NCERT Solution for Class 12 Accountancy Part 2 Chapter 4 – Analysis of Financial Statements

NCERT solution for class 12 Accountancy Part 2 Chapter 4 – Analysis of Financial Statements

Short Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 4

5. What are Comparative Financial Statements?

Comparative financial statements refer to statements which enable comparison that is both intra and inter firm and is based over a period of time. These statements help various users of accounting information in evaluating financial progress of a firm in relative terms. These statements express the data in absolute figures or as percentage change and absolute change that occurs in the item of the financial statement over a period of time. The data presented in financial statements are self-explanatory and easy to understand. When items of the financial statement are treated with the same accounting policies and practices over a fixed period of time, then the comparative data derived from such statements bear meaningful comparisons.

Two common types are:

1. Comparative Income Statement

2. Comparative Balance Sheet

6. What do you mean by Common Size Statements?

Common Size Statements are those statements where the items are displayed as percentages of a common base figure instead of absolute figures. It is helpful for proper analysis between companies (inter-firm comparison) or between time periods of the same company (intra-firm comparison). In these statements the relationship between items present in financial statements and common items like balance sheet total and net sales are highlighted in percentage. The analysis based on these statements is called as Vertical Analysis.

Two types are:

1. Common Size Income Statements

2. Common Size Balance Sheet

Long Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 4

1. Describe the different techniques of financial analysis and explain the limitations of financial analysis.

Following different techniques are used for financial analysis:

1. Cash Flow Analysis: This analysis focuses on the inflow and outflow of cash and cash equivalents from the various activities of a business namely, investing, operating and financing activities during an accounting period. This helps in analysing cash payments and reason of receipt and the respective changes in cash balances during the accounting year.

2. Ratio Analysis: This method highlights the relationship between items of Balance Sheet and Income Statements. It is helpful in determining efficiency, profitability and solvency of a firm. This analysis expresses the financial items as fraction, percentage or proportion. Also, it determines the qualitative relationship among different financial variables. It also serves as a source of information regarding the performance, viability and financial position of a firm.

3. Trend Analysis: This technique studies the trends in operating performance and financial position of the business over a period of many years in succession. In such study, any particular year is considered as base year and the rest years are expressed as percentage of the base year’s figures. It helps in identifying problems and inefficiency along with detecting operating efficiency and financial position of the firm.

4. Comparative Statements: These statements use figures from two accounting periods that helps determine financial position and profitability. It also enables to do intra and inter firm comparison and therefore determine the efficiency of firm in relative terms. It uses both percentage as well as absolute terms. This analysis is known as Horizontal analysis.

5. Common size Statements: Common Size Statements are those statements where the items are displayed as percentages of a common base figure instead of absolute figures. It is helpful for proper analysis between companies (inter-firm comparison) or between time periods of the same company (intra-firm comparison). In these statements the relationship between items present in financial statements and common items like balance sheet total and net sales are highlighted in percentage. The analysis based on these statements is called as Vertical Analysis.

It has following limitations:

1. It fails to depict changes in accounting policy and procedures

2. These statements provide the interim report and hence have incomplete information.

3. These statements lack the qualitative aspect like growth prospects, managerial efficiency and express only in monetary terms

4. Financial analysis is based on accounting concepts and conventions and hence are not reliable as it does not take the current market value of items.

5. It involves personal biasness and judgements of the accountant for example in case of depreciation different methods can be charged for same item.

6. It does not take into account the change in price level. Only nominal values are considered.

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

Trend analysis is a form of analysing financial data and it is expressed as percentage for each year. It helps the accounting user in evaluating financial performance of the business and also form opinion of various tendencies by which businesses can predict future trends.

Importance of trend analysis:

1. Predicting of the trends of business which is forecasting of future trends in business.

2. Trends are expressed as percentages which is less time consuming and easy to follow.

3. It becomes a popular financial analysis method due to trends being expressed in percentages which makes evaluating financial performance and operating efficiency of the firm relatively simpler.

4. It presents a broader picture of the performance of company in terms of finance, viability and efficiency.

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

Comparative statements have the following importance:

1. It presents financial data in a simple form, with year wise data being presented in side by side fashion making the presentation neat and enabling intra and inter-firm comparisons more conclusive.

2. Presentation is very effective for drawing insights quickly and easily

3. It assists the management in drafting future plans and forecast trends which is acheived by analysing profitability and operating efficiency of a business over time.

4. Comparative analysis helps easy detection of problems. Early detection helps take corrective measures and align the business in meeting the desired target.

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

Financial analysis is of great importance for the various users of accounting information. Financial statements such as Balance Sheets, Income sheets and other sources of financial data provide ample information on the various expenses and sources of profit, loss and income which is helpful in determining the financial status of a business. Financial data is not making any meaningful contribution until it is analysed. There are various methods which help in analysing financial statement and make it useful for various accounting users.

Following reasons are essential for performing financial analysis:

1. It is very helpful in determining the financial viability and profit earning capacity of the firm.

2. It is helpful in evaluating the solvency of the business in the long term

3. It is useful in comparing the financial status of a firm in comparison to other competitor firms

4. It helps management in decision making, drafting plan and also in establishing a robust and effective control mechanism

5. Explain how common size statements are prepared giving an example.

Common size statements are of two types:

1. Common Size Income Statements

2. Common Size Balance Sheet

Common size statement is prepared as columnar form for performing analysis. In such a statement each item of the available financial statement is compared to a common item. Such analysis is called as vertical analysis.

Following columns are present:

1. Particulars: It shows the various financial item under each respective headings

2. Amount Columns: Under these columns the amount of each item is depicted along with sub-totals and gross total of a particular year.

3. Percentage/Ratio Columns: Under these columns the proportion of each item is shown as percentage or ratio with reference to common item.

It is prepared in following two ways:

Following example will help get a better understanding of the preparation

Working Note:

For example,

Numerical Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 4

1. Following are the balance sheets of Alpha Ltd. as at March 31^st, 2016 and 2017:

2. Following are the balance sheets of Beta Ltd. at March 31^st, 2016 and 2017:

3. Prepare Comparative Income Statement from the following information:

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

4. Prepare Comparative Income Statement from the following information:

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

Working Notes:

1. Calculation of Net Purchases and Change in Inventory

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

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

Working Notes:

1. Calculation of expenses

Other Expenses = Indirect Expenses = % of Gross Profit

Gross Profit = Net Sales −- Revenue from Operations

For 2016, Gross Profit = ₹(6,00,000 −- 4,28,000) = ₹1,72,000

For 2017, Gross Profit = ₹(8,00,000 −- 7,28,000) = ₹72,000

2016=1,72,000×25%=₹43,000

2017=72,000×25%=₹18,000

2016=1, 72,000×25%=₹43,000

2017=72,000×25%=₹18,000

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

*The total of Liabilities side must be equal to the total of Assets side, therefore, it should be 10, 00,000.