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

## Analysis of Financial Statements Class 12

### Short answersnumerical questionslong answers : Solutions of Questions on Page Number : 232

Q1 :

List the techniques of Financial Statement Analysis.

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

Q2 :

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

 Particulars 2004 Rs 2005 Rs Gross Sales 7,25,000 8,15,000 Less : Returns 25,000 15,000 Net Sales 7,00,000 8,00,000 Cost of Goods Sold 5,95,000 6,15,000 Gross Profit 1,05,000 1,85,000 Other Expenses Selling & distribution Expenses 23,000 24,000 Administration Expenses 12,700 12,500 Total Expenses 35,700 36,500 Operating Income 69,300 1,48,500 Other Income 1,200 8,050 70,500 1,56,550 Non Operating Expenses 1,750 1,940 Net Profit 68,750 1,54,610

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

Current Year - Previous Year

Q3 :

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

Q4 :

Distinguish between Vertical and Horizontal Analysis of financial data.

Q5 :

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

Q6 :

Explain the meaning of Analysis and Interpretation.

Q7 :

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

Q8 :

Bring out the importance of Financial Analysis

Q9 :

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

Q10 :

What are Comparative Financial Statements?

Q11 :

Explain how common size statements are prepared giving an example.

Q12 :

What do you mean by Common Size Statements?

### 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 3 3 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.

Q2 :

The following are the balance sheets of Devi Co. Ltd at the end of 2002 and 2003. Prepare a Comparative Balance Sheet and study the financial position of the concern.

 Liabilities 2002 Rs 2003 Rs Assets 2002 Rs 2003 Rs Equity Capital 1,20,000 1,85,000 Fixed Assets 1,40,000 1,95,000 Preference Capital 70,000 95,000 Stock 40,000 45,000 Reserves 30,000 35,000 Debtors 70,000 82,500 P&L 17,500 20,000 Bills Receivables 20,000 50,000 Bank overdraft 35,000 45,450 Prepaid Expenses 6,000 8,000 Creditors 25,000 35,000 Cash at bank 40,000 48,500 Provision for Taxation 15,000 22,500 Cash in hand 5,000 29,000 Proposed Dividend 8,500 20,050 3,21,000 4,58,000 3,21,000 4,58,000

Q3 :

Convert the following Income Statement into Common Size Statement and interpret the changes in 2005 in the light of the conditions in 2004.

 2004 Rs 2005 Rs Gross Sales 30,600 36,720 Less : Returns 600 700 Net Sales 30,000 36,020 Less : Cost of Goods Sold 18,200 20,250 Gross Profit 11,800 15,770 Less : Operating Expenses Administration Expenses 3,000 3,400 Sales Expenses 6,000 6,600 Total Expenses 9,000 10,000 Income from Operations 2,800 5,770 Add : Non-operating Income 300 400 Total Income 3,100 6,170 Less : Non-operating Expenses 400 600 Net Profit 2,700 5,570

Q4 :

Following are the balance sheets of Reddy Ltd. as on 31 March 2003 and 2004.

 Liabilities 2004 2005 Assets 2004 2005 Share Capital 2,400 3,600 Land & buildings 1,620 1,040 Reserves & Surplus 1,872 2,124 Plant & Machinery 1,860 4,716 Debentures 300 600 Furniture & Fixtures 54 108 Long-term Debt 900 1,530 Other Fixed Assets 120 180 Bills Payable 1,530 702 Long-terms Loans 276 354 Other Current Liabilities 42 60 Cash & Bank Balances 708 60 Bill Receivable 1,254 1,120 Stock 960 780 Prepaid Expenses 18 18 Other Current Assets 174 240 7,044 8,616 7,044 8,616

Analyse the financial position of the company with the help of the Common Size Balance Sheet.

Q5 :

The accompanying balance sheet and profit and loss account related to SUMO Logistics Pvt. Ltd. Convert these into Common Size Statements.

Previous Year = 2005, Current Year = 2006

 Rs'000 Previous Year Current Year Liabilities Equity Share Capital (of Rs 10 each) 240 240 General Reserve 96 182 Long Term loans 182 169.5 Creditors 67 52 Outstanding expenses 6 - Other Current liabilities 9 6.5 Total Liabilities 600 650 Assets Plant assets net of accumulated less depreciation 402 390 Cash 54 78 Debtors 60 65 Inventories 84 117 Total Assets 600 650

 Income Statement for the year ended Rs'000 Previous Year Current Year Gross Sales 370 480 Less : Returns 20 30 Net Sales 350 450 Less : Cost of goods sold 190 215 Gross Profit 160 235 Less : Selling general and administration expenses 50 72 Operating profit 110 163 Less : Interest expenses 20 17 Earnings before tax 90 146 Less : Taxes 45 73 Earnings After Tax 45 73

Q6 :

From the following particulars extracted from P&L A/c of Prashanth Ltd., you are required to calculate trend percentages

 Year Sales Rs Wages Rs Bad Debts Rs Profit after tax Rs 2003 3,50,000 50,000 14,000 16,000 2004 4,15,000 60,000 26,000 24,500 2005 4,25,000 72,200 29,000 45,000 2006 4,60,000 85,000 33,000 60,000

Q7 :

Calculate trend percentages from the following figures of ABC Ltd., taking 2000 as base and interpret them.

 Year Sales Stock Profit before tax 2000 1,500 700 300 2001 2,140 780 450 2002 2,365 820 480 2003 3,020 930 530 2004 3,500 1160 660 2005 4000 1200 700

Q8 :

From the following data relating to the liabilities side of balance sheet of Madhuri Ltd., as on 31st March 2006, you are required to calculate trend percentages taking 2002 as the base year.

 (Rs in lakhs) Liabilities 2002 2003 2004 2005 2006 Share capital 100 125 130 150 160 Reserves & Surplus 50 60 65 75 80 12% Debentures 200 250 300 400 400 Bank overdraft 10 20 25 25 20 Profit & Loss A/c 20 22 28 26 30 Sundry Creditors 40 70 60 70 75