# NCERT Solution for Class 12 Accountancy Chapter 4 - Analysis of Financial Statements

NCERT Solutions is an extremely helpful resource while preparing for the CBSE Class 12 Accountancy examination. This study material provides students with in-depth knowledge of the concepts covered, and the NCERT solutions collated by the subject-matter experts are easy to understand.

NCERT Solutions for Class 12 Accountancy Chapter 4 â€“ Analysis of Financial Statements provides students with all-inclusive data for all the concepts covered in the chapter. As the students would have learnt the basic concepts about the subject of Accountancy in Class 11, the Class 12 Solutions of NCERT is a continuation of it, which explains the concepts in a more detailed way.

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### Access NCERT Solutions for Class 12 Accountancy Chapter 4 â€“ Analysis of Financial Statements

Short Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 4

1. List the techniques of Financial Statement Analysis.

The most commonly used techniques of Financial Statement Analysis are as listed below:

1. Common Size Financial Statements

2. Trend Analysis

3. Comparative Financial Statements

4. Cash Flow Statement

5. Fund Flow Statement

6. Ratio Analysis

2. Distinguish between Vertical and Horizontal Analysis of financial data.

 Basis of Comparison Horizontal Analysis Vertical Analysis Meaning It is the comparative evaluation of a financial statement of two or more periods for calculating relative and absolute variances for every line of the item It is the analysis of financial data, which is independent of time and items relating to the financial information of the company and its impact on the performance of the company. Purpose To specify changes in financial performance between two comparable accounting periods To compare a financial item as a percentage of the base figure Comparison of Intra-firm comparison Both intra and inter-firm comparison Usefulness The growth or decline of an item is represented here It is useful in predicting and determining the relative proportion of an item in the financial statement to a common item in the financial statement

3. State the meaning of Analysis and Interpretation.

Analysis and interpretation is a critical and systematic examination of the financial statement. It presents the financial data in a systematic manner and also establishes a cause-and-effect relationship with all the items of financial statements. Analysis and interpretation is all about presenting financial data which is self-explanatory and easy to understand. It helps users of accounting information in assessing the status of the financial performance of the business for a time period, and enables them to take proper decisions regarding the finance policy of the firm.

4. State the importance of Financial Analysis.

Financial analysis is of great importance for the various users of accounting information. Financial statements such as Balance Sheets, Income sheets and other sources of financial data provide ample information on the various expenses and sources of profit, loss and income, which is helpful in determining the financial status of a business. Financial data is not making any meaningful contribution until it is analysed. There are various methods which help in analysing financial statements and make them useful for various accounting users.

The following are the essential reasons for performing financial analysis:

1. It is very helpful in determining the financial viability and profit-earning capacity of the firm.

2. It is helpful in evaluating the business solvency in the long term

3. It is useful in comparing the financial status of a firm in comparison to other competitor firms

4. It helps management in decision-making and drafting plans and also establishes a robust and effective control mechanism

5. What are Comparative Financial Statements?

Comparative financial statements refer to statements which enable comparison that is both intra and inter-firm and is based on a period of time. These statements help various users of accounting information in evaluating the financial progress of a firm in relative terms. These statements express the data in absolute figures or as percentage change and absolute change that occurs in the item of the financial statement over a period of time. The data presented in financial statements are self-explanatory and easy to understand. When items of the financial statement are treated with the same accounting policies and practices over a fixed period of time, then the comparative data derived from such statements bear meaningful comparisons.

Two common types are as follows::

1. Comparative Income Statement

2. Comparative Balance Sheet

6. What do you mean by Common Size Statements?

Common Size Statements are those statements where the items are displayed as percentages of a common base figure instead of absolute figures. It is helpful for proper analysis between companies (inter-firm comparison) or between time periods of the same company (intra-firm comparison). In these statements, the relationship between items present in financial statements and common items like balance sheet, total and net sales are highlighted in percentage. The analysis based on these statements is called Vertical Analysis.

Two types of Common Size Statements are as follows:

1. Common Size Income Statements

2. Common Size Balance Sheet

Long Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 4

1. Describe the different techniques of financial analysis and explain the limitations of financial analysis.

The following different techniques are used for financial analysis:

1. Cash Flow Analysis: This analysis focuses on the inflow and outflow of cash and cash equivalents from the various activities of a business, namely investing, operating and financing activities during an accounting period. This helps in analysing cash payments and the reason for receipt, and the respective changes in cash balances during the accounting year.

2. Ratio Analysis: This method highlights the relationship between items of the Balance Sheet and Income Statements. It is helpful in determining the efficiency, profitability and solvency of a firm. This analysis expresses the financial items as fractions, percentages or proportions. Also, it determines the qualitative relationship among different financial variables. It also serves as a source of information regarding the performance, viability and financial position of a firm.

3. Trend Analysis: This technique studies the trends in operating performance and financial position of the business over a period of many years in succession. In such a study, any particular year is considered as the base year, and the rest years are expressed as a percentage of the base yearâ€™s figures. It helps in identifying problems and inefficiency along with detecting operating efficiency and the financial position of the firm.

4. Comparative Statements: These statements use figures from two accounting periods that help determine financial position and profitability. It also enables to do intra and inter-firm comparisons and, therefore, determines the efficiency of the firm in relative terms. It uses both percentages as well as absolute terms. This analysis is known as Horizontal analysis.

5. Common Size Statements: Common Size Statements are those statements where the items are displayed as percentages of a common base figure instead of absolute figures. It is helpful for proper analysis between companies (inter-firm comparison) or between time periods of the same company (intra-firm comparison). In these statements, the relationship between items present in financial statements and common items like balance sheet, total and net sales are highlighted in percentage. The analysis based on these statements is called Vertical Analysis.

It has the following limitations:

1. It fails to depict changes in accounting policy and procedures.

2. These statements provide the interim report and hence have incomplete information.

3. These statements lack qualitative aspects like growth prospects and managerial efficiency and express only in monetary terms.

4. Financial analysis is based on accounting concepts and conventions and hence is unreliable as it does not take the current market value of items.

5. It involves personal bias and judgements of the accountant; for example, in the case of depreciation, different methods can be charged for the same item.

6. It does not take into account the change in the price level. Only nominal values are considered.

2. Explain the usefulness of trend percentages in the interpretation of the financial performance of a company.

Trend analysis is a form of analysing financial data, and it is expressed as a percentage for each year. It helps the accounting user in evaluating the financial performance of the business and also forms an opinion of various tendencies by which businesses can predict future trends.

The importance of trend analysis is as follows:

1. Predicting the trends of business which is forecasting future trends in business.

2. Trends are expressed as percentages which are less time-consuming and easy to follow.

3. It becomes a popular financial analysis method due to trends being expressed in percentages which makes evaluating the financial performance and operating efficiency of the firm relatively simpler.

4. It presents a broader picture of the performance of the company in terms of finance, viability and efficiency.

3. What is the importance of comparative statements? Illustrate your answer with particular reference to the comparative income statement.

Comparative statements have the following importance:

1. It presents financial data in a simple form, with year-wise data being presented in a side-by-side fashion, making the presentation neat and enabling intra and inter-firm comparisons more conclusive.

2. Presentation is very effective for drawing insights quickly and easily

3. It assists the management in drafting future plans and forecast trends which is achieved by analysing the profitability and operating efficiency of a business over time.

4. Comparative analysis helps the easy detection of problems. Early detection helps take corrective measures and align the business to meet the desired target.

4. What do you understand by analysis and interpretation of financial statements? Discuss its importance.

Financial analysis is of great importance for the various users of accounting information. Financial statements such as balance sheets, income sheets and other sources of financial data provide ample information on the various expenses and sources of profit, loss and income, which is helpful in determining the financial status of a business. Financial data is not making any meaningful contribution until it is analysed. There are various methods which help in analysing financial statements and make them useful for various accounting users.

The following reasons are essential for performing financial analysis:

1. It is very helpful in determining the financial viability and profit-earning capacity of the firm

2. It is helpful in evaluating the solvency of the business in the long term

3. It is useful in comparing the financial status of a firm in comparison to other competitor firms

4. It helps management in decision-making, drafting plans and also in establishing a robust and effective control mechanism

5. Explain how common size statements are prepared, giving an example.

Common size statements are of two types:

1. Common Size Income Statements

2. Common Size Balance Sheet

A common size statement is prepared as a 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 vertical analysis.

The following columns are present in a common size statement:

1. Particulars: It shows the various financial item under each respective heading

2. Amount Columns: Under these columns, the amount of each item is depicted along with sub-totals and the gross total of a particular year.

3. Percentage/Ratio Columns: Under these columns, the proportion of each item is shown as a percentage or ratio with reference to the common item.

It is prepared in the following two ways:

The following example will help get a better understanding of the preparation

Working Note:

For example,

Numerical Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 4

1. Following are the balance sheets of Alpha Ltd. as on March 31st, 2016, and 2017:

 Particulars 2016 â‚¹. 2017 â‚¹. 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
 Comparative Balance Sheet as on March 31, 2016, and 2017 Particulars 2016 (â‚¹) 2017 (â‚¹) Absolute Change Percentage Change I. Equity and Liabilities 1. Shareholderâ€™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 AssetsÂ 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

2. Following are the balance sheets of Beta Ltd. as on March 31st, 2016 and 2017:

 Particulars 2017 â‚¹. 2016 â‚¹. 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
 Comparative Balance Sheet as on March 31, 2016, and 2017 Particulars 2016 (â‚¹) 2017 (â‚¹) Absolute Change Percentage Change I. Equity and Liabilities 1. Shareholderâ€™s Fund Â a. Equity Share Capital 3,00,000 4,00,000 1,00,000 33.3 Â 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 Â a. Short Term Borrowings 50,000 70,000 20,000 40 Â b. Trade Payables 30,000 60,000 30,000 100 Â c. Short Term Provisions 20,000 10,000 (10,000) (50) Â 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 Â a. Fixed Assets 2,20,000 4,00,000 1,80,000 81.8 Â b. Non-current Investments 1,00,000 2,25,000 1,25,000 125 2. Current Assets Â a. Current Investments 60,000 80,000 20,000 33.3 Â b. Inventories (Stock) 90,000 1,05,000 15,000 16.6 Â c. Trade Receivables 60,000 90,000 30,000 50 Â d. Short Term Loans and Advances 85,000 1,00,000 15,000 17.65 Â 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

3. Prepare a Comparative Income Statement from the following information:

 Particulars 2016-17 â‚¹. 2015-16 â‚¹. 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 Â 80,000 60,000 Credit purchases Â 60,000 20,000 Returns inward Â 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 the office car 90,000 60,000 Tax rate 40% 50%
 Comparative Income Statement for the year ended March 31, 2016, and 2017 Particulars Note No. 2015-16 (â‚¹) 2016-17 (â‚¹) AbsoluteÂ  Change (â‚¹) 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.Â Total Revenue (1 + 2) 2,26,000 1,12,000 (1,14,000) (50.44) 4.Â 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 Â Total Expenses 2,21,000 2,52,000 31,000 14.03 5.Â Profit before Tax (3 â€“ 4) 5,000 (1,40,000) (83,000) 16.6 Â Â Â Â Â Less: Income Tax 2,500 â€“ (2,500) (100) 6.Â Profit After Tax 2,500 (1,40,000) (1,37,500) 55

Working Notes:

1.Â Calculation of Net Sales

Net Sales = Cost of Goods Sold + Gross Profit â€“ Sales Return

or, Net Sales = Purchases + Manufacturing Expenses + Change in Inventory + Gross Profit â€“ Sales Return

Net Sales (2016) = 80,000 + 20,000 +30,000 + 90,000 â€“ 4,000 = â‚¹ 2, 16,000

Net Sales (2017) = 1, 40,000 + 50,000 â€“ 60,000 â€“ 30,000 â€“ 80,000 = â‚¹ 92,000

2.Â Calculation of Finance Cost

Finance Cost = Interest on short-term loans + Interest on 10% Debentures

Finance Cost (2016) = 20,000 + 1,000 = â‚¹ 21,000

Finance Cost (2017) = 20,000 + 2,000 = â‚¹ 22,000

3.Â Calculation of Other Expenses

Other Expenses = Freight Outward + Carriage Outward + Loss on sale of the office car

Other Expenses (2016) = 10,000 + 10,000 + 60,000 = â‚¹ 80,000

Other Expenses (2017) = 20,000 + 20,000 + 90,000 = â‚¹ 1, 30,000

4. Prepare a Comparative Income Statement from the following information:

 Particulars 2015-16 â‚¹. 2016-17 â‚¹. 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 â€“ 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%

*There is a misprint in the book; this should be 2,00,000

 Comparative Income Statement for the years ended March 31, 2016, and 2017 Particulars Note Â No. 2015-16 (â‚¹) 2016-17 (â‚¹) AbsoluteÂ  Change (â‚¹) Percentage ChangeÂ 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.Â Total Revenue (1 + 2) 9,70,000 4,70,000 (5,00,000) (51.55) 4.Â 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 â€“ â€“ e. Other Expenses 30,000 40,000 10,000 33.33 Â Total Expenses 3,26,000 1,34,000 (1,92,000) 58.90 5.Â Profit before Tax (3 â€“ 4) 6,44,000 3,36,000 (3,08,000) 47.83 Â Â Â Â Â Less: Income Tax 3,22,000 1,34,400 (1,87,600) 58.26 6.Â Profit After Tax 3,22,000 2,01,600 1,20,400 37.39

Working Notes:

1.Â Calculation of Net Purchases and Change in Inventory

2.Â Calculation of Finance Cost

Finance Cost = Interest on Bank Overdraft + Interest on Debentures

Finance Cost (2016) = 5,000 + 20,000 = â‚¹ 25,000

Finance Cost (2017) = 0 + 20,000 = â‚¹ 20,000

3.Â Calculation of Other Expenses

Other Expenses = Carriage outward + other operating expenses

Other Expenses (2016) = 10,000 + 20,000 = â‚¹ 30,000

Other Expenses (2017) = 30,000 + 10,000 = â‚¹ 40,000

5. Prepare a common size statement of profit and loss of Shefali Ltd. with the help of the following information:

 Particulars 2015-16 (â‚¹) 2016-17 (â‚¹) Revenue from operations Â 6,00,000 8,00,000 Indirect expense Â 25% of gross profit 25% of gross profit Cost of revenue from operations Â 4,28,000 7,28,000 Other incomes 10,000 12,000 Income tax 30% Â 30%
 Common Size Income Statement for the years ended March 31, 2016, and 20174 Particulars Note No. 2015-16 (â‚¹) 2016-17 (â‚¹) 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.Â Total Revenue (1 + 2) 6,10,000 8,12,000 101.67 101.5 4.Â 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 Â Total Expenses 4,71,000 7,46,000 78.5 93.25 5.Â Profit before Tax (3 â€“ 4) 1,39,000 66,000 23.167 8.25 Â Â Â Â Â Less: Income Tax (41,700) (19,800) 5.35 6.Â Profit After Tax 97,300 46,200 16.22 5.775

Working Notes:

1.Â Calculation of expenses

Other Expenses = Indirect Expenses = % of Gross Profit

Gross Profit = Net SalesÂ âˆ’-Â Revenue from Operations

For 2016,Â Gross Profit =Â â‚¹(6,00,000Â âˆ’-Â 4,28,000) =Â â‚¹1,72,000

For 2017,Â Gross Profit =Â â‚¹(8,00,000Â âˆ’-Â 7,28,000) =Â â‚¹72,000

2016=1,72,000Ã—25%=â‚¹43,000

2017=72,000Ã—25%=â‚¹18,000

2016=1, 72,000Ã—25%=â‚¹43,000

2017=72,000Ã—25%=â‚¹18,000

6. Prepare a common size balance sheet from the following balance sheet of Aditya Ltd. and Anjali Ltd.:

 Particulars Aditya Ltd. â‚¹. Anjali Ltd. â‚¹. 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 Â 4,00,000 7,00,000 b) Current assets Â 6,00,000 5,00,000 Total 1,00,0000* 12,00,000

*The total liabilities side must be equal to the total assets side; therefore, it should be 10,00,000.

 Common Size Balance SheetÂ Particulars Aditya Ltd. (â‚¹) Anjali Ltd.Â  (â‚¹) % of TotalÂ Aditya Ltd. Anjali Ltd. I. Equity and Liabilities 1. Shareholderâ€™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 Â 2. Current Assets 6,00,000 5,00,000 60 41.67 Total 10,00,000 12,00,000 100 100

Concepts covered in this chapter are listed below:

• Meaning of financial analysis
• Significance of financial analysis
• Trend analysis
• Tools of financial analysis
• Limitations of financial analysis

### Conclusion

NCERT Solutions for Class 12 Accountancy Chapter 4 provides a wide range of illustrative examples, which assists the students in comprehending and learning quickly. The above-mentioned are the solutions as per the Class 12 CBSE syllabus. For more solutions and study materials of NCERT Solutions for Class 12 Accountancy, visit BYJUâ€™S or download BYJUâ€™S â€“ The Learning App for more information.

Also, explore â€“Â

NCERT Solutions for Class 12 Accountancy Part II