186 Financial Reporting and Analysis

UNIT 6 FINANCIAL STATEMENT ANALYSIS I

Structure:
6.0 Learning Objectives
6.1 Introduction
6.2 Objectives of Financial Statement Analysis
6.3 Techniques of Financial Statement Analysis
6.4 Common Size Statements
6.5 Summary
6.6 Key Words/Abbreviations
6.7 Learning Activity
6.8 Unit End Questions (MCQ and Descriptive)
6.9 References

6.0 Learning Objectives

After studying this unit, you will be able to:
 describe and draft a report on intra-firm and inter-firm comparison
 perform financial statement analysis for management control purposes
 prepare and interpret common size statements of income and financial position

6.1 Introduction
Financial Statement Analysis is an analysis which highlights important relationships in the financial
statements. Financial statement analysis embraces the methods used in assessing and interpreting
the results of past performance and current financial position as they relate to particular factors of

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interest in investment decisions. It is an important means of assessing past performance and in

forecasting and planning future performance.
According to Lev1, “Financial Statement Analysis is an information processing system designed
to provide data for decision making models, such as the portfolio selection model, bank lending
decision models, and corporate financial management models.”

6.2 Objectives of Financial Statement Analysis

The major objective of financial statement analysis is to provide decision makers information
about a business enterprise for use in decision making. Users of financial statement information are
the decision makers concerned with evaluating the economic situation of the firm and predicting its
future course.
Financial statement analysis can be used by the different users and decision makers to achieve
the following objectives:
1. Assessment of Past Performance and Current Position: Past performance is often a
good indicator of future performance. Therefore, an investor or creditor is interested in the trend of
past sales, expenses, net income, cash flow and return on investment. These trends offer a means
for judging management’s past performance and are possible indicators of future performance.
Similarly, the analysis of current position indicates where the business stands today. For instance,
the current position analysis will show the types of assets owned by a business enterprise and the
different liabilities due against the enterprise. It will tell what the cash position is, how much debt the
company has in relation to equity and how reasonable the inventories and receivables are.
2. Prediction of Net Income and Growth Prospects: The financial statement analysis
helps in predicting the earning prospects and growth rates in the earnings which are used by investors
while comparing investment alternatives and other users interested in judging earning potential of
business enterprises. Investors also consider the risk or uncertainty associated with the expected
return. The decision makers are futuristic and are always concerned with the future. Financial
statements which contain information on past performances are analysed and interpreted as a basis
for forecasting future rates of return and for assessing risk.
3. Prediction of Bankruptcy and Failure: Financial statement analysis is a significant tool in
predicting the bankruptcy and failure probability of business enterprises. After being aware about
probable failure, both managers and investors can take preventive measures to avoid/minimise losses.
Corporate managements can effect changes in operating policy, reorganise financial structure or
even go for voluntary liquidation to shorten the length of time losses.
In accounting and finance area, empirical studies conducted have suggested a set of financial
ratios which can give early signal of corporate failure. Such a prediction model based on financial
statement analysis is useful to managers, investors and creditors. Managers may use the ratios

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prediction model to assess the solvency position of their firms and thus can take appropriate corrective
actions. Investors and shareholders can use the model to make the optimum portfolio selection and
to bring changes in the investment strategy in accordance with their investment goals. Similarly,
creditors can apply the prediction model while evaluating the creditworthiness of business enterprises.
4. Loan Decision by Financial Institutions and Banks: Financial statement analysis is
used by financial institutions, loaning agencies, banks and others to make sound loan or credit decision.
In this way, they can make proper allocation of credit among the different borrowers. Financial
statement analysis helps in determining credit risk, deciding terms and conditions of loan if sanctioned,
interest rate, maturity date, etc.

6.3 Techniques of Financial Statement Analysis

Various techniques are used in the analysis of financial data to emphasise the comparative and
relative importance of data presented and to evaluate the position of the firm. Among the more
widely used of these techniques are the following:
(i) Comparative statements
(ii) Common size statements
(iii) Trend analysis
(iv) Ratio analysis

Comparative Statements
Comparative analysis of financial statements refers to “over the period comparison” of various
figures to understand the change and rate of change. It involves simultaneous presentation and
analysis of income statements or balance sheets of the same firm for two or more accounting
periods (intra-firm) or for different firm over an accounting period (inter-firm). Horizontal analysis
is used for the same.
The percentage analysis of increases and decreases in corresponding items in comparative
financial statements is called horizontal analysis. Horizontal analysis involves the computation of
amount changes and percentage changes from the previous to the current year. The amount of each
item on the most recent statement is compared with the corresponding item on one more earlier
statements. The increase or decrease in the amount of the item is then listed, together with the per
cent of increase or decrease. When the comparison is made between two statements, the earlier
statement is used as the base. If the horizontal analysis includes three or more statements, there are
two alternatives in the selection of the base. First, the earliest date or period may be used as the
basis for comparing all later dates or periods: or second, each statement may be compared with the
immediately preceding statement.

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Figures 6.1 and 6.2 present the comparative balance sheet and profit and loss account respectively
of a company with the amount of increase or decrease and percentage changes shown. The percentage
change is computed as follows:
Amount of change
Percentage change = Previous year amount × 100

ABC LTD. BALANCE SHEET

31st March, 2016 and 31st March 2017

Particulars (in `000) (Increase (Decrease)

2016 2017 Amount Percentage

I. Equity and Liabilities

1. Shareholders’ Funds
(a) Share Capital 40,000 45,000 5,000 12.50
(b) Reserves and Surplus 19,024 20,800 1,776 9.34
2. Non-current Liabilities
(a) Long-term borrowings 10,000 11,000 1,000 10.00
(b) Other long-term liabilities 6,000 2,000 –4,000 –66.67
(c) Long-term provisions 4,000 3,000 –1,000 –25.00
3. Current Liabilities
(a) Short-term borrowings 300 325 25 8.33
(b) Trade payables 3,200 4,275 1075 33.59
(c) Other current liabilities 500 400 –100 20.00
(d) Short-term provisions 8,576 9,300 924 10.77
Total 91,600 96,300 4700 5.13
II. Assets
1. Non-current Assets
(a) Fixed assets
(i) Tangible assets 44,440 45,600 1160 2.61
(ii) Intangible assets 700 800 100 14.29
(b) Non-current investments 500 1300 800 160.00
2. Current Assets
(a) Inventories 25,600 29,800 4,200 16.41
(b) Trade receivables 13,000 12,000 –1,000 –7.69
(c) Cash and cash equivalents 5,200 3500 –1,700 –32.69
(d) Short-term loans and advances 1,760 2,800 1,040 39.09
(e) Other current assets 400 5,200 100 25.00
Total 91,600 96,300 4,700 5.13
Fig. 6.1: Balance Sheet
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ABC LTD. STATEMENT OF PROFIT AND LOSS

31st March, 2016 and 31st March, 2017

Particulars (in `000) (Increase/Decrease)

2016 2017 Amount Percentage

I. Revenue from operations 37,02,000 39,11,000 2,09,000 5.65

II. Other Incomes 44,000 55,000 11,000 25.00
III. Total Revenue (I + II) 37,46,000 39,66,000 2,20,000 5.87
IV. Expenses:
Cost of materials consumed
Purchase of Stock-in-trade 12,39,500 16,00,000 3,60,500 29.08
Changes in inventories of
finished goods, work-in-progress
and stock-in-trade –1,00,000 –1,10,000 –10,000 10.00
Employee benefit expense 11,04,000 12,50,000 1,46,000 13.22
Financial costs 25,000 20,000 –5,000 –20.00
Depreciation and amortisation expense 50,000 51,000 1,000 2.00
Other expenses 4,96,000 4,80,000 –16,000 –3.23
Total Expenses 28,14,500 32,91,000 4,76,500 16.93
V. Profit before tax (III – IV) 9,31,500 6,75,000 –2,56,500 –27.54
VI. Tax expense:
1. Current tax 4,65,750 3,37,500 –1,28,250 –27.54
2. Deferred tax 0 0
VII. Profit/Loss for the period 4,65,750 3,37,500 –1,28,250 –27.54
VII. Earning per equity share: Basic 46.58 33.75 –12.83 –27.54

Fig. 6.2: Profit and Loss Statement

Importance of Comparative Statements:

 It makes the data more simpler and understandable
 It indicates the trend of change by putting the figures of different items for a number of
years side by side.
 It indicates the strong and the weak points of the concern
 It compares the firm’s performance with the average performance of the industry.
 It helps in forecasting the profitability and financial soundness of the business.

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6.4 Common Size Statements

Common size statements involve expressing comparisons in percentages. Common size
statements may be prepared in order to compare percentages of a current period with past periods,
to compare individual business, or to compare one business with industry percentages published by
trade associations and financial information services.
Common size financial statements contain the percentages of a key figure alone, without the
long corresponding amount figures. The use of percentages is usually preferable to the use of
absolute figures. An illustration will make this clear. If company A earns `10,000 and Company B
earns ` 1,000, which is more profitable? The answer is likely to be company A. However, the total
shareholders equity of company A is ` 10,00,000 and company B is ` 10,000, the return on equity
will be as follows:

Earnings
Return on Equity =
Equity

` 10,000
Company A = = 1%
` 10,00,000
` 1,000
Company B = ` 10,000 = 10%

Comparing the return on equity, it can be clearly said that company B is more profitable than
company A.
The use of common size statements can make comparisons of business enterprises of different
sizes much more meaningful since the numbers are brought to common base, i.e., per cent. Such
statement allows an analyst to compare the operating and financing characteristics of may two
companies of different sizes in the same industry.
Care must be exercised in the use of common size statements when the absolute figures are
small, because a small absolute change can result in a very substantial percentage change. For
example, if net profits last year amounted to `1,000 and increased this year to `5,000, this would be
an increase of only `4,000 in net profits, but represents a substantial increase in percentage terms.
Common size statements can be prepared in vertical analysis and horizontal analysis from
formats. In vertical analysis format, a figure from a year is compared with a base selected from the
same year. For example, if advertising expenses were `10,000 in 2016 and sales ` 10,00,000, then
the advertising expenses will be 1% of sales. In horizontal analysis format, the amount of an item
(an account) is expressed in terms of that same account figure for a selected base year. For example,
if sales were `8,00,000 in 2016 and `12,00,000 in 2017, then sales increased to 150% of the 2016
level in 2017, an increase of 50%.

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Vertical Analysis uses percentages to show the relationship of the different parts to the total in
a single statement. Vertical analysis sets a total figure in the statement equal to 100% and computes
the percentage of each component of that figure. The figure to be used as 100% will be total assets
or total liabilities and equity capital in the case of balance sheet and revenue or sales in the case of
the profit and loss account.
The same has been presented with the help of following examples (see Figures 6.3 and 6.4)
ABC LTD. STATEMENT OF PROFIT AND LOSS
31st March, 2016 and 31st March, 2017

Particulars (in ` 000) (Increase/Decrease)

2016 % 2017 %

I. Equity and Liabilities

1. Shareholder’s Funds
(a) Share capital 40,000 43.67 45,000 46.73
(b) Reserves and surplus 19,024 20.77 20,800 21.60
2. Non-current Liabilities
(a) Long-term borrowings 10,000 10.92 11,000 11.42
(b) Other long-term liabilities 6,000 6.55 2,000 2.08
(c) Long-term provisions 4,000 4.37 3,000 3.12
3. Current Liabilities
(a) Short-term borrowings 300 0.33 325 0.34
(b) Trade payables 3,200 3.49 4,275 4.44
(c) Other current liabilities 500 0.55 400 0.42
(d) Short-term provisions 8,576 9.36 9,500 9.87
Total 91,600 100.00 96,300 100
II. Assets
1. Non-current assets
(a) Fixed assets
(i) Tangible assets 44,440 48.52 45,600 47.35
(ii) Intangible assets 700 0.76 800 0.83
(b) Non-current investments 500 0.55 1,300 1.35
2. Current Assets
(a) Inventories 25,600 27.95 29,800
(b) Trade receivables 13,000 14.19 12,000 12.46
(c) Cash and cash equivalents 5,200 5.68 3,500 3.63
(d) Short-term loans and advances 1,760 1.92 2,800 2.91
(e) Other current assets 400 0.44 500 0.52
Total 91,600 100 96,300 100

Fig. 6.3: Statement of Profit and Loss

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ABC LTD. STATEMENT OF PROFIT AND LOSS

31st March, 2016 and 31st March, 2017

Particulars (in `000) (Increase (Decrease)

2016 % 2017 %
I. Revenue from operations 37,02,000 100.00 39,11,000 100.00
II. Other Income 44,000 1.19 55,000 1.41
III. Total Revenue (I +11) 37,46,000 101.19 39,66,000 101.41
IV. Expenses:
Cost of materials consumed:
Purchase of stock-in-trade 12,39,500 33.48 16,00,000 40.91
Changes in inventories of finished goods,
work-in-progress and stock-in-trade –1,00,000 –2.70 –1,10,000 –2.81
Employee benefit expense 11,04,000 29.82 12,50,000 31.96
Financial costs 25,000 0.68 20,000 0.51
Depreciation and amortization expense 50,000 1.35 51,000 1.30
Other expenses 4,96,000 13 40 4,80,000 12.27
Total Expenses 28,14,500 76.03 32,91,000 84.15
V. Profit before tax (III – IV) 9,31,500 25.16 6,75,000 17.26
VI. Tax expense:
1. Current tax 4,65,750 12.58 3,37,500 8.63
2. Deferred tax 0 0
VII. Profit/(Loss) for the period 4,65,750 12.58 3,37,500 8.63
VIII. Earning per equity share: Basic 46.58 33.75

Fig. 6.4: Statement of Profit and Loss

Importance of Common Size Statements
Analysis of financial statement with the help of common size statement is more useful. Because
the financial statement of different firms can be converted into uniform common size format
irrespective of the size of individual item.
Common size income statements establishes relationship between sales and other items of
income statement and this relationship is helpful in evaluating operational activities of a business
firm. Whereas, a Common Size Balance Sheet is very useful for comparing the profitability and
financial position of two more business firms.
Significance of Financial Analysis
In the words of Gerstenberg, “The management can measure the effectiveness of its own
policies and decisions, determine the advisability of adopting new policies and procedures and
documents to owners, the results of their managerial efforts.”

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(i) Significance for Management: Management of a firm is always interested in the solvency,
profitability and the capital structure of the firm. They want to make sure that the business
must be in a solvent position to pay the debts as and when they fail due. They are also
interested not only in the current years profit but also in the capacity of the business to earn
more profits in future. By comparing the financial statements of their business with the
financial statements of other rims in the same area it can draw significant conclusions
about the sales, profits, expenses, etc.
(ii) Significance for Creditors: Short-term creditors want to know the liquidity of the business
whether the company will have sufficient current assets and cash to pay their debts or not.
Current ratio and quick ratio calculated on the basis of financial statements help them in
assessing this.
On the other hand, long-term creditors want to know that whether the company will be
able to pay the interest consistently, and whether the company will be able to pay their
debts when they fall due. With the help of interest coverage ratio, they can find out whether
the company will be able to pay the interest regularly or not on the basis of debt-equity ratio
they can find out whether the company will be able to pay their debts on maturity.
(iii) Significance for Investors: Investors and shareholders of the business are interested in
the longevity of the firm. Therefore, they want to know the earning capacity of the business
and its prospects for future growth and prosperity. Analysing the financial statements helps
in assessing the capacity of the business to pay dividend at a higher rate and also the safety
of their investments.
(iv) Significance for Government: Government can judge on the basis of analysis of financial
statements, which industry is progressing on the desired way and which industry is in
actual need of financial help. Government can take decision to reduce the GST in those
industries where the profit margins are low in comparison to the cost of production. On the
other hand, if the profit margins are too high in comparison to the cost of production,
Government can increase the GST or can enforce the price regulation.
(v) Significance for Employees: Employees on the basis of profitability can ascertain as to
how much bonus and increase in their wages is possible from the profits of the company.
Analysis of the financial statements also help the trade unions in negotiating wage agreements.
(vi) Significance for Stock Exchange Authorities: By analysing the financial statements
they determine the price earning ratio and earning per share with the help of which the
market price of a company’s share is determined.
(vii) Significance for Financial Institutions: All the financial institutions which provide finance
to the industries such as banks, insurance companies, etc. want to know the profit earning
capacity of the businesses and its long-term solvency. They want to assess not only the
present position of the business enterprise but also its likely position in the future.
(viii) Significance for Taxation Authorities: They analyse the financial statement of a company
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to know whether the financial statements have been prepared in accordance with the legal
provisions and whether the figures of production, sales and profits are correct for the
purpose of assessment of GST and income tax, etc.
(ix) Significance for Researchers: Analysis of financial statements of a company is of much
importance to a researcher who is conducting research in respect of the profitability,
efficiency, financial soundness and future growth potential of that company.
(x) Significance for Other Parties: Some other parties may also be interested in the analysis
of financial statements of a company from their own point of view, such as economics,
trade associations, etc.

6.5 Summary
Financial statement analysis also helps in making comparison between various groups to draw
various conclusions. It helps in classifying the items contained in financial statements in convenient
and rational groups. An income statement in which each account is expressed as a percentage of
the value of the sales. This type of financial statement can be used to allow for easy analysis
between companies or between time period of a company. On the other hand, a company balance
sheet that displays all items as percentages of a common base figure. This type of financial statement
can used to allow for easy analysis between companies or between time periods of a company. The
comparative statements lines up a section of the income statement, balance sheet or cash flow
statement with its corresponding section from a previous period.
Objectives of financial statement analysis are: (1) assessment of past performance and current
position, (2) prediction of net income and growth prospects, (3) prediction of bankruptcy and failure
and (4) loan decision by financial institutions and banks.
Various techniques used in the analysis of financial data to emphasise the comparative and
relative importance of data are the following: (i) Comparative statements, (ii) Common size statements,
(iii) Trend analysis and (iv) Ratio analysis.
Comparative statements: Comparative analysis of financial statements refers to “over the
period comparison” of various figures to understand the change and rate of change. It involves
simultaneous presentation and analysis of income statements or balance sheets of the same firm for
two or more accounting periods (intra-firm) or for different firm over an accounting period (inter-
firm). Horizontal analysis is used for the same.
Importance of Comparative Statements: (1) to make the data more simpler and understandable,
(2) to indicate the trend of change by putting the figures of different items for a number of years side
by side, (3) to indicates the strong and the weal points of the concern, (4) to compare the firms
performance with the average performance of the industry and (5) to help in forecasting the
profitability and financial soundness of the business.

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Common size statements involve expressing comparisons in percentages. Common size statements
may be prepared in order to compare percentages of a current period with past periods, to compare
individual business, or to compare one business with industry percentages published by trade associations
and financial information services. Financial analysis is significant for: (i) Management of a firm is
always interested in the solvency, profitability and the capital structure of the firm. (ii) Short-term
creditors want to know the liquidity of the business whether the company will have sufficient current
assets and cash to pay their debts or not. On the other hand, long-term creditors want to know that
whether the company will be able to pay the interest consistently, and whether the company will be
able to pay their debts when they fall due. (iii) Investors and shareholders of the business are interested
in the longevity of the firm and therefore, they want to know the earning capacity of the business.
(iv) Government can judge on the basis of analysis of financial statements, which industry is progressing
on the desired way and which industry is in actual need of financial help. (v) Employees on the basis of
profitability can ascertain as to how much bonus and increase in their wages is possible from the profits
of the company. Analysing the financial statements also help the trade unions in negotiating wage
agreements. (vi) By analysing the financial statements, stock exchange authorities determine the price
earnings ratio and earning per share with the help of which the market price of a company’s share is
determined. (vii) All the financial institutions which provide finance to the industries such as banks,
insurance companies, etc. want to know the profit earning capacity of the businesses and its long-term
solvency. (viii) Taxation authorities analyse the financial statement of a company to know whether the
financial statements have been prepared in accordance with the legal provisions and whether the
figures of production, sales and profits are correct for the purpose of assessment of GST and income
tax, etc. (ix) Analysis of financial statements of a company is of much importance to a researcher who
is conducting research in respect of the profitability, efficiency, financial soundness and future growth
potential of that company. (x) Some other parties may also be interested in the analysis of financial
statements of a company from their own point of view, such as economics, trade associations, etc.

6.6 Key Words/Abbreviations

 Comparative statements: Comparative analysis of financial statements refers to “over
the period comparison” of various figures to understand the change and rate of change. It
involves simultaneous presentation and analysis of income statements or balance sheets of
the same firm for two or more accounting periods (intra-firm) or for different firm over an
accounting period (inter-firm).
 Common size statements: Common size statements involve expressing comparisons in
percentages. Common size statements may be prepared in order to compare percentages
of a current period with past periods, to compare individual business, or to compare one
business with industry percentages published by trade associations and financial information
services.

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6.7 Learning Activity

1. Ram Ltd. was in the business of manufacturing. Following are the Balance Sheets of Ram
Ltd. as at 31st March, 2018 and 2019:
Particulars 31.03.19 31.03.18
I. EQUITY AND LIABILTIES:
1. Shareholder’s Funds:
(a) Share Capital 10,00,000 5,00,000
(b) Reserve and Surplus 2,00,000 3,00,000
2. Non-current Liabilities
Long-term Borrowings 8,00,000 5,00,000
3. Current Liabilities
Trade Payables 4,00,000 2,00,000
TOTAL 24,00,000 15,00,000
II. ASSETS
1. Non-current Assets
2. Fixed Assets:
(a) Tangible Assets 14,00,000 8,00,000
(b) Intangible Assets 3,00,000 2,00,000
3. Current Assets
(a) Inventories 5,00,000 4,00,000
(b) Cash and Cash Equivalents 2,00,000 1,00,000
TOTAL 24,00,000 15,00,000
You are required to:
(a) Prepare a Comparative Balance Sheet
(b) Identify any two values which the company wants to communicate to the society.
_________________________________________________________________
_________________________________________________________________
2. Following is the statement of Profit and Loss of Megha Ltd. for the year ended 31st
March, 2018:

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Particulars 31.03.2018 31.03.2017

Revenue from Operations 25,00,000 20,00,000
Other Incomes 1,00,000 5,00,000
Employee Benefit Expenses 60% of total revenue 50% of total revenue
Other Expenses 10% of employee 20% of employee
benefit expenses benefit expenses
Tax Rate 50% 40%
The motto of Megha Ltd. is to produce and supply green energy in the rural areas of India.
It has also taken up a project of constructing a road that will pass through five villages, so
that these villages could be connected to the nearby town. It will use the local resources
and employee local people for construction of the road.
You are required to prepare a Comparative Statement of Profit and Loss of Megha Ltd.
from the given statement of Profit and Loss. Also, identify any two values that the company
wishes to convey to the society.
________________________________________________________________
________________________________________________________________

6.8 Unit End Questions (MCQ and Descriptive)

A. Descriptive Type Questions
1. What do you mean by financial statement analysis?
2. What are comparative statements? Substantiate with example.
3. Explain common size statement and how are they used.
4. Give a specimen of Comparative Statement of Profit and Loss of two years.

B. Multiple Choice/Objective Type Questions

1. Dividend is paid on:
(a) Authorised Capital (c) Issued Capital
(b) Subscribed Capital that is paid up (d) Reserve Capital
2. Debentures are shown in the Balance Sheet under the head of:
(a) Long-term Borrowings (c) Current Liabilities
(b) Long-term Provisions (d) Shareholders’ Fund

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3. Gain on sale of fixed assets by a financial company is shown in the Statement of Profit and
Loss as:
(a) Revenue from operations (c) Other Income
(b) Both (a) and (c) (d) None of the above
4. Which among the following is the tool of Financial Statement Analysis?
(a) Comparative Statement (c) Common Size Statement
(b) Ratio Analysis (d) All the above
5. Which among the following is the limitation of Financial Statement Analysis?
(a) Ignores price level changes (c) Qualitative aspect ignored
(b) Not free from bias (d) All the above
6. It is an arithmetical relationship between two accounting variables:
(a) Cash Flow Statement (c) Ratio Analysis
(b) Common Size Statement (d) Comparative Statement
7. Which among the following is the objective of Common Size Statement?
(a) To analyse change in individual items of Income Statement
(b) To study the trend in different items of incomes and expenses
(c) To assess the efficiency
(d) All the above
8. Which among the following is also termed as 100% Statement since in this statement all
items are expressed as percentage of the base item:
(a) Cash Flow Statement (c) Ratio Analysis
(b) Common Size Statement (d) Comparative Statement
9. Comparative statements are prepared to show:
(a) Absolute amount (b) Increase/Decrease in absolute amounts
(c) Percentage of totals (d) All the above
Answers:
1. (b), 2. (a), 3. (c), 4. (d), 5. (d), 6. (c), 7. (d), 8. (b), 9. (d)

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Unsolved Questions:
1. From the following information, prepare Comparative Balance Sheets of Neha Ltd.
Particulars 31.03.2018 31.03.2017
Reserve and Surplus 12,00,000 6,00,000
Share Capital 10,00,000 10,00,000
Trade Payables 12,70,000 9,00,000
Land and Buildings 16,00,000 15,00,000
Plant and Machinery 6,30,000 5,00,000
Goodwill – 1,00,000
Investments 1,20,000 1,00,000
Current Assets 15,20,000 8,00,000
Long-term Borrowings 4,00,000 5,00,000
Ans: Absolute change (Increase or Decrease): 8,70,000
Percentage change (Increase or Decrease): 29.00
2. From the information given below, prepare Comparative Statement of Profit and Loss:

Particulars 31.03.2017 31.03.2016

A. Revenue from Operations: Sales 24,00,000 21,00,000
B. Return Inward 4,00,000 1,00,000
C. Cost of Materials Consumed 50% of Revenue from 60% of Revenue from
operations (net) operations (net)
D. Other Expenses %
(Net Revenue from Operations
– Cost of materials consumed) 10% 20%
E. Income Tax 40% 40%
Ans: Absolute change (Increase or Decrease): 1,56,000
Percentage change (Increase or Decrease): 40.63
3. Prepare a common size Balance Sheet and comment on the financial position of Mani Ltd.
and Rajeev Ltd. The Balance Sheet as at 31st March, 2018:
Particulars Mani Ltd. Rajeev Ltd.
I. EQUITIES AND LIABILTIIES:
1. Shareholders’ Funds 3,00,000 4,00,000
2. Non-current Liabilities 2,00,000 3,00,000
3. Current Liabilities 1,00,000 50,000
TOTAL 6,00,000 7,50,000

CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Statement Analysis I 201

II. ASSETS:
1. Non-current Assets
(i) Tangible Assets 2,50,000 3,00,000
(ii) Intangible Assets 1,50,000 1,00,000
2. Current Assets 2,00,000 3,50,000
TOTAL 6,00,000 7,50,000
4. Following the Statement of Profit and Loss of Raghav Ltd. for the year ended 31st March,
2019:
Particulars Amount
Income:
Revenue from Operations 2,00,000
Other Incomes 15,000
Total Revenue 2,15,000
Expenses:
Cost of Materials Consumed 1,10,000
Other Expenses 5,000
Total Expenses 1,15,000
Tax 40,000
You are required to prepare a common size Statement of Profit and Loss of Raghav Ltd.
for the year ended 31st March, 2019.
Ans: Absolute amounts: 60,000;
% of revenue from operations: 30

6.9 References
1. Baruch Lev, Financial Statement Analysis, New Approach, Prentice Hall, 1974, p. 5.
2. Accountingtools.com – Financial Statement Analysis.
3. Beginner’s Guide to Financial Statements by SEC.gov

CU IDOL SELF LEARNING MATERIAL (SLM)