Revision: Analysis of Financial Statements Accounts HSC Commerce (English Medium) 12th Standard Board Exam Maharashtra State Board

Definitions [7]

Definition: Financial Statements

"Financial Statements are the end product of financial accounting prepared by the accounts of a business enterprise that purport to reveal the financial position of the enterprise, the result of its recent activities and an analysis of what has been done with earnings." - Smith and Ashburne
"The Financial Statements are a summary of accounts of a business enterprise, the Balance Sheet showing the assets, liabilities and capital as on a certain date and income statement showing the results, i.e., profit or loss for the period." - John N. Myer
"The Statements which are prepared by the business to find out profitability, efficiency, solvency, growth of business to judge the financial strength and status are called as Financial Statements."

Definition: Financial Statement Analysis

"Financial analysis consists in separating facts according to some definite plan, arranging them in groups according to certain circumstances and then presenting them in a convenient and easily read and understandable form.'' - Finney and Miller
"Financial statement analysis is largely a study ofrelationships among the various financial factors in a business, as disclosed by a single set of statements and a study of the trends of these factors as shown in a series of statements." - John N. Myres

Definition: Comparative Statement

Comparative Statements or Comparative Financial Statements mean a comparative study of individual items or components of financial statements, i.e., Balance Sheet and Statement of Profit & Loss of two or more years of the enterprise itself.
Statement showing financial data for two or more than two years placed aside by side to facilitate comparisons are called Comparative Financial Statement.

Definition: Comparative Balance Sheet

"Comparative Balance Sheet analysis is the study of the trend of the same items, group of items and computed items in two or more Balance Sheets of the same business enterprise on different dates." - Foulka

Definition: Common-Size Statement

"Common-size Statements are accounting statements expressed in percentage of some base rather than rupees." - Kohler
Common-size Statements are the Statements which show the relationship of different items of financial statements with some common item (base) by expressing each item as a percentage of that common base.

Definition: Cash Flow Statement

Cash Flow Statement is a statement that shows inflows and outflows of cash and cash equivalents under Operating, Investing and Financing Activities of a company during a particular accounting period.
Cash Flow Statement can be defined as a “Statement which summarises sources of cash inflows and uses for cash outflows during a particular period.”

Definition: Ratio Analysis

"Ratio analysis is a study of relationship among various financial factors in a business'' - Myres
The use of different types of accounting ratios to evaluate the financial performance of business is called Ratio Analysis.

Formulae [11]

Percentage Change

\[\text{Percentage Change}\ =\ \frac{\text{Absolute Change}}{\text{Amount of Previous Year}}\times100\]

Absolute Change

Absolute Change = Current Year - Previous Year

Common Size Percentage Change

\[\text{Common Size Percentage Change }=\frac{\text{Amount of Item}}{\text{Total Fund Employed}}\times100\]

Current Ratio

\[\text{Current Ratio}=\frac{\text{Current Assets}}{\text{Current Liabilities}}\]

1. Current Assets:

Current Assets = Current Investments + Inventories (Excluding Loose Tools and Stores and spares) + Trade Receivables (Bills Receivable + Sundry Debtors - Provisions for Doubtful debts) + Cash and Bank Balances + Short-term Loans and Advances + Other Current Assets.

Current Assets = Total Assets - Non-current Assets

Current Assets = Current Liabilities + Working Capital

Working Capital = Current Assets - Current Liabilities

2. Current Liabilities:

Current Liabilities = Short-term Borrowings + Trade Payables + Other Current Liabilities + Short-term Provisions

Current Liabilities = Current Assets - Working Capital

Quick Ratio or Liquid Ratio

\[\text{Quick Ratio or Liquid Ratio}=\frac{\text{Quick Assets or Liquid Assets }}{\text{Current Liabilities}}\]

1. Quick or Liquid Assets:

Quick or Liquid Assets = Current Investments + Trade Receivables (i.e., Bills Receivable and Sundry Debtors less Provision for Doubtful Debts) + Cash and Bank Balances + Short-term Loans and Advances + Other Current Assets (Except Prepaid Expenses).

Quick or Liquid Assets = Current Assets - Inventories - Prepaid Expenses and Advance tax.

2. Current Liabilities:

Current Liabilities = Short-term Borrowings + Trade Payables (Sundry Creditors + Bills Payable) + Other Current Liabilities + Short-term Provisions

Gross Profit Ratio

\[\text{Gross Profit Ratio}\quad=\frac{\text{Gross Profit}}{\text{Revenue from Operations }i.e.,\text{Net~Sales}}\times100\]

1. Gross Profit:

Gross Profit = Revenue from Operations - Cost of Revenue from Operations

2. Cost of Revenue from Operations:

Cost of Revenue From Operations = Opening Inventory + Net Purchases + Direct Expenses ( Carriage, Wages, etc.) - Closing Inventory

Cost of Revenue from Operations = Revenue from Operations - Gross Profit

Cost of Revenue From Operations = Cost of Materials Consumed (including Direct Expenses) + Changes in Inventories of Work-in-Progress and Finished Goods

Cost of Revenue From Operations = Cost of Materials Consumed (including Direct Expenses) + Purchases of Stock-in-Trade + Changes in Inventories of Work-in-Progress, Finished Goods and Stock-in-Trade + Direct Expenses*

Net Profit Ratio

\[\text{Net Profit Ratio}=\frac{\text{Net Profit after Tax}}{\text{Revenue from Operations}}\times100\]

Net Profit:

Net Profit = Gross Profit + Other Income - Indirect Expenses - Tax

Net Profit = Revenue from Operations - Cost of Revenue from Operations - Operating Expenses - Non-operating Expenses + Non-operating Income - Tax

Indirect Expenses & Losses = Office Expenses + Selling Expenses + Interest on Long Term Borrowings + Accidental Losses

Operating Profit Ratio

\[\text{Operating Profit Ratio}=\frac{\text{Net Operating Profit}}{\text{Revenue from Operations}}\times100\]

Net Operating Profit:

Net Operating Profit = Net Profit after Tax + Non-operating Expenses - Non-operating Income

Net Operating Profit = Gross Profit - Operating Expenses + Operating Income - Tax

a) Net Operating Expenses = Finance Cosr (Interest on Borrowings) + Loss on Sale of Non-current Assets

b) Non-operating Income + Interest and Dividend Received o Investment + Gain (Profit) on Sale of Non-current Assets

c) Operating Income = Sale of Scrap + Trading Commission Received + Cash discount Received + Revenue from Services Provided

Operating Ratio

\[\text{Operating Ratio}=\frac{\text{Cost of Revenue from Operations}+\text{Operating Expenses}}{\text{Revenue from Operations}}\times100\]

\[\text{Operating Ratio}=\frac{\text{Cost of Revenue from Operations}+\text{Operating Expenses - Operating Income}}{\text{Revenue from Operations}}\times100\]

1. Cost of Revenue from Operations or Cost of Goods Sold:

Cost of Revenue from Operations = Opening Inventory + Net Purchases + Direct Expenses – Closing Inventory

2. Operating Expenses:

Operating Expenses = Employees' Benefit Expenses + Depreciation and Amortisation Expense + Selling and Distribution Expenses + Office and Administration Expenses, etc. + Discount + Bad Debts + Interest on Short-term Loans

3. Operating Income:

Operating Income = Commission Received + Cash Discount Received

Return on Investment

\[\text{Return on Investment (ROI)}=\frac{\text{Net Profit before Interest and Tax}}{\text{Capital Employed}}\times100=.....\%.\]

Capital Employed:

1. Liabilities Side Approach:

Capital Employed = Shareholders' Funds + Long Term Debts (Long Term Borrowings + Long Term Provisions) - Non Trade Investments

2. Assets Side Approach:

Capital Employed = Non-Current Assets + Working Capital

Non Current Assets = Property, Plant and equipment + Intangible Assets + Non Current Investments (except non-trade Investments) + Long Term Loans & Advances

Return on Capital Employed

\[\text{Return on Capital Employed} = \frac{\text{Net Profit before interest and Tax}}{\text{Net Capital Employed/ Equity}}\]

Net Capital Employed = Total Assets - Current Liabilities

= Fixed Assets + Current Assets - Current Liabilities

Key Points

Key Points: Financial Statements

Meaning & Parts: Show a business’s profit and financial position. Include Balance Sheet, P&L A/c, Cash Flow, Equity Statement, and Notes.
Purpose: Provide a true and fair view to help users make informed decisions.
Features: Based on past data, in monetary terms. A balance sheet is for a date; a P&L is for a period. Must be verifiable, relevant, understandable, and comparable.
Nature: Influenced by facts, accounting concepts, conventions, standards, and judgments.
Legal Requirement: As per the Companies Act, 2013, companies must prepare them yearly in the prescribed format (Schedule III).

Key Points: Financial Statement Analysis

Meaning: Study of financial data to understand profit, performance, solvency, and efficiency.
Tools: Comparative & Common-size Statements, Cash Flow, Ratio Analysis.
Purpose/Use: Helps assess trends, make decisions on investment, credit, dividends, and compare firms.
Users: Management, investors, creditors, banks, govt., employees, etc.
Limitations: Based on past data, may be biased, ignores price changes & qualitative factors, affected by window dressing.

Format: Vertical Income Statement

.............. Company Ltd.

Vertical Income Statement for the year ended ..................

Particulars	Amount (₹)	Amount (₹)
Income
Sales	xxx
(-) Sales Return	xxx
Net Sales		xxx
Less: Cost of Goods Sold
Opening Stock	xxx
Add: Purchases	xxx
Add: Wages	xxx
Add: Carriage Inward	xxx
Add: Direct Expenses	xxx
Less: Closing Stock	xxx
Net Cost of Goods Sold		xxx
Gross Profit (Net Sales – Net Cost of Goods Sold)		xxx
Less: Operating Expenses
a. Administrative Expenses	xxx
b. Finance Expenses	xxx
c. Selling Expenses	xxx
Total Operating Expenses		xxxx
Operating Profit (Gross Profit – Operating Expenses)		xxxx
Add: Non-operating Income	xxxx
Less: Non-operating Expenses	(xxxx)
Net Profit Before Tax		xxxx
Less: Tax (Charged on Net Profit Before Tax)	xxx
Net Profit After Tax		xxxx

Format: Balance Sheet

.............. Company Ltd.

Balance Sheet as on ........................

Particulars	Amount ₹	Amount ₹
I) Sources of Funds
A) Owners Fund / Shareholders Fund
a) Share Capital
Equity Share Capital	xxx
Preference Share Capital	xxx
b) Add: Reserves and Surplus
Profit & Loss A/c	xxx
General Reserve	xxx
Securities Premium	xxx
c) Less: Fictitious Assets	xxx
Net Worth / Owners Fund		xxx
B) Borrowed Funds
Bank Loan	xxx
Debentures	xxx
Total Fund Available		xxx
II) Application of Funds
1) Fixed Assets
Land and Building	xxx
Plant and Machinery	xxx
Furniture	xxx
Vehicle	xxx
		xxx
2) Investment		xxx
3) Working Capital
Current Assets
Quick Assets
Cash	xxx
Bank	xxx
Debtors	xxx
Bill Receivable	xxx
Total Quick Assets		xxx
Non-Quick Assets
Stock	xxx
Prepaid Expenses	xxx
Advances	xxx
Total Non-Quick Assets		xxx
Total Current Assets (Quick + Non-Quick Assets)		xxx
Less: Current Liabilities
Quick Liabilities
Creditors	xxx
Outside Expenses	xxx
Bill Payable	xxx
Total Current Liability		xxx
Non-Quick Liability
Bank Overdraft	xxx
Total Current Liabilities		xxx
Working Capital (Current Assets – Current Liabilities)		xxx
Total Funds Employed / Applied		xx

Key Points: Tools for Financial Analysis

Comparative Statements – Compare figures of different years to study trends and performance.
Common Size Statements – Show data as percentages for easy comparison.
Trend Analysis – Tracks the increase or decrease in items over the years using a base year.
Ratio Analysis – Uses ratios to assess profitability, liquidity, and financial health.
Cash & Funds Flow – Cash Flow shows cash movement; Funds Flow shows changes in financial position.

Key Points: Comparative Financial Statement

Meaning: Comparative Statements present financial data of two or more years side‑by‑side to show changes in amount and percentage.
Types: Intra‑firm comparison compares the same firm over different years, while Inter‑firm comparison compares different firms.
Uses: They simplify financial data, show trends, identify strengths and weaknesses, help compare with industry performance, and assist in forecasting.
Limitations: They are based on past data, affected by estimates and personal judgement, ignore qualitative factors, do not consider price level changes, and are unreliable if accounting policies differ.
Formats: Information can be shown as absolute changes, percentage changes, ratios, averages, and through comparative Balance Sheet and Profit & Loss statements.

Format: Comparative Balance Sheet

COMPARATIVE BALANCE SHEET as at........

Particulars (1)	Current Year (₹)	Previous Year (₹)	Absolute Change (Increase/Decrease) ₹	Percentage Change (Increase/Decrease) %
	A (3)	B (4)	C = A – B (5)	(D = C/B × 100) (6)
	A (3)	B (4)	C = A – B (5)	(D = C/B × 100) (6)
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital:
(i) Equity Share Capital	…	…	…	…
(ii) Preference Share Capital	…	…	…	…
(b) Reserves and Surplus	…	…	…	…
2. Non-Current Liabilities
(a) Long-term Borrowings	…	…	…	…
(b) Long-term Provisions	…	…	…	…
3. Current Liabilities
(a) Short-term Borrowings	…	…	…	…
(b) Trade Payables	…	…	…	…
(c) Other Current Liabilities	…	…	…	…
(d) Short-term Provisions	…	…	…	…
Total	…	…	…	…
II. ASSETS
1. Non-Current Assets
(a) Property, Plant and Equipment and
Intangible Assets:
(i) Property, Plant and Equipment	…	…	…	…
(ii) Intangible Assets	…	…	…	…
(b) Non-current Investments	…	…	…	…
(c) Long-term Loans and Advances	…	…	…	…
2. Current Assets
(a) Current Investments	…	…	…	…
(b) Inventories	…	…	…	…
(c) Trade Receivables	…	…	…	…
(d) Cash and Bank Balances	…	…	…	…
(e) Short-term Loans and Advances	…	…	…	…
(f) Other Current Assets	…	…	…	…
Total	…	…	…	…

Format: Comparative Income Statement

COMPARATIVE STATEMENT OF PROFIT & LOSS

for the year ended 31st March....

Particulars	Figures for the Current Year	Figures for the Previous Year	Absolute Change (Increase/Decrease)	Percentage (Increase/Decrease)
1	2	3	4	5
	A	B	(A - B) = C	\[\frac{C}{B}\times100=D\]
	₹	₹	₹	₹
I. Revenue from Operations	...	...	...	...
II. Add: Other Incomes	...	...	...	...
III. Total Revenue(I + II)	...	...	...	...
IV. Less: Expenses
- Cost of Materials Consumed	...	...	...	...
- Purchase of Stock in Trade	...	...	...	...
- Changes in Inventories of Finished Goods, Work-in-Progress and Stock in Trade	...	...	...	...
- Employee Benefit Expenses	...	...	...	...
- Finance Costs	...	...	...	...
- Depreciation and Amortization Expense	...	...	...	...
- Other Expenses	...	...	...	...
Total Expenses	...	...	...	...
V. Profit before Tax (III – IV)	...	...	...	...
VI. Less: Tax	(...)	(...)	(...)	(...)
VII. Profit after Tax (V – VI)	...	...	...	...

Key Points: Common-Size Statement

Common-size statements show each financial item as a percentage of a common base.
They are used in the Balance Sheet and Income Statement for better comparison.
The main purpose is to compare data, analyse trends, and understand financial relationships.
Each item is shown in actual figures and as a percentage of the base amount.
They help in tracking changes, identifying trends, and assessing business efficiency.

Format: Common Size Balance Sheet

COMMON SIZE BALANCE SHEET

as at 31st March........

Particulars	Absolute Amounts		Percentage of Balance Sheet Total
	Current Year	Previous Year	Current Year	Previous Year
	₹	₹	%	%
I. EQUITY AND LIABILITIES:
1. Shareholders’ Funds
(a) Share Capital	…	…	…	…
(b) Reserves & Surplus	…	…	…	…
2. Non‑Current Liabilities
(a) Long‑term Borrowings	…	…	…	…
(b) Long‑term Provisions	…	…	…	…
3. Current Liabilities
(a) Short‑term Borrowings	…	…	…	…
(b) Trade Payables	…	…	…	…
(c) Other Current Liabilities	…	…	…	…
(d) Short‑term Provisions	…	…	…	…
Total	…	…	100	100

II. ASSETS:
1. Non-Current Assets
(a) Property, Plant and Equipment and Intangible Assets
(i) Property, Plant and Equipment	…	…	…	…
(ii) Intangible Assets	…	…	…	…
(b) Non-Current Investments	…	…	…	…
(c) Long-term Loans and Advances	…	…	…	…
2. Current Assets
(a) Current Investments	…	…	…	…
(b) Inventories	…	…	…	…
(c) Trade Receivables	…	…	…	…
(d) Cash & Bank Balance	…	…	…	…
(e) Short-term Loans and Advances	…	…	…	…
(f) Other Current Assets	…	…	…	…
Total	…	…	100	100

Format: Common Size Income Statement

COMMON SIZE STATEMENT OF PROFIT & LOSS

for the year ended 31st March........

Particulars	Absolute Amounts		Percentage of Revenue from Operations
	Current Year	Previous Year	Current Year	Previous Year
	₹	₹	%	%
I. Revenue from Operations	…	…	100	100
II. Add: Other Incomes	…	…	…	…
III. Total Revenue(I + II)	…	…	…	…
IV. Less: Expenses
Cost of Materials Consumed	…	…	…	…
Purchase of Stock in Trade	…	…	…	…
Changes in Inventories of Finished Goods, Work‑in‑Progress and Stock in Trade	…	…	…	…
Employee Benefit Expenses	…	…	…	…
Finance Costs	…	…	…	…
Depreciation and Amortization Expenses	…	…	…	…
Other Expenses	…	…	…	…
Total Expenses	…	…	…	…
V. Profit before Tax (III – IV)	…	…	…	…
VI. Less: Tax	(… )	(… )	(… )	(… )
VII. Profit after Tax (V – VI)	…	…	…	…

Key Points: Cash Flow Statement

A Cash Flow Statement shows cash inflows and outflows during a specific accounting period.
It covers cash from operating, investing, and financing activities.
It helps explain the net change in cash between two balance sheet dates.
The statement is useful for short-term planning, liquidity analysis, and decision-making.
It is prepared as per Accounting Standard-3 (AS-3 Revised).
It helps assess a company’s performance, liquidity, and solvency through activity-wise analysis.
Limitations: It ignores non-cash items, reflects only past data, and does not measure profit.

Note: Calculation of Net Profit Before Tax

Particulars	₹
Net Profit of the current year (after appropriations)	..........
(Difference between Closing Balance and Opening Balance of Statement of Profit & Loss, under Reserve and Surplus)
Add:
Transfer to Reserves (all transfers to Reserves from balances of the Statement of Profit & Loss)	..........
Proposed Dividend of Previous year	..........
Interim Dividend paid during the year	..........
Provision for Income Tax made during the current year (Less Refund of Income Tax)	..........
Net Profit before Tax	__________

Format: Cash Flow Statement

CASH FLOW STATEMENT for the year ended

Particulars	₹	₹
A. Cash Flows from Operating Activities
Net Profit before Tax	..........
Adjustments for Non-Cash and Non-Operating Items
Add: Depreciation	..........
Preliminary Expenses/Discount on issue of Debentures written off	..........
Goodwill, Patents and Trademarks Amortised	..........
Interest paid on short-term and long-term Borrowings	..........
Interest paid on Bank Overdraft/Cash Credit	..........
Loss on Sale of Property, Plant & Equipment and Intangible Assets	..........
Increase in Provision for Doubtful Debts	..........
Less: Interest Income	(..........)
Dividend Income	(..........)
Rental Income	(..........)
Gain on Sale of Property, Plant & Equipment and Intangible Assets	(..........)
Decrease in Provision for Doubtful Debts	(..........)	(..........)
Operating Profit before Working Capital Changes	..........
Add: Decrease in Current Assets	..........
Increase in Current Liabilities	..........
Less: Increase in Current Assets	(..........)
Decrease in Current Liabilities	(..........)	(..........)
Cash generated from operations	..........
Less: Income Tax Paid (Net of Refund)	(..........)
Net Cash from (or used in) Operating Activities	..........	..........
B. Cash Flows from Investing Activities
Proceeds from Sale of Property, Plant and Equipment	..........
Proceeds from Sale of Intangible Assets like goodwill	..........
Proceeds from Sale of Non-Current Investments	..........
Interest and Dividend Received	..........
Rent Received	..........
Purchase of Property, Plant and Equipment	(..........)
Purchase of Intangible Assets like goodwill	(..........)
Purchase of Non-Current Investments	(..........)	(..........)
Net Cash from (or used in) Investing Activities	..........	..........
C. Cash Flows from Financing Activities
Proceeds from Issue of Shares and Debentures	..........
Proceeds from Other Long-term Borrowings	..........
Proceeds from Short-term Borrowings:
(i) Increase in Balance of Bank Overdraft or Cash Credit	..........
(ii) Decrease in Balance of Bank Overdraft or Cash Credit	(..........)
Payment of Interim Dividend	(..........)
Payment of Proposed Dividend of Previous Year	(..........)
Interest Paid on Short-term and Long-term Borrowings	(..........)
Interest Paid on Bank Overdraft/Cash Credit	(..........)
Repayment of Loans (Short-term or Long-term)	(..........)
Redemption of Debentures/Preference Shares	(..........)	(..........)
Net Cash from (or used in) Financing Activities	..........	..........
Net Increase / (Decrease) in Cash & Cash Equivalents (A + B + C)	..........
Add: Cash & Cash Equivalents at Beginning of the Year	..........
Cash & Cash Equivalents at End of the Year	..........

Key Points: Ratio Analysis

Meaning: Ratio analysis studies financial relationships to assess a business’s performance and financial position.
Objectives: It simplifies data, identifies weak areas, checks solvency and profitability, and supports planning.
Advantages: Helps with decision-making, shows trends, and supports comparisons across firms and over time.
Use in Comparison: Allows inter-firm and intra-firm comparisons to evaluate business efficiency.
Limitations: Depends on data accuracy, may ignore qualitative factors, and is affected by policies and bias.
Important Reminder: Use ratio analysis with care, considering its limitations and verifying data before conclusions.

Important Questions [20]

Introduction to Partnership and Partnership Final Accounts Computer In Accounting

Revision: Analysis of Financial Statements Accounts HSC Commerce (English Medium) 12th Standard Board Exam Maharashtra State Board

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Definitions [7]

Formulae [11]

Key Points

Important Questions [20]

Concepts [21]

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