Management Accounting

Module – 02: Analysis of Financial Statements

Meaning and Importance of Financial Statement Analysis - Methods of Financial
Analysis – Problems on Comparative Statement analysis – Common Size Statement and
Trend Analysis.

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Management Accounting

Meaning Of Financial Statement:

Financial statements are formal records of the financial activities and position of a
business, person, or other entity. These statements provide an overview of the financial
performance, financial position, and cash flows of an organization.
Financial statements are essential tools for assessing the financial health and
performance of an organization and are used by various stakeholders such as investors,
creditors, analysts, and regulatory authorities.
There are four main types of financial statements:
1. Income Statement (Profit and Loss Statement): This statement summarizes
the revenues, expenses, gains, and losses of a business over a specified period,
usually quarterly or annually. It shows whether a company made a profit or
incurred a loss during the period by subtracting expenses from revenues.
2. Balance Sheet: A balance sheet presents the financial position of a business at a
specific point in time, typically the end of a fiscal quarter or year. It lists the
company's assets, liabilities, and shareholders' equity. The balance sheet follows
the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity.
3. Cash Flow Statement: This statement tracks the inflows and outflows of cash
and cash equivalents over a specific period. It categorizes cash flows into
operating activities, investing activities, and financing activities, providing
insight into how cash is generated and used by the business.
4. Statement of Changes in Equity (or Statement of Retained Earnings): This
statement details the changes in equity (or ownership interest) of shareholders
over a specific period. It typically includes net income or loss, dividends paid,
and any other transactions affecting shareholders' equity.
Objectives of Financial Statement
The primary objectives of financial statements are to provide relevant and reliable
information about the financial position, performance, and cash flows of an entity.
These objectives serve various stakeholders and are crucial for decision-making
processes. Here are the key objectives of financial statements:
1. Provide Information for Decision Making: Financial statements aim to provide
relevant and timely information to users such as investors, creditors,
management, regulators, and other stakeholders. This information assists them
in making informed decisions regarding investments, lending, creditworthiness,
and other business-related matters.
2. Assess Financial Performance: Financial statements help users assess the
profitability, efficiency, and overall financial performance of an entity over a
specific period. By analyzing metrics such as revenue growth, profit margins, and

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Management Accounting

return on investment (ROI), stakeholders can evaluate the effectiveness of

management's strategies and operations.
3. Evaluate Financial Position: Financial statements present a snapshot of the
financial position of an entity at a given point in time. Stakeholders can assess
the entity's liquidity, solvency, and financial stability by examining its assets,
liabilities, and equity. This evaluation aids in understanding the entity's ability to
meet its short-term and long-term obligations.
4. Facilitate Comparability: Financial statements enable users to compare the
financial performance and position of an entity across different periods and with
other similar entities. Consistency in accounting methods and presentation
enhances comparability, allowing stakeholders to identify trends, assess
performance relative to competitors, and make benchmarking evaluations.
5. Ensure Accountability and Transparency: Financial statements promote
accountability and transparency by providing a clear and comprehensive
overview of the entity's financial activities and results. Transparent reporting
practices help build trust with stakeholders and demonstrate the entity's
commitment to ethical business practices.
6. Comply with Regulatory Requirements: Financial statements are often subject
to regulatory requirements and accounting standards established by governing
bodies such as the Financial Accounting Standards Board (FASB) or the
International Financial Reporting Standards (IFRS) Foundation. Compliance with
these standards ensures consistency, reliability, and credibility in financial
reporting.
7. Assist in Forecasting and Planning: Financial statements provide valuable
information for forecasting future financial performance and planning business
strategies. By analyzing historical data and trends presented in financial
statements, management can make informed projections, set realistic goals, and
develop effective financial plans.
Overall, the objectives of financial statements revolve around providing relevant,
reliable, and understandable information that enables stakeholders to assess the
financial health and performance of an entity and make informed decisions.
Nature of Financial Statements
The nature of financial statements refers to the characteristics and qualities that define
these statements and the information they convey about an entity's financial
performance, position, and cash flows. Several key aspects highlight the nature of
financial statements:
1. Objective: Financial statements are objective in nature, aiming to provide an
unbiased and accurate representation of an entity's financial position,

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Management Accounting

performance, and cash flows. They are prepared based on reliable data and
accounting principles to ensure transparency and integrity in financial reporting.
2. Historical Perspective: Financial statements primarily present historical
financial data, reflecting past transactions, events, and activities of the entity
over a specific period, such as a fiscal quarter or year. While they provide
valuable insights into past performance, financial statements may also include
forward-looking information, such as management's discussion and analysis
(MD&A), to assist users in making future projections.
3. Quantitative Information: Financial statements primarily consist of
quantitative data expressed in monetary terms. They include numerical values
representing revenues, expenses, assets, liabilities, and equity, allowing
stakeholders to analyze and interpret financial performance and position
quantitatively.
4. Systematic Presentation: Financial statements follow a structured and
systematic format to facilitate understanding and analysis by users. They
typically include standardized components, such as income statements, balance
sheets, cash flow statements, and accompanying notes, arranged in a logical
order to provide a comprehensive overview of the entity's financial affairs.
5. Reliability and Relevance: Financial statements are prepared based on the
principles of reliability and relevance. Reliable financial information is accurate,
verifiable, and free from bias, while relevant information is material and useful
for decision-making purposes. Financial statements strive to balance these
qualities to ensure that the information presented is both reliable and relevant to
users' needs.
6. Regulatory Compliance: Financial statements are subject to regulatory
requirements and accounting standards established by governing bodies such as
the Financial Accounting Standards Board (FASB) or the International Financial
Reporting Standards (IFRS) Foundation. Compliance with these standards
ensures consistency, comparability, and transparency in financial reporting,
enhancing the reliability and credibility of financial statements.
7. Interpretive Nature: While financial statements provide a comprehensive
overview of an entity's financial affairs, interpreting the information requires
knowledge of accounting principles, industry-specific dynamics, and economic
factors. Users must analyze financial statements in context to understand the
underlying performance, trends, and risks associated with the entity.
In summary, the nature of financial statements encompasses their objectivity, historical
perspective, quantitative nature, systematic presentation, reliability, relevance,
regulatory compliance, and interpretive aspects. These characteristics collectively
contribute to the usefulness and effectiveness of financial statements in informing
stakeholders about an entity's financial health and performance.
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Management Accounting

Essential of Financial Statement

The essentials of financial statements encapsulate the key components and elements
necessary for these statements to effectively communicate an entity's financial
performance, position, and cash flows to stakeholders. Here are the essential
components of financial statements:
1. Accuracy and Reliability: Financial statements must provide accurate and
reliable information about the entity's financial activities. This includes ensuring
that transactions are recorded correctly, assets and liabilities are appropriately
valued, and financial data is free from material errors or misstatements.
2. Completeness: Financial statements should encompass all relevant financial
information necessary to present a comprehensive view of the entity's financial
affairs. They should include all material transactions, events, and activities that
could impact the financial position, performance, or cash flows of the entity.
3. Relevance: Financial statements should contain information that is relevant and
material to users' decision-making needs. This involves presenting data that
influences users' assessments of the entity's financial health, performance, and
future prospects. Relevant information helps users make informed decisions
about investments, lending, and other business-related matters.
4. Comparability: Financial statements should be comparable across different
periods and with other entities to facilitate meaningful analysis and evaluation.
This requires consistency in accounting policies, presentation formats, and
disclosure practices to ensure that users can accurately assess changes in the
entity's financial position and performance over time or in comparison to peers.
5. Understandability: Financial statements should be presented in a clear and
understandable manner to enable users with varying levels of financial literacy
to comprehend the information effectively. This involves using clear language,
logical organization, and appropriate formatting to enhance readability and
accessibility.
6. Consistency: Financial statements should maintain consistency in accounting
principles, measurement techniques, and reporting practices from period to
period. Consistency promotes reliability and comparability, allowing users to
track trends, assess performance, and make meaningful comparisons over time.
7. Transparency: Financial statements should promote transparency by providing
full and transparent disclosure of relevant information, including significant
accounting policies, estimates, assumptions, and uncertainties. Transparent
reporting practices enhance trust and confidence among stakeholders and help
mitigate information asymmetry.
8. Timeliness: Financial statements should be prepared and presented in a timely
manner to meet users' information needs and decision-making timelines. Timely
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reporting ensures that stakeholders have access to up-to-date financial

information to make informed decisions about the entity.
Limitations of Financial Statements
While financial statements are crucial tools for assessing the financial health and
performance of an entity, it's essential to recognize their limitations. Here are some of
the key limitations of financial statements:
1. Historical Information: Financial statements primarily provide historical data,
reflecting past transactions and events. While historical information is valuable
for assessing trends and performance over time, it may not fully capture future
developments or emerging risks.
2. Use of Estimates and Assumptions: Financial statements often rely on
estimates and assumptions for items such as asset valuations, bad debt
provisions, and depreciation expenses. These estimates are based on
management's judgment and can be subjective, leading to potential inaccuracies
or biases in financial reporting.
3. Omission of Non-Financial Information: Financial statements focus primarily
on quantitative financial data and may not capture qualitative or non-financial
factors that could impact the entity's performance, such as changes in market
dynamics, technological advancements, or regulatory developments.
4. Limited Scope: Financial statements have a limited scope and may not fully
reflect all aspects of an entity's operations, particularly in complex or diversified
businesses. Certain transactions or off-balance sheet items may not be
adequately disclosed, leading to gaps in understanding the entity's financial
position and risks.
5. Influence of Accounting Policies: Financial statements can be influenced by the
selection of accounting policies and methods used by management. Different
accounting treatments for similar transactions can result in variations in
reported financial results, affecting comparability and transparency.
6. Lack of Precision: Financial statements often aggregate financial data and use
rounding conventions, which may result in imprecision or rounding errors.
While these discrepancies may be immaterial in isolation, they can impact the
overall accuracy and reliability of financial reporting.
7. Dependence on Historical Cost: Financial statements typically value assets and
liabilities at historical cost, which may not reflect their current market values.
This can lead to distortions in the assessment of an entity's financial position,
particularly in periods of significant market volatility or asset price fluctuations.
8. Limited Predictive Ability: While financial statements provide insights into
past performance, they may have limited predictive ability for future outcomes,
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Management Accounting

especially in rapidly changing business environments or industries undergoing

disruption. External factors, such as economic conditions or competitive
pressures, can impact future results unpredictably.
9. Complexity and Length: Financial statements can be complex and lengthy
documents, making them challenging for users to interpret, especially those
without a strong financial background. Users may struggle to extract relevant
insights efficiently, leading to potential misinterpretation or oversight of key
information.
10. Potential for Manipulation: Financial statements can be subject to
manipulation or fraud, as management may have incentives to present the
company's financial position and performance in a favorable light. While
regulatory oversight and internal controls aim to mitigate this risk, instances of
financial misstatement can still occur.
Meaning and Definitions of Financial Analysis
Financial analysis is the process of evaluating and interpreting financial data to gain
insights into the financial performance, position, and health of an entity.
It involves examining various financial statements, ratios, trends, and other metrics to
assess the entity's profitability, liquidity, solvency, efficiency, and overall financial
stability.
Financial analysis helps stakeholders, such as investors, creditors, management, and
analysts, make informed decisions about investments, lending, strategic planning, and
risk management.
Definition:
According to john Myer, “financial statement analysis is largely a study of relationship
among the various financial factors in a business as disclosed by single set of statements
and a study of the trend of these factors as shown in a series of statements.
According to Kennedy and Muller, “the analysis and interpretation of financial
statements reveal each and every aspect regarding the well-being financial soundness,
operational efficiency and credit worthiness of the concern concerned”.
Importance or Users of Financial statements
Financial statements play a crucial role in providing relevant, reliable, and timely
information about an entity's financial performance, position, and cash flows. These
statements are used by various stakeholders to make informed decisions and assess the
financial health of the entity. Here are the key importance and users of financial
statements:
1. Investors: Investors, including shareholders and potential investors, use
financial statements to evaluate the profitability, growth potential, and financial
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stability of an entity before making investment decisions. They analyze financial

ratios, trends, and other metrics to assess the entity's performance and potential
returns on investment.
2. Creditors: Creditors, such as banks, lenders, and suppliers, rely on financial
statements to assess the creditworthiness and financial health of the entity
before extending credit or providing financing. They analyze liquidity ratios,
leverage ratios, and other financial indicators to evaluate the entity's ability to
meet its debt obligations.
3. Management: Management uses financial statements to monitor the entity's
financial performance, identify areas of strength and weakness, and make
strategic decisions to improve profitability and efficiency. Financial statements
help management track progress towards financial goals, allocate resources
effectively, and plan for future growth and expansion.
4. Regulators and Government Agencies: Regulators and government agencies
use financial statements to ensure compliance with accounting standards,
regulations, and tax laws. They may review financial statements to assess the
entity's adherence to regulatory requirements, detect financial fraud or
misconduct, and protect the interests of investors and the public.
5. Analysts and Financial Advisors: Financial analysts and advisors use financial
statements to conduct in-depth analysis and provide recommendations to
investors and clients. They analyze financial data, industry trends, and market
conditions to evaluate investment opportunities, assess risk, and develop
investment strategies.
6. Employees and Labor Unions: Employees and labor unions may use financial
statements to assess the financial health and stability of the entity, particularly
regarding job security, wages, benefits, and pension plans. Financial statements
provide insights into the entity's profitability, liquidity, and ability to sustain
operations, which can impact employment decisions and labor negotiations.
7. Suppliers and Customers: Suppliers and customers may review financial
statements to assess the entity's financial stability, creditworthiness, and ability
to fulfill contractual obligations. Financial statements can influence supplier
credit terms, customer purchasing decisions, and business relationships.
8. Competitors: Competitors may analyze financial statements to benchmark their
own performance against industry peers, identify competitive strengths and
weaknesses, and gain insights into market dynamics and trends. Financial
statements can provide valuable information for strategic planning, competitive
positioning, and market analysis.
Types of Financial Statement Analysis

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Assistant Professor
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Management Accounting

Financial statement analysis involves examining an entity's financial statements to

assess its financial performance, position, and cash flows. There are several types of
financial statement analysis techniques, each focusing on different aspects of the
entity's financial data. Here are the main types of financial statement analysis:
1. Horizontal Analysis (Trend Analysis):
• Horizontal analysis involves comparing financial data across multiple
periods to identify trends, changes, and patterns in the entity's
performance over time.
• It typically involves calculating the percentage change in financial line
items, such as revenues, expenses, and net income, from one period to
another.
• Horizontal analysis helps stakeholders assess the direction and
magnitude of changes in financial performance and identify areas of
improvement or concern.
2. Vertical Analysis (Common-Size Analysis):
• Vertical analysis involves expressing each line item on the financial
statements as a percentage of a base figure, typically total revenues or
total assets.
• It helps stakeholders evaluate the relative composition and structure of
the entity's financial statements, highlighting the proportion of each line
item relative to the total.
• Vertical analysis facilitates comparisons across different entities or
periods and provides insights into the entity's financial structure,
profitability, and efficiency.
3. Ratio Analysis:
• Ratio analysis involves calculating and interpreting various financial
ratios derived from the entity's financial statements.
• Financial ratios provide insights into different aspects of the entity's
financial performance, liquidity, solvency, efficiency, and profitability.
• Common financial ratios include liquidity ratios (e.g., current ratio, quick
ratio), solvency ratios (e.g., debt-to-equity ratio, interest coverage ratio),
profitability ratios (e.g., return on assets, return on equity), and efficiency
ratios (e.g., asset turnover ratio, inventory turnover ratio).
4. Cash Flow Analysis:

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• Cash flow analysis focuses on evaluating the entity's cash flows from
operating, investing, and financing activities as presented in the cash flow
statement.
• It helps stakeholders assess the entity's ability to generate cash, manage
liquidity, fund operations, and meet financial obligations.
• Cash flow analysis provides insights into the entity's cash flow dynamics,
cash conversion cycle, and sustainability of cash flows over time.
5. Comparative Analysis:
• Comparative analysis involves comparing the financial performance and
position of the entity with that of its peers, competitors, or industry
benchmarks.
• It helps stakeholders assess the entity's relative performance, competitive
positioning, and industry trends.
• Comparative analysis may involve benchmarking financial ratios,
profitability margins, market valuations, and other key metrics against
industry averages or competitors' performance.
6. Qualitative Analysis:
• Qualitative analysis complements quantitative analysis by considering
non-financial factors that may impact the entity's financial performance
and prospects.
• It involves assessing qualitative factors such as industry trends, market
conditions, regulatory environment, management quality, competitive
positioning, and strategic initiatives.
• Qualitative analysis helps stakeholders gain a comprehensive
understanding of the entity's operating environment, risks, opportunities,
and long-term sustainability.
Process of Analysis and Interpretation of Financial Statements
The term "analysis" can be understood as the process of splitting the facts or data
found in the financial statements into simple elements.
The term "interpretation" can be understood as the explanation of the meaning and
significance of the financial data, so simplified with a view to throw light on the
profitability and financial position of an enterprise.
Thus, analysis and interpretation of financial statements is the process of classifying the
facts and figures given in the financial statements into simple understandable
component or elements, and establishing the relationship between the elements,
explaining the significance of the relationship between the classified component with a
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Management Accounting

view to provide a full picture of the profitability and the financial position of an
enterprise.
Methods of Financial Analysis
I. Comparative statements (Horizontal analysis):
The comparative statements are statements of financial position of
different points of time. The elements of financial position are shown in a
comparative form so as to give idea of financial positions at two or more
period.
Types:
1. Comparative Income Statement:-
It gives an idea of the progress of a business concern over a period of
time. The figures in comparative statements can be used for
identifying the direction of changes and also the trends in different
indicators of performance of an organization.

Comparative Income Statement

Particulars Notes Previous Current Increase/ Increase/
year year Decrease Decrease
In Rs. In %
Revenue from operations (sales) XXX XXX XXX XXX
Add: other income XXX XXX XXX XXX
Total Revenue (A) XXX XXX XXX XXX
Less:- Expenses
Cost of materials
consumed(Purchase) XXX XXX XXX XXX
Purchased of stock-in-trade XXX XXX XXX XXX
Changes in Inventories
(opening stock – closing stock) XXX XXX XXX XXX
Employees benefit expenses
(wages) 11 XXX XXX XXX XXX
Finance costs 12 XXX XXX XXX XXX
Depreciation & Amortization 13 XXX XXX XXX XXX
Other expenses 14 XXX XXX XXX XXX
Total Expenses (B) XXX XXX XXX XXX
Profit before tax (PBT) (A-B) XXX XXX XXX XXX
Less:- Income tax expenses XXX XXX XXX XXX
Profit after tax (PAT) XXX XXX XXX XXX

Formula:
To calculate % of Increase and Decrease amount
= Increase or Decrease amount x 100
Previous Year amount

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Assistant Professor
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Management Accounting

Problem no. 01:

Prepare Comparative Income Statement with the help of the following information.

Details 2022 2023

Sales Rs. 1000000 Rs. 1600000
Cost of Goods Sold 75% of sale 80% of sale
Indirect Expenses 40% of Gross Profit 30% of Gross Profit
Income Tax 55% of Profit Before Tax 50% of Profit Before Tax

Problem no. 02:

The information given below was taken from the financial statement of ABC company.
During 2023, the company has made the purchases from a new supplier,

Particulars 2022(Rs) 2023(Rs)

Gross profit on sales 150000 240000
Net Income as a percentage on sales 10% 5%
Net Income 60000 40000
Operating Expenses 90000 200000

You are required to prepare a condensed Comparative Income Statement showing as

many details as possible and point out the favorable and unfavorable trends.

Problem no. 03:

From the Profit and loss A/c for the years ended 31.12.2022 and 31.12.2023. Prepare a
Comparative Income Statement:

Particulars 2022(Rs) 2023(Rs) Particulars 2022(Rs) 2023(Rs)

To cost of goods sold 72000 78000 By sales 100000 130000
To depreciation 5000 6000 By Dividend 20000 10000
To selling and By Interest
distribution Exp 8000 12000 on 10000 ----
To Interest on Debt 15000 14000 Investments
To provision for
Taxation 15000 15000
To Net profit 15000 15000
130000 140000 130000 140000

Problem no. 04:

Prepare a Comparative Income Statement from the following:

Particulars As at As at
31.03.2022 31.03.2023
(Rs) (Rs)
Sales 2150000 2500000
Cost of goods sold 1300000 1450000
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Management Accounting

Operating expenses:
Administrative expenses 210000 180000
Selling expenses 190000 250000
Non-operating expenses:
Interest 140000 120000
Income tax 170000 230000

Problem no. 05:

From the following data prepare Comparative Income Statement and submit a report to
the General Manager, NSK ltd., on your findings and suggestions.

Year Net Cost of Operating Non- Non- Taxes

sales Goods Expenses operating operating
(Rs) Sold (Rs) (Rs) Expenses Income (Rs)
(Rs) (Rs)
2022 185400 78560 36450 12500 24000 12400
2023 194840 82640 38210 13800 32000 16500

Problem no. 06:

From the following financial statement of SHREE trading company limited, prepare
comparative income statement.
Trading and profit & loss account
Particulars 2018 2019 Particulars 2018 2019
To opening stock 400000 500000 By Sales 2000000 2200000
To Purchase 1200000 1400000 By Closing
To Wages 250000 300000 stock 600000 800000
To Factory exp 250000 250000
To Gross profit 500000 550000
2600000 30000000 2600000 3000000
To Admn. Exps 75000 85000 By Gross profit 500000 550000
To S & D exps 50000 40000 By Dividend &
To Depreciation 65000 75000 rent 30000 40000
To Int. on Deb 20000 20000
To Prov. For tax 120000 130000
To Net profit 200000 240000
530000 590000 530000 590000

Problem no. 07:

From the following information, prepare a comparative income statement.
Particulars 31/3/2018 31/3/2019
Sales 790000 910000
Return inwards 5000 10000
COGS 450000 500000
Operating expenses:
Administrative expenses 70000 72000

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Selling expenses 80000 90000

Non-operating income:
Dividend received 10000 20000
Non-operating expenses:
Interest paid 25000 30000
Income tax 30% of profits 30% of profits

Problem no. 08:

Following are income statement of Star Ltd. Mumbai for the year 2022-23. Prepare a
comparative income statement and comment on the profitability of the company.

Trading and profit & loss account

Particulars 31.03.22 31.03.23 Particulars 31.03.22 31.03.23
To Opening 85000 200000 By Sales 1000000 1200000
Stock By Closing
To Purchases 500000 550000 Stock 200000 225000
To Wages 60000 80000 By Income
To Salaries 42000 64000 from
To Rent and Investment 12000 15000
Taxes 35000 40000 By Dividend
To received 5000 7500
Depreciation 40000 60000
To Selling Exp 12000 12000
To Discount
Allowed 5000 7000
To Loss on Sale
of Plant - 8000
To Interest
paid 12000 14000
To Net Profit 426000 412500
Total 1217000 14475000 Total 1217000 14475000

2. Comparative Balance Sheet:-

The comparative balance sheet is the study of the trend of some items,
group of items and computed items in two or more balance sheet of
same business enterprise. The changes in periodic balance sheet items
reflect the conduct of business. The changes can be observed by a
comparison of the balance sheet at the beginning and at the end of a
period & these changes can help in presenting an opinion about the
progress of an enterprise.

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Assistant Professor
Janatha First Grade College
Management Accounting

Comparative Balance Sheet

Particulars Notes Previous Current Increase/ Increase/
year year Decrease Decrease
In Rs. In %
[Link] and Liabilities
1. Shareholder’s fund:
Share capital 1 XXX XXX XXX XXX
Reserves & surplus 2 XXX XXX XXX XXX
Total shareholder’s fund (A) XXX XXX XXX XXX
2. Non-Current liabilities:
Long term Borrowings 3 XXX XXX XXX XXX
Long term liabilities XXX XXX XXX XXX
Long term provision XXX XXX XXX XXX
Total Non-Current liabilities(B) XXX XXX XXX XXX
3. Current Liabilities
Short term borrowings XXX XXX XXX XXX
Trade payables 5 XXX XXX XXX XXX
Short term provisions 6 XXX XXX XXX XXX
Other current liabilities XXX XXX XXX XXX
Total current liabilities (C) XXX XXX XXX XXX
Total Equity and Liabilities (A + XXX XXX XXX XXX
B + C)
[Link]
1. Non- Current Assets
Fixed Assets 7 XXX XXX XXX XXX
Tangible assets XXX XXX XXX XXX
Intangible assets XXX XXX XXX XXX
Non-current Investment XXX XXX XXX XXX
Long Term Loans &
Advance XXX XXX XXX XXX
Other Non-current Asset XXX XXX XXX XXX
Total non-current assets (A) XXX XXX XXX XXX
2. Current assets
Current investments XXX XXX XXX XXX
Inventories 8 XXX XXX XXX XXX
Trade receivables 9 XXX XXX XXX XXX
Cash & cash equivalents 10 XXX XXX XXX XXX
Short term loans &
advances XXX XXX XXX XXX
Other Current Assets XXX XXX XXX XXX
Total Current Assets (B) XXX XXX XXX XXX
Total Assets (A + B) XXX XXX XXX XXX
Formula:
To calculate % of Increase and Decrease amount
= Increase or Decrease amount x 100
Previous Year amount

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Assistant Professor
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Management Accounting

Problem no. 09:

The Balance sheets of Sri Gopal & co. Ltd. for the year 2022 and 2023 are given below:

Particulars 31-12-2022 31-12-

2023
Liabilities:
Equity share capital 200000 250000
10% Preference share capital 200000 150000
Reserve Fund 80000 100000
Profit and loss Account 100000 150000
12% Debentures 200000 300000
Creditors 100000 120000
Bank Overdraft 50000 20000
Total Liabilities 930000 1090000
Assets:
Buildings 300000 320000
Machinery 150000 180000
Furniture 40000 35000
Investment 100000 150000
Stock 150000 200000
Debtors 100000 120000
Cash at bank 90000 85000
Total Assets: 930000 1090000

You are required to comment on the financial position of the business with the help of
Comparative Balance sheet Technique.

Problem no. 10:

Following is the Balance sheet of Global Exports as on 31-03-2022 and 31-03-2023. You
are required to prepare the Comparative Balance sheet and comment on the financial
position of the concern.

Liabilities 31.3.22 31.3.23Assets 31.3.22 31.3.23

Share capital 1200000 1000000Fixed Assets
Reserves and Building 300000 255000
Surplus 20000 25000 Machinery 490000 325000
Secured loans 45000 30000 Current Assets
Unsecured loans 200000 250000 Stock 300000 375000
Current Liabilities 125000 150000 Debts 250000 300000
Cash 250000 200000
Total 1590000 1455000 Total 1590000 1455000

Problem no. 11:

The Following is the Balance sheet of a concern for the year 2022 and 2023. Prepare a
Comparative Balance sheet and comment on the financial position of the concern.
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Assistant Professor
Janatha First Grade College
Management Accounting

Liabilities 2022 2023 Assets 2022 2023

Equity share capital 1200000 1600000 Land &
Reserves and Building 740000 540000
surplus 660000 440000 Plant &
Debentures 400000 600000 Machinery 800000 1200000
Long term loans on Furniture &
mortgage 300000 400000 Fixtures 40000 50000
Bills payable 100000 90000 Other fixed
Sundry creditors 200000 240000 assets 50000 60000
Other current Cash in hand
liabilities 10000 20000 & at bank 40000 160000
Bills
receivable 300000 180000
Sundry
Debtors 400000 500000
Stock 500000 700000
Prepaid
Expenses _ 4000
Total 2870000 3394000 Total 2870000 3394000

Problem no. 12:

Following is the Balance sheet of J.K. Ltd. as on 31.03.2022 and 31.03.2023. You are
required to Prepare a Comparative Balance sheet and comment on the financial position
of the concern.

Liabilities 31.3.22 31.3.23 Assets 31.3.22 31.3.23

Share capital 100000 125000 Fixed Assets
Reserves and Surplus 20000 25000 Building 75000 150000
8% Debentures 45000 30000 Furniture 200000 240000
Long-term Current Assets
Borrowings 200000 250000 Stock 100000 35000
Creditors 125000 150000 Debtors 40000 100000
Bills Payable 45000 50000 Cash 132500 120000
Bank Overdraft 12500 15000
Total 547500 645000 Total 547500 645000

Problem no. 13:

From the following balance sheet, prepare comparative balance sheet.

Particulars 2018 2019

Share capital 800000 1000000
Reserves 100000 120000
Debentures 30000 40000
20000 10000

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Manjunath M
[Link]
Assistant Professor
Janatha First Grade College
Management Accounting

Other long term loans 80000 100000

Trade payables 400000 500000
Buildings 300000 400000
Machinery 200000 180000
Inventory 100000 150000
Trade receivables 30000 40000
Cash & cash equivalent

Problem no. 14:

From the following information, prepare a comparative balance sheet.

Liabilities 2018 2019 Assets 2018 2019

Share capital 400000 600000 Plant and
Debentures 200000 325000 machinery 100000 200000
Sundry Creditors 255000 117000 Land &
Bank Overdraft 7000 10000 Building 360000 540000
Investment 270000 170000
Sundry Debtors 100000 88000
Cash in Hand 32000 54000
Total 862000 1052000 Total 862000 1052000

II. Common Size statements:-

Common Size Statements are those statements in which the data or
figures reported in the financial statement are converted into percentages
of a common base amount. Generally, in common size income statement,
the net sales figures is taken as 100% and all other items of the income
statements are expressed as a percentage of net sales.
Types:
1. Common Size Income Statement:-
The items on income statement can be shown as percentage of sales to
show the relation of each item to sales. A significant relationship can
be established between items of income statement and volume of
sales. This relationship is helpful in evaluating operational activities of
the enterprise.

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Manjunath M
[Link]
Assistant Professor
Janatha First Grade College
Management Accounting

Common Size Income Statement

Particulars Notes Previous Year Current Year

Amount % Amount %
Revenue from operations (sales) XXX XXX XXX XXX
Add: other income XXX XXX XXX XXX
Total Revenue (A) XXX XXX XXX XXX
Less:- Expenses
Cost of materials consumed(Purchase) XXX XXX XXX XXX
Purchased of stock-in-trade XXX XXX XXX XXX
Changes in Inventories
(opening stock – closing stock) XXX XXX XXX XXX
Employees benefit expenses (wages) 11 XXX XXX XXX XXX
Finance costs 12 XXX XXX XXX XXX
Depreciation & Amortization 13 XXX XXX XXX XXX
Other expenses 14 XXX XXX XXX XXX
Total Expenses (B) XXX XXX XXX XXX
Profit before tax (PBT) (A-B) XXX XXX XXX XXX
Less:- Income tax expenses XXX XXX XXX XXX
Profit after tax (PAT) XXX XXX XXX XXX
Formula:
To calculate % (Common base is sales amount of respective year)
Previous Year = Amount x 100
Sales
Current Year = Amount x 100
Sales

Problem no. 15:

Prepare a common size income statement from the profit and loss account of Shekhar
limited 2018 and 2019.

Particulars 2018 2019 Particulars 2018 2019

To opening stock 180000 220000 By sales
To Purchases 1530000 1845000 Cash sales 540000 660000
To Office exps. 120000 220000 Credit Sales 2240000 2960000
To Selling exps. 100000 140000 By Closing
To Debenture 40000 40000 Stock 220000 380000
interest 30000 35000
To Depreciation 500000 750000
To Provision for tax 500000 750000
To Net profit
3000000 4000000 30,00,000 40,00,000

Problem no. 16:

Prepare a common size income statement and give your comments.

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Manjunath M
[Link]
Assistant Professor
Janatha First Grade College
Management Accounting

Rs. In 000’s Sales Cost of Administrative Selling Exp Net profit

goods sold Exp
31.03.2022 1000 600 150 100 150
31.03.2023 1500 750 225 175 350

Problem no. 17:

Following is the detail of M/S BSL as on 31-03-2022 and 31-03-2023. You are required
to Prepare a common size income statement for the year ending 31-03-2022 and 31-03-
2023 and comment on the financial position of the concern.

Particulars 31-03-2022 31-03-2023

Sales 350000 450000
COGS 275000 400000
Operating expenses: 11000 22500
Office Expenses 4500 15000
Selling expenses 2500 3000
Distribution Expenses 1250 1000
Financial Expenses 10000 12500
Income tax 35%

Problem no. 18:

Following is the detail of G’s Ltd., as on 31-03-2022 and 31-03-2023. You are required
to Prepare a common size income statement for the year ending 31-03-2022 and 31-03-
2023 and comment on the financial position of the concern.

Particulars 31-03-2022 31-03-2023

Sales 4500000 7200000
COGS 2250000 3600000
Operating expenses: 125000 2450000
Interest on Loan 15000 100000
Depreciation 175000 100000
Advertisement expenses 45000 75000
Distribution Expenses 10000 -
Income tax 35% 35%

2. Common Size Balance Sheet:-

A statement in which balance sheet items are expressed as the ratio of
each asset to total assets and the ratio of each liability to total
liabilities is called common size balance sheet.

20
Manjunath M
[Link]
Assistant Professor
Janatha First Grade College
Management Accounting

Common Size Balance Sheet

Particulars Notes Previous Year Current Year
Amount % Amount %
[Link] and Liabilities
1. Shareholder’s fund:
Share capital 1 XXX XXX XXX XXX
Reserves & surplus 2 XXX XXX XXX XXX
Total shareholder’s fund (A) XXX XXX XXX XXX
2. Non-Current liabilities:
Long term Borrowings 3 XXX XXX XXX XXX
Long term Liabilities XXX XXX XXX XXX
Long Term Provisions XXX XXX XXX XXX
Total Non-Current liabilities (B) XXX XXX XXX XXX
3. Current Liabilities
Short term borrowings XXX XXX XXX XXX
Trade payables 5 XXX XXX XXX XXX
Short term provisions 6 XXX XXX XXX XXX
Other current liabilities XXX XXX XXX XXX
Total current liabilities (C) XXX XXX XXX XXX
Total Equity and Liabilities (A + B +C) XXX XXX XXX XXX
[Link]
1. Non- Current Assets
Fixed Assets 7 XXX XXX XXX XXX
Tangible assets XXX XXX XXX XXX
Intangible assets XXX XXX XXX XXX
Non-current Investment XXX XXX XXX XXX
Long term Loans & Advance XXX XXX XXX XXX
Other Non-Current Assets XXX XXX XXX XXX
Total non-current assets (A) XXX XXX XXX XXX
2. Current assets
Current investments XXX XXX XXX XXX
Inventories 8 XXX XXX XXX XXX
Trade receivables 9 XXX XXX XXX XXX
Cash & cash equivalents 10 XXX XXX XXX XXX
Short term loans & advances XXX XXX XXX XXX
Other Current Assets XXX XXX XXX XXX
Total Current Assets (B) XXX XXX XXX XXX
Total Assets (A + B) XXX XXX XXX XXX
Formula:
To calculate % (Common base is Total assets & Total Liabilities amount of respective
year)
Previous Year = Amount x 100
Total liabilities/Assets
Current Year = Amount x 100
Total liabilities/Assets

21
Manjunath M
[Link]
Assistant Professor
Janatha First Grade College
Management Accounting

Problem no. 19:

The Balance sheet of Karthi company and Subhash Company as on 31.12.2023 are as
follows. Compare the financial position of both the firms with the help of Common Size
Balance sheet and Interpret the results.

Liabilities Karthi Subhash Assets Karthi Subhash

Co. Co. Co. Co.
Preference share Land & Building 80000 123000
capital 120000 180000 Plant & Machinery 334000 600000
Equity Share Temporary
Capital 150000 400000 investment 1000 40000
Reserves & Stock 10000 25000
Surplus 14000 18000 Book Debts 4000 8000
Long term Loans 115000 130000 Prepaid Expenses 1000 2000
Bills Payable 2000 - Cash at Bank balance 8000 30000
Sundry creditors 12000 4000 Preliminary
Outstanding expenses
Expenses 22000 10000 7000 4000
Proposed
Dividend 10000 90000
Total 445000 832000 Total 445000 832000

Problem no. 20:

Following are the Balance sheet of Shashi co. and Kiran co. as on 31-03-2023.

Particulars Shashi Kiran

co. co.
Assets:
Land & Building 40000 60000
Plant & Machinery 150000 312500
Investment 50000 100000
Stock 75000 100000
Sundry Debtors 50000 60000
Cash and Bank balance 35000 67500
Total 400000 700000
Liabilities:
10% Preference share capital 100000 125000
12% Debentures 50000 100000
Equity Share Capital 100000 150000
Reserves & Surplus 50000 60000
Dividend provision 25000 35000
Sundry creditors 75000 205000
Bank overdraft - 25000
Total 400000 700000

22
Manjunath M
[Link]
Assistant Professor
Janatha First Grade College
Management Accounting

Compare the financial position of both the firms with the help of Common Size Balance
sheet and comment.

Problem no. 21:

From the following Balance sheet of A Ltd. And B Ltd. As on 31.3.2018. You are required
to prepare a Common size balance sheet and comment.

Particulars A Ltd. B Ltd

Assets:
Land & Building 900000 440000
Plant & Machinery 700000 500000
Investment 100000 60000
Sundry Debtors 340000 280000
Cash and Bank balance 110000 40000
Prepaid Expenses 60000 28000
Total 2210000 1348000
Liabilities:
10% Preference share capital 300000 200000
Equity Share Capital 650000 360000
Reserves & Surplus 250000 240000
Long term loans 900000 500000
Sundry creditors 40000 14000
Bills payable 60000 30000
Outstanding expenses 10000 4000
Total 2210000 1348000

Problem no. 22:

From the following Balance sheet of A Ltd. And B Ltd. As on 31.3.2015. You are required
to prepare a Common size balance sheet and comment.

Liabilities A Ltd B Ltd Assets A Ltd B Ltd

10% Preference Land & Building 300000 625000
share capital 100000 150000 Plant &
Equity Share Machinery 180000 420000
Capital 200000 500000 Stock 150000 200000
Reserves & Surplus 100000 120000 Sundry Debtors 100000 135000
Long term Loans 100000 100000 Cash at Bank 70000 20000
Sundry creditors 250000 410000
Proposed Dividend 50000 70000
Bank Overdraft - 50000
Total 800000 1400000 Total 800000 1400000

23
Manjunath M
[Link]
Assistant Professor
Janatha First Grade College
Management Accounting

III. Trend Analysis:-

The financial statements may be analyzed by comparing trend of series of
information. This method of financial statement analysis determines the
direction upwards or downwards and involves computation of %
relationship that each statement items bear to the same item in the base
year. The information for a number of years is taken up and one year,
usually the first year is taken as a base year.
Types
1. Trend analysis Income Statement:-

Particulars Notes Previous Year Current Year

Amount % Amount %
Revenue from operations (sales) XXX XXX XXX XXX
Add: other income XXX XXX XXX XXX
Total Revenue (A) XXX XXX XXX XXX
Less:- Expenses
Cost of materials consumed(Purchase) XXX XXX XXX XXX
Purchased of stock-in-trade XXX XXX XXX XXX
Changes in Inventories
(opening stock – closing stock) XXX XXX XXX XXX
Employees benefit expenses (wages) 11 XXX XXX XXX XXX
Finance costs 12 XXX XXX XXX XXX
Depreciation & Amortization 13 XXX XXX XXX XXX
Other expenses 14 XXX XXX XXX XXX
Total Expenses (B) XXX XXX XXX XXX
Profit before tax (PBT) (A-B) XXX XXX XXX XXX
Less:- Income tax expenses XXX XXX XXX XXX
Profit after tax (PAT) XXX XXX XXX XXX
Formula:
To calculate Trend % (Base is First year always 100%)
Current Year = Sales amount x 100
Sales amount of Previous Year

Problem no. 23:

From the following information, prepare a trend percentage income.

Particulars 31-03-2022 31-03-2023

Sales 1000000 800000
COGS 600000 400000
Administration, selling & Distribution Expenses 200000 140000
Other income 40000 20000
Income tax 120000 140000

Problem no. 24:

24
Manjunath M
[Link]
Assistant Professor
Janatha First Grade College
Management Accounting

From the following information, prepare a trend percentage income and interpret the
result.
Particulars 2020 2021 2022 2023
Sales (Net) 100 90 120 150
Less: COGS 60 60 70 80
Gross profit 40 30 50 70
Less: Operating Expenses 10 10 15 20
Operating Profit 30 20 35 50
Less: Taxes 15 10 17.5 25
Profit after tax 15 10 17.5 25

Problem no. 25:

From the following information, prepare a trend percentage income and interpret the
result use 2017 as base amount in lakhs of rupees for the year ended.

Particulars 2017 2018 2019 2020

Sales (Net) 200 190 240 260
COGS 120 117.8 139.2 145.6
Gross profit 80 72.2 100.8 114.4
Operating Expenses 20 19.4 22 24
Net Operating Profit 60 52.8 78.8 90.4

Problem no. 26:

From the following data prepare comparative income statement.
Particulars 2018 2019 2020
Sales (Net) 100000 225000 275000
Less: COGS 75000 150000 150000
Gross Profit 25000 75000 125000
Less: Operating Expenses
Office expenses 5000 27500 35000
Selling expenses 2500 15000 22500
Distribution expenses 1000 2500 3000
Less: Non-Operating Expenses
Interest on Debentures 3000 7000 15000
Interest on Loans 7500 10000 25000
Net profit 6000 13000 24500

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Manjunath M
[Link]
Assistant Professor
Janatha First Grade College
Management Accounting

2. Trend analysis Balance Sheet:-

Particulars Notes Previous Year Current Year

Amount % Amount %
[Link] and Liabilities
1. Shareholder’s fund:
Share capital 1 XXX XXX XXX XXX
Reserves & surplus 2 XXX XXX XXX XXX
Total shareholder’s fund (A) XXX XXX XXX XXX
2. Non-Current liabilities:
Long term Borrowings 3 XXX XXX XXX XXX
Long term liabilities XXX XXX XXX XXX
Long term Provision
Total Non-Current liabilities (B) XXX XXX XXX XXX
3. Current Liabilities
Short term borrowings XXX XXX XXX XXX
Trade payables 4 XXX XXX XXX XXX
Short term provisions 5 XXX XXX XXX XXX
Other current liabilities XXX XXX XXX XXX
Total current liabilities (C) XXX XXX XXX XXX
Total Equity and Liabilities (A + B +C) XXX XXX XXX XXX
[Link]
1. Non- Current Assets
Fixed Assets 7 XXX XXX XXX XXX
Tangible assets XXX XXX XXX XXX
Intangible assets XXX XXX XXX XXX
Non-current Investment XXX XXX XXX XXX
Long Term loans & Advances XXX XXX XXX XXX
Other Non-Current Assets XXX XXX XXX XXX
Total non-current assets (A) XXX XXX XXX XXX
2. Current assets
Current investments XXX XXX XXX XXX
Inventories 8 XXX XXX XXX XXX
Trade receivables 9 XXX XXX XXX XXX
Cash & cash equivalents 10 XXX XXX XXX XXX
Short term loans & advances XXX XXX XXX XXX
Other Current Assets
Total Current Assets (B) XXX XXX XXX XXX
Total Assets (A + B) XXX XXX XXX XXX

Formula:
To calculate Trend % (Base is First year always 100%)
= Equity amount of Next Year x 100
Equity amount of Base Year

Problem no. 27:

From the following data of the balance sheet of kamadhenu limited, for the period
31.12.2017, 2018, and 2019 are as follows:

26
Manjunath M
[Link]
Assistant Professor
Janatha First Grade College
Management Accounting

Particulars 2017 2018 2019

Assets:
Fixed assets (Net) 2000000 4000000 5000000
Investments 800000 1000000 1200000
Accounts receivable 200000 800000 900000
Cash and bank 100000 300000 200000
Inventories 900000 1300000 1200000
Total 4000000 7400000 8500000
Liabilities:
Equity share capital 1200000 2400000 2800000
12% pref. share capital 1000000 1800000 2000000
Reserve fund 800000 1000000 1200000
P/L account 400000 600000 800000
Long term loans 400000 1000000 1200000
Creditors 200000 600000 500000
Total 4000000 7400000 8500000

Prepare a Statement of Trend Analysis.

27
Manjunath M
[Link]
Assistant Professor
Janatha First Grade College