Introduction:

Accounting is a foundational element of business, linked to providing control,

stability, and accountability to a company’s finances. It’s a role that will likely always
be in demand. In many ways, accounting is the backbone of a business. Its role is to
track a company’s finances in whatever forms they may take; from credits, debits, and
profitability to payroll and tax filings. It is a field driven by analytics and analytical
interpretations. The information derived from such functions provides a detailed
record of a business’s financial health and stability. Financial reports generated from
this information can drive a company’s strategies in both the short and long term.

Undertaking a project in accountancy holds significant importance for Class 12

students. It not only reinforces theoretical knowledge but also nurtures practical skills,
fostering a holistic understanding of accounting principles. These projects serve as
an avenue for students to apply their learning in real-life scenarios, enhancing their
analytical, problem-solving, and presentation abilities. Accountancy projects offer a
platform to apply the theoretical concepts learned in class. They enable students to
comprehend the practical implications of accounting principles in business operations.
By working on these projects, students gain insights into financial statements,
bookkeeping, and various accounting methods, thereby solidifying their
understanding of the subject.

Executing an accountancy project necessitates practical involvement in tasks

such as preparing financial statements, maintaining records, and analyzing financial
data. Students learn to navigate accounting software, interpret financial information,
and make informed decisions. This hands-on experience not only enriches their
practical skills but also instills confidence in handling real-world accounting scenarios.
Accountancy projects challenge students to analyze and interpret financial data,
fostering critical thinking and analytical skills. They learn to scrutinize financial
statements, identify discrepancies, and propose corrective measures. This process
sharpens their ability to dissect complex information and draw meaningful
conclusions—a crucial skill set for future accountants and professionals in the
financial sector.

Presenting an accountancy project hones students' communication and

presentation skills. They learn to articulate their findings, explain financial data, and
defend their conclusions. This experience in presenting their work not only refines
their communication abilities but also instills confidence in conveying complex
financial information to diverse audiences. Conducting an accountancy project in
Class 12 is instrumental in bridging the gap between theory and practice. It not only
reinforces theoretical knowledge but also cultivates practical skills, analytical thinking,
and effective communication—all vital for a successful career in the field of
accountancy. These projects offer invaluable experience, preparing students for the
multifaceted demands of the accounting profession and beyond.

Objectives of The Project

The objectives of conducting a project in accountancy for Class 12 students

include:

1. To apply the accounting concepts, principles, and methodologies learned in class

to real-world scenarios, fostering a deeper understanding of their practical
implications.

2. To provide students with hands-on experience in maintaining financial records,

preparing financial statements, and analysing financial statements, enhancing
their practical skills.

3. To enhance students' analytical abilities by interpreting and analyzing financial

data, enabling them to draw conclusions and make informed financial decisions.

4. To develop problem-solving capabilities by identifying discrepancies in financial

statements and proposing corrective measures, nurturing critical thinking in
financial scenarios.

5. To improve students' ability to communicate financial information effectively, both

in writing and presentation, aiding in the development of strong communication
skills.
 6. To know more about the concept of Analysis of Financial Statement of a
Company through the following tools;

a) Accounting Ratio

b) Cash Flow Statement

c) Comparative Statement

d) Common Size Statement

Need and Significance of Project

The necessity and significance of conducting a project in accountancy for Class

12 students are multifaceted. These projects serve as a bridge between theoretical
classroom learning and real-world applications, offering a practical understanding of
accounting principles. Through these projects, students gain hands-on experience in
financial statement preparation, bookkeeping, and data analysis, fostering practical
skills crucial for their future professional endeavors. This practical exposure is
invaluable as it equips students with the ability to comprehend and handle real-life
financial scenarios, enabling them to apply theoretical knowledge in practical
situations.

Furthermore, these projects play a pivotal role in honing essential skills such as
critical thinking, problem-solving, and communication. Students are challenged to
analyze financial data, identify discrepancies, and propose solutions, thereby
enhancing their analytical abilities. Additionally, presenting these projects helps
students refine their communication and presentation skills, as they learn to effectively
convey complex financial information. Such experiences are instrumental in preparing
students for higher education in accounting and finance-related fields and for their
future careers, where practical application of knowledge and strong communication
skills are essential for success. Ultimately, conducting accountancy projects in Class
12 is instrumental in nurturing a well-rounded understanding of accounting concepts
while simultaneously developing essential skills required in the professional world.

Execution of The Project

 The important steps taken by the investigator for the completion of this project
include;

▪ Selection of Area (Accounting ratio and Cash flow statement) project work
▪ Visiting a business organisation in our locality
▪ Collecting Historical data and financial statement of the company
▪ Analysis of financial statement using accounting ratio calculation and
preparation of cash flow statement.
▪ Preparation of Project Report
 PART – A
ACCOUNTING RATIO
Theoretical Overview

A ratio is a mathematical number calculated as a reference to relationship of two or more

numbers and can be expressed as a fraction, proportion, percentage and a number of times.
Accounting ratios represent relationship between two accounting numbers.
Objectives of Ratio Analysis
1. To know the areas of the business which need more attention;
2. To know about the potential areas which can be improved.
3. To provide a deeper analysis of the profitability, liquidity, solvency and efficiency levels in the
business;
4. To provide information for making cross sectional analysis by comparing the performance with
the best industry standards; and
5. To provide information derived from financial statements useful for making projections and
estimates for the future
Advantages of Ratio Analysis

Helps understand
efficacy of decisions

Simplify complex
Advantages of Ratio Analysis

figures and establish

relationships

Helpful in comparative
analysis

Identification of
problem areas

Enables SWOT analysis

Various comparisons

Types of Ratios
 Liquidity Solvency Activity Profitability
Ratios Ratios (Turnover) Ratios Ratios

To assess the
ability of the It helps for measuring
business to pay the To assess its Analysis of profits
ability to meet its the efficiency of in relation to
amount due to operations of business
stakeholders. contractual revenue from
obligations based on effective operations or
towards utilisation of funds employed
stakeholders. resources.
Current Ratio
Liquidity Ratio

1. Gross Profit Ratio

1. Debt-Equity Ratio; 1. Inventory Turnover;
2. Operating Ratio
2. Debt to Capital Employed 2. Trade Receivable Turnover;
3. Operating Profit Ratio
Ratio; 3. Trade Payable Turnover;
4. Net profit Ratio
3. Proprietary Ratio; 4. Investment (Net Assets) 5. Return on Investment
4. Total Assets to Debt Ratio; Turnover
6. Return on Net Worth
5. Interest Coverage Ratio. 5. Fixed Assets Turnover; and
(RONW)
6. Working Capital Turnover.
7. Earnings per Share
5.8.1 Inventory Turn-over
8. Book Value per Share
Ratio
9. Dividend Payout Ratio
10. Price Earning Ratio.

LIQUIDITY RATIOS
Liquidity ratios are calculated to measure the short-term solvency of the business. The two
ratios included in this category are Current Ratio and Liquidity Ratio.

Current Ratio
Current ratio is the proportion of current assets to current liabilities.
Current Assets
Current Ratio = Current Liabilities

Current assets include current investments, inventories, trade receivables (debtors and bills
receivables), cash and cash equivalents, short-term loans and advances and other current assets
such as prepaid expenses, advance tax and accrued income, etc.
Current liabilities include short-term borrowings, trade payables (creditors and bills payables),
other current liabilities and short-term provisions.
A very high current ratio implies heavy investment and A low ratio endangers the business
and puts it at risk.
Quick Ratio
It is the ratio of quick (or liquid) asset to current liabilities. It is also known as Acid-Test Ratio.
Quick Assets
Quick Ratio = Current Liabilities

While calculating quick assets we exclude the inventories at the end and other current assets
such as prepaid expenses, advance tax, charges and expenses, etc. from the current assets.
A1:1 ratio will be safe , low ratio will be very risky.
SOLVENCY RATIOS
Solvency ratios are calculated to determine the ability of the business to service its debt. The
Solvency ratios are ;

Debt-Equity Ratio

Debt to Capital
Employed Ratio

Solvency ratios Proprietary Ratio

Total Assets to
Debt Ratio

Interest Coverage
Ratio
Debt-Equity Ratio
Debt-Equity Ratio measures the relationship between long-term debt and equity. Normally
2:1 is a good debt-equity ratio.
Long − term Debts
Debt-Equity Ratio = Shareholders′ Funds

Debt to Capital Employed Ratio

It refers to the ratio of long-term debt to the total of external and internal funds (capital
employed or net assets).
Long−term Debt
Debt to Capital Employed Ratio = Capital Employed (or Net Assets)

Low ratio provides security to creditors and high ratio helps management in trading on equity.
Proprietary Ratio
Proprietary ratio expresses relationship of proprietor’s (shareholders) funds to net assets.
 Shareholders Funds
Proprietary ratio = Capital Employed (or Net Assets)

Total Assets to Debt Ratio

This ratio measures the extent of the coverage of long-term debts by assets.
Total assets
Total Assets to Debt Ratio = Long−term debts

The higher ratio indicates that assets have been mainly financed by owners funds and the
long-term is adequately covered by assets.
Interest Coverage Ratio
It is a ratio which deals with the servicing of interest on loan. A higher ratio ensures safety of
interest on debts
Net Profit before Interest and Tax
Interest Coverage Ratio = Interest on long−term debts

ACTIVITY (OR TURNOVER) RATIO

These ratios indicate the speed at which, activities of the business are being
performed. The activity ratios are ;
1. Inventory Turnover
2. Trade Receivable Turnover
3. Trade Payable Turnover
4. Investment (Net Assets) Turnover
5. Fixed Assets Turnover
6. Working Capital Turnover.

Inventory Turnover

Trade Receivable
Turnover

Trade Payable
Turnover
ACTIVITY (OR
TURNOVER) RATIO
Investment (Net
Assets) Turnover

Fixed Assets Turnover

Working Capital
Turnover.
Inventory Turn-over Ratio

It determines the number of times inventory is converted in to revenue from operations. Lower

ratio is danger and higher ratio is good.

Cost of Revenue from Operations

Inventory Turn-over Ratio = Average Inventory

Trade Receivables Turnover Ratio

It expresses the relationship between credit revenue from operations and trade

receivable. Higher turnover means speedy collection from trade receivable.

Net Credit Revenue from Operations

Trade Receivables Turnover Ratio = Average Trade Receivables

Trade Payable Turnover Ratio

Trade Payables turnover ratio indicates the pattern of payment of trade payable. Lower ratio

means credit allowed by the supplier is for a long period.

Net Credit purchases

Trade Payable Turnover Ratio = Average trade payable

Net Assets/Capital Employed Turnover Ratio

It reflects relationship between net assets/capital employed and revenue from

operations in the business. Higher turnover means better activity and profitability.

Revenue from Operations/

Net Assets/Capital Employed Turnover Ratio = Capital Employed

Fixed Assets Turnover Ratio

Net Revenue from Operations

Fixed asset turnover Ratio = Net Fixed Assets

Working Capital Turnover Ratio

Net Revenue from Operations

Working Capital Turnover Ratio = Working Capital

PROFITABILITY RATIOS

Profitability ratios are calculated to analyse the earning capacity of the business. The

profitability ratios are ;

1. Gross Profit Ratio

2. Operating Ratio

3. Operating Profit Ratio

 4. Net profit Ratio

5. Return on Investment (ROI) or Return on Capital Employed (ROCE)

Gross Profit Ratio

Gross profit ratio as a percentage of revenue from operations is computed to find out gross

margin. Higher gross profit ratio is always a good sign.

Gross Profit
Gross Profit Ratio = Net Revenue of Operations 100

Operating Ratio

It is computed to analyse cost of operation in relation to revenue from operations.

Cost of Revenue from Operations + Operating Expenses)

Operating Ratio = 100
Net Sales

Operating Profit Ratio

It is calculated to reveal operating margin. Lower operating ratio is a very healthy sign.

Operating Profit Ratio = 100 – Operating Ratio

Operating Profit
Operating Profit Ratio = Net Revenue of Operations 100

Net Profit Ratio

It relates revenue from operations to net profit after operational as well as non-operational

expenses and incomes.

Net Profit
Net Profit Ratio = Net Revenue of Operations 100

Return on Capital Employed or Investment (ROCE or ROI)

It explains the overall utilisation of funds by a business enterprise.

Profit before Interest and Tax

Return on Capital Employed = 100
Capital Employed
Analysis And Interpretation Of Data
▪ After the theoretical overview, you have to write the balance sheet collected for analysis.
▪ Then you can Write solution for minimum 8-10 ratios with steps of calculation.
Findings of the Study
Write findings based on each ratio calculation.
 PART – B
COMPARATIVE STATEMENT
Theoretical Overview

ANALYSIS OF FINANCIAL STATEMENTS

It is the process of simplification of financial informations through analysis, interpretations,

and generalization. It is the systematic numerical representation of the relationship of one financial
fact with the other to measure the profitability, operational efficiency, solvency, and the growth
potential of the business.

Objectives of Financial Analysis

• To assess the current profitability and operational efficiency of the firm

• To ascertain the relative importance of different components of the financial position of the
firm.
• To identify the reasons for change in the profitability/financial position of the firm.
• To judge the ability of the firm to repay its debt and assessing the short-term as well as the
long-term liquidity position of the firm.
Types of Financial Statement Analysis
(i) External analysis
(ii) Internal analysis
(iii) Horizontal analysis
(iv) Vertical analysis
(v) Long-term analysis
(vi) Short-term analysis
Process of Financial Statement Analysis
(i) Rearrangement of data
(ii) Comparison
(iii) Analysis
(iv) Interpretation
Uses or Advantages of Financial Statement Analysis
(i) Security analysis
(ii) Credit analysis
(iii) Debt analysis
(iv) Dividend decision
(v) General business analysis
Limitations of Financial Statement Analysis
(i) Financial statement analysis ignores qualitative aspects like quality of management, labour
force and public relations.
(ii) Suffering from the limitations of financial statements, which are as follows:
(a) Financial statements are historical in nature.
(b) Financial statements do not show price level changes hence, affect the analysis also.
(c) The results obtained by analysis of financial statements may be misleading due to window
dressing.
(d) Financial statements are affected by the personal ability and bias of the analyst.
Tools of Financial Analysis

1. Comparative Financial Statements

Statements used to compare the items of income statement i.e. profit and loss account and
position statement i.e. balance sheet for ascertaining the trend of the performance and profitability
of an enterprise are known as comparative financial statements.
Comparative Income Statement
Income statements provide the details about the results of the operations of the business, and
comparative income statements provide the progress made by the business over a period of a few
years. This statement also helps in ascertaining the changes that occur in each line item of the
income statement over different periods.
The comparative income statement not only shows the operational efficiency of the business but
also helps in comparing the results with the competitors, over different time periods. This is possible
by comparing the operational data spanning multiple periods of accounting.
The following points should be studied when analysing a comparative income statement
1. Compare the increase or decrease in sales with a relative increase in the cost of goods sold
2. Studying the operational profits of the business
3. Overall profitability of the business can be analysed by an increase or decrease in the net
profit List out absolute figures in rupees relating to two points of time.
Find out change in absolute figures by subtracting the first year from the second year and indicate
the change as increase (+) or decrease (–) and put it in column 4.
Preferably, also calculate the percentage change as follows and put it in Column 5.
𝑆𝑒𝑐𝑜𝑛𝑑 𝑌𝑒𝑎𝑟 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝐹𝑖𝑔𝑢𝑟𝑒
Percentage = × 100
𝐹𝑖𝑟𝑠𝑡 𝑌𝑒𝑎𝑟 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝐹𝑖𝑔𝑢𝑟𝑒

Particulars First Second Absolute Percentage

Year Year Increase (+) or Increase (+) or
Decrease (–) Decrease (–)
1 2 (Rs) 3 (Rs.) 4 (Rs) 5 (%)
Revenue from operations
Add: Other incomes
Total Revenue I+II
Less: Expenses
 Profit before tax
Less: Tax
Profit after tax

Comparative Balance Sheet

Comparative balance sheet analyses the assets and liabilities of business for the current year and
also compares the increase or decrease in them in relative as well as absolute parameters. A
comparative balance sheet not only provides the state of assets and liabilities in different time
periods, but it also provides the changes that have taken place in individual assets and liabilities
over different accounting periods.
The following points should be studied when analysing a comparative balance sheet
1. The present financial and liquidity position (study working capital)
2. The financial position of the business in the long term
3. The profitability of the business
Steps in preparing a comparative balance sheet
1. Determine the absolute value of assets and liabilities related to the accounting periods.
2. Determine absolute changes in the items of the balance sheet relative to the accounting
periods in question.
3. Calculate the percentage change in assets and liabilities by comparing current year values
with values of previous accounting periods.

ANALYSIS AND INTERPRETATION

After the theoretical overview, you have to write the balance sheet collected for
analysis.
Then you can Write solution for the question by drawing proper format
Findings of the Study
Write in your own words the results
Common Size Statement
Theoretical Overview

Common size statement expresses all items of a financial statement as a percentage of some
common base such as revenue from operations for statement of profit and loss and total assets for
balance sheet.
Use of Common Size Income Statement
It helps the business owner in understanding the following points
● Whether profits are showing an increase or decrease in relation to the sales obtained.
● Percentage change in cost of goods that were sold during the accounting period.
 ● Variation that might have occurred at expense.
● If the increase in retained earnings is in proportion to the increase in profit of the business.
● Helps to compare income statements of two or more periods.

Particulars Absolute Amounts Percentage of Net Sales

Year - 1 Year – 2 Year - 1 Year – 2
Net Sales
(Less) Cost of goods sold
Gross Profit
(Less) Operating Expenses
Operating Income
(Less) Non-operating Expenses

Profit
Common Size Balance Sheet
A common size balance sheet is a balance sheet that displays both the numeric value and relative
percentage for total assets, total liabilities, and equity accounts. Common size balance sheets are
used by internal and external analysts and are not a reporting requirement of generally accepted
accounting principles (GAAP).
ANALYSIS AND INTERPRETATION
After the theoretical overview, you have to write the balance sheet collected for
analysis.
Then you can Write solution for the question by drawing proper format
Findings of the Study
Write in your own words the results

CONCLUSION

The experiential learning helps to develops lots of new concepts and skills about the learned

topic. This project enriched the skill for the analysis of financial statement of a company using

accounting ratios and through the preparation of cash flow statement. It also motivates for doing

more research-oriented projects in future and solving life related problems.

Bibliography

✓ NCERT accountancy text book class 12 - https://ncert.nic.in/textbook.php?leac1=0-5

✓ NCERT Solutions for Class 12 Commerce Accountancy Chapter 5 - Accounting

Ratios : https://www.meritnation.com/cbse-class-12-

commerce/accountancy/company-accounts-and-analysis-of-financial-

statements_book-ii-ncert-solutions_2022/accounting-ratios/ncert-

solutions/59_17_4421_30070_234_15136

✓ WWW.WIKIPEDIA.COM

✓ ACCOUNTANCY TEXT BOOK PART B – D.K. GOEL