CHAPTER 3

TOOLS FOR FINANCIAL STATEMENT ANALYSIS

Points to remember:
1. In comparative statement deviation for current year to previous year is
always divided by previous year amount.
2. In common size statement of Profit & Loss take revenue from operation as

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common base not the total revenue.
3. In common size Balance Sheet take Balance Sheet total amount either
total assets or total liabilities as common base.
The various tools used for analysis of financial statements are:

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· Comparative Statement: Financial Statements of two years are compared
and changes in absolute terms and in percentage terms are calculated. It is
a form of Horizontal Analysis.
· Common Size Statement: Figures of Financial Statements are converted

·
ID
in to percentage with respect to some common base.
Ratio Analysis: It is a technique of study of relationship between various
items in the Financial Statements.
Cash Flow Statement: It is a statement that shows the inflow and outflow
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of cash and cash equivalents during a particular period which helps in
finding out the causes of changes in cash position between the two balance
sheet dates.
YG
D
U
ST

319 [Class XII : Accountancy]

 Tools for Financial Statement Analysis

Comparative Common size Ratio Cash flow

Financial Financial Analysis statement
Statement Statement

Comparative Common size Liquidity Ratios

Balance Sheet Balance Sheet

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Solvency Ratios

Comparative Common size Activity Ratios

Income Income

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Statement Statement
Profitability Ratios

Comparative Financial Statements

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It is a tool of financial Analysis that shows changes in each item of the financial
statement in absolute amount and in percentage, taking the amounts of the
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preceding accounting period as the base.
YG

Types of Comparative Statement:

1. Comparative Balance Sheet; and

2. Comparative Statement of Profit and Loss.

D

1. Comparative Balance Sheet: It shows the increases and decreases

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in various items of assets, equity and liabilities in absolute term and in

percentage term by taking the corresponding figures in the previous year’s
balance sheet as a base.
ST

Format for a Comparative Balance Sheet as per CBSE Circular No. 43 dated
2,July 2013

[Class XII : Accountancy] 320

 Comparative Balance Sheet of .............Ltd.
As at 31st March 2018-2019

Particulars 2018 2019 Absolute Percentage

Change Change
%
` ` `
EQUITY AND LIABILITIES:
Shareholders’ funds
Share Capital
Reserve and Surplus

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Non-Current Liabilities
Long term Borrowings
Other long term liabilities
Long term provisions

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Current liabilities
Short term Borrowings
Trade payables
Other current liabilities Total
Short term provision

ASSETS:
Non-current Assets
Fixed Assets
ID
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Non-current investments
Long term Loans and Advances
Current Assets
YG

Current investments
Inventories
Trade receivables
Cash and cash equivalents
Short term loans and advances
D

Other current assets

Total
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Absolute Change = Current year figure – Previous year figure

Related absolute change

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% change =
Related figures of Previous year
× 100

Illustration 1: From the following Balance Sheet of XYZ Ltd. as at 31st March 2016
and 2015. Prepare a comparative Balance Sheet.

321 [Class XII : Accountancy]

 Particulars Note No. 31-3-2016 31-3-2015
I. Equity & Liabilities:
Shareholder’s funds
20,00,000 10,00,000
(a) Share Capital 4,00,000 6,00,000
(b) Reserves & Surplus
Non-current Liabilities 16,00,000 10,00,000
Long term borrowings
Current liabilities 8,00,000 4,00,000
Trade payables

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Total 48,00,000 30,00,000

II. Assets:
Non-current Assets

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Fixed Assets:
i. Tangible Assets
ii. Intangible Assets 16,00,000
28,00,000 4,00,000
6,00,000
Current Assets
(a) Inventories
(b) Cash & Cash equivalents

ID Total
10,00,000
4,00,000
48,00,000
8,00,000
2,00,000

30,00,000
U
Solution:
YG

Comparative Balance Sheet of XYZ Ltd.

As at 31st March 2015 & 2016

Particulars Note 31-3-2015 31-3-2016 Absolute % Change

No. change
D

↑ OR ↓ ↑ OR ↓
I II II – I = III
× 100
U

Equity & Liabilities:

(1) Shareholder’s funds 10,00,000 20,00,000 10,00,000 100%
ST

(a) Share Capital 6,00,000 4,00,000 (2,00,000) (33.33%)

(b) Reserves & Surplus 60%
(2) Non-current Liabilities 10,00,000 16,00,000 6,00,000 60%
Long term borrowings
(3) Current liabilities 4,00,000 8,00,000 4,00,000 100%
Trade payables
Total 30,00,000 48,00,000 18,00,000 60%

[Class XII : Accountancy] 322

 Assets:
(1) Non-current Assets
Fixed Assets: 16,00,000 28,00,000 12,00,000 75%
(i) Tangible Assets 4,00,000 6,00,000 2,00,000 50%

(ii)Intangible Assets

(2) Current Assets 8,00,000 10,00,000 2,00,000 25%

60
(a)Inventories 2,00,000 4,00,000 2,00,000 100%

(b)Cash & Cash equivalents 30,00,000 48,00,000 18,00,000 60%

Total
Steps for Capital Calculations:

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1. Absolute amount of share capital for 31-3-2015 = 10,00,000
& for 31-3-2016 = 20,00,0000
Absolute change in share capital = Current year figure – Previous year figure

% change =
absolute change ID = 20, 00,000 – 10, 00,000 = 10, 00,000

× 100
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Previous year figure
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10,00,000
= × 100 = 100%
10,00,000
2,00,000
2. For Reserves & Surplus = × 100 = 33.33%
6,00,000
Here absolute change is in negative figure
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∴ % change will also be in bracket indicating -ve%

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3. So on ______
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 COMPARATIVE STATEMENT OF PROFIT AND
LOSS/COMPARATIVE INCOME STATEMENT

Comparative Income Statement: It shows the increases and decreases in various

items of income Statement in absolute amount and in percentage amount by taking
the corresponding figures in the previous year’s Income Statement as a base.

Format for a Comparative statement of Profit & Loss as per CBSE Cr. No. 43

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dated 2 July 2013

Comparative Statement of Profit and Loss

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For the year ended on 31st March, 2018 and 2019

Particulars 2018 2019 Absolute Percentage

Change Change
` ` ` %

I. Revenue from Operations

II. Add: Other Income

III. Total Revenue I + II
ID
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IV. Expenses:

a. Cost of Material Consumed

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b. Purchases of Stock-in-Trade

c. Changes in inventories of Finished

Goods, work-in-progress and Stock-
in-Trade
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d. Employees benefit expenses

e. Finance costs
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f. Depreciation

g. Other expenses
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Total Expenses

V. Profit before tax (III-IV)

Less: Income Tax

VI. Profit after tax

[Class XII : Accountancy] 324

 Importance of Comparative Financial Statement
· To make the data simple and more understandable.
· To indicate the trend with respect to the previous year.

· To compare the firm’s performance with the performance of other firm in the
same business.
Illustration 2: From the following information of ‘Anjali’ Ltd. Prepare comparative
statement of Profit & Loss.
Particulars Note No. 31st March 31st March

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2016 (`) 2015 (`)

Revenue from operations 20,00,000 16,00,000

Employees Benefit Expenses 10,00,000 8,00,000

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Depreciation & Amortisation Expenses 25,000 20,000
Other expenses 75,000 1,80,000

Tax Rate 30%

Solution:

Particulars
ID
Comparative statement of profit & Loss
For the year ended 31st March 2015-2016

Note 31-3-2015
(`)
31-3-2016
(`)
Absolute
change(`)
%
Change(%)
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No.
↑ OR ↓ ↑ OR ↓

I II III=II – I
YG

IV= ×100

A. Revenue from Operations 16,00,000 20,00,000 4,00,000 25%

B. Expenses
(i) Employee Benefit 8,00,000 10,00,000 2,00,000 25%
Expenses
(ii) Depreciation & 20,000 25,000 5,000 25%
D

Amortisation Expenses
(iii) Other Expenses
1,80,000 75000 1,05,000 58.33%
Total Expenses
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10,00,000 11,00,000 1,00,000 10%

C. Profit before tax(A-B)
6,00,000 9,00,000 3,00,000 50%
D. Less
1,80,000 2,70,000 90,000 50%
E. Profit after tax(C-D)
ST

4,20,000 6,30,000 2,10,000 50%

Common Size Financial Statements 100% statements

325 [Class XII : Accountancy]

 Common Size Financial Statements are the statements in which amounts of the
various items of financial statements are converted into percentages to a common
base.

Types of Common Size Statements:

1. Common Size Balance Sheet; and
2. Common Size Statement of Profit and Loss.
Common Size Balance Sheet: It is a statement in which every item of assets,
equity and liabilities is expressed as a percentage to the total of all assets or to the

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total of Equity and Liabilities.
Total Assets or Total Equity & Liabilities are taken as Common base
Format for a Common Size Balance Sheet:

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As per CBSE Cr. No. 43 dated 2 July 2013
Common Size Balance Sheet of ............. Ltd.
As at 31st March 2016 and 2017
Particulars Absolute Amounts Percentage of Balance

EQUITY AND LIABILITIES:

ID 2016 ` 2017 `
Sheet Total
2016 % 2017 %
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Shareholders’ Funds
Share Capital
Reserve and Surplus
Non-Current Liabilities
YG

Long term Borrowings

Other long term liabilities
Long term provisions
Current liabilities
Short term Borrowings
Trade payables
Other current liabilities
Short term provision
D

Total 100 100

ASSETS:
Non-current Assets
U

Fixed Assets
Non-current investments
Long term Loans and Advances
Current Assets
ST

Current investments
Inventories
Trade receivables
Cash and cash equivalents
Short term loans and advances
Other current assets

Total 100 100

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 Common Size Income Statement or Statement of Profit & Loss: It is a statement in
which every item of Statement of Profit and Loss is expressed as a percentage to
the amount of Revenue from Operations.
Sales (Revenue from operations) is taken as base
Format for a Common Size Statement of Profit and Loss
As per CBSE Cr. No. 43 dated 2 July 2013
Common Size Statement of Profit and Loss
For the years ended on 31st March, 2016 and 2017

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Particulars Absolute Amounts Percentage of Revenue
from operation (Net Sales)

2016 ` 2017 ` 2016 % 2017 %

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I. Revenue from operations 100 100
II. Add: Other Income
III. Total Revenue I+II
IV. Expenses:
a.
b.
c.
Cost of Material Consumed
Purchases of Stock in Trade ID
Changes in inventories of Finished
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Goods, work in progress and Stock- in-
Trade
d. Employees benefit expenses
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e. Finance costs
f. Depreciation
g. Other expenses
Total Expenses
V. Profit before tax (III-IV)
D

Less: Income Tax

VI. Profit after tax
U
ST

327 [Class XII : Accountancy]

 Illustration 3: Prepare a ‘Common Size Balance Sheet’ on the basis of the
information given in the Balance Sheet of Z Ltd. as at 31st March 2016.

Particulars Note 31-3-16

No. `

I. EQUITY AND LIABILITIES

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1. Shareholders’ Funds

(a) Share Capital 6,00,000

(b) Reserve and Surplus 1,00,000

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2. Non-Current Liabilities

(a) Long term borrowings 2,50,000

3. Current Liabilities

(a) Trade Payable

ID 50,000

10,00,000
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Total

II. ASSETS
YG

1. Non-Current Assets

(a) Fixed Assets

(i) Tangible Assets 6,50,000

D

(b) Non-Current Investments 1,50,000

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2. Current Assets

(a) Inventories 70,000

ST

(b) Trade Receivables 50,000

(c) Cash and cash equivalents 80,000

Total
10,00,000

[Class XII : Accountancy] 328

 Solution:
Common Size Balance Sheet of Z Ltd.
As at 31st March, 2016

Particulars Note Absolute Amount Percentage of

No. (`) Balance Sheet Total

EQUITY AND LIABILITIES:

1. Shareholders’ Funds
(a) Share Capital 6,00,000 60%

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(b) Reserve and Surplus 1,00,000 10%

2. Non-Current Liabilities
(a) Long term Borrowings 2,50,000 25%

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3. Current liabilities
(a) Trade payable 50,000 5%
Total
10,00,000 100%

ASSETS:
1. Non-current Assets
(a) Fixed Assets
ID
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6,50,000 65%
i. Tangible Assets
1,50,000 15%
(b) Non-current investments
YG

2. Current Assets
70,000 7%
(a) Inventories
50,000 5%
(b) Trade receivables
80,000 8%
(c) Cash and cash equivalents
D

Total 10,00,000 100%

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Step for calcualtion:

1. Absolute Amount of share capital = ` 6,00,000% of Balance Sheet Total =

ST

6, 00, 000
× 100= 60%
10, 00, 000
1, 00, 000
2. For Reserves & Surplus × 100= 100%
10, 00, 000
6,50, 000
3. Similarly, for tangible Assets × 100= 65%
& so on....... 10, 00, 000

329 [Class XII : Accountancy]

 Illustration 4: From the following information for the years ended onst, 31
March,2015 and 2016, prepare a ‘Comparative Statement of Profit & Loss’ of Beta
Ltd.

Particulars Note No. 2015-2016 2014-15

Revenue from operations 7,00,000 5,00,000
Expenses 4,50,000 3,75,000
Other Incomes 75,000 1,00,000

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Rate of Income Tax was 50%
Solution:
Comparative Statement of Profit and Loss of Beta Ltd for the years ended
31st March, 2015 and 2016

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Particulars Note 2014-15 2015-16 Absolute Change
change in %
No.

Revenue from operations 5,00,000 7,00,000 2,00,000 40%

Add: Other Income

Total Revenue ID 1,00,000

6,00,000
75,000
7,75,000
(25,000)
1,75,000
(25%)
29.17%
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Less: Expenses 3,75,000 4,50,000 75,000 20%
Profit before tax 2,25,000 3,25,000 1,00,000 44.44%
YG

Less: tax @ 50% 1,12,500 1,62,500 50,000 44.44%

Profit after tax 1,12,500 1,62,500 50,000 44.44%

Illustration 5: Prepare a Comparative Income Statement and Common Size

Statement of Profit and Loss from the following information:
D

Particulars 31st March 31st March

2015 2016
U

Revenue from operations 125% 140%

(% of cost of Material Consumed)
Cost of Material Consumed 2,40,000 2,50,000
ST

Other expenses (% of Revenue from Operations) 10% 12%

Other Income 15,000 20,000
Tax Rate 30% 30%

Solution
COMMON SIZE STATEMENT OF PROFIT AND LOSS OF
For the years ended on 31st March 2015 and 2016

[Class XII : Accountancy] 330

 Particulars Amounts Amounts Percentage of
Revenue from
operation (Net Sales)

31st 31st 31st 31st

March March March March
2015(`) 2016(`) 2015 % 2016 %

I. Revenue from operations 3,00,000 3,50,000 100.00 100.00

II. Add: Other Income 15,000 20,000 5.00 5.71

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III. Total Revenue (I+II) 3,15,000 3,70,000 105.00 105.71

IV. Expenses:
a) 2,40,000 2,50,000 80.00 71.43

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Cost of Material Consumed
b) Other expenses 30,000 42,000 10.00 12.00

Total Expenses 2,70,000 2,92,000 90.00 83.43

V. Profit before tax (III-IV) 45,000 78,000 15.00 22.28

VI.
Less: Income Tax

Profit after tax

ID (13,500)

COMPARATIVE INCOME STATEMENT

31,500
(23,400)

54,600
(4.50)

10.50
(6.69)

15.59
U
For the years ended on 31st March 2015 and 2016
YG

Particulars Amount Absolute Percentage

Absolute Change
Change

31st 31st March (`) %

March 2016(`)
2015(`)

I. Revenue from operations 3,00,00 3,50,000 50,000 16.67

D

II. Add: Other Income 15,000 20,000 5,000 33.33

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3,15,000 3,70,000 55,000 17,46

III. Total Revenue (I+II)

IV. Expenses: 2,40,000 2,50,000 10,000 4.16

ST

30,000
a. Cost of Material Consumed 42,000 12,000 40.00
b. Other expenses
2,70,000 2,92,000 22,000 8.15
Total Expenses 45,000 78,000 33,000 73.33
(13,500) (23,400) (9,900) (73.33)
V. Profit before tax (III-IV)
Less: Income Tax
31,500 54,600 23,100 73.33
VI. Profit after tax

331 [Class XII : Accountancy]

 Illustration 6: Fill in the missing information in the following comparative statement
of profit and loss.

Comparative Statement of Profit and Loss for the year ended 31st March 2014 and
2015.

Particulars Note 2014- 2015-16 Absolute Percentage

No. 15 (`) Change Change
(`) (`) %

I. Revenue from operations --------- --------- --------- ---------

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II. Add: Other Income 25,000 -------- 65,000 ---------
III. Total Revenue (I+II)
--------- --------- --------- ---------
IV.Expenses:
a. Cost of Material Consumed ------- 6,00,000 2,00,000 ---------

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b. Other expenses --- --------- --------- 60%
Total Expenses 25,000
--------- --------- --------- ---------
V. Profit before tax (III-IV)
Less: Income Tax @ 30% --------- --------- --------- ---------
VI.

Solution
Profit after tax

ID 60,000

---------
75,000

---------
---------
---------
---------
---------
U
Comparative Statement of Profit and Loss
YG

For the year ended 31st March 2015 and 2016

Particulars Note 2014-15 2015-16 Absolute Percentage

No. (`) (`) Change Change
(`) %

I. Revenue from operations 6,00,000 8,00,000 2,00,000 33.33%

D

25,000 90,000 65,000 260%

II. Add: Other Income
III. Total Revenue I+II 6,25,000 8,90,000 2,65,000 42.4%
U

IV.Expenses:
4,00,000 6,00,000 2,00,000 50%
a. Cost of Material Consumed 25,000 15,000
b. Other expenses 40,000 60%
ST

Total Expenses 4,25,000 6,40,000 2,15,000 50.59%

c. Profit before tax (III-IV)
2,00,000 2,50,000 50,000 25%
Less: Income Tax @ 30% 60,000 75,000 15,000 25%
d. Profit after tax
1,40,000 1,75,000 35,000 25%

Illustration 7: From the following statement of profit and loss of the Sakshi Ltd. for
the year ended 31st March. 2017, Prepare comparative statement of Profit & Loss.

[Class XII : Accountancy] 332

 Statement of Profit & Loss

For the year indeed 31st March, 2017

Particulars 31st March 31st March
2015-16 2016-17
Revenue from operations 50,00,000 80,00,000
Expenses:
a. Employee benefit expenses were 5% of Revenue
form operation

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11,80,000 13,60,000
b. Other Expenses
Rate of Tax 35%
Solution

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Comparative Statement of Profit and Loss
For the year ended 31st March 2016 and 2017

Particulars 2015-16 2016-17 Absolute Percentage

(`) (`) Change Change

(i) Revenue from operations

Expenses :
(a) Employee benefits Exp.
ID 50,00,000

2,50,000
80,00,000

4,00,000
(`)
30,00,000

1,50,000
60

60
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11,80,000 13,60,000 1,80,000 15.25
(b) Other expenses

14,30,000 17,60,000 3,30,000 23.08

(ii) Total Expenses:
YG

35,70,000 62,40,000 26,70,000 74.79

(iii) Profit before tax (I-II)
(iv) Less : Taxes @ 35% 12,49,500 21,84,000 9,34,500 74.79
(v) Profit after tax (III-IV) 23,20,500 40,56,000 17,35,500 74.79

Things to Remember
Ø Why do we use tools for financial Analysis?
D

Financial statements are not ready to use/understand to the users. Therefore,

we require tools to analyse them to be easily understandable by all the users.
U

Ø What are the tools for financial Analysis? Comparative financial statements
common size financial statements Ratio Analysis cash flow statement
ST

Ø List any two purposes of comparative statements?

1. To make the information simple & easily understandable.

2. To show the trend of changes.

Ø What are the steps for formation of comparative financial statement?

333 [Class XII : Accountancy]

 Step 1: Take the figure of previous year

Step 2: Take the figure of current year

Step 3: Find absolute change=current year figure-Previous year figure

Absolute change of an item

Step 4: Find % change = X100
Previous year figure of that item
m
ØHow to show the negative change in any item

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By putting brackets, we can show the negative change

ØName the types of comparative financial statements

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1. Comparative Balance sheet

2. Comparative Income Statement/comparative statement of profit & loss

What is change in Inventories in inventories=opening stock-closing stock

ID
ØCommon Size statements are also known as ....................

Vertical Analysis and 100% statements

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ØWhy do we call common size statements as vertical Analysis?
YG

Why do we call common size statements as 100% statements?

Because all the items of financial statements have to be expressed in terms of

a base i.e. 100.

Give any 2 utility of common size statements.

D

1. To create a relationship between base items & other items of financial

statements
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2. To establish common base for comparison purposes.

ST

ØList 2 types of common size financial statements.

1. Common size Balance sheet

2. Common size income statement or common size statement of Profit & Loss

ØWhat are the steps for formation of common size financial statement?

Step 1: Take the figure of previous year

[Class XII : Accountancy] 334

 Step 2: Take the figure of current year

Step 3: Calculate % total of each item to total of base which is 100 for previous
year.

Step 4: Calculate % total of each item to total of base which is 100 for current year.

Ø What is the common base in common size Balance sheet?

Total of equity & Liabilities or total Assets.

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ØWhat is the common base in common size income statement?

Revenue from operations

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ØWhat are the 2 types of comparisons in comparative financial statement.

1. Intra firm comparison

2. Inter firm comparison

ID
Ø Give any 2 limitation of comparison financial statement

1. Historical records only

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2. Affected by personal judgement
YG

ØCan we prepare common size statement for a year.

(yes)

ØCan we prepare comparative financial statements for a year.

D

(no)
U
ST

335 [Class XII : Accountancy]