MANAGEMENT ACCOUNTING

MODULE 2: FINANCIAL STATEMENTS ANALYSIS AND INTERPRETATION

 INTRODUCTION
Analysis of financial statements involves examining the financial statements for the purpose of
determining the financial strength of a firm, its leverages, its capital structure, the efficiency of
operation and also the trends over a period in the various components of the financial statements.
Earlier firms used to fail due to inefficiency in its operations, mainly in production, marketing or labour
relation. At present, the companies fail due to accounting scandals, over-borrowing, inefficient capital
structure, improper source of raising finance, maintaining unwieldy inventory, ever-increasing
accounts receivables in the light of stagnant sales etc, which led to laying importance to the health of
the financial statements of the firms. Earlier, only the big lenders used to analyse the financial
statements. Now, even the shareholders, media, analysts, credit rating agencies, research institutions
etc analyse the financial statements in order to determine the share value or enterprise value of the
companies. This calls for a study of analysis of financial statements.

 MEANING OF FINANCIAL STATEMENTS

Financial Statements are the basic and formal annual reports through which the corporate management
communicates financial information to its owners and various other external parties which include
investors, tax authorities, government, employees etc.

There are two significantly important financial statements that are universally prepared and relied
upon:
1. Profit and Loss (P&L) Statement – The Profit and Loss (P&L) Statement is a financial statement
that summarizes the revenues, costs and expenses incurred during a specified period. It is prepared
for the purpose of ascertaining the profits of a firm.
2. Balance Sheet – A balance sheet is a financial statement that reports a company’s assets, liabilities
and shareholders equity at a specific point in time.

 DEFINATION OF FINANCIAL STATEMENTS

In the words of John N Myer, “The financial statements provide a summary of the accounts of a
business enterprise, balance sheet reflecting the assets, liabilities and capital as on a certain date and
the income statements showing the results of operations during a certain period.”

 NATURE OF FINANCIAL STATEMENTS

Financial statements are basically records that depict financial and accounting information relating to
businesses. Financial statements are prepared using facts relating to events, which are recorded
chronologically. we have to first record all these facts in monetary terms then process them using all
applicable rules and procedures. Finally, we can use all this data to generate financial statements.

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 The nature of financial statements are as follows:

1. Recorded Facts: The term recorded facts refers to the data drawn from accounting records. Only
those facts which have been recorded in the books are shown in financial statements.

2. Accounting principles: In the preparation of financial statements certain accounting principles,

concepts and conventions are followed. For eg: the principle of cost price or market price whichever
is less is followed while valuing inventory.

3. Assumptions or postulates: Business transactions are recorded on certain assumptions. In preparing

financial statements, the accountants make many assumptions like that the value of money remains
constant, going concern concept etc.

[Link] judgement: The financial statements are affected by the personal judgements of
accountants. The method of stock valuation, method of depreciation depends upon the personal
judgement of the accountant.

 LIMITATIONS OF FINANCIAL STATEMENTS

Though financial statements are relevant and useful for the concern, still they do not present accurate
picture of the concern. The analysis and interpretation of these statements should be done very
carefully. Other-wise misleading conclusions may be drawn.
The financial statements suffer from the following limitations:

1. Limited to Monetary Aspects: Financial Statements focus on monetary transactions. Certain

valuable aspects of a business such as brand reputations or employee knowledge are not reflected. It
may not cover all aspects of the business.

2. No Precision: Certain items in the financial statements involves estimates and judgements such as
depreciation methods, bad debt provisions etc. Various conventions, postulates, personal judgements
etc are used for developing data.

3. Variation in financial reports: The use of different accounting policies and methods can lead to
variations in financial reporting among companies.

4. Lack of Future predictive value: The Financial Statements are prepared based on past data. It
provides insights into past performance and may not be strong predictor of future performance.

5. Ignores Price Level Changes: Financial statements do not account for changes in general price level,
potentially leading to distortions in the real value of assets and liabilities.

6. Do not give exact position: The financial statements do not give the accurate position of business.
For instance, while preparing balance sheet assets are recorded at cost price based on the assumption
of going concern concept. So fixed assets are shown at cost less depreciation. The market value of

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 the asset is not considered. Thus, the value of fixed assets in the balance sheet may not give the exact
value at which the asset can be sold or replaced. Similarly, there are certain assets shown in the balance
sheet such as preliminary expenses, discount on issue of shares which will realise nothing at the time
of liquidation.

 ESSENTIALS OF FINANCIAL STATEMENTS

A financial statement is a report that shows the financial activities and performance of a business. The
statements are prepared with a view to depict financial position of the concern. A proper analysis and
interpretation of these statements enables a person to judge the profitability and financial strength of
the business. Therefor the financial statements should be prepared in such a way that they are able to
give clear picture of the concern.
The ideal financial statements have following characteristics:

1. Understandability: Financial statements should be easily understandable by the users. The

information contained in these statements should be simple and clear.

2. Relevance: financial statement must contain only relevant information. Then only the users can
evaluate past, present and future events and can take wise decisions.

3. Reliability and Accuracy: The information contained in the financial statement should be true and
accurate. It must depict a true financial position of the business. The information shown in the financial
statement should not mislead creditors, investors and other users.

4. Completeness: The information contained in the financial statement should be complete in all
respects. No material information should be withheld while preparing these statements.

5. Timeliness: The financial statements should be prepared within a reasonable time after the
accounting period is over. If the statements are not prepared and presented in time, they cannot be
properly used. Besides the firm cannot formulate plan for future.

6. Effective presentation: the financial statement should be presented in brief and in a simple way. A
person who is not well versed with accounting terminology should also be able to understand the
statements without much difficulty. This will enhance the utility of these statements.

 MEANING OF FINANCIAL STATEMENTS ANALYSIS AND INTERPRETATION

Financial Statement analysis is the process of critical evaluation of the financial information contained
in the financial statements in order to understand and make decisions regarding operations of the firm.
It is basically a study of relationship among various financial facts and figures as given in a set of
financial statements, and the interpretation thereof to gain an insight into the profitability and
operational efficiency of the firm to assess its financial health and future prospects.
The term ‘financial analysis’ includes both ‘analysis and interpretation’. The term analysis means
simplification of financial data by methodical classification given in the financial statements.
Interpretation means explaining the meaning and significance of the data. These two are

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 complimentary to each other. Analysis is useless without interpretation, and interpretation without
analysis is difficult or even impossible.

Need of Financial Statement Analysis (Objectives):

Analysis of financial statements reveals important facts concerning managerial performance and the
efficiency of the firm. Broadly speaking, the objectives of the analysis are to apprehend the information
contained in financial statements with a view to know the weaknesses and strengths of the firm and to
make a forecast about the future prospects of the firm thereby, enabling the analysts to take decisions
regarding the operation of, and further investment in the firm. To be more specific, the analysis is
undertaken to serve the following purposes:
 to assess the current profitability and operational efficiency of the firm as a whole as well as
its different departments so as to judge the financial health 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. On the basis of materials used or persons interested in the analysis

a. External Analysis: This analysis is done by outsiders who do not have access to the detailed internal
accounting records of the business firm. These outsiders include investors, potential investors,
creditors, potential creditors, government agencies, credit agencies, and the general public. For
financial analysis, these external parties to the firm depend almost entirely on the published financial
statements.
b. Internal Analysis: The analysis conducted by persons who have access to the internal accounting
records of business firm is known as internal analysis. Such an analysis can, therefore, be formed by
executives and employees of the organization as well as government agencies which have statutory
powers vested in them. Financial analysis for managerial purposes is the internal type of analysis
that can be affected depending upon the purpose to be achieved.

II. On the basis of modus operandi or method of operation followed

a. Horizontal Analysis: Horizontal analysis refers to the comparison of financial data of a company for
several years. The figures of the various years are compared with standard or base year. A base year
is a year chosen as beginning point. This type of analysis is also called ‘Dynamic Analysis’ as it is
based on the data from year to year rather than on data of any one year.
b. Vertical Analysis: Vertical analysis refers to the study of relationship of the various items in the
financial statements of one accounting period. In this type of analysis, the figures from financial
statement of a year are compared with a base selected from the same year’s statement. It is also
known as ‘Static Analysis’.

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 III. On the basis of objectives
a. Short term analysis: It is a type of analysis which is mainly intended for measuring the liquidity
position, working capital position, cash position, operational efficiency and profitability. Ratio
analysis is the main tool employed.
b. Long term analysis: It is a type of analysis which is mainly intended for determination of capital
structure, long term financial position, fixed assets etc. Its emphasis is on the stability and earning
potentiality of the concern.

IV. On the basis of entities involved

a. Interfirm analysis: It involves comparison of financial data of a firm with other firm for the same
time period. This type of analysis is also called as ‘cross sectional’ analysis.
b. Intrafirm analysis: It involves the study of performance of the same firm over a period of time. This
type of analysis is also called ‘time series’ analysis.

 TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS

The most commonly used techniques of financial analysis are as follows:

1. Comparative Statements: These are the statements showing the profitability and financial position
of a firm for different periods of time in a comparative form to give an idea about the position of two
or more periods. It usually applies to the two important financial statements, namely, balance sheet
and statement of profit and loss prepared in a comparative form. The financial data will be comparative
only when same accounting principles are used in preparing these statements. If this is not the case,
the deviation in the use of accounting principles should be mentioned as a footnote. Comparative
figures indicate the trend and direction of financial position and operating results. This analysis is also
known as ‘horizontal analysis’.

2. Common Size Statements: These are the statements which indicate the relationship of different items
of a financial statement with a common item by expressing each item as a percentage of that common
item. The percentage thus calculated can be easily compared with the results of corresponding
percentages of the previous year or of some other firms, as the numbers are brought to common base.
Such statements also allow an analyst to compare the operating and financing characteristics of two
companies of different sizes in the same industry. Thus, common size statements are useful, both, in
intra-firm comparisons over different years and also in making inter-firm comparisons for the same
year or for several years. This analysis is also known as ‘Vertical analysis’.

3. Trend Analysis: It is a technique of studying the operational results and financial position over a
series of years. Using the previous years’ data of a business enterprise, trend analysis can be done to
observe the percentage changes over time in the selected data. The trend percentage is the percentage
relationship, in which each item of different years bear to the same item in the base year. Trend analysis
is important because, with its long run view, it may point to basic changes in the nature of the business.
By looking at a trend in a particular ratio, one may find whether the ratio is falling, rising or remaining
relatively constant. From this observation, a problem is detected or the sign of good or poor
management is detected.

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4. Ratio Analysis: It describes the significant relationship which exists between various items of a
balance sheet and a statement of profit and loss of a firm. As a technique of financial analysis,
accounting ratios measure the comparative significance of the individual items of the income and
position statements. It is possible to assess the profitability, solvency and efficiency of an enterprise
through the technique of ratio analysis.

5. Cash Flow Analysis: It refers to the analysis of actual movement of cash into and out of an
organisation. The flow of cash into the business is called as cash inflow or positive cash flow and the
flow of cash out of the firm is called as cash outflow or a negative cash flow. The difference between
the inflow and outflow of cash is the net cash flow. Cash flow statement is prepared to project the
manner in which the cash has been received and has been utilised during an accounting year as it shows
the sources of cash receipts and also the purposes for which payments are made. Thus, it summarises
the causes for the changes in cash position of a business enterprise between dates of two balance sheets.

ILLUSTRATIONS:

1) Convert the following statement of profit and loss of BCR Co. Ltd. into the comparative statement
of profit and loss of BCR Co. Ltd.:

Particulars Note 2015-16 2016-17

No. (Rs.) (Rs.)
Revenue from operations 60,00,000 75,00,000
Other incomes 1,50,000 1,20,000
Expenses 44,00,000 50,60,000
Income tax 35% 40%

2) From the following statement of profit and loss of Madhu Co. Ltd., prepare comparative statement
of profit and loss for the year ended March 31, 2016 and 2017:

Particulars Note 2015-16 2016-17

No. (Rs.) (Rs.)
Revenue from operations 16,00,000 20,00,000
Employee benefit expenses 8,00,000 10,00,000
Other expenses 2,00,000 1,00,000
Tax rate 40%

3) From the following data, prepare a comparative Statement of Profit and Loss:

Particulars 31.03.2021 31.03.2020

Revenue from operations 20,00,000 15,00,000

Cost of materials consumed (% 60% 70%
of revenue from operations)
Employee benefit expenses 2,50,000 1,00,000
Income tax rate 40% 40%

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4) With the help of the following information, prepare comparative statement of Profit and loss:

Particulars 31.3.2021 31.3.2020

A. Revenue from Operations (Sales) ₹ 6,00,000 ₹ 4,50,000
B. Sales Returns ₹ 3,00,00 ₹ 1,50,000
C. Cost of Material Consumes (% Of Net
Revenue from Operations) 50% 60%
D. Other Expenses (% of Net Revenue from
Operations- Cost of Material Consumed) 10% 20%
E. Rate of Income Tax 25% 25%

5) Rearrange the following data in the form of comparative statement of profit and loss and
study the profitability of the concern.

Particulars 31.3.2016 31.3.2015

Revenue from Operations (Net Sales) 12,50,000 10,00,000
Purchases of Stock-in-trade 6,00,000 5,80,000
Change in Inventories of Stock-in-trade 40,000 50,000
Other Income (Interest on Investments) 30,000 30,000
Other Expenses 60,000 50,000
Rate of Income Tax 40% 40%

6) Prepare comparative income statement with the help of the following information:

Details 2022 2023

Sales ₹10,00,000 ₹16,00,000
Cost of goods sold 75% of sale 80% of sales
Indirect Expenses 40% of gross profit 30% of gross profit
Income Tax 55% of profit before 50% of profit before tax
tax

7) From the following profit and loss a/c for the years ended 31.12.2022 and 31.12.2023.
Prepare a comparative income statement:
Particulars 2022 2023 Particulars 2022 2023
To cost of goods sold 72,000 78,000 By Sales 1,00,000 1,30,000
To Depreciation 5,000 6,000 By Dividend 20,000 10,000
To selling & By Interest
Distribution exp. 8,000 12,000 Investments on 10,000
To Interest on Debt 15,000 14,000
To provision for 15,000 15,000
taxation
To Net profit 15,000 15,000
1,30,000 1,40,000 1,30,000 1,40,000

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8) 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 Operatin Non- Non- Taxes

Sales goods g operatin operating (₹)
(₹) sold (₹) Expense g Income
s (₹) Expense (₹)
s (₹)
2022 1,85,400 78,560 36,450 12,500 24,000 12,400
2023 1,94,840 82,640 38,210 13,800 32,000 16,500

9) Following is the income statement of Star Ltd. Mumbai for the years
2022-2023. Prepare comparative income statement and comment on the
profitability of the company.

Particulars 31.3.23 Particulars 31.3.22 31.3.23

31.3.22
To Opening 85,000 2,00,000 By Sales 10,00,00 12,00,00
stock 5,00,000 5,50,000 By Closing stock 0 0
To purchases 60,000 80,000 By Income from 2,00,000 2,25,000
To wages 42,000 64,000 Investment
To salaries 35,000 40,000 By dividend 12,000 15,000
To Rent & 40,000 60,000 received
taxes 5,000 7,500
To 12,000 12,000
Depreciation
To Selling 5,000 7,000
expenses
To discount - 8,000
allowed 12,000 14,000
To loss on sale 4,26,000 4,12,500
of plant
To Interest
paid
To Net Profit
12,17,00 14,47,50 12,17,00 14,47,50
0 0 0 0

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PROBLEMS ON COMPARATIVE BALANCE SHEET

1) The following are the Balance Sheets of J. Ltd. as at March 31, 2016 and 2017. Prepare a
Comparative balance sheet.

Particulars 31st March 31st March

2017 (₹) 2016 (₹)
Ⅰ. Equity and Liabilities
1. Shareholders’ Funds
a) Share Capital 20,00,000 15,00,000
b) Reserves and Surplus 3,00,000 4,00,000
2. Non-Current Liabilities
Long-term borrowings 9,00,000 6,00,000
3. Current Liabilities 3,00,000 2,00,000
Trade Payables
35,00,000 27,00,000
Ⅱ. Assets
1. Non-current Assets
a) Fixed Assets 20,00,000 15,00,000
-Tangible Assets 9,00,000 6,00,000
- Intangible assets
b) Current Assets
Inventories 3,00,000 4,00,000
Cash and cash equivalents 3,00,000 2,00,000
35,00,000 27,00,000

2) From the following Balance Sheets of Amrit Limited as at March 31, 2016 and 2017, prepare a
comparative balance sheet:

Particulars 31st March 31st March

2017 (₹) 2016 (₹)
Ⅰ. Equity and Liabilities
1. Shareholders’ Funds
a) Share Capital 20,00,000 15,00,000
b) Reserves and Surplus 13,00,000 14,00,000
2. Non-Current Liabilities
Long-term borrowings 19,00,000 16,00,000
3. Current Liabilities 3,00,000 2,00,000
Trade Payables
55,00,000 47,00,000
Ⅱ. Assets
1. Non-current Assets
a) Fixed Assets 20,00,000 15,00,000
-Tangible Assets 19,00,000 16,00,000
- Intangible assets
b) Current Assets
Inventories
Cash and cash equivalents 13,00,000 14,00,000
3,00,000 2,00,000
55,00,000 47,00,000

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3) Following are the balance sheets of Rachna Ltd. As at 31st March, 2021
and 2020:

Particulars 31st March 31st March

2021(₹) 2020(₹)
Ⅰ. Equity and Liabilities
Shareholders’ Funds
Share Capital 1,50,000 1,00,000
Reserves and Surplus 1,00,000 1,00,000
Non-Current Liabilities
Long-term borrowings (Loans) 80,000 20,000
Current Liabilities (Trade 50,000 30,000
Payables)
3,80,000 2,50,000
Ⅱ. Assets
Non-current Assets
Fixed Assets (Tangible) 3,00,000 2,00,000
Current Assets (Trade 80,000 50,000
Receivables)
3,80,000 2,50,000

Prepare a comparative balance sheet.

4) From the following information, prepare a Comparative Balance Sheet of Enova

Ltd.

Particulars 31.03.2021 31.03.2020

Share Capital 50,00,000 50,00,000
Trade Payables 13,00,000 10,00,000
Reserves and surplus 12,00,000 10,00,000
Investments (non-current) 10,00,000 10,00,000
Long-term Borrowings (Loans) 20,00,000 25,00,000
Current Assets 25,00,000 30,00,000
Land and buildings 30,00,000 15,00,000
Plant and Machinery 25,00,000 30,00,000
Goodwill 5,00,000 10,00,000

5) The following are the Balance Sheets of a X Co. Ltd. for the year 2022 and 2023.
Prepare a Comparative Balance Sheet and study the financial Position of the concern.

Particulars 2022 2023 Particulars 2022 2023

Equity share Land & 7,40,000 5,40,000
capital 12,00,00 16,00,00 building
Reserves and 0 0 Plant & 8,00,000 12,00,00
surplus Machinery 0
Debentures 6,60,000 4,44,000 Furniture & 40,000
Long term 4,00,000 6,00,000 Fixtures 50,000
loans on Other fixed 50,000

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 Mortgage 3,00,000 4,00,000 assets 60,000
Bills Payable 1,00,000 90,000 Cash in hand 40,000
Sundry 2,00,000 2,40,000 and at Bank 1,60,000
Creditors Bills 3,00,000
Other current 10,000 20,000 Receivables 4,00,000 1,80,000
Liabilities Sundry 5,00,000 5,00,000
Debtors 7,00,000
Stock -
Prepaid 4,000
expenses
Total 28,70,000 33,94,000 Total 28,70,000 33,94,000

6) Following is the Balance sheet of Global Exports as on 31-3-2022 and 31-32-

2023. You are required to prepare the comparative statement and comment
on the financial position of the concern.
Liabilities 31.3.202 31.3.202 Assets 31.3.202 31.3.202
2 3 2 3
Share Capital 12,00,00 10,00,00 Fixed Assets:
Reserves and 0 0 Buildings 3,00,000 2,55,000
Surplus Machinery 4,90,000 3,25,000
Secured 20,000 25,000 Current
Loans 45,000 30,000 Assets: 3,00,000 3,75,000
Unsecured Stock 2,50,000 3,00,000
Loans 2,00,000 2,50,000 Debts 2,50,000 2,00,000
Current Cash
Liabilities 1,25,000 1,50,000
Total 15,90,00 14,55,00 Total 15,90,00 14,55,00
0 0 0 0

COMMON-SIZE STATEMENT ANALYSIS

PROBLEMS ON COMMON-SIZE P/L STATEMENT:
1) From the following particulars obtained from the records of a company
prepare a common sized statement of profit and loss:

Particulars 31.3.2016 (₹) 31.3.2015 (₹)

Revenue from operations (Sales) 60,00,000 35,00,000
Purchases of stock in trade 40,00,000 22,50,000
Change in inventories (3,00,000) 2,00,000
Other income 2,00,000 1,50,000
Other expenses 1,50,000 1,00,000
Income tax (Rate) 35% 40%

2) The following is the statement of Profit and Loss of Sanyasi Ltd. for the years
ended 31st march 2016 and 2015.

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 Particulars 31.3.2016 31.3.2015 (₹)
(₹)
I. Revenue from operations
Gross sales 8,15,000 7,25,000
Less: Returns 15,000 25,000
8,00,000 7,00,000
II. Other income 8,050 1,200
III. Total revenue (I+II) 8,08050 7,01,200
IV. Expenses:
Cost of material consumed 6,15,000 5,95,000
Employee benefits expenses 12,500 12,700
Depreciation and amortization 1,940 1,750
expenses 24,000 23,000
Other expenses 6,53,440 6,32,450
1,54,610 68,750
V. Profit before tax (III-IV)
Prepare common size statement of profit and loss and interpret the changes.

3) Following is the details of M/S BSL as on 31.3.2022 and 31.3.2023. You are
required to prepare the Common -Size income statement for the year ending
31.3.2022 and 31.3.2023and comment on the financial position of the concern.

Particulars 31.3.2022 31.3.2023

Sales 3,50,000 4,50,000
Cost of goods sold 2,75,000 4,00,000
Operating expenses 11,000 22,500
Office expenses 4,500 15,000
Selling expenses 2,500 3,000
Distribution expenses 1,250 1,000
Financial expenses 10,000 12,500
Tax rate is 35%

4) Prepare a common size income statement and give your comments.

₹ in 000’s Sales Cost of Administration Selling Net profit

goods expenses expenses
sold
31.3.2022 1,000 600 150 100 150
31.3.2023 1,500 750 225 175 350

COMMON SIZE BALANCE SHEET

1) The balance sheet of Kartik Company and Subhash Company as on 31st December
2023 are as follows. Compare the financial position of both the firms with the help
of common size balance sheets and interpret the results.

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 Liabilities Karthi Subhas Assets Karthi Subhas
k Co. h Co k Co. h Co
Preference Land & 80,000 1,23,00
share capital 1,20,00 1,80,00 building Plant 0
Equity share 0 0 & machinery 3,34,00
capital 1,50,00 4,00,00 Temporary 0 6,00,00
Reserves & 0 0 investment 0
surplus 14,000 1,80,00 Stock 1,000
Long term 1,15,00 0 Book debts 10,000 40,000
loans 0 1,30,00 Prepaid 4,000 25,000
Bills payable 2,000 0 expenses 8,000
Sundry 12,000 - Cash at bank 1,000
creditors 22,000 4,000 balance 2,000
O/s expenses 10,000 10,000 Preliminary 8,000
Proposed 90,000 expenses 30,000
dividend 7,000
4,000
Total 4,45,00 8,32,00 Total 4,45,00 8,32,00
0 0 0 0

2) From the following Balance Sheets of RKS Ltd., prepare common size balance
sheet and comment upon the financial position of the company.

Liabilities 31.3.22 31.3.23 Assets 31.3.22 31.3.23

₹ ₹ ₹ ₹
Equity share capital 3,00,00 4,50,000 Land and
10% preference 0 buildings 3,90,00 4,05,000
share capital 1,50,000 Plant & 0
Reserve & surplus 1,50,00 60,000 machinery 3,60,000
Profit and loss a/c 0 45,000 Furniture 1,50,00 45,000
12% debentures 45,000 3,00,000 Shares in 0
Mortgage loan 22,500 1,12,500 Apoorva 30,000 75,000
Bank overdraft 1,50,00 30,000 Ltd. 30,000
Creditors 0 90,000 Govt. bonds 37,500 1,12,500
Bills payable 75,000 9,750 Stock 22,500 1,76,250
O/s expenses 15,000 5,250 Debtors 75,000
Provision for 75,000 30,000 Bills 1,20,00 60,000
taxation 7,500 15,000 receivable 0
Proposed dividend 3,750 cash and 15,000
22,500 bank 30,000
15,000 balance 7,500
prepaid 7,500
expenses 11,250
preliminary 3,750
expenses
15,000
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 8,81,20 12,97,50 8,81,250 12,97,50
0 0 0

3) Following are balance sheets of Shashi and Co. and Kiran and Co. as on
31st March 2023.

Particulars Shashi and Kiran and

Co. Co.
Assets
Land and buildings 40,000 60,000
Plant and machinery 1,50,000 3,12,500
Investments 50,000 1,00,000
Stock 75,000 1,00,000
Sundry debtors 50,000 60,000
Cash and bank balance 35,000 67,500
Total 4,00,000 7,00,000
Liabilities
Equity share capital 1,00,000 1,50,000
12% debentures 50,000 1,00,000
10% preference share capital 1,00,000 1,25,000
Reserve and surplus 50,000 60,000
Dividend provision 25,000 35,000
Sundry creditors 75,000 2,05,000
Bank overdraft - 25,000
Total 4,00,000 7,00,000

Compare the financial position of the two companies with the help of
common size balance sheets and comment.

PROBLEMS ON TREND ANALYSIS

1) Sir Osborne Smith Ltd., achieved the following profits over 5 years.
Calculate the trend values taking the operating profit of the year ending 30
June 2005 as the base year.
Period ended Operating Profit (Rs)
30-06-2009 40,500
30-06-2008 29,750
30-06-2007 35,125
30-06-2006 22,100
2) Calculate the trend percentages taking 2016 as the base:
Rupees in Lakhs
Year Sales Stock Profit before
tax
2016 1881 709 321
2017 2340 781 435
2018 2655 816 458
2019 3021 944 527
2020 3768 1,154 672
14 | P a g e Notes Compiled by Prof. Akshaya Pai
3) From the following information extracted from the balance sheets of star Ltd
for four previous financial years, calculate the trend percentages taking 2003-
04 as the base year.
2003-04 2004-05 2005-06 2006-07
(Rs in Lakhs)
Current assets:
Cash 200 240 400 220
Bank 260 300 200 240
Debtors 400 600 1000 1600
Stock 800 1200 1800 2000
Fixed assets :
Building 1000 1200 1200 1200
Plant and 2000 2400 2400 2800
machinery
4660 5940 7000 8060

4) Prepare the comparative income statement showing the trend of the financial
position
Particulars 2018 2019 2020
Sales 1,00,000 2,25,000 2,75,000
Less Cost of Goods Sold 75,000 1,50,000 1,50,000
Gross profit 25,000 75,000 1,25,000
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 10,000 25000
Net Profits 6000 13000 25000

5) Prepare the comparative Balance Sheet showing the trend

percentage
Particulars 31/03/201 31/3/2019 31/03/202
8 0
Share Capital 15,00,000 18,00,000 20,00,000
Reserves and surplus 1,50,000 3,00,000 1,75,000
Debentures 45,000 90,000 40,000
Long term loans 2,00,000 2,50,000 2,00,000
Creditors 1,25,000 1,50,000 10,000
Bills payable 45,000 60.000 5,000
Bank overdraft 12,500 15,000 2,500
Total liabilities 20,77,500 26,65,000 24,32,500

Fixed assets:
Building 14,50,000 17,50,000 21,75,000
Furniture 2,00,000 4,40,000 40,000
Current assets:
Stock 1,00,000 1,85,000 1,10,000
15 | P a g e Notes Compiled by Prof. Akshaya Pai
Debtors 1,45,000 1,70,000 1,05,000
Cash 1,82,000 1,20,000 2,500
Total assets 20,77,500 26,65,000 24,32,500

16 | P a g e Notes Compiled by Prof. Akshaya Pai