Question 1

Q1: List the techniques of Financial Statement Analysis.

Accepted Answer

According to Section 4.4 of the chapter, the most commonly used techniques (or tools) of financial analysis are: 1.  Comparative Statements: Also known as horizontal analysis, these statements compare financial data over different periods. 2.  Common Size Statements: Also known as vertical analysis,...

Question 2

Q10: What do you understand by analysis and interpretation of financial statements? Discuss its importance.

Accepted Answer

Meaning of Analysis and Interpretation of Financial Statements As defined in Section 4.1, 'Financial Statement Analysis' is the process of critically evaluating the financial information contained in the financial statements to understand the firm and make decisions about its operations. It involves...

Question 3

Q11: Explain how common size statements are prepared giving an example.

Accepted Answer

Common size statements are financial statements in which amounts are shown as percentages of a common base. This process converts absolute figures into relative figures, making them easy to compare. This is also known as vertical analysis. Preparation of Common Size Statements The procedure for prep...

Question 4

Q12: Following are the balance sheets of Alpha Ltd., as at March 31, 2016 and 2017. You are required to prepare Comparative Balance Sheet. | Particulars |...

Accepted Answer

Question 5

Accepted Answer

Comparative Balance Sheet of Beta Ltd. as at March 31, 2016 and 2017 | Particulars | March 31, 2016 (Rs.) | March 31, 2017 (Rs.) | Absolute Change (Increase/Decrease) (Rs.) | Percentage Change (%) | | :--- | :--- | :--- | :--- | :--- | | I. Equity and Liabilities | | | | | | 1. Shareholders' Funds |...

Question 6

Q14: Prepare Comparative Statement of profit and loss from the following information. | Particulars | 2015-16 (Rs.) | 2016-17 (Rs.) | | :--- | :--- | :---...

Accepted Answer

Working Notes: 1.  The data provided is not in the standard format of a Statement of Profit and Loss. We need to rearrange it. Revenue from Operations is not given, but Gross Profit is. We will start from there. 2.  Operating Expenses will include Wages (office), Carriage Outward, and Depreciation....

Question 7

Q15: Prepare Comparative Statement of Profit and Loss from the following information: | Particulars | 2015-16 (Rs.) | 2016-17 (Rs.) | | :--- | :--- | :---...

Accepted Answer

Working Notes: For 2015-16:    Revenue from Operations (Sales): 9,60,000    Cash Purchases = 80% of 1,50,000 = 1,20,000    Total Purchases = 1,50,000 (Credit) + 1,20,000 (Cash) = 2,70,000    Net Purchases = 2,70,000 - 4,000 (Returns) = 2,66,000    Closing Stock = 150% of 30,000 = 45,000    Cost of R...

Question 8

Q16: Prepare a Common size statement of profit and loss of Shefali Ltd. with the help of following information: | Particulars | 2015-16 (Rs.) | 2016-17 (Rs...

Accepted Answer

Working Notes: For 2015-16:    Gross Profit = Revenue from operations - Cost of revenue from operations     = 6,00,000 - 4,28,000 = 1,72,000    Indirect Expense = 25% of 1,72,000 = 43,000    Profit before Tax = Gross Profit + Other Income - Indirect Expense     = 1,72,000 + 10,000 - 43,000 = 1,39,00...

Question 9

Q17: Prepare a Common Size balance sheet from the following balance sheet of Aditya Ltd., and Anjali Ltd.: | Particulars | Aditya Ltd. (Rs.) | Anjali Ltd....

Accepted Answer

Question 10

Q2: Distinguish between Vertical and Horizontal Analysis of financial data.

Accepted Answer

Question 11

Q3: State the meaning of Analysis and Interpretation.

Accepted Answer

As explained in Section 4.1, 'Analysis' and 'Interpretation' are two complementary parts of financial statement analysis.    Analysis: The term 'analysis' means the simplification of financial data by methodical classification. It involves breaking down the complex information contained in financial...

Question 12

Q4: State the importance of Financial Analysis?

Accepted Answer

Financial analysis is of great importance to various users as it helps in identifying the financial strengths and weaknesses of a firm. Its significance, as described in Section 4.2, can be understood from the perspective of different stakeholders:    For Finance Manager: It helps in making rational...

Question 13

Q5: What are Comparative Financial Statements?

Accepted Answer

Comparative Financial Statements, as explained in Section 4.5, are statements that show the profitability and financial position of a firm for different periods of time in a comparative format. They typically apply to the two main financial statements: the Statement of Profit and Loss and the Balanc...

Question 14

Q6: What do you mean by Common Size Statements?

Accepted Answer

Common Size Statements, as described in Section 4.6, are financial statements where each item is expressed as a percentage of a common base item. This type of analysis is also known as 'vertical analysis' or 'component percentage statement'.    In a Common Size Statement of Profit and Loss, each ite...

Question 15

Q7: Describe the different techniques of financial analysis and explain the limitations of financial analysis.

Accepted Answer

Financial analysis is the process of evaluating the financial information in financial statements to make decisions. The most common techniques and limitations are as follows: Techniques of Financial Analysis (as per Section 4.4): 1.  Comparative Statements: These statements present financial data f...

Question 16

Q8: Explain the usefulness of trend percentages in interpretation of financial performance of a company.

Accepted Answer

Trend analysis, or the calculation of trend percentages, is a valuable technique for interpreting the financial performance of a company over a series of years. Its usefulness, as mentioned in Section 4.4, lies in providing a long-run view of the business, which can highlight basic changes and signi...

Question 17

Q9: What is the importance of comparative statements? Illustrate your answer with particular reference to comparative income statement.

Accepted Answer

Comparative statements are a crucial tool of financial analysis because they present financial data from different accounting periods in a side-by-side format, allowing for easy comparison. The primary importance of these statements lies in their ability to show the direction of change, the trend of...

Question 18

Q1: Fill in the blanks with appropriate word(s): 1. Analysis simply means-data. 2. Interpretation means-data. 3. Comparative analysis is also known as - a...

Accepted Answer

1. Analysis simply means simplification of financial data. 2. Interpretation means explaining the meaning and significance of the data. 3. Comparative analysis is also known as horizontal analysis. 4. Common size analysis is also known as vertical analysis. 5. The analysis of actual movement of mone...

Question 19

Q1: The financial statements of a business enterprise include: (a) Balance sheet (b) Statement of Profit and loss account (c) Cash flow statement (d) All...

Accepted Answer

(d) All the above As stated in the chapter summary, an annual report contains the basic financial statements, which are the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement.

Question 20

Q2: The most commonly used tools for financial analysis are: (a) Horizontal analysis (b) Vertical analysis (c) Ratio analysis (d) All the above

Accepted Answer

(d) All the above Horizontal analysis (like comparative statements), vertical analysis (like common-size statements), and ratio analysis are all listed in Section 4.4 as commonly used techniques of financial analysis.

Particulars	2015-16 (Rs.)	2016-17 (Rs.)
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%

Particulars	2015-16 (Rs.)	2016-17 (Rs.)
Revenue from operations	6,00,000	8,00,00
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%

Particulars	Aditya Ltd. (Rs.)	Anjali Ltd. (Rs.)
I. Equity and Liabilities
1. Shareholder's Funds
a) Equity share capital	6,00,000	8,00,000
b) Reserves and surplus	3,00,000	2,50,000
2. Current liabilities	1,00,000	1,50,000
Total	10,00,000	12,00,000
II. Assets
1. Non current assets
a) Fixed assets	4,00,000	7,00,000
2. Current assets	6,00,000	5,00,000
Total	10,00,000	12,00,000

Particulars	2015-16 (Rs.)	2016-17 (Rs.)
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
Return inward	8,000	4,000
Gross profit	(30,000)	90,000
Carriage outward	20,000	10,000
Machinery	3,00,000	2,00,000
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%

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