2nd Puc Accountancy Chapter 9 Analysis of Financial Statements Part – 2 Notes | ದ್ವಿತೀಯ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಅಧ್ಯಾಯ -‌ 9 ನೋಟ್ಸ್

ದ್ವಿತೀಯ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಅಧ್ಯಾಯ -‌ 9 ನೋಟ್ಸ್ 2nd Puc Accountancy Chapter 9 Analysis of Financial Statements Notes Question Answer Mcq Pdf Karnataka Kannada 2nd Puc Accountancy Chapter 9 Analysis of Financial Statements Part – 2 Notes analysis of financial statements class 12 Notes 2022 analysis of financial statements class 12 practical problems analysis of financial statements class 12 chapter 9 solutions Kseeb Solution For Class 12 Chapter 9 Notes 2022

2nd Puc Accountancy Chapter 9 Notes

2nd Puc Accountancy Chapter 9 Analysis of Financial Statements Part - 2 Notes | ದ್ವಿತೀಯ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಅಧ್ಯಾಯ -‌ 9 ನೋಟ್ಸ್
2nd Puc Accountancy Chapter 9 Analysis of Financial Statements Part – 2 Notes

2nd Puc Accountancy Chapter 9 Notes

Short Questions

Q1. State the meaning of Analysis and Interpretation.

A: It 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.

Q2 State the importance of Financial Analysis.


A: 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 analyzed. There are various methods that help in analyzing 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 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, drafting plans and also establishing a robust and effective control mechanism

Q3. What are Comparative Financial Statements?

A: Comparative financial statements refer to statements that 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:

1. Comparative Income Statement

2. Comparative Balance Sheet

Q4. List the techniques of Financial Statement Analysis.

A: The most commonly used techniques are:

1. Common Size Financial Statements

2. Trend Analysis

3. Comparative Financial Statements

4. Cash Flow Statement

5. Fund Flow Statement

6. Ratio Analysis

Q5. Distinguish between Vertical and Horizontal Analysis of financial data.

Basis of ComparisonHorizontal AnalysisVertical Analysis
MeaningIt is the comparative evaluation of a financial statement of two or more periods, for calculating relative and absolute variances for every line of the itemIt 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.
PurposeTo specify changes in financial performance between two comparable accounting periodsTo compare a financial item as a percentage of the base figure
Comparison ofIntra-firm comparisonBoth intra – firm and inter-firm comparison
UsefulnessThe growth or decline of an item is represented hereIs useful in predicting and determining the relative proportion of an item in the financial statement to a common item in the financial statement

Q6. What do you mean by Common Size Statements?

A: 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 are:

1. Common Size Income Statements

2. Common Size Balance Sheet

Karnataka 2nd PUC Accountancy Chapter 9 Analysis of Financial Statements Notes

Long Questions And Practical Problems With Solutions

Q1. Explain the usefulness of trend percentages in the interpretation of the financial performance of a company.

A: Trend analysis is a form of analyzing 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.

Importance of trend analysis:

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

2. Trends are expressed as percentages that 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.

Q2. What is the importance of comparative statements? Illustrate your answer with particular reference to the comparative income statement.

A: 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 analyzing 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 in meeting the desired target.

Q3. 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 name, including investing, operating, and financing activities during an accounting period. This helps in analyzing 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 base year and the rest years are expressed as a percentage of the base year’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 as Vertical Analysis.

It has 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 the qualitative aspect 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 not reliable as it does not take the current market value of items.

5. It involves personal biases and judgments 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

Q4. 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 analyzed. There are various methods that help in analyzing financial statements and make it 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

Q5. 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 in 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 as vertical analysis.

The following columns are present:

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:

Class 12 Chp 4-1

Following example will help get a better understanding of the preparation

Class 12 Chp 4-2
Class 12 Chp 4-3

Working Note:

Class 12 Chp 4-4

For example,

Class 12 Chp 4-5

Q6. Following are the balance sheets of Alpha Ltd. as of March 31st, 2016 and 2017:

Particulars2016
₹.
2017
₹.
I. Equity and Liabilities
Equity share capital2,00,0004,00,000
Reserves and surplus1,00,0001,50,000
Long-term borrowings2,00,0003,00,000
Short-term borrowings50,00070,000
Trade payables30,00060,000
Short-term provisions20,00010,000
Other current liabilities20,00030,000
Total6,20,00010,20,000
II. Assets
Fixed assets2,00,0005,00,000
Non-current investments1,00,0001,25,000
Current investments60,00080,000
Inventories1,35,0001,55,000
Trade receivables60,00090,000
Short-term loans and advances40,00060,000
Cash at bank25,00010,000
Total6,20,00010,20,000

Comparative Balance Sheet as on March 31, 2016, and 2017

Particulars2016(₹)2017(₹)Absolute ChangePercentage Change
I. Equity and Liabilities
1. Shareholder’s Fund
a. Equity Share Capital2,00,0004,00,0002,00,000100
b. Reserves and Surplus1,00,0001,50,00050,00050
2. Non-Current Liabilities
a. Long-Term Borrowings2,00,0003,00,0001,00,00050
3. Current Liabilities
a. Short-Term Borrowings50,00070,00020,00040
b. Trade Payables30,00060,00030,000100
c. Short-Term Provisions20,00010,000(10,000)(50)
d. Other Current Liabilities20,00030,00010,00050
Total6,20,00010,20,0004,00,00064.5
II. Assets
1. Non-Current Assets
a. Fixed Assets2,00,0005,00,0003,00,000150
b. Non-Current Investments1,00,0001,25,00025,00025
2. Current Assets 
a. Current Investments60,00080,00020,00033.3
b. Inventories1,35,0001,55,00020,00014.8
c. Trade Receivables60,00090,00030,00050
d. Short Term Loans and Advances40,00060,00020,00050
e. Cash and Cash Equivalents25,00010,000(15,000)(60)
Total6,20,00010,20,0004,00,00064.5

Q7. Following are the balance sheets of Beta Ltd. on March 31st, 2016, and 2017:

Particulars2017
₹.
2016
₹.
I. Equity and Liabilities
Equity share capital4,00,0003,00,000
Reserves and surplus1,50,0001,00,000
Loan from IDBI3,00,0001,00,000
Short-term borrowings70,00050,000
Trade payables60,00030,000
Short-term provisions10,00020,000
Other current liabilities1,10,0001,00,000
Total11,00,0007,00,000
II. Assets
Fixed assets4,00,0002,20,000
Non-current investments2,25,0001,00,000
Current investments80,00060,000
Stock1,05,00090,000
Trade receivables90,00060,000
Short-term loans and advances1,00,00085,000
Cash and cash equivalents1,00,00085,000
Total11,00,0007,00,000

Comparative Balance Sheet as on March 31, 2016, and 2017

Particulars2016(₹)2017(₹)Absolute ChangePercentage Change
I. Equity and Liabilities
1. Shareholder’s Fund
 a. Equity Share Capital3,00,0004,00,0001,00,00033.3
 b. Reserves and Surplus1,00,0001,50,00050,00050
2. Non-Current Liabilities
a. Long Term Borrowings(Loan from IDBI)1,00,0003,00,0002,00,000200
3. Current Liabilities
 a. Short-Term Borrowings50,00070,00020,00040
 b. Trade Payables30,00060,00030,000100
 c. Short-Term Provisions20,00010,000(10,000)(50)
 d. Other Current Liabilities1,00,0001,10,00010,00010
Total7,00,00011,00,0004,00,00057.14
II. Assets
1. Non-Current Assets
 a. Fixed Assets2,20,0004,00,0001,80,00081.8
 b. Non-Current Investments1,00,0002,25,0001,25,000125
2. Current Assets
 a. Current Investments60,00080,00020,00033.3
 b. Inventories (Stock)90,0001,05,00015,00016.6
 c. Trade Receivables60,00090,00030,00050
 d. Short Term Loans and Advances85,0001,00,00015,00017.65
 e. Cash and Cash Equivalents85,0001,00,00015,00017.65
Total7,00,00011,00,0004,00,00057.14

Q8. Prepare Comparative Income Statement from the following information:

Particulars2016-17
₹.
2015-16
₹.
Freight Outward20,00010,000
Wages (office)10,0005,000
Manufacturing Expenses50,00020,000
Stock adjustment(60,000)30,000
Cash purchases 80,00060,000
Credit purchases 60,00020,000
Returns inward 8,0004,000
Gross profit(30,000)90,000
Carriage outward20,00010,000
Machinery3,00,0002,00,000
Charge 10% depreciation on machinery10,0005,000
Interest on short-term loans20,00020,000
10% debentures20,00010,000
Profit on sale of furniture20,00010,000
Loss on sale of the office car90,00060,000
Tax rate40%50%

Comparative Income Statement for the year ended March 31, 2016 and 2017

ParticularsNote No.2015-16(₹)2016-17(₹)Absolute Change
(₹)
PercentageChange
1. Revenue from Operations2,16,00092,000(1,24,000)(57.4)
2. Other Income10,00020,00010,000100
3. Total Revenue (1 + 2)2,26,0001,12,000(1,14,000)(50.44)
4. Expenses
a. Purchases of Stock-in-Trade80,0001,40,00060,00075
b. Change in Inventories30,000(60,000)(90,000)(300)
c. Employee Benefit Expenses5,00010,0005,000100
d. Finance Costs21,00022,0001,0004.54
e. Depreciation and Amortisation Expenses5,00010,0005,000100
f. Other Expenses80,0001,30,00050,00062.5
 Total Expenses2,21,0002,52,00031,00014.03
5. Profit before Tax (3 – 4)5,000(1,40,000)(83,000)16.6
     Less: Income Tax2,500(2,500)(100)
6. Profit After Tax2,500(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 the 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

Q9. Prepare Comparative Income Statement from the following information:

Particulars2015-16
₹.
2016-17
₹.
Manufacturing expenses35,00080,000
Opening stock30,00060% of closing stock
Sales9,60,0004,50,000
Returns outward4,000 (out of credit purchase)6,000 (out of cash purchase)
Closing stock150% of the opening stock1,00,000
Credit purchases1,50,000150% of cash purchase
Cash purchases80% of credit purchases40,000
Carriage outward10,00030,000
Building1,00,0002,00,000
Depreciation on building20%10%
Interest on bank overdraft5,000
10% debentures2,00,00020,00,000*
Profit on sale of copyright10,00020,000
Loss on sale of personal car10,00020,000
Other operating expenses20,00010,000
Tax rate50%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

ParticularsNote No.2015-16(₹)2016-17(₹)Absolute Change
(₹)
PercentageChange 
1. Revenue from Operations9,60,0004,50,000(5,10,000)(53.13)
2. Other Income10,00020,00010,000100
3. Total Revenue (1 + 2)9,70,0004,70,000(5,00,000)(51.55)
4. Expenses
a. Purchases of Stock-in-Trade2,66,00094,000(1,72,000)(64.7)
b. Change in Inventories(15,000)(40,000)(55,000)(366.7)
c. Finance Costs25,00020,000(5,000)(20)
d. Depreciation and Amortisation Expenses20,00020,000
e. Other Expenses30,00040,00010,00033.33
 Total Expenses3,26,0001,34,000(1,92,000)58.90
5. Profit before Tax (3 – 4)6,44,0003,36,000(3,08,000)47.83
     Less: Income Tax3,22,0001,34,400(1,87,600)58.26
6. Profit After Tax3,22,0002,01,6001,20,40037.39

Working Notes:

1. Calculation of Net Purchases and Change in Inventory

Class 12 Chp 4-6

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

Q10. Prepare a Common size statement of profit and loss of Shefali Ltd. with the help of the following information:

Particulars2015-16
(₹)
2016-17
(₹)
Revenue from operations 6,00,0008,00,000
Indirect expense 25% of gross profit25% of gross profit
Cost of revenue from operations 4,28,0007,28,000
Other incomes10,00012,000
Income tax30% 30%

Common Size Income Statement for the years ended March 31, 2016, and 2017

Particularsnote no.2015-16(₹)2016-17(₹)Percentage ofSales
2015-162016-17
1. Revenue from Operations6,00,0008,00,000100100
2. Other Income10,00012,0001.671.5
3. Total Revenue (1 + 2)6,10,0008,12,000101.67101.5
4. Expenses
a. Cost of Revenue from Operations (COGS)4,28,0007,28,00071.3391
b. Other Expenses43,00018,0007.172.25
 Total Expenses4,71,0007,46,00078.593.25
5. Profit before Tax (3 – 4)1,39,00066,00023.1678.25
     Less: Income Tax(41,700)(19,800)5.35
6. Profit After Tax97,30046,20016.225.775

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

Q11. Prepare a Common Size balance sheet from the following balance sheet of Aditya Ltd. and Anjali Ltd.:

ParticularsAditya Ltd.
₹.
Anjali Ltd.
₹.
I. Equity and Liabilities
a) Equity share capital6,00,0008,00,000
b) Reserves and surplus3,00,0002,50,000
c) Current liabilities1,00,0001,50,000
Total10,00,00012,00,000
II. Assets
a) Fixed assets 4,00,0007,00,000
b) Current assets 6,00,0005,00,000
Total1,00,000012,00,000

The total of Liabilities side must be equal to the total of Assets side, therefore, it should be 10, 00,000.

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 Capital6,00,0008,00,0006066.67
b. Reserves and Surplus3,00,0002,50,0003020.83
2. Current Liabilities1,00,0001,50,0001012.5
Total10,00,00012,00,000100100
II. Assets
1. Non-Current Assets
a. Fixed Assets4,00,0007,00,0004058.33
 2. Current Assets6,00,0005,00,0006041.67
Total10,00,00012,00,000100100

FAQ:

1. What is Horizontal Analysis

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

2. What is Vertical Analysis

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.

3. State the meaning of Analysis and Interpretation.

It 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 are all about presenting financial data which is self-explanatory and easy to understand.

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