{"id":21522,"date":"2021-03-19T14:44:18","date_gmt":"2021-03-19T09:14:18","guid":{"rendered":"https:\/\/ncertsolutions.guru\/?p=21522"},"modified":"2021-03-19T14:44:18","modified_gmt":"2021-03-19T09:14:18","slug":"ncert-solutions-for-class-12-accountancy-chapter-9","status":"publish","type":"post","link":"https:\/\/ncertsolutions.guru\/ncert-solutions-for-class-12-accountancy-chapter-9\/","title":{"rendered":"NCERT Solutions for Class 12 Accountancy Chapter 9 Analysis of Financial Statements"},"content":{"rendered":"

Detailed, Step-by-Step NCERT Solutions for 12 Accountancy<\/a> Chapter 9 Analysis of Financial Statements Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.<\/p>\n

Analysis of Financial Statements NCERT Solutions for Class 12 Accountancy Chapter 9<\/h2>\n

Analysis of Financial Statements Questions and Answers <\/span>Class 12 Accountancy Chapter 9<\/h3>\n

Test Your Understanding-I (Page. No. 205)<\/span><\/p>\n

Fill in the blanks with appropriate words :
\n(i) Analysis simply means data.
\n(ii) Interpretation means data.
\n(iii) Comparative analysis is also known as analysis.
\n(iv) Common-size analysis is also known as analysis.
\n(v) Tire analysis of actual movement of money inflow and outflow in an organisation of called analysis.
\nAnswer:
\n(i) Simplification
\n(ii) Explaining
\n(iii) Horizontal
\n(iv) Vertical
\n(v) Cash Flow<\/p>\n

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Choose the right answer:<\/p>\n

Question 1.
\nThe financial statements of a business enterprise include :
\n(a) Balance sheet
\n(b) Profit and loss account
\n(c) Cash flow statement
\n(d) All the above
\nAnswer:
\n(d) All the above.<\/p>\n

Question 2.
\nThe most commonly used tools for financial analysis are :
\n(a) Horizontal analysis
\n(b) Vertical analysis
\n(c) atio analysis
\n(d) All the above
\nTest Your Understanding-II (Page No. 220)
\nAnswer:
\n(d) All the above.<\/p>\n

Question 3.
\nAn Annual Report is issued by a company to its :
\n(a) Directors
\n(b) Auditors
\n(c) Shareholders
\n(d) Management
\nAnswer:
\n(c) Shareholders.<\/p>\n

Question 4.
\nBalance Sheet provides information about financial position of the enterprise:
\n(a) At a point in time
\n(b) Over a period of time
\n(c) For a period of time
\n(d) None of the above
\nAnswer:
\n(a) At a point in time.<\/p>\n

Question 5.
\nComparative statement are also known as :
\n(a) Dynamic analysis
\n(b) Horizontal analysis
\n(c) Vertical analysis
\n(d) External analysis
\nAnswer:
\n(b) Horizontal analysis.<\/p>\n

Test Your Understanding-III (Page No. 230)
\n<\/span>
\nState whether each of the following is True or False :
\n(a) The financial statements of a business enterprise include funds flow statement.
\n(b) Comparative statements are the form of horizontal analysis.
\n(c) Common size statements and financial ratios are the two tools employed in vertical analysis.
\n(d) Ratio analysis establishes relationship between two financial statements.
\n(e) Ratio analysis is a tool for analysing the financial statements of any enterprise.
\n(f) Financial analysis is used only by the creditors.
\n(g) Profit and loss account shows the operating performance of an enterprise for a period of time.
\n(h) Financial analysis helps an analyst to arrive at a decision.
\n(i) Cash Flow Statement is a tool of financial statement analysis.
\n(j) In a Common size statement each item is expressed as a percentage of some common base.
\nAnswer:
\n(a) True
\n(b) True
\n(c) True
\n(d) True
\n(e) True
\n(f) False
\n(g) True
\n(h) True
\n(i) True
\n(j) True.<\/p>\n

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Do it Yourself (Page No. 212)<\/span><\/p>\n

From the following balance sheet and income statement of Day Dreaming Co. Ltd., for the year ending 2005 and 2006, prepare the comparative statements.<\/p>\n

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\nAnswer:
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\nAnswer:
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Interpretation:
\n(i) The Comparative Income Statement reveals that there has been an increase in sales by 16.67% while the cost of goods sold has increased by 30.77%, thereby resulting in a decreases in Gross Profit by 20%. Although the operating expenses have remained constant, there has been decrease in net profit by 26.32% because of decline in Gross Profit.<\/p>\n

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(ii) The Companies current Assets have increased by Rs. 140 Lakhs i.e. 16.47% whereas the current liabilities have increased by 125 Lakhs (22.73%).
\n(iii) Shareholders Funds have increased by 45 Lakhs i.e. 3%.
\n(iv) The overall financial position of the company is satisfactory.<\/p>\n

Do it Yourself (Page No. 219)<\/span>
\nThe following are the Balance Sheets of Harsha Ltd. as on March 31, 2006 and March 31,2007
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\nPrepare Common-Size Balance Sheet and interpret the same.
\nAnswer:
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\nInterpretation:
\n(i) In the year 2006, Current Assets have increased from 47.83% to 48.53%. Cash Balance increased by 4.42% from 2.18%.<\/p>\n

(ii) Current Liabilities decreased from 27.18% to 22.06% implying that the company has paid the Current Liabilities from Current Assets. Even then, the liquidity position’s reasonably good.<\/p>\n

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(iii) Fixed Assets increased from Rs. 1,20,000 in 2005 to Rs. 1,75,000 in 2006 as a result of Purchase of Fixed Assets by the additional issue of Share Capital.<\/p>\n

(iv) The overall Financial Position of the Company is satisfactory.<\/p>\n

Do it Yourself (Page No. 222)<\/span>
\nThe following data is available from the P & L AJc of Deepak
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\nYou are required to show Trend Percentages of different items.
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\nInterpretation:
\n(i) The sale for the year 2004 and 2006 have increased but the sales for the year 2005 have decreased. It is not a good sign for the business.
\n(ii) The wages paid to the employees is continuously increasing and the selling expenses are also increasing
\n(iii) The Gross Profit for the year 2003 is 100 and for the year
\n2004 is 106 but it has gradually decreased for the period 2005 and 2006.
\n(iv) The Firm should reduce its expenses in order to increases the gross profit. The overall performance is not satisfactory.<\/p>\n

Short Answer Type Questions<\/span><\/p>\n

Question 1.
\nList the techniques of Financial Statement Analysis.
\nAnswer:
\nThe process of critical examination of the financial information contained in the Financial Statement in order to understand and make decision regarding the operations of firm is called the ‘Financial Statement Analysis’. Basically, it is a study of the relationship among various financial facts and figures as given in a set of Financial Statements.<\/p>\n

“Financial Statement analysis is designed to indicate the strength and weaknesses of business undertaking through, the establishment of certain crucial relationship by regrouping and analysis of figures contained in financial statements.” \u2014J.N. Myres<\/p>\n

“Financial Statement analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements and a study of trends of these factors, as shown in a series of statements.’\u2014Myer<\/p>\n

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Techniques of Financial Statement Analysis:
\nFinancial Statements indicate certain absolute information about assets, liabilities, equity, revenues, expenses and profit or loss of an enterprise. They are not readily understandable to the external users of accounts. The users of accounts need information about profitability, solvency and liquidity of the enterprise. Accordingly various techniques are employed for analysing the financial statements.<\/p>\n

The following are the main techniques for analysis of the financial statements\u2014
\n(i) Comparative Statement Analysis.
\n(ii) Common Size Statement Analysis.
\n(iii) Trend Analysis.
\n(iv) Ratio Analysis.
\n(v) Cash Flow Analysis.<\/p>\n

(i) Comparative Statement Analysis : Comparative statements compares financial numbers at two points of time and helps in driving meaningful conclusions regarding the changes in financial positions and operating results and to enable the reader to understand the significance of such changes.<\/p>\n

Such comparison of financial statements is accomplished by setting up Balance Sheet and Profit and Loss Account side by side and studying the changes that have occurred in the individual figure therein from year to year and over the years.<\/p>\n

Thus, Comparative Statements are those which summarise and present relating data for a number of years incorporating therein the changes in individuals items of financial statements. This analysis is also known as Horizontal Analysis.<\/p>\n

(ii) Common Size Statement Analysis: These Statements indicate the relationship of different items of a Financial Statements with some common item by expressing each item as a percentage of the common item. The percent thus calculated can be easily compared with the corresponding percentages of some other firms, as the number are brought to common base. This analysis is also known as ‘Vertical Analysis’.<\/p>\n

(iii) Trend Analysis: It is a technique of studying several Financial Statements over a series of years. Using the previous years, data of a business enterprise, trend analysis can be done to observe the percentage changes over time in the selected data. Trend analysis is important because, with its long run view, it may point to basic changes in the nature of the business. By looking at a trend in a particular ratio, one may find whether the ratio is falling, rising or remaining relatively constant.<\/p>\n

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(iv) Ratio Analysis: Accounting ratios measure the comparative significances of the individual items of the income and position statements. It is possible to assess the profitability, solvency and efficiency of an enterprise through the techniques of ratio analysis.<\/p>\n

(v) Cash Flow Analysis : It refers to the analysis of actual movement of cash in to and out of an organisation. Cash Flow Statements is prepared to project the manner in which the cash received has been utilised during an accounting year. It is a statement, which shows the sources of cash receipts and also the purposes for which payments are made. Thus, it summarises the causes for the changes in cash position of a business enterprise between dates of two balance sheets.<\/p>\n

Question 2.
\nDistinguish between Vertical and Horizontal Analysis of financial data;
\nAnswer:
\nHorizontal Analysis : This analysis is made to review and analyse financial statements of a number of years and are, therefore based on financial data taken for those years. It is a time series analysis. It shows comparison of financial data for several years against a chosen base year. This is very useful for long term trend analysis and planning. Comparative Financial Statement is an example of this type of analysis.<\/p>\n

Vertical Analysis : This analysis is made to review and analyse the financial statements of one particular year only. This type of analysis is also called ‘Statistics Analysis’ as it is frequently used for referring to ratio’s developed for one date or for one accounting period. Such an analysis is useful in company or the performance of several companies in the same group or divisions or departments in the same enterprise.<\/p>\n

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Difference between Horizontal Analysis and Vertical Analysis<\/p>\n\n\n\n\n
Horizontal Analysis<\/strong><\/td>\nVertical Analysis<\/strong><\/td>\n<\/tr>\n
1. It requires comparative financial statements of two or more accounting periods.
\n2. It is a part of comparisons.
\n3. It provides information in absolute and percentage form.
\n4. It deals with same item of different periods.
\n5. It is generally used for time series analysis.<\/td>\n		1.\u00a0\u00a0\u00a0\u00a0 It requires a statement of one period.
\n2.\u00a0\u00a0\u00a0\u00a0 It is a step towards comparisons.
\n3.\u00a0\u00a0\u00a0\u00a0 It provides information in, percentage for money.
\n4.\u00a0\u00a0\u00a0\u00a0 It deals with different items of same period.
\n5.\u00a0\u00a0\u00a0\u00a0 It is generally used for cross\u00adsection analysis.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Question 3.
\nExplain the meaning of Analysis and Interpretation?
\nAnswer:
\nAnalysis of Financial Statements is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationship between the items of the Balance Sheet and Income Statement. Whereas, Interpretation involves explaining the meaning and significance of the relationship so established by the analysis. Thus, analysis provide the basis for interpretation.<\/p>\n

Question 4.
\nBring out the importance of Financial Analysis.
\nAnswer:
\nFinancial Statement Analysis are very important and useful to all those who are interested in the well-being of the business in one way or the other. It is an important part of over all financial assessment. It is based on the statements which are the end product of accounting system, i.e. Balance Sheet and Profit & Loss A\/c and the Statement of Source and Application of Funds. The financial analysis serves the following purposes and that brings out the importance of such analysis:<\/p>\n

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1. To judge the financial soundness of the business concern : On the basis of financial statement, the solvency of the concern may be judged i.e. the long term, as well as short term solvency of a business, can be judged from the information contained in the financial statements.<\/p>\n

Debenture holders and lenders judge the ability of the company to pay the principal and interest as most of the companies raise a portion of their capital requirements by issuing debentures and raising long term loans.<\/p>\n

Trade creditors are mainly interested in assessing the short term solvency of the business as they want to know that the business is in a position to pay debts as and when they fall due.<\/p>\n

2. To judge the Managerial Efficiency: The financial statement analysis helps to pinpoint the areas wherein, the managers have shown better efficiency and the areas of inefficiencies.<\/p>\n

3. Inter firm comparison: Analysis of financial statement makes it easy to make inter-firm comparison. The inter-firm comparison helps in assessing own performance as well as that of others if mergers and acquistions are considered. This comparison can also be made for various time periods.<\/p>\n

4. To judge the Earning Capacity or Profitability: On the basis of financial statements, the earning capacity of the business concern may be computed. In addition to this the future earning capacity of the concern may be forecasted.<\/p>\n

5. Making Forecasts and Preparing budgets : Past financial statements analysis helps a great deal in assessing developments in the future, specially the next year. Analysis thus helps in preparing budgets.<\/p>\n

Question 5.
\nWhat are Comparative Financial Statements?
\nAnswer:
\nComparative statements compare the financial numbers at two points of time and captures changes in the same. The change could be presented in absolute amount or in comparative terms such as percentage.<\/p>\n

Under this method, the following informations are presented by’ the comparative financial statements :
\n(i) Absolute money values of different items.
\n(ii) Increase or decrease in absolute data in terms of money values.
\n(iii) Increase or decease in absolute data in terms of percentage.<\/p>\n

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For the purpose of analysis, various comparative statements are prepared. Out of these, important ones are :
\n1. Comparative Balance Sheet
\n2. Comparative Profit and Loss A\/c
\n3. Comparative Statement of Cost of Production
\n4. Comparative Statement of Working Capital.<\/p>\n

1. Comparative Balance Sheet\u2014In comparing Balance Sheet, the items of Balance Sheet for two or more periods are presented in a manner that increase or decrease in assets and liabilities between these periods can be ascertained easily. All business transactions affect assets, liabilities and capital presented in the balance sheet. Changes in the items can be known by comparing balance sheets at the beginning and end of the year. Thus, comparative balance sheet is very important to determine tendencies for business.<\/p>\n

Significance of Comparative Balance Sheet:
\n(i) Comparative Balance Sheet is quite significant for an analyst, because it not only provides infonnations about various items on a particular date, but also the changes in these items between two periods can be ascertained.<\/p>\n

(ii) With the help of Comparative Balance Sheet future trends of assets, liabilities and captial can be ascertained. It helps prepare the plans easily.<\/p>\n

(iii) The profit and loss account of business acts as a link between the balance sheets of two dates. The quantum of profit or loss affects the items of balance sheet.<\/p>\n

2. Comparative Profit and Loss Account\u2014Comparative Profit and Loss Account represents net profit or net loss in a period of time. It helps to determine whether sales, cost of sales, gross profit or net profit have increased or decreased. Besides absolute increase or decrease in various items of profit and loss acount, they also be shown in percentage terms.<\/p>\n

To analyse the items in profit and loss A\/c, the analyst should compare the changes in cost of sales and operating expenses with the changes in sales. The increase or decrease in gross profit should be considered with reference to sales. Net profit can also be compared with income.<\/p>\n

3. Comparative Statement of Cost of Production\u2014The comparative statement of cost of production can present absolute increase or decrease, percentage increase or decrease in each item of cost of production and the proportion of that item to the cost of production. It will help in finding out what changes in each item of cost of production have occured and what are their effects on cost of production. It will help in taking proper decisions to control the cost in future.<\/p>\n

4. Comparative Statement of Working Capital\u2014The Comparative Statement of Working Capital helps find out changes (increase or decrease) in the working capital, each of the current assets, each of the current liabilities, total current assets and total current liabilities. By comparing the changes in current assets and current liabilities, the liquidity of business can be evaluated.<\/p>\n

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Question 6.
\nWhat do you mean by Common-Size Statements?
\nAnswer:
\nCommon-Size Statement : Common-Size Statement also known as component percentage statement, is a financial tool for studing the key changes and trends in the Financial Position (Balance Sheet) and Financial Result (Profit and Loss A\/c) of a company. In this figures reported are converted into percentages of some common base. For example, Total assets may be chosen as a measures size for Balance Sheet and Sales may act as a measure size for Profit and Loss A\/c.<\/p>\n

These statements are known as common size statements, because all the figures are converted into a common size.<\/p>\n

Purpose: An Analysis of common size statement will help better understand the important changes which have occured in the enterprise over a period of time. This analysis constitute a vertical study within one column of the comparative statement therefore, it is also called as vertical analysis.<\/p>\n

Importance: An analysis of commorisize statement is of immense use which comparing business enterprise which differ substantially in size as it provides an in sight into the structure of financial statements.<\/p>\n

Common Size Balance Sheet :<\/p>\n

In Common Size Balance Sheet, each item of assets is shown as percentage of total assets and each item of liability is shown as a percentage of total liabilities. The total of the assets and that of liabilities is taken as 100 percent and each item, appearing on the assets side as well as liabilities side is shown as proportion of the total of 100. It is also known as Percentage Balance Sheet.<\/p>\n

Common Size Income Statement : Income Statements are reduced to common size by expressing each item as a percentage of net sales. Thus, the Common Size Income Statement captures the relationship between sales and expenses.<\/p>\n

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Steps:
\nThe following steps may be followed to prepare the common size statements:
\n1. Draw table with the five columns like.
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2. List out absolute figures in ruppees at two different point of time.<\/p>\n

3. Choose a common base (as 100). For example, Sales revenue total may be-taken as base (100) in case of Profit and Loss A\/c and total assets or total liabilities (100) in case of Balance Sheet.<\/p>\n

4. Convert all items of Col. 2 and Col. 4 as a percentage of that total. Column 3 and 5 portray these percentages.
\nThe purpose of common-size analysis is to know the importance of each item in the total. Hence, this analysis can be done for one year also.<\/p>\n

Long Answer Type Questions<\/span><\/p>\n

Question 1.
\nDescribe the different techniques of financial analysis and explain the limitations of financial analysis.
\nAnswer:
\nFollowing are the main tools or techniques of financial analysis :
\n1. Comparative Financial Statements
\n2. Common-Size Statements
\n3. Ratio Analysis
\n4. Fund Flow Statement
\n5. Cash Flow Analysis.
\n6. Trend Analysis.<\/p>\n

1. Comparative Financial Statements\u2014By preparing comparative statement, the nature and quantum of change in different items can be calculated and it also helps in future estimates. By comparing with the data of the previous years, it can be ascertained what type of changes in different items of current year have taken place and the future trend of business can be estimated.
\nFor the purpose of analysis, various comparative statements are prepared. Out of these, important ones are :<\/p>\n