Chapter 4 Analysis of Financial Statements Solutions
Question - 11 : - Explain how common size statements are prepared giving an example.
Answer - 11 : -
Common size statements are of two types:
1. Common Size Income Statements
2. Common Size Balance Sheet
Common size statement is prepared as columnar form for performing analysis. In such a statement each item of the available financial statement is compared to a common item. Such analysis is called as vertical analysis.
Following columns are present:
1. Particulars: It shows the various financial item under each respective headings
2. Amount Columns: Under these columns the amount of each item is depicted along with sub-totals and gross total of a particular year.
3. Percentage/Ratio Columns: Under these columns the proportion of each item is shown as percentage or ratio with reference to common item.
It is prepared in following two ways:
Following example will help get a better understanding of the preparation
Working Note:
For example,
Question - 12 : - Following are the balance sheets of Alpha Ltd. as at March 31st, 2016 and 2017: | Particulars | 2016
₹. | 2017
₹. |
| I. Equity and Liabilities | | |
| Equity share capital | 2,00,000 | 4,00,000 |
| Reserves and surplus | 1,00,000 | 1,50,000 |
| Long-term borrowings | 2,00,000 | 3,00,000 |
| Short-term borrowings | 50,000 | 70,000 |
| Trade payables | 30,000 | 60,000 |
| Short-term provisions | 20,000 | 10,000 |
| Other current liabilities | 20,000 | 30,000 |
| Total | 6,20,000 | 10,20,000 |
| II. Assets | | |
| Fixed assets | 2,00,000 | 5,00,000 |
| Non-current investments | 1,00,000 | 1,25,000 |
| Current investments | 60,000 | 80,000 |
| Inventories | 1,35,000 | 1,55,000 |
| Trade receivables | 60,000 | 90,000 |
| Short term loans and advances | 40,000 | 60,000 |
| Cash at bank | 25,000 | 10,000 |
| Total | 6,20,000 | 10,20,000 |
Answer - 12 : -
| Comparative Balance Sheet as on March 31, 2016 and 2017 |
| Particulars | 2016 (₹) | 2017 (₹) | Absolute Change | Percentage Change |
| I. Equity and Liabilities | | | | |
| 1. Shareholder’s Fund | | | | |
| a. Equity Share Capital | 2,00,000 | 4,00,000 | 2,00,000 | 100 |
| b. Reserves and Surplus | 1,00,000 | 1,50,000 | 50,000 | 50 |
| 2. Non-Current Liabilities | | | | |
| a. Long Term Borrowings | 2,00,000 | 3,00,000 | 1,00,000 | 50 |
| 3. Current Liabilities | | | | |
| a. Short Term Borrowings | 50,000 | 70,000 | 20,000 | 40 |
| b. Trade Payables | 30,000 | 60,000 | 30,000 | 100 |
| c. Short Term Provisions | 20,000 | 10,000 | (10,000) | (50) |
| d. Other Current Liabilities | 20,000 | 30,000 | 10,000 | 50 |
| Total | 6,20,000 | 10,20,000 | 4,00,000 | 64.5 |
| II. Assets | | | | |
| 1. Non-Current Assets | | | | |
| a. Fixed Assets | 2,00,000 | 5,00,000 | 3,00,000 | 150 |
| b. Non Current Investments | 1,00,000 | 1,25,000 | 25,000 | 25 |
| 2. Current Assets | | | | |
| a. Current Investments | 60,000 | 80,000 | 20,000 | 33.3 |
| b. Inventories | 1,35,000 | 1,55,000 | 20,000 | 14.8 |
| c. Trade Receivables | 60,000 | 90,000 | 30,000 | 50 |
| d. Short Term Loans and Advances | 40,000 | 60,000 | 20,000 | 50 |
| e. Cash and Cash Equivalents | 25,000 | 10,000 | (15,000) | (60) |
| Total | 6,20,000 | 10,20,000 | 4,00,000 | 64.5 |
| | | | |
Question - 13 : - Following are the balance sheets of Beta Ltd. at March 31st, 2016 and 2017: | Particulars | 2017
₹. | 2016
₹. |
| I. Equity and Liabilities | | |
| Equity share capital | 4,00,000 | 3,00,000 |
| Reserves and surplus | 1,50,000 | 1,00,000 |
| Loan from IDBI | 3,00,000 | 1,00,000 |
| Short-term borrowings | 70,000 | 50,000 |
| Trade payables | 60,000 | 30,000 |
| Short-term provisions | 10,000 | 20,000 |
| Other current liabilities | 1,10,000 | 1,00,000 |
| Total | 11,00,000 | 7,00,000 |
| II. Assets | | |
| Fixed assets | 4,00,000 | 2,20,000 |
| Non-current investments | 2,25,000 | 1,00,000 |
| Current investments | 80,000 | 60,000 |
| Stock | 1,05,000 | 90,000 |
| Trade receivables | 90,000 | 60,000 |
| Short term loans and advances | 1,00,000 | 85,000 |
| Cash and cash equivalents | 1,00,000 | 85,000 |
| Total | 11,00,000 | 7,00,000 |
| | |
Answer - 13 : -
| Comparative Balance Sheet as on March 31, 2016 and 2017 |
| Particulars | 2016 (₹) | 2017 (₹) | Absolute Change | Percentage Change |
| I. Equity and Liabilities | | | | |
| 1. Shareholder’s Fund | | | | |
| a. Equity Share Capital | 3,00,000 | 4,00,000 | 1,00,000 | 33.3 |
| b. Reserves and Surplus | 1,00,000 | 1,50,000 | 50,000 | 50 |
| 2. Non-Current Liabilities | | | | |
| a. Long Term Borrowings (Loan from IDBI) | 1,00,000 | 3,00,000 | 2,00,000 | 200 |
| 3. Current Liabilities | | | | |
| a. Short Term Borrowings | 50,000 | 70,000 | 20,000 | 40 |
| b. Trade Payables | 30,000 | 60,000 | 30,000 | 100 |
| c. Short Term Provisions | 20,000 | 10,000 | (10,000) | (50) |
| d. Other Current Liabilities | 1,00,000 | 1,10,000 | 10,000 | 10 |
| Total | 7,00,000 | 11,00,000 | 4,00,000 | 57.14 |
| II. Assets | | | | |
| 1. Non-Current Assets | | | | |
| a. Fixed Assets | 2,20,000 | 4,00,000 | 1,80,000 | 81.8 |
| b. Non Current Investments | 1,00,000 | 2,25,000 | 1,25,000 | 125 |
| 2. Current Assets | | | | |
| a. Current Investments | 60,000 | 80,000 | 20,000 | 33.3 |
| b. Inventories (Stock) | 90,000 | 1,05,000 | 15,000 | 16.6 |
| c. Trade Receivables | 60,000 | 90,000 | 30,000 | 50 |
| d. Short Term Loans and Advances | 85,000 | 1,00,000 | 15,000 | 17.65 |
| e. Cash and Cash Equivalents | 85,000 | 1,00,000 | 15,000 | 17.65 |
| Total | 7,00,000 | 11,00,000 | 4,00,000 | 57.14 |
| | | | |
Question - 14 : - Prepare Comparative Income Statement from the following information: | Particulars | 2016-17
₹. | 2015-16
₹. |
| Freight Outward | 20,000 | 10,000 |
| Wages (office) | 10,000 | 5,000 |
| Manufacturing Expenses | 50,000 | 20,000 |
| Stock adjustment | (60,000) | 30,000 |
| Cash purchases | 80,000 | 60,000 |
| Credit purchases | 60,000 | 20,000 |
| Returns inward | 8,000 | 4,000 |
| Gross profit | (30,000) | 90,000 |
| Carriage outward | 20,000 | 10,000 |
| Machinery | 3,00,000 | 2,00,000 |
| Charge 10% depreciation on machinery | 10,000 | 5,000 |
| Interest on short-term loans | 20,000 | 20,000 |
| 10% debentures | 20,000 | 10,000 |
| Profit on sale of furniture | 20,000 | 10,000 |
| Loss on sale of office car | 90,000 | 60,000 |
| Tax rate | 40% | 50% |
Answer - 14 : -
| Comparative Income Statement for the year ended March 31, 2016 and 2017 |
| Particulars | Note No. | 2015-16 (₹) | 2016-17 (₹) | Absolute Change
(₹) | Percentage Change |
| 1. Revenue from Operations | | 2,16,000 | 92,000 | (1,24,000) | (57.4) |
| 2. Other Income | | 10,000 | 20,000 | 10,000 | 100 |
| 3. Total Revenue (1 + 2) | | 2,26,000 | 1,12,000 | (1,14,000) | (50.44) |
| 4. Expenses | | | | | |
| a. Purchases of Stock-in-Trade | | 80,000 | 1,40,000 | 60,000 | 75 |
| b. Change in Inventories | | 30,000 | (60,000) | (90,000) | (300) |
| c. Employee Benefit Expenses | | 5,000 | 10,000 | 5,000 | 100 |
| d. Finance Costs | | 21,000 | 22,000 | 1,000 | 4.54 |
| e. Depreciation and Amortisation Expenses | | 5,000 | 10,000 | 5,000 | 100 |
| f. Other Expenses | | 80,000 | 1,30,000 | 50,000 | 62.5 |
| Total Expenses | | 2,21,000 | 2,52,000 | 31,000 | 14.03 |
| 5. Profit before Tax (3 – 4) | | 5,000 | (1,40,000) | (83,000) | 16.6 |
| Less: Income Tax | | 2,500 | – | (2,500) | (100) |
| 6. Profit After Tax | | 2,500 | (1,40,000) | (1,37,500) | 55 |
| | | | | |
Working Notes:
1. Calculation of Net Sales
Net Sales = Cost of Goods Sold + Gross Profit – Sales Return
or, Net Sales = Purchases + Manufacturing Expenses + Change in Inventory + Gross Profit – Sales Return
Net Sales (2016) = 80,000 + 20,000 +30,000 + 90,000 – 4,000 = ₹ 2, 16,000
Net Sales (2017) = 1, 40,000 + 50,000 – 60,000 – 30,000 – 80,000 = ₹ 92,000
2. Calculation of Finance Cost
Finance Cost = Interest on short-term loans + Interest on 10% Debentures
Finance Cost (2016) = 20,000 + 1,000 = ₹ 21,000
Finance Cost (2017) = 20,000 + 2,000 = ₹ 22,000
3. Calculation of Other Expenses
Other Expenses = Freight Outward + Carriage Outward + Loss on sale of office car
Other Expenses (2016) = 10,000 + 10,000 + 60,000 = ₹ 80,000
Other Expenses (2017) = 20,000 + 20,000 + 90,000 = ₹ 1, 30,000
Question - 15 : - Prepare Comparative Income Statement from the following information: | Particulars | 2015-16
₹. | 2016-17
₹. |
| Manufacturing expenses | 35,000 | 80,000 |
| Opening stock | 30,000 | 60% of closing stock |
| Sales | 9,60,000 | 4,50,000 |
| Returns outward | 4,000 (out of credit purchase) | 6,000 (out of cash purchase) |
| Closing stock | 150% of opening stock | 1,00,000 |
| Credit purchases | 1,50,000 | 150% of cash purchase |
| Cash purchases | 80% of credit purchases | 40,000 |
| Carriage outward | 10,000 | 30,000 |
| Building | 1,00,000 | 2,00,000 |
| Depreciation on building | 20% | 10% |
| Interest on bank overdraft | 5,000 | – |
| 10% debentures | 2,00,000 | 20,00,000* |
| Profit on sale of copyright | 10,000 | 20,000 |
| Loss on sale of personal car | 10,000 | 20,000 |
| Other operating expenses | 20,000 | 10,000 |
| Tax rate | 50% | 40% |
Answer - 15 : -
| Comparative Income Statement for the years ended March 31, 2016 and 2017 |
| Particulars | Note No. | 2015-16 (₹) | 2016-17 (₹) | Absolute Change
(₹) | Percentage Change |
| 1. Revenue from Operations | | 9,60,000 | 4,50,000 | (5,10,000) | (53.13) |
| 2. Other Income | | 10,000 | 20,000 | 10,000 | 100 |
| 3. Total Revenue (1 + 2) | | 9,70,000 | 4,70,000 | (5,00,000) | (51.55) |
| 4. Expenses | | | | | |
| a. Purchases of Stock-in-Trade | | 2,66,000 | 94,000 | (1,72,000) | (64.7) |
| b. Change in Inventories | | (15,000) | (40,000) | (55,000) | (366.7) |
| c. Finance Costs | | 25,000 | 20,000 | (5,000) | (20) |
| d. Depreciation and Amortisation Expenses | | 20,000 | 20,000 | – | – |
| e. Other Expenses | | 30,000 | 40,000 | 10,000 | 33.33 |
| Total Expenses | | 3,26,000 | 1,34,000 | (1,92,000) | 58.90 |
| 5. Profit before Tax (3 – 4) | | 6,44,000 | 3,36,000 | (3,08,000) | 47.83 |
| Less: Income Tax | | 3,22,000 | 1,34,400 | (1,87,600) | 58.26 |
| 6. Profit After Tax | | 3,22,000 | 2,01,600 | 1,20,400 | 37.39 |
| | | | | |
Working Notes:
1. Calculation of Net Purchases and Change in Inventory
2. Calculation of Finance Cost
Finance Cost = Interest on Bank Overdraft + Interest on Debentures
Finance Cost (2016) = 5,000 + 20,000 = ₹ 25,000
Finance Cost (2017) = 0 + 20,000 = ₹ 20,000
3. Calculation of Other Expenses
Other Expenses = Carriage outward + other operating expenses
Other Expenses (2016) = 10,000 + 20,000 = ₹ 30,000
Other Expenses (2017) = 30,000 + 10,000 = ₹ 40,000
Question - 16 : - Prepare a Common size statement of profit and loss of Shefali Ltd. with the help of following information: | Particulars | 2015-16
(₹) | 2016-17
(₹) |
| Revenue from operations | 6,00,000 | 8,00,000 |
| Indirect expense | 25% of gross profit | 25% of gross profit |
| Cost of revenue from operations | 4,28,000 | 7,28,000 |
| Other incomes | 10,000 | 12,000 |
| Income tax | 30% | 30% |
Answer - 16 : -
| Common Size Income Statement for the years ended March 31, 2016 and 20174 |
| Particulars | Note No. | 2015-16 (₹) | 2016-17 (₹) | Percentage of Sales |
| 2015-16 | 2016-17 |
| 1. Revenue from Operations | | 6,00,000 | 8,00,000 | 100 | 100 |
| 2. Other Income | | 10,000 | 12,000 | 1.67 | 1.5 |
| 3. Total Revenue (1 + 2) | | 6,10,000 | 8,12,000 | 101.67 | 101.5 |
| 4. Expenses | | | | | |
| a. Cost of Revenue from Operations (COGS) | | 4,28,000 | 7,28,000 | 71.33 | 91 |
| b. Other Expenses | | 43,000 | 18,000 | 7.17 | 2.25 |
| Total Expenses | | 4,71,000 | 7,46,000 | 78.5 | 93.25 |
| 5. Profit before Tax (3 – 4) | | 1,39,000 | 66,000 | 23.167 | 8.25 |
| Less: Income Tax | | (41,700) | (19,800) | 5.35 | |
| 6. Profit After Tax | | 97,300 | 46,200 | 16.22 | 5.775 |
| | | | | |
Working Notes:
1. Calculation of expenses
Other Expenses = Indirect Expenses = % of Gross Profit
Gross Profit = Net Sales −- Revenue from Operations
For 2016, Gross Profit = ₹(6,00,000 −- 4,28,000) = ₹1,72,000
For 2017, Gross Profit = ₹(8,00,000 −- 7,28,000) = ₹72,000
2016=1,72,000×25%=₹43,000
2017=72,000×25%=₹18,000
2016=1, 72,000×25%=₹43,000
2017=72,000×25%=₹18,000
Question - 17 : - Prepare a Common Size balance sheet from the following balance sheet of Aditya Ltd. and Anjali Ltd.: | Particulars | Aditya Ltd.
₹. | Anjali Ltd.
₹. |
| I. Equity and Liabilities | | |
| a) Equity share capital | 6,00,000 | 8,00,000 |
| b) Reserves and surplus | 3,00,000 | 2,50,000 |
| c) Current liabilities | 1,00,000 | 1,50,000 |
| Total | 10,00,000 | 12,00,000 |
| II. Assets | | |
| a) Fixed assets | 4,00,000 | 7,00,000 |
| b) Current assets | 6,00,000 | 5,00,000 |
| Total | 1,00,0000* | 12,00,000 |
Answer - 17 : -
| Common Size Balance Sheet |
| Particulars | Aditya Ltd. (₹) | Anjali Ltd. (₹) | % of Total |
| Aditya Ltd. | Anjali Ltd. |
| I. Equity and Liabilities | | | | |
| 1. Shareholder’s Fund | | | | |
| a. Equity Share Capital | 6,00,000 | 8,00,000 | 60 | 66.67 |
| b. Reserves and Surplus | 3,00,000 | 2,50,000 | 30 | 20.83 |
| 2. Current Liabilities | 1,00,000 | 1,50,000 | 10 | 12.5 |
| Total | 10,00,000 | 12,00,000 | 100 | 100 |
| II. Assets | | | | |
| 1. Non-Current Assets | | | | |
| a. Fixed Assets | 4,00,000 | 7,00,000 | 40 | 58.33 |
| 2. Current Assets | 6,00,000 | 5,00,000 | 60 | 41.67 |
| Total | 10,00,000 | 12,00,000 | 100 | 100 |
| | | | |