans
a) Debentures
b) Loan and advances from bank etc.

4. Unsecured Loans
a) Fixed Deposits
b) Loan & Advances from subsidiaries

5. Fixed Assets: These are those assets that are used for more than one year, like:
a) Goodwill
b) Land
c) Building
d) Plant & Machinery
e) Patents, Trade Marks
f) Livestock
g) Vehicles, etc.

6. Current Assets: Assets that can be easily converted into cash or cash equivalents are termed as
current assets. These are required to run day to day business activities; for example, cash,
debtors, stock, etc.

7. Current Liabilities: Those liabilities that are incurred with an intention to be paid or are
payable within a year; for example, bank overdraft creditors, bills payable, outstanding wages,
short-term loans, etc are called current liabilities.

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Q11 :
What is buy-back of shares?

Answer :
Buy-back of shares means repurchasing of its own shares by a company from the
market for reducing the number of shares in the open market. As per the Section 77A,
77AA and 77B of the Company Act of 1956, a company can Buy-back its own shares
and debentures on the account of following reasons.
1. To improve EPS (Earnings Per Share)

2. To return surplus cash to the shareholders that is not required by the business
3. To support value of its shares
4. To facilitates capital restructuring of the company.
5. To prevent take-over bid.
Buy-back of shares may be done:
a) By purchasing shares from existing share holders on a proportionate basis, or
b) By purchasing shares from the open market, or
c) By purchasing shares from odd lots, viz. where the lot of securities listed in the
recognised stock market is smaller than such marketable lot, or
d) By purchasing shares from the employees of the company
Sources for Buy-back of share:
1. Free Reserves,
2. Securities Premium Account,
3. Proceeds of any shares or other specified securities, provided that no Buy-back of
any kind of shares or other specified securities shall be made out of the proceeds of the
earlier issues of the similar kind of shares or similar kind of other specified securities.

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Q12 :
Explain how financial statements are useful to the various parties who are
interested in the affairs of an undertaking?

Answer :
The various parties that are directly or indirectly interested in the financial statements of
a company can be categorized into the following two categories:
1. Internal parties
2. External parties

Internal Parties

The following are the various internal accounting users who are directly related to the
company.

1. Owner- The owner/s is/are interested in the profit earned or loss incurred during an
accounting period. They are interested in assessing the profitability and viability of the
capital invested by them in the business.

2. Management- The financial statements help the management in drafting various
policies measures, facilitating planning and decision making process. The financial
statements also enable management to exercise various cost controlling measures and
to remove inefficiencies.

3. Employees and workers- They are interested in the timely payment of wages and
salaries, bonus and appropriate increment in their wages and salaries. With the help of
the financial statements they can know the amount of profit earned by the company and
can demand reasonable hike in their wages and salaries.

External Parties

There are various external users of accounting who need accounting information for
decision making, investment planning and to assess the financial position of the
business. The various external users are given below.

1. Banks and other financial institutions- Banks provide finance in the form of loans
and advances to various businesses. Thus, they need information regarding liquidity,
creditworthiness, solvency and profitability to advance loans.

2. Creditors- These are those individuals and organisations to whom a business owes
money on account of credit purchases of goods and receiving services; hence, the
creditors require information about credit worthiness of the business.

3. Investors and potential investors- They invest or plan to invest in the business.
Hence, in order to assess the viability and prospectus of their investment, creditors
need information about profitability and solvency of the business.

4. Tax authorities- They need information about sales, revenues, profit and taxable
income in order to determine the levy various types of tax on the business.

5. Government- It needs information to determine national income, GDP, industrial
growth, etc. The accounting information assist the government in the formulation of
various policies measures and to address various economic problems like employment,
poverty etc.

6. Researchers- Various research institutes like NGOs and other independent research
institutions like CRISIL, stock exchanges, etc. undertake various research projects and
the accounting information facilitates their research work.

7. Consumers- Every business tries to build up reputation in the eyes of consumers,
which can be created by the supply of better quality products and post-sale services at
reasonable and affordable prices. Business that has transparent financial records,
assists the customers to know the correct cost of production and accordingly assess the
degree of reasonability of the price charged by the business for its products and ,thus,
helps in repo building of the business.

8. Public- Public is keenly interested to know the proportion of the profit that the
business spends on various public welfare schemes; for example, charitable hospitals,
funding schools, etc. This information is also revealed by the profit and loss account and
balance sheet of the business.

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Q13 :
Write a brief note on 'Minimum Subscription'.

Answer :

When shares are issued to the general public, the minimum amount that must be
subscribed by the public so that the company can allot shares to the applicants is
termed as Minimum Subscription. As per the Company Act of 1956, the Minimum
Subscription of share cannot be less than 90% of the issued amount. If the Minimum
Subscription is not received, the company cannot allot shares to its applicants and it
shall immediately refund the entire application amount received to the public.

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Q14 :
`Financial statements reflect a combination of recorded facts, accounting
conventions and personal judgments' discuss.

Answer :

The financial statements are the end-products of the accounting process. The financial
statements not only reveal the true financial position of the company but also help
various accounting users in decision making and policy designing process. The nature
of the financial statements depends upon the following aspects like recorded facts,
conventions, concepts, and personal judgment

1. Recorded facts- The items recorded in the financial statements reflect their original
cost i.e. the cost at which they were acquired. Consequently, financial statements do
not reveal the current market price of the items. Further, financial statements fail to
capture the inflation effects.

2. Conventions- The preparation of financial statements is based on some accounting
conventions like, Prudence Convention, Materiality Convention, Matching Concept, etc.
The adherence to such accounting conventions makes financial statements easy to
understand, comparable and reflects the true and fair financial position of the company.

3. Accounting Assumptions - These basic accounting assumptions like Going
Concern Concept, Money Measurement Concept, Realisation Concept, etc are called
as postulates. While preparing financial statements, certain postulates are adhered to.
The nature of these postulates is reflected in the nature of the financial statements.

4. Personal Judgments- Personal value judgments play an important role in deciding
the nature of the financial statements. Different judgments are attached to different
practices of recording transactions in the financial statements. For example, recording
stock either at market value or at the cost requires value judgment. Similarly, provision
on various assets, method of charging depreciation, period related to writing off
intangible assets depends on personal judgment. Thus, personal judgments determine
the nature of the financial statements to a great extent.

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Q15 :
Explain the process of preparing income statement and balance sheet.

Answer :

The process of preparing Horizontal Form of Income Statement is explained below in a
chronological order.

1. Prepare a Trial Balance on the basis of the balances of various accounts in the
ledger.

2. Record Opening Stock, Purchases, Manufacturing Expenses and other direct
expenses on the debit side of Trading Account

3. Record Sales and Closing Stock on the credit side of the Trading Account.

4. Ascertain the balancing figure by totaling both the sides of the Trading Account. If the
credit side exceeds the debit side, then the balancing figure is termed as Gross Profit,
but if the debit side exceeds the credit side, then the balancing figure is termed as
Gross Loss.

5. Carry forward the Gross Profit (Gross Loss) to the credit (debit) side of the Profit and
Loss Account.

6. Record all current year's operating and non-operating revenue expenditures with their
relevant adjustments on the debit side of the Profit and Loss Account.

7. Record all current year's operating and non operating revenue incomes with their
relevant adjustments on the credit side of the Profit and Loss Account.

8. Ascertain the balancing figure by totaling both the sides of the Profit and Loss
Account. If the credit exceeds the debit side, then the balancing figure is termed as Net
Profit, but if the debit side exceeds the credit side, then the balancing figure is termed
as Net Loss.

The process of preparing Horizontal Form of Balance Sheet is explained below in a
chronological order.

1. Prepare a Trial Balance on the basis of the balances of various accounts in the
ledger.

2. Record all the debit balances of Real and Personal Accounts on the left hand side
(i.e. Assets side) of the Balance Sheet after making all adjustments for provision and
other related items.

3. Record all the credit balances of Real and Personal Accounts on the right hand side
(i.e. Liabilities side) of the Balance Sheet after making all adjustments for interest and
outstanding items.

4. Add Net Profit to the Opening Capital and deduct Net Loss, if any from the Opening
Capital

5. Ascertain the total of two sides, which must be equal.

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Statements >>

Numerical questions : Solutions of Questions on Page Number : 182
Q1 :
The following is the trial balance on June 30, 2006 of the Modern Manufacturing Company
Ltd.

Details Amount Details Amount
Rs Rs
Stock, 30th June, 2005 500
Sales 7,500 Dividend paid in, August, 2005 400
Purchases 10,000
Productive wages 35,000 Interim Dividend paid in Feb., 2006 3,750
Discounts (Dr.) 1,750
Discounts (Cr.) 24,500 Capital- 10,000 Rs 1 shares full Paid 2,900
Salaries 1,620
Rent 5,000 Debtors 1,550
General expenses 325
Profit and loss account, 700 Creditors 158
30th June 2005 (Cr.)
500 Plant and machinery

750 Cash in Bank

495 Reserve

1,705 Loan to Managing Director

1,503 Bad Debts

Stock, on June 30, 2006 Rs 8,200. You are required to make out the trading account, and
profit and loss account for the year ended June 30, 2006 and the balance sheet as on the
date. You are also to make provision in respect of the following: (i) Depreciate machinery
@ 10% per annum; (ii) Reserve 5% for discount on debtors; (iii) One month rent Rs 45
was due on 30th June; and (iv) Six month's insurance, included in general expenses, was
unexpired at Rs 75.

Answer :

Modern Manufacturing Company Ltd.

Trading and Profit and Loss Account for the year ended June 30, 2006

Dr. Cr
Amoun
Amount
Rs
Expenses/Losses Rs Revenues/Gains 35,000
8,200
Opening Stock 7,500 Sales
43,200
Purchases 24,500 Closing Stock
6,200
Productive Wages 5,000 500

Gross Profit c/d 6,200

43,200

Salaries 750 Gross Profit b/d
Discount 700 Discount
Rent 495
Add: Outstanding 45 540

General Expenses 1,705 1,630
Less: Prepaid Insurance (75) 290
Depreciation on Machinery 158
Bad Debts

Reserve for discount on Debtors 187.5 6,700
Net Profit c/d 2,444.5
1,503
Dividend paid in Aug. 6,700 2,444.5
Interim Dividend
Balance c/d 500 Balance b/d 3,947.5
400 Net Profit for the Current year
3,047.5
3,947.5

Balance Sheet as on June 30, 2006

Liabilities Amount Assets Amoun
Share Capital Rs Rs
Authorised Capital:
….shares of Rs …. each Fixed Assets
Issued and Subscribed:
10,000 shares of Rs 1 each Plant and Machinery 2,900
Reserves and Surplus
Reserve Less: Depreciation 290 2,61
Profit and Loss
Current Liabilities and Provision 10,000 3,562
Current Liabilities: 1,62
Creditors Current Assets, Loans and Advances 7
Rent Outstanding 8,20
1,550 Debtors 3,750 32

3,047.5 Less: Reserve for Discount 187.5

Cash at Bank

Prepaid Insurance

1,750 Stock

45 Loan to Managing Director

16,392.5 16,392

Note: It has been assumed that the Dividend Paid, August, 2005 of Rs 500 has been declared and
paid in the same accounting period.

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Q2 :
The following is the trial balance of Alfa Ltd., for the year ended June 30, 2005

Details Amount Details A
Rs
Land and Buildings
Plant and Machinery 3,00,000 Sundry Creditors
Furniture and Fittings
Goodwill 4,50,000 Bills Payable
Sundry Debtors
Bills Receivable 40,000 General Reserve
Investments (5% Govt. Securities)
Cash in Hand 60,000 Profit and Loss Account Balance (on 1.7.04)
Cash at Bank
Preliminary Expenses 60,000 Sales
Purchases
Sales Return 26,000 Purchase Returns
Stock on 1-7-04
Wages 30,000 Equity Share Capital
Salaries
Rent, rates and taxes 2,000 8% Preference Share Capital
Carriage Inwards
Law Charges 55,000

29,000

4,00,000

10,000

85,000

47,000

55,000

9,000

6,500

2,500

Trade Expenses 23,000
16,90,000
1

Prepare the Profit and Loss Account and Balance Sheet of the company after taking the
following particulars into consideration:

a) The original cost of land and building plant and machinery and furniture and fittings
was Rs 2,50,000, Rs 6,00,000 and Rs 60,000 respectively. Additions during the year were:
Building Rs 50,000 and Plant Rs 20,000.

b) Depreciation is to be charged on plant and machinery and furniture and fitting at 10 per
cent on original cost.

c) Of the sundry debtors, Rs 10,000 is outstanding for a period exceeding 6 months, Rs
5,000 are considered doubtful, while the others are considered good.

d) The directors are entitled to a commission at 1 percent of the net profits before charging
such commission.

e) Stock on 30th June, 2005 is Rs 1,30,000.

f) Provide Rs 34,800 for income tax

Answer :

Alfa Ltd.

Profit and Loss Account for the year ended June 30, 2005

Dr. C
Amoun
Amount
Rs
Expenses/Losses Rs Revenues/Gains 6,25,000
(10,000) 6,15,00
Opening Stock 85,000 Sales

Purchases 4,00,000 Less: Return

Less: Return (15,000) 3,85,000 Closing Stock 1,30,00
Wages 47,000 7,45,00
Carriage Inwards 6,500
Gross Profit c/d
2,21,500
7,41,500

Salaries 55,000 Gross Profit b/d 2,21,50
Rent, Rates and Taxes 9,000 Accrued Interest on 5% Govt. Securities 1,50
Law Charges 2,500
Trade Expenses 23,000
Depreciation on:
Plant and Machinery 60,000
Furniture 6,000 66,000
Provision for Income Tax
Directors' Commission 34,800
Net profit c/d 324

32,376 2,23,00
2,23,000

Proposed Dividend on Preference Shares 16,000 Balance b/d 90,00
Balance c/d 1,06,376 Net Profit for the current year 32,37
1,22,376 1,22,37

Balance Sheet as on June 30, 2005

Liabilities Amount Assets Amoun
Share Capital Rs Rs

Authorised Capital:

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Q3 :
The following balances appeared in the books of Parasuram Flour Mills Ltd., as on
December 31, 2005 :

Details Rs Details
Stock of wheat 9,500 Furniture
Stock of flour 16,000 Vehicles
Wheat Purchases
Manufacturing Expenses 4,05,000 Stores and spare parts
Flour Sales 90,000 Advances
Salaries and Wages
Establishment 5,55,000 Book Debts
Interest (Cr.) 13,000 Investments
Rent Received 4,700 Share Capital
Profit and Loss Account (Cr.) 500 Pension Fund
Director's Fees 800 Dividend Equalisation fund
Dividend for 2004 15,000 Taxation Provision
Land 1,200 Unclaimed Dividends
Buildings 9,000 Deposits (Cr.)
Plants and Machinery 12,000 Trade Creditors
50,500 Cash in Hand
50,500 Cash at Bank

Prepare the company's trading and profit and loss account for the year and balance sheet
as on December 31, 2005 after taking the following adjustments into account:

(a) Stock on December 31, 2005 were: Wheat at cost, Rs 14,900: Flour at market price, Rs
21,700; (b) Outstanding expenses: Manufacturing expenses, Rs 23,500; and salaries and
wages, Rs 1,200; (c) Provide depreciation : Building at 2% ; Plant and machinery at 10%:

Furniture at 10% ; and Vehicle 20%. (d) Interest accrued on Government Securities,
Rs100: (e) A tax provision of Rs 8,000 is considered necessary. (f) The directors propose a
dividend of 20%. (g) The authorised capital consists of 12,000 equity shares of Rs 10 each
of which 7,200 shares were issued and fully paid up.

Answer :

Parasuram Flour Mills Ltd.

Profit and Loss Account for the year ended December 31, 2005

Dr. Cr
Amount
Amount
Rs
Expenses/Losses Rs Revenues/Gains 5,55,00

Opening Stock: Sales (Flour)

Wheat 9,500 Closing Stock

Flour 16,000 25,500 Wheat (at cost) 14,900
21,700
Purchases (wheat) 4,05,000 Flour (at market price) 36,60

Manufacturing Expenses 90,000

Add: Outstanding 23,500 1,13,500

Gross Profit c/d 47,600

5,91,600 5,91,60

Salaries and Wages 13,000 Gross Profit b/d 47,60
Add: Outstanding 1,200 14,200 Interest 500
4,700 Add: Accrued 100 60
Establishment 1,010 1,200 Rent Received
Director's Fees 5,050 80
Depreciation: Taxation Provision 50
Building 510 (8,500 – 8,000)
Plant and Machinery
Furniture

Vehicle 1,020 7,590
Net Profit c/d 21,810
49,500 49,50
Dividend for 2004
Proposed Dividend 9,000 Balance b/d 15,00
Balance c/d 14,400 Net Profit for the current year 21,81
13,410
36,810 36,81

Balance Sheet as on December 31, 2005

Amount Amount
Rs
Liabilities Rs Assets

Share Capital Fixed Assets

Authorised Capital: Land 12,000
49,490
12,000 shares of Rs 10 each 1,20,000 Buildings 50,500
(1,010)
Less: Depreciation

Issued and Subscribed and Paid up

7,200 shares of Rs 10 each 72,000 Plants and Machinery 50,500
(5,050)
Less: Depreciation 45,450

Reserves and Surplus

Pension Fund 23,000 Furniture 5,100
(510)
Dividend Equalisation Fund 10,000 Less: Depreciation 4,590

Profit and Loss 13,410

Vehicles 5,100
(1,020)
Secured Loans – Less: Depreciation 4,080

Unsecured Loans Investments

Deposits 1,600 Investments 4,000
100
Current Liabilities and Provisions Add: Accrued 4,100

A. Current Liabilities: 1,24,000 Current Assets, Loan and Advances
Trade Creditors 900 A. Current Assets:
Unclaimed Dividends

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Q4 :
An unexperienced accountant prepared the following trial balance of Bang Vikas Ltd., for
the year ending 31.12.2005. The cash in hand on 31.12.2005 was Rs 750.

Details Rs Details Rs
Depreciation on
machinery 33,000 Authorised Capital: 6,00,000
60,000 shares of Rs 4,00,000
Calls in Arrear 10 each 3,00,000
Land and Buildings
Machinery 7,500 Subscribed Capital 13,625

Interim dividend 3,00,000 6% Debentures 87,000
paid
Stock on 1-1-2005 2,97,000 Profit and Loss
Sundry Creditors Account (Cr.)
Bills Payable
37,500 Sundry Debtors
Furniture
Bank Balance 75,000 Sales 4,15,000
Purchases 40,000 Sinking Fund 75,000
Provision for Bad 38,000 Preliminary 5,000
Debts
Investments Expenses
Salary and Wages 7,200
Repairs 39,900
Fuel 1,85,000
4,375

75,000
99,300
4,300
2,500

Rates and Taxes 1,800

Travelling Expenses 2,000

Discounts 6,400

Director's Fees 5,700

Bad Debts 2,100

Debenture interest 9,000

Carriage 1,800

Freight 8,900

Sundry Expenses 2,350

Public Deposits 10,000

12,95,625 12,95,625

After locating the mistakes and making the following adjustments prepare trading and
profit and loss account and balance sheet in the prescribed form.

Adjustments: (i) Stock on 31.12.2005 Rs 95,000 and (ii) Write-off preliminary expenses.

Answer :

Bang Vikas Ltd

Profit and Loss Account for the year ended December 31, 2005

Dr.

Amount

Expenses/Losses Rs Revenues/Gains

Opening Stock 75,000 Sales

Purchases 1,85,000 Closing Stock

Fuel 2,500

Carriage 1,800

Freight 8,900

Gross Profit c/d 2,36,800
5,10,000
Salary and Wages
Repairs 99,300 Gross Profit b/d
Rates and Taxes 4,300
Travelling Expenses 1,800
Discounts 2,000
Director's Fee 6,400
Bad Debts 5,700
Debenture Interest 2,100

Add: Outstanding 9,000 18,000
Sundry Expenses 9,000 2,350
Depreciation on Machinery 33,000
Preliminary Expenses written off 5,000
Net Profit c/d 56,850
2,36,800
Interim Dividend Paid
Balance c/d 37,500 Balance b/d
32,975 Net Profit of the Current year
70,475

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Q5 :
The Silver Ore Co. Ltd. was formed on April 1, 2005 with an authorised capital of
Rs6,00,000 in shares of Rs 10 each. Of these 52,000 shares had been issued and subscribed
but there were calls in arrear on 100 shares @ Rs 2.50. From the following trial balance as
on March 31, 2006 prepare the trading and profit and loss account and the balance sheet:

Cash at Bank Rs
Share Capital 1,05,500 Advertising
Plant 5,19,750 Cartage on Plant
Sale of Silver
Mines 40,000 Furniture and Buildings
Promotion Expenses 1,79,500 Administrative Expenses
Interest of F.D. up to Dec.31,2005 2,20,000 Repairs of Plant
Dividend on Investment
Royalties Paid 6,000 Coal and Oil
Railway track and wagons 3,900 Cash
Wages of Mines 3,200 Investments-share of tin mines
10,000 Brokerage on above
17,000 6% F.D. in Syndicate Bank
74,220

(i) Depreciate plant and railways by 10%; furniture and building by 5%; (ii) Write off a
third of the promotion expenses; (iii) Value of silver ore on March 31, 1969 Rs 15,000, The
directors forfeited on December 20, 1968, 100 shares on which only Rs 7.50 had been paid.

Answer :

Silver Ore Co. Ltd.

Profit and Loss Account for the year ended March 31, 2006

Dr. Cr
Amount
Amount
Rs
Expenses/Losses Rs Revenues/Gains 1,79,500

Coal and Oil 6,500 Sale 15,000

Wages 74,220 Closing Stock

Royalties 10,000

Gross Profit c/d 1,03,780

1,94,500 1,94,500
1,03,780
Promotion Expenses Written off 2,000 Gross Profit b/d 3,900
Advertising 5,000 Interest on FD 1,440 5,340

Administrative Expenses Add: Accrued Interest 3,200
Repairs of Plant 28,000 Dividend on Investment
Depreciation: 1,12,320
Railways Track and Wagons 900
Furniture and Building
Net Profit c/d 1,700
1,045 2,745

73,675
1,12,320

Balance Sheet as on March 31, 2006

Liabilities Amount Assets Amount
Rs Rs

Share Capital Fixed 40,000 41,800
Assets 1,800
Authorised Capital:
60,000 shares of Rs 6,00,000 Plant
10 each
Add:
Cartage on
Plant

Issued and Mines 2,20,000
Subscribed:

51,900 5,19,000 Furniture 20,900
shares of and
10 each Buildings

Add: 750 5,19,750 Less: (1,045) 19,855
Share
Depreciation

Forfeiture Railways 17,000
Reserves and Track and
Surplus Wagons

Profit and Loss 73,675 Less: (1,700) 15,300

Depreciation

NCERT Solutions for Class 12 Accountancy
Company Accounts and Analysis of Financial
Statements Chapter 4

Analysis of Financial Statements Class 12

Chapter 4 Analysis of Financial Statements Exercise Solutions
<< Previous Chapter 3 : Financial Statements of a CompanyNext Chapter 5 : Accounting Ratios >>

Short answersnumerical questionslong answers : Solutions of Questions on Page Number
: 232
Q1 :
List the techniques of Financial Statement Analysis.

Answer :
The following are the 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
a) Comparative Statement (Balance Sheet, Profit and Loss Account)
b) Common size Statement (of the same period)
c) Ratio of two or more Competitive Firms (of the same period)

d) Cash Flow Statement of two or more Competitive firms
e) Polygon, Bar Diagram
2. Intra-firm Comparison
a) Comparative Statement (Balance Sheet, Profit and Loss Account)
b) Common size Statement (of the same period)
c) Ratio of two or more Competitive Firms (of the same period)
d) Cash Flow Statement of two or more Competitive firms
e) Polygon, Bar Diagram
3. Horizontal Comparison
4. Vertical Comparison

B. On the basis of Time
1. Inter-period Comparison
a) Comparative statement (two or more periods)
b) Cash Flow statement (two or more period) etc.
2. Cross Sectional (Intra-period) Comparison
a) Common size statement
b) 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

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Q2 :

From the following information of Narsimham Company Ltd., prepare a Comparative
Income Statement for the years 2004-2005

Particulars 2004
Rs
Gross Sales
Less : Returns 7,25,000
25,000
Net Sales
Cost of Goods Sold 7,00,000
Gross Profit 5,95,000
Other Expenses 1,05,000
Selling & distribution Expenses
Administration Expenses 23,000
Total Expenses 12,700
Operating Income 35,700
Other Income 69,300
1,200
Non Operating Expenses 70,500
Net Profit 1,750
68,750

Answer :

Comparative Income Statement of Narsimham Company Ltd.
for the year ended 2004 and 2005

Absolute Percentage

Increase (+) Increase (+)

or or

Particulars 2004 2005 Decrease (–) Decrease
Rs
Gross Sales 7,25,000 Rs Rs %
Less: Return 25,000
7,00,000 8,15,000 + 90,000 + 12.41
Net Sales 5,95,000
Cost of Good Sold 1,05,000 15,000 (–) 10,000 (–) 40.00
Gross Profit
Other Expenses 8,00,000 + 1,00,000 + 14.28
Selling & distribution Expenses
Administration Expenses 6,15,000 + 20,000 + 3.36
Total Expenses
Operating Income 1,85,000 + 80,000 + 76.19
Other Income
23,000 24,000 + 1,000 + 4.35
Non Operating Expenses 12,700 12,500 (–) 200 (–) 1.57
Net Profit 35,700 36,500
69,300 1,48,500 + 800 + 2.24
1,200 8,050 + 79,200 + 114.29
70,500 1,56,550 + 6,850 + 570.83
1,750 1,940 + 86,050 + 122.06
68,750 1,54,610 + 10.86
+ 190 + 124.89
+ 85,860

Current Year - Previous Year

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Q3 :
Describe the different techniques of financial analysis and explain the limitations
of financial analysis.

Answer :

The various techniques used in financial analysis are as follows:

1. Comparative Statements: These statements depict the figures of two or more
accounting years simultaneously that help to access the profitability and financial
position of a business. The Comparative Statements help us in analysing the trend of
the financial position of the business. These statements also enable us to undertake
various types of comparisons like inter-firm comparisons and intra-firm comparisons. It
presents the change in the financial items both in absolute as well as percentage terms.
Therefore, these statements help in measuring the efficiency of the business in relative
terms. The analyses based on these statements are known as Horizontal Analysis.

2. Common Size Statements: These statements depict the relationship between
various items of financial statements and some common items (like Net Sales and the
Total of Balance Sheet) in percentage terms. In other words, 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. On the other hand,
different items of 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 that of the previous years' (i.e. inter-firm comparison)
and with that of the figures of other firms in the same industry (i.e. inter-firm
comparison) as well. The analyses based on these statements are commonly known as
Vertical Analysis.

3. Trend Analysis: This analysis undertakes the study of trend in the financial positions
and the operating performance of a business over a series of successive years. In this
technique, a particular year is assumed to be the base year and the figures of all other
years are expressed in percentage terms of the base year's figures. These trends (or
the percentage figures) not only helps in assessing the operational efficiency and the

financial position of the business but also helps in detecting the problems and
inefficiencies.

4. Ratio Analysis: This technique depicts the relationship between various items of
Balance Sheet and the Income Statements. It helps in ascertaining the profitability,
operational efficiency, solvency, etc of a firm. The analysis expresses financial items in
terms of percentage, fraction, proportion and as number of times. It enables budgetary
controls by assessing the qualitative relationship among different financial variables.
This analysis provides vital information to different accounting users regarding the
financial position, viability and performance of a firm. It also facilitates decision making
and policy designing process.

5. Cash Flow Analysis: This analysis is presented in the form of a statement showing
inflows and outflows of cash and cash equivalents from operating, investing and
financing activities of a company during a particular period of time. It helps in analysing
the reasons of receipts and payments in cash and change in the cash balances during
an accounting year in a company.

Limitations of Financial Analysis

The limitations of Financial Analysis are :

1. Ignores Changes in the Price level

The financial analysis fails to capture the change in price level. The figures of different
years are taken on nominal values and not in real terms (i.e. not taking price change
into considerations).

2. Misleading and Wrong Information

The financial analysis fails to reveal the change in the accounting procedures and
practices. Consequently they may provide wrong and misleading information.

3. Interim and Final Picture

The financial analysis presents only the interim report and thereby provides incomplete
information. They fail to provide the final and holistic picture.

4. Ignores Qualitative and Non-monetary Aspects

The financial analysis reveals only the monetary aspects. In other words, these
analyses consider only that information that can be expressed only in monetary terms.
These analyses fail to disclose managerial efficiency, growth prospects, and other non-
operational efficiency of a business.

5. Accounting Concepts and Conventions

The financial analysis are based an accounting concepts and conventions. Therefore,
the analysis and conclusions based on such analyses may not be reliable. For example,
the analysis considers only the book-value of various items (i.e. according to the Going
Concept) and consequently ignores the present market value of those items. Hence, the
analysis may not be realistic.

6. Involves Personal Biasness

The financial analysis reflects the personal biasness and personal value judgments of
the accountants and clerks involved. There are different techniques used by different
personnel for charging depreciation (original cost or written-down value method) and
also for inventory valuation. The use of different techniques by different people reduces
the effectiveness of the financial analysis.

7. Unsuitable for Comparisons

Due to the involvement of personal value judgment, personal biasness and use of
different techniques by different accountant, various types of comparisons such as inter-
firm and intra-firm comparisons may not be possible and reliable.

Answer needs Correction? Click Here

Q4 :
Distinguish between Vertical and Horizontal Analysis of financial data.

Answer :

Basis of Difference Horizontal Analysis Vertical Anal
Meaning
Purpose It refers to the comparison of an item of the financial It refers to the comparison of i

Usefulness statement of one period or periods to its financial statement to the com

corresponding item of the base accounting period. same accounting period.

Its purpose is to determine the change in an item Its purpose is to determine the
during an accounting period. The change in the item item/items to the common item
is expressed either in absolute figures or in accounting period. The change
percentage or in both terms. expressed either in ratio or in p

It indicates growth or decline of the item. It helps in predicting and deter
relative proportion of an item

item.

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Q5 :
Explain the usefulness of trend percentages in interpretation of financial
performance of a company.

Answer :
The Trend Analysis presents each financial item in percentage terms for each year.
These Trend Analyses not only help the accounting users to assess the financial
performance of the business but also assist them to form an opinion about various
tendencies and predict the future trend of the business.
Usefulness and Importance of Trend Analysis
The following are the various importance of Trend Analysis:
1. Assists in forecasting
The trends provided by Trend Analysis help the accounting users to forecast the future
trend of the business.
2. Percentage Terms
The trends are expressed in percentage terms. Analysing the percentage figures is
easy and also less time consuming.
3. User Friendly
As the trends are expressed in percentage figures, so it is the most popular financial
analysis to analyse the financial performance and operational efficiency of the company.
In other words, one need not to have an in-depth and sophisticated knowledge of
accounting in order to analyse these percentage trends.
4. Presents a Broader Picture
The trend analysis presents a broader picture about the financial performance, viability
and operational efficiency of a business. Generally, companies prefer to present their

financial data for a period of 5 or 10 years in forms of percentage trends, whereas the
other techniques of Financial Analysis lack this popularity.

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Q6 :
Explain the meaning of Analysis and Interpretation.

Answer :

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 financial data in a proper
manner. The main purpose of Analysis and Interpretation is to present the financial data
in such a manner that is easily understandable and self explanatory. This not only helps
the accounting users to assess the financial performance of the business over a period
of time but also enables them in decision making and policy and financial designing
process.

Country Man Ltd Comparative statement as on March 31, 2010 and 2011

Particular 2009–10 2010–11 Absolute
Change
Sales 1,00,000 1,50,000
Less: Cost of Goods Sold 60,000 78,000 50,00
40,000 72,000 18,00
Gross Profit 32,00
Less: Operating Expenses: 8,000 10,000
5,000 6,000 2,00
Office and Administrative Exp. 27,000 56,000 1,00
Selling and Distribution Exp. 3,000 4,800 29,00
Operating Profit 4,000 4,800 1,80
26,000 56,000
Add: Other Income 80
Less: Non-operating Expenses 30,00
Profit Before Interest and Tax

Interest 2,000 1,800 (200
Profit before Tax 24,000 54,200 30,20
12,000 27,100 15,10
Less: 50% Income Tax 12,000 27,100 15,10

Interpretation:
1. Sales of the company have increased by 50% during the year 2010 - 11 whereas the
cost of goods sold has also increased but at a lesser rate. From this, we can infer 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 (2009-10).
2. In 2010 - 11, 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.

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Q7 :
What is the importance of comparative statements? Illustrate your answer with
particular reference to comparative income statement.

Answer :
The following are the importance of Comparative Statements.
1. Simple Presentation
The Comparative Statements present the financial data in a simpler form. Moreover, the
year-wise data of the same items are presented side-by-side, which not only makes the
presentation clear but also enables easy comparisons (both intra-firm and inter-firm)
conclusive.
2. Easy for Drawing Conclusion

The presentation of comparative statement is so effective that it enables the analyst to
draw conclusion quickly and easily and that too without any ambiguity

3. Easy to Forecast

The comparative analysis of profitability and operational efficiency of a business over a
period of time helps in analysing the trend and also assists the management to forecast
and draft various future plans and policy measures accordingly.

4. Easy Detection of Problems

By comparing the financial data of two or more years, the financial management can
easily detect the problems. While comparing the data, some items may have increased
while others have decreased or remained constant. The comparative analysis not only
enables the management in locating the problems but also helps them to put various
budgetary controls and corrective measures to check whether the current performance
is aligned with that of the planned targets.

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Q8 :
Bring out the importance of Financial Analysis

Answer :

Financial Analysis has great importance to various accounting users on various matters.
Income Statements, Balance Sheets and other financial data provides information about
expenses and sources of income, profit or loss and also helps in assessing the financial
position of a business. These financial data are not useful until they are analysed. There
are various tools and methods such as Ratio Analysis, Cash Flow Statements that
make the financial data to cater varying needs of various accounting users.

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 a 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 controlling system.

Answer needs Correction? Click Here

Q9 :
What do you understand by analysis and interpretation of financial statements?
Discuss their importance.

Answer :
Financial Analysis has great importance to various accounting users on various matters.
Income Statements, Balance Sheets and other financial data provide information about
expenses and sources of income, profit or loss and also helps in assessing the financial
position of a business. These financial data are not useful until they are analysed. There
are various tools and methods such as Ratio Analysis, Cash Flow Statements that
make the financial data to cater varying needs of various accounting users.
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 a 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 controlling system.

Answer needs Correction? Click Here

Q10 :
What are Comparative Financial Statements?

Answer :
Those financial statements that enable intra-firm and inter-firm comparisons of financial
statements over a period of time are called Comparative Financial Statements. In other
words, these statements help the accounting users to evaluate and assess the financial
progress in the relative terms. These statements express the absolute figures, absolute
change and the percentage change in the financial items over a period of time.
Comparative Financial Statements present the financial data in such a manner that is

easily understandable and can be analysed without any ambiguity. If the accounting
policies and practices for the treatment of the items are same over the period of study,
only then the Comparative Financial Statements enable meaningful comparisons.
The following are the two Comparative Financial Statements that are commonly
prepared:
1. Comparative Balance Sheet
2. Comparative Income Statements
Answer needs Correction? Click Here

Q11 :
Explain how common size statements are prepared giving an example.

Answer :
The two Common Size Statements that are most commonly prepared are as follows.
1. Common Size Balance Sheet
2. Common Size Income Statements

Common Size Statement is prepared in a columnar form for analysis. In a Common Size
Statement each item of the financial statements is compared to a common item. The analyses
based on these statements are commonly known as Vertical Analysis.

The following are the columns prepared in a Common Size Statement.
1. Particulars Column: This column shows the various financial items under their respective
heads.
2. Amount Columns: These columns depict the amount of each item, sub-totals and the 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.

The Common Size Statements can be presented in the following two ways.

Method 1

1. Percentage Column is shown beside the Amount Column of the year to which percentage
column belongs.

Particulars Year (2007) % Year (2006)
Rs Rs

Method 2

Amount Columns are shown first and their percentage columns are shown after the Amount
Columns.

Particulars Year (2007) Year (2008) % 2007
Rs Rs

The preparation of the Common Size Statements can be better understood by the help of the
following example.

Balance Sheet of Indo Press Ltd.

Liabilities 2007 2008 Assets 200
Rs Rs R
Capital 1,00,000 2,00
Reserves and Surplus 80,000 1,50,000 Fixed Assets 1,20
Long term Loans 2,00,000 1,8
Current Liabilities 1,20,000 1,20,000 Investments
5,00,000 5,00
1,50,000 Current Asset

1,80,000

6,00,000

Indo Press Ltd.
Comparative Size Balance Sheet for the year 2007 and 2008

Particulars 2007 2008 %
Rs Rs 2007

Assets: 2,00,000 2,40,000
Fixed Assets 1,20,000 1,50,000
Investments 1,80,000 2,10,000
Current Assets

5,00,000 6,00,000 1

Liabilities: 1,00,000 1,50,000
Capital 80,000 1,20,000
Reserved Surplus 1,50,000
Long terms loans 2,00,000 1,80,000
Current liabilities 1,20,000

5,00,000 6,00,000 1

Preparation

Step 1: Title of the Common Size Statement, i.e. 'Common Size Balance Sheet' is written on the
top of the statement.
Step 2: In the 'Particulars' column, the various items of the Balance Sheet are shown under the
headings of 'Assets' and 'Liabilities'.
Step 3: In the 'Amount' column, amount of the items are shown in the 'Year' column to which
they belong
Step 4: The Assets and Liabilities are totaled and are shown separately for each year.
Step 5: In the 'Percentage' column, the percentage of each item in comparison to the Total of
Balance Sheet are shown, i.e. for year 2007, the common base is Rs 5,00,000 and for the year
2008, the common base is Rs 6,00,000. The percentage change in each item is calculated by the
help of the following formula.

Answer needs Correction? Click Here

Q12 :
What do you mean by Common Size Statements?

Answer :
These statements depict the relationship between various items of financial statements
and some common items (like Net Sales and the Total of Balance Sheet) in percentage
terms. In other words, various items of Trading and Profit and Loss Account such
asCost of Goods Sold, Non-Operating Incomes and Expenses are expressed in terms
of percentage of Net Sales. On the other hand, different items of 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 that of
the previous years' (i.e. inter-firm comparison) and with that of the figures of other firms
in the same industry (i.e. inter-firm comparison) as well.
The analyses based on these statements are commonly known as Vertical Analysis.
The following are commonly prepared Common Size Statements.
1. Common Size Balance Sheet
2. Common Size Income Statements

Answer needs Correction? Click Here

<< Previous Chapter 3 : Financial Statements of a CompanyNext Chapter 5 : Accounting Ratios >>

Numerical questions : Solutions of Questions on Page Number : 233
Q1 :

The following are the Balance Sheets of Mohan Ltd., at the end of 2004 and 2005.

Rs'000

Liabilities 2004 2005 Assets 2004 2005

Equity Share Capital 400 600 Land & buildings 270 170

Reserves & Surplus 312 354 Plant & Machinery 310 786

Debentures 50 100 Furniture & Fixtures 9 18

Long-term Loans 150 255 Other Fixed Assets 20 30

Accounts Payable 255 117 Loans and Advances 46 59

Other Current Liabilities 7 10 Cash and Bank 118 10

Account Receivable 209 190

Inventory 160 130

Prepaid Expenses 33

Other current Assets 29 40

1,174 1,436 1,174 1,436

Prepare a Comparative Balance Sheet and study the financial position of the company.

Answer :

Comparative Balance Sheet of Mohan Ltd.

Particulars 2004 2005 Absolute Percentage
Rs'(000) Rs'(000) Increase (+) Increase (+)
Assets:
Current Assets or or
Cash and Bank Decrease (-) Decrease (-)
Account Receivable
Inventory Rs'(000) %
Prepaid Expenses
Loan and Advances 118 10 (-) 108 (-) 91.52
Other current Assets 209 190 (-) 19 (-) 9.09
Total Current Assets (A) 160 130 (-) 30 (-) 18.75
Fixed Assets: - -
Loan and Buildings 33 + 13 + 28.26
Plant and Machinery 46 59 + 11 + 37.93
Furniture and Fixtures 29 40 (-) 133 (-) 23.54
Other Fixed Assets 565 432
Total Fixed Assets (B)
Total Assets (A+B) 270 170 (-) 100 (-) 37.04
310 786 + 476 +153.54
Liabilities: 18 + 100.00
9 30 +9 + 50.00
Answer needs Correction? Click Here 20 1,004 + 10 + 64.86
609 1,436 + 395 + 22.32
1,174 + 262