Analysis of Financial Statements

This page contains the CBSE accountancy class 12 chapter Analysis of Financial Statements. You can find the questions/answers/solutions for the chapter 9 of CBSE class 12 accountancy in this page. So is the case if you are looking for CBSE class 12 Commerce related topic Analysis of Financial Statements. This page contains theretical questions, Test Your Understanding, Do It Yourself, Short Answers and Long Answers. If you’re looking for Numerical Questions Solutions, you can find them at Numerical Questions Solutions

Test your Understanding – I
Fill in the blanks with appropriate word(s):
1.
Analysis simply means data. (Simplifying)
2.
Interpretation means data. (explaining the impact of)
3.
Comparative analysis is also known as analysis. (horizontal)
4.
Common size analysis is also known as analysis. (vertical)
5.
The analysis of actual movement of money inflow and outflow in an organisation is called analysis. (cash flow)

Do it yourself – I
From the following particulars, prepare comparative statement of profit and loss of Narang Colours Ltd. for the year ended March 31, 2016 and 2017:
Particulars
Note
No.
2016-17
2015-16
1. Revenue from operations
40,00,000
35,00,000
2. Other income
50,000
50,000
3. Cost of material consumed
15,00,000
18,00,000
4. Changes in inventories of finished goods
10,000
(15,000)
5. Employee benefit expenses
2,40,000
2,40,000
6. Depreciation and amortisation
25,000
22,500
7. Other expenses
2,66,000
3,02,000
8. Profit
20,09,000
14.27,300
Note to Accounts
Particulars
2016-17
2015-16
1. Other expenses
i) Power and fuel
36,000
40,000
ii) Carriage outwards
7,500
9,500
iii) License fees
2,500
2,500
iv) Selling and distribution
1,70,000
1,90,000
v) Provision of tax
50,000
60,000
2,66,000
3,02,000
Comparative Statement of Profit and Loss of Narang Colours Ltd. for the years ended March 31, 2016 and 2017
Particulars
Note
No.
2015-16
2016-17
Absolute Change
Absolute Change
%
I. Revenue from operations
35,00,000
40,00,000
5,00,000
14.3
II. Add: Other Income
50,000
50,000
0
0
III. Total Revenue (I + II)
35,50,000
40,50,000
5,00,000
14.1
IV. Expenses
Cost of material consumed
18,00,000
15,00,000
(3,00,000)
(16.7)
Changes in inventory of finished goods
(15,000)
10,000
25,000
(166.7)
Employee benefit expenses
2,40,000
2,40,000
0
0
Depreciation and amortisation
22,500
25,000
2,500
11.1
Other expenses
3,02,000
2,66,000
(36,000)
(11.9)
Total Expenses
23,49,500
20,41,000
(3,08,500)
(13.1)
V. Profit Before Tax (III – IV)
12,00,500
20,09,000
(8,08,500)
67.3
VI. Profit
14,27,300
20,09,000
5,81,700
40.7

Do it yourself – II
From the Balance Sheets for the year ended March 31, 2016 and 2017, prepare the comparative Balance Sheet of Omega Chemicals Ltd.:
₹ in Lakhs
Particulars
Note
No.
2017
2016
I. Equity and Liabilities
1) Shareholders’ Fund
a) Share capital
5
10
b) Reserve and Surplus
3
2
2) Non-Current Liabilties
Long-term borrowings
5
8
3) Current Liabilties
Trade Payable
2
4
Total
15
24
II. Assets
1) Non-Current Assets
a) Fixed Assets
– Tangible Assets
8
14
– Intangible Assets
2
3
2) Current Assets
a) Inventories
4
5
b) Cash and cash equivalents
1
2
Total
15
24
Note: The assets section numbers are interchanged in the text book. So, it is considered in the correct order so that the balance sheet totals are matched.
Comparative Balance Sheet of Omega Chemicals Ltd. as at March 31, 2016 and March 31, 2017
₹ in Lakhs
Particulars
March 31, 2016
March 31, 2017
Absolute Change
Absolute Change
%
I. Equity and Liabilities
1) Shareholders’ Fund
a) Share capital
10
5
(5)
(50)
b) Reserve and Surplus
2
3
1
50
2) Non-Current Liabilties
Long-term borrowings
8
5
(3)
(37.5)
3) Current Liabilties
Trade Payable
4
2
(2)
(50)
Total
24
15
(9)
(37.5)
II. Assets
1) Non-Current Assets
a) Fixed Assets
– Tangible Assets
14
8
(6)
(42.85)
– Intangible Assets
3
2
(1)
(33.3)
2) Current Assets
a) Inventories
5
4
(1)
(20)
b) Cash and cash equivalents
2
1
(1)
(50)
Total
24
15
(9)
(37.5)

Do it yourself – III
Prepare common size balance sheet of Raj Co. Ltd. as at March 31, 2016 and March 31, 2017 from the given information:
Particulars
2017
2016
I. Equity and Liabilities
1. Shareholders’ Fund
a) Share capital
20,00,000
15,00,000
b) Reserve and surplus
3,00,000
4,00,000
2. Non-current liabiliteis
Long-term borrowings
9,00,000
6,00,000
3. Current liabiliteis
Trade payables
3,00,000
2,00,000
Total
35,00,000
27,00,000
II. Assets
1. Non-current assets
a) Fixed assets
– Tangible assets
20,00,000
15,00,000
– Intangible assets
9,00,000
6,00,000
2) Current assets
– Inventories
3,00,000
4,00,000
– Cash and cash equivalents
3,00,000
2,00,000
Total
35,00,000
27,00,000
Common Size Balance Sheet of Raj Co. Ltd. as at March 31, 2016 and March 31, 2017
Particulars
Absolute Amounts
Percentage of Total Assets
March 31, 2016
(₹)
March 31, 2017
(₹)
March 31, 2016
(%)
March 31, 2017
(%)
I. Equity and Liabilities
1. Shareholders’ Fund
a) Share capital
15,00,000
20,00,000
55.56
57.14
b) Reserve and surplus
4,00,000
3,00,000
14.81
8.57
2. Non-current liabiliteis
Long-term borrowings
6,00,000
9,00,000
22.22
25.71
3. Current liabiliteis
Trade payables
2,00,000
3,00,000
7.41
8.57
Total
27,00,000
35,00,000
100
100
II. Assets
1. Non-current assets
a) Fixed assets
– Tangible assets
15,00,000
20,00,000
55.56
57.14
– Intangible assets
6,00,000
9,00,000
22.22
25.71
2) Current assets
– Inventories
4,00,000
3,00,000
14.81
8.57
– Cash and cash equivalents
2,00,000
3,00,000
7.41
8.57
Total
27,00,000
35,00,000
100
100

Test your Understanding – II
Choose the right answer :
1.
1. The financial statements of a business enterprise include:
(a)
Balance sheet
(b)
Statement of Profit and loss account
(c)
Cash flow statement
(d)
All the above ✔
2.
The most commonly used tools for financial analysis are:
(a)
Horizontal analysis
(b)
Vertical analysis
(c)
Ratio analysis
(d)
All the above ✔
3.
An Annual Report is issued by a company to its:
(a)
Directors
(b)
Auditors
(c)
Shareholders ✔
(d)
Management
4.
Balance Sheet provides information about financial position of the enterprise:
(a)
At a point in time ✔
(b)
Over a period of time
(c)
For a period of time
(d)
None of the above
5.
Comparative statements are also known as:
(a)
Dynamic analysis
(b)
Horizontal analysis ✔
(c)
Vertical analysis
(d)
External analysis

Test your Understanding – III
State whether each of the following is True or False :
(a)
The financial statements of a business enterprise include cash flow statement. (✔ True)
(b)
Comparative statements are the form of horizontal analysis. (✔ True)
(c)
Common size statements and financial ratios are the two tools employed in vertical analysis. (✔ True)
(d)
Ratio analysis establishes relationship between two financial statements. (✔ True)
(e)
Ratio analysis is a tool for analysing the financial statements of any enterprise. (✔ True)
(f)
Financial analysis is used only by the creditors. (❌ False)
(g)
Statement of profit and loss account shows the operating performance of an enterprise for a period of time. (✔ True)
(h)
Financial analysis helps an analyst to arrive at a decision. (✔ True)
(i)
Cash Flow Statement is a tool of financial statement analysis. (✔ True)
(j)
In a Common size statement each item is expressed as a percentage of some common base. (✔ True)

Short Answer Questions
1. List the techniques of Financial Statement Analysis.
The following is the list of the techniques of Financial Statement Analysis.
1.
Comparative Financial Statements
2.
Common Size Financial Statements
3.
Trend Analysis
4.
Ratio Analysis
5.
Cash Flow Analysis
6.
Fund Flow Analysis
2. Distinguish between Vertical and Horizontal Analysis of financial data.
Basis
Horizontal Analysis
Vertical Analysis
1. Meaning
It refers to the comparision of an item of a financial statement of a given period with the same item in the base accounting period
It refers to the comparision of an item of a financial statement to the common item in the same financial statement.
2. No of Financial Statements
Needs Financial statements from two or more accounting periods.
Needs Financial statement of a given period.
3. Purpose
To determine the change of an item during an accounting period.
To determine the proportion of an item(s) to the common item in a given accounting period.
4. Expression of change
Expressed either as an absolute figure or as a percentage or both.
Expressed either as a ratio or as a percentage.
5. Usage
To find the growth or decline of the item.
To predect the future relative proportion of an item to the common item.
6. Scope
Intra-firm comparisons over different accounting periods.
Intra-firm comparisons over different accounting periods or Inter-firm comparisons over same accounting period or differnt accounting periods.
3. State the meaning of Analysis and Interpretation.
Both Analysis and Interpretation are commonly and collectively referred to as financial analysis.
The term analysis means simplification of financial data by methodical classification given in the financial statements.
The term interpretation means explaining the meaning and significance of the data.
Both analysis and interpretaion are complimentary to each other. Analysis is useless without interpretation and interpretation without analysis is difficult or even impossible.
4. State the importance of Financial Analysis?
The following is the importance of Financial Analysis.
1.
It helps in determination of the continuity of the
operating policies
investment values of the business
credit ratings and
testing the efficiency of the operations.
2.
It helps in constant review of the actual financial operations of the firm to analyze the causes of major deviations. This helps in taking corrective measures, if required.
3.
It helps to find whether the resources of the firm are used most efficiently and also to find whether the firm’s financial condition is sound or not.
4.
To measure the success of company’s operations, appraising the individual’s performance and evaluating the system of internal control.
5.
To find about whether the company is able to meet its short-term obligations and whether it’ll continue to do so in the future.
6.
It helps in knowing the liquity position of the firm.
7.
It helps to find about
the long-term solvency
survival
profitability
and cash flow.
8.
It helps to know the efficiency of the management.
9.
It provides the details about the present business and economic conditions which in-turn help the government to decide on
the price regulations
taxation
and other similar purposes.

5. What are Comparative Financial Statements?
The statements showing the profitability and financial profitability and financial position of a firm for different periods of time in a comparative form to give an idea about the position of two or more periods are known as comparative statements. These are usually in the form of balance sheet and statement of profit and loss prepared in comparative form.
To qualify for comparison the same accounting principles should have been used while preparing these statements. If the same accounting principles are not used, the deviation in the use fo accounting principles should be mentioned as a footnote.
The comparative figures indicate the trend and direction of financial position and operating results.
This analysis is also known as horizontal analysis.
6. What do you mean by Common Size Statements?
The statements which indicate the relationship of different items of a financial statement with a common item by expressing each item as a percentage of that common item is known as Common Size Statement.
The percentage calculated in the common size statements can be easily compared with the results of corresponding percentages of the previous year or of some other firm. This is possible as these numbers are brought to common base.
These statements can also be used to compare the operating and financing characteristics of two companies of different size in the same industry.
So, these statements are useful both in intra-firm comparisons over different years and also in making inter-firm comparisons for the same year or for several years.
This analysis is also called as vertical analysis

Long Answer Questions
1. Describe the different techniques of financial analysis and explain the limitations of financial analysis.
The following are the different techniques of financial analysis.
1. Comparative Statements: The comparative statements show the profitability and financial position of a firm for different periods of time in a comparative form. As the data is shown in a comparative form it gives an idea about the position of two or more periods. Usually the balance sheet as well as the statement of profit and loss are prepared in a comparative form. They help us to compare the financial statements of the same firm over a number of accounting periods against a financial statement of a base accounting period. The change in the financial items is represented both as an absolute and percentage. So, they give us an idea about the relative efficiency of the business. Comparative statement analysis is also called as horizontal analysis.
2. Common Size Statements: The common size statements show the relationship of different items of a financial statement with a common item (such as revenue from operations, balance sheet total etc) by expressing each item as a percentage of that common item. The percentage calculated using this method can be easily compared with the results of corresponding percentages of the previous year or some other firm, as the numbers are brought to the common base. The common size statements can also be used to compare the operating and financing characteristics of two companies of different sizes in the same industry. So, these are used for intra-firm comparisons over different years and can also be used for inter-firm comparisons for the same year or different years. This analysis is also known as vertical analysis
3. Trend Analysis: Trend analysis is a technique to study the operational results and financial position over a series of years. In this, the previous year’s data is used and trend analysis is done to observe the percentage changes over time in the selected data. This trend percentage is the percentage relationship where-in each item in different years bear to the same item in the base year. Trend analysis plays an important role to point to basic changes in the nature of the business. The trend analysis gives the rising or falling or remaining relatively constant trend in a particular ratio. This gives an idea about any underlying problem or an idea about whether the management is good or poor.
4. Ratio Analysis: Ratio Analysis projects significant relationship that exists between the various items of a balance sheet and the staement of profit and loss of a business. It measures the comparative significance of the idividual items of the financial statements. It is possible to assess
the profitability
solvency
and efficiency
of a business using the ratio analysis.
5. Cash Flow Analysis: Cash flow analysis refers to the analysis of actual movement of cash into and out of an organisation. The flow of cash into the business is called as cash inflow or positive cash flow and the flow of cash out of the business is called as cash outflow or negative cash flow. The difference between inflow and outflow of cash is the net cash flow. Cash flow statement shows the sources of cash receipts and also the purposes for which payments are maded. So, it projects the manner in which the cash has been received and has been utilised during an accounting period. Thus it gives the summary of the cuases that contributed to the changes in cash position of a business enterprise between dates of two balance sheets.
The following are the limitations of the financial analysis:
1.
Ignores Price Level Changes: It does not consider the price level changes for different items that might occur over different years. So, the comparison is not done among the real price figures. To summarise, it does not take into account the price level changes.
2.
Misleading When they are analyzed without the knowledge of the accounting procedure followed by a firm, they could be misleading and lead to wrong interpretation.
3.
Limited Scope: Financial analysis is just a study of the reports of the company.
4.
Consideration of only Moneytary Aspects: As the financial statements project only the monetary information, other non-monetary aspects like
growth prospects
non-operational efficiency
managerial efficiency
are not reflected.
5.
Not a true reflection of current position: As the financial statements are prepared on the basis of accounting concepts and conventions they do not reflect the curent position of the business.
6.
Biased: Financial statements are the outcome of
recorded facts
accounting concepts and conventions
personal judgements
made in different situations by the accountants. So, they involve a lot of bias and hence the financial analysis done may not be realistic.
7.
Unsuitable for Comaprisons: When preparing the financial statements, the accountants rely on different accounting techniques based on their personal judgements. So, the financial statements of different firms prepared by different accountants are not comparable.

2. Explain the usefulness of trend percentages in interpretation of financial performance of a company.
Trend analysis is used to study the operational results and financial position over a series of years. In this, a given year’s data is taken as base, and the percentage of changes in the selected data over a period of time is observed. Trend analysis is useful in pointing out the basic changes in the nature of the business.
The usefulness of trend analysis in interpretation of financial performance of a company can be summarised as follows:
1.
Helps in future trend forecasting: The trend percentages calculated in the trend analysis can be interpreted and conclusions can be drawn about the future trend of the business.
2.
Percentage Terms: As the items are expressed in percentages, it is easier to study and complete the analysis in relatively short time.
3.
User Friendly: Trend analysis requires the items to be expressed in percentages. As the percentages are easier to study, trend analysis has becocme the most popular tool for the analysis of the financial statements to determine the financial performance and operational efficiency of the firm. A person, even without in-depth and sophisticated accounting expertise, can analyze the trend analysis percentages.
4.
Depicts the Big Picture: The trend analysis is aimed at providing a big picture of
the financial performance
viability
and operational efficiency
of a business. Even financial data spanning over a number of years can be easily presented. So, the trend analysis has become more popular and commonly adopted by the firms as compared to other tools of financial analysis.

3. What is the importance of comparative statements? Illustrate your answer with particular reference to comparative income statement.
The importance of comparative statements is as follows:
1.
Simplified Presentation: The financial statements present the data in simplied form. As the year-wise/firm-wise data is for the same items and as it is presented together and side-by-side, the comparative statements makes the presentation clear and the data can be compared easily and conclusions can be drawn from both intra-firm or inter-firm comparisons.
2.
Makes it easy to draw conclusions: The comparative statements are easy to study and eliminate ambiguity. This enables the analysts to draw conclusions quickly and easily.
3.
Easier Forecast: Managers use the comparative statements to analyze the profitability and operational efficiency of the business during different accounting periods. This will help them to detect any trend and help in forecasting. Based on that, they make decisions regarding the planning and implement various policy measures.
4.
Detect Problems: Any existing problems can be easily detected, when the financial statements of two or more years are compared. By comparing the financial statements, we can detect whether the figures for any item have increased or decreased or remained constant. Thus the comparative statements help the analysts to easily detect any underlying problem and exercise various corrective measures to put the problem under control so that it meets the plan.
Illustration with particular reference to comparative income statement:
1.
Simplified Presentation: The various items like revenue from operations, expenses etc for different accounting periods of the same firm or for the same or different accounting periods of differnet firms can be presented together sid-by-side in the most simplified form.
2.
Makes it easy to draw conclusions: The revenue from operations or expenses are presented side by side and it helps to observe any increasing/decreasing trend and there by draw conclusions.
3.
Easier Forecast: The profits can be compared and conclusions can be drawn regarding profitability. Similarly operational expenses agaist revenue can be compared and operational efficiencies can be determined. This will help the managers to forcast the tends and take corrective measures.
4.
Detect Problems: If there is a lot of increase in any expense, it can be detected from the huge increase in percentage and this will help the managers to take corrective measures to put the problem under control and ensure that the corresponding expenses won’t go beyond the amount planned for.
4. What do you understand by analysis and interpretation of financial statements? Discuss its importance.
Financial statement analysis is a process of critical evaluation of the financial information presented in the financial statement. The purpose is to understand and take decisions with respect to the operations of the firm. It studies the relationship among various financial facts and figures as given in a set of financial statement and then interprets them to get an insight into the profitability and operational efficiences of the firm to assess its financial health and future prospects.
Financial analysis includes both analysis and interpretation. The term analysis refers to the simplification of financial data by methodical classification given in the financial statements. Interpretation means explaining the meaning and significance of the data. These two are complimentary to each otehr. Analysis is useless without interpretation and interpretation without analysis is difficult or even impossible.
Discussion of Importance of analysis and interpretation of financial statements:
Financial analysis is carried out with an aim to identify the financial strengths and weaknesses of the firm by properly establishing relationships between various items of the balance sheet and the statement of profit and loss. It can be done by internal or external parties including
owners
trade creditors
lendors
investors
trade unions
analysts
and others.
Financial analysis bears importance to different users in the following way:
(a)
Finance Manager: They focus on the relationships among
managerial performance
corporate efficiency
financial strengths and weaknesses
creditworthiness
The various tools used for financial analysis help in studying the accounting data and help in deciding
continuity of the operating policies
investment value of the business
credit ratings
testing the efficiency of the operations
These techniques also help in financial control there by enabling finance managers to make constant reviews of the actual financial operations of the firm. This will help them to determine what is causing major deviations. This will in-turn help in taking corrective measures.
(b)
Top management: Eery aspect of the financial analysis is important to the top management. Based on the financial analysis, they ensure that the resources of the firm are used most efficiently and also ensure that the firm has a sound financial condition. The financial analysis helps the mangement in measuring
the success of the company’s operations
appraising the individual’s performance
and evaluating the system of internal control
(c)
Trade Payables: Financial analysis is important to the trade payables in appraising the ability of the firm to meet its short-term obligations but also estimate the possibility of whether the firm will be able to meet its financial obligations in the future too. So, they will be interested in knowing the liquidity of the firm.
(d)
Lenders: Financial statements are important to the leders as they provide the information about the long-term solvency and survival of the firm. They help them to get an idea about
profitability over a period of time
ability to generate cash
ability to pay interest
ability to repay the principal
the relationship between various sources of funds (capital structure relationships)
Future solvency
Profitability
(e)
Investors: Financial statements provide the information about the firm’s earnings. They’re interested in the firm’s present and future profitability. They are also interested in the firm’s capital structure to find its influences on the firm’s earning and risk. They evaluate the efficiency of the management and determine whether a change is needed or not. However, in large companies the shareholders will be interested to know whether they should buy or sell or hold the shares.
(f)
Labour Unions: They assess whether the firm can afford a wage increase at the moment and whether it can absorb a wage increasse through increased productivity or by raising the prices.
(g)
Others: The economics, researchers etc. study the present business and economic conditions. The goverment agencies need it for price regulations, taxation and other similar purposes.
5. Explain how common size statements are prepared giving an example.
The following are the two most commonly prepared common-size statements:
1.
Common Size Balance Sheet
2.
Common Size Statement of Profit and Loss
Common size statements are prepared in a columnar form so that they can be easily analyzed. So, the analysis is also called as vertical analysis. In these statements, each item of the financial staement is compared to a common item. For instance, in case of statement of profit and loss, each item is compared to the revenue from operations and in balance sheets each item is compared against the total of the balance sheet. The common size statements consists of the following columns:
1.
Particulars Column:: This column is similar to the particulars column in the corresponding financial statement and shows the various financial items under their respective heads.
2.
Amount Columns: The amount column is sub-divided into amount for each year that need to be analyzed. These columns are used to display the amount of each item, subtotals and gross total for a given year.
3.
Ratio or Percentage Columns: They contain the proportion of each item to the common item expressed either as a ratio or as a percentage.
The following are the two commonly used formats of the common size statements:
Format I: In this the amount column and percentage or ratio column are displayed side-by-side.
Particulars
Year 1
(₹)
% OR Ratio
Year 2
(₹)
% OR Ratio
Format II: In this all the amount column are displayed first and then all the percentage or ratio column displayed together side-by-side.
Particulars
Year 1
(₹)
Year 2
(₹)
% OR Ratio
(for Year 1)
% OR Ratio
(for Year 2)
The following example depicts the prepreation of the common size statements for the balance sheet.
Note: The example below is the same one that we have in Do it yourself – III
Balance sheet of Raj Co. Ltd. as at March 31, 2016 and March 31, 2017
Particulars
2017
2016
I. Equity and Liabilities
1. Shareholders’ Fund
a) Share capital
20,00,000
15,00,000
b) Reserve and surplus
3,00,000
4,00,000
2. Non-current liabiliteis
Long-term borrowings
9,00,000
6,00,000
3. Current liabiliteis
Trade payables
3,00,000
2,00,000
Total
35,00,000
27,00,000
II. Assets
1. Non-current assets
a) Fixed assets
– Tangible assets
20,00,000
15,00,000
– Intangible assets
9,00,000
6,00,000
2) Current assets
– Inventories
3,00,000
4,00,000
– Cash and cash equivalents
3,00,000
2,00,000
Total
35,00,000
27,00,000
Common Size Balance Sheet of Raj Co. Ltd. as at March 31, 2016 and March 31, 2017
Particulars
Absolute Amounts
Percentage of Total Assets
March 31, 2016
(₹)
March 31, 2017
(₹)
March 31, 2016
(%)
March 31, 2017
(%)
I. Equity and Liabilities
1. Shareholders’ Fund
a) Share capital
15,00,000
20,00,000
55.56
57.14
b) Reserve and surplus
4,00,000
3,00,000
14.81
8.57
2. Non-current liabiliteis
Long-term borrowings
6,00,000
9,00,000
22.22
25.71
3. Current liabiliteis
Trade payables
2,00,000
3,00,000
7.41
8.57
Total
27,00,000
35,00,000
100
100
II. Assets
1. Non-current assets
a) Fixed assets
– Tangible assets
15,00,000
20,00,000
55.56
57.14
– Intangible assets
6,00,000
9,00,000
22.22
25.71
2) Current assets
– Inventories
4,00,000
3,00,000
14.81
8.57
– Cash and cash equivalents
2,00,000
3,00,000
7.41
8.57
Total
27,00,000
35,00,000
100
100
Working Notes:
Percentage
(Previous Year)
{= \dfrac{Previous~year~Absolute~Figure}{Balance~Sheet~Total~of~Previous~Year} × 100}
Percentage
(Current Year)
{= \dfrac{Previous~year~Absolute~Figure}{Balance~Sheet~Total~of~Current~Year} × 100}
For instance, the percentages for the Equity share capital are calculated as follows:
Percentage (in 2016)
{= \dfrac{₹~15,00,000}{₹~27,00,000} × 100}
= 55.56
Percentage (in 2017)
{= \dfrac{₹~20,00,000}{₹~35,00,000} × 100}
= 57.14
Preparation:
Step 1:
Write the title of Common Size Statement. In the example above, the title is written as ‘Common Size Balance Sheet of Raj Co. Ltd. as at March 31, 2016 and March 31, 2017
Step 2:
The various items of the Balance Sheet are displayed in the Particulars column with the headings Equity and Liabilities and Assets
Step 3:
The amounts of various items are written in the ‘Amount’ column for the corresponding year.
Step 4:
The Assets and Liabilities are totalled and the totals for each year are displayed.
Step 5:
The percentage with respect to the total is written in the corresponding percentage column.