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Explain how common size statements are prepared giving an example. - Accountancy

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Answer in Brief

Explain how common size statements are prepared giving an example.

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Solution

The two Common Size Statements that are most commonly prepared are as follows.

1. Common Size Balance Sheet

2. Common Size Income Statements 
Common Size Statement is prepared in a columnar form for analysis. In a Common Size Statement each item of the financial statements is compared to a common item. The analyses based on these statements are commonly known as Vertical Analysis.

The following are the columns prepared in a Common Size Statement.

i) Particulars Column: This column shows the various financial items under their respective heads.

ii) Amount Columns: These columns depict the amount of each item, sub-totals and the gross total of a particular year.

iii) Percentage or Ratio Columns: These columns show the proportion of each item to the common item either in terms of percentage or ratio.

The Common Size Statements can be presented in the following two ways.

Method 1

1. Percentage Column is shown beside the Amount Column of the year to which percentage column belongs. 

Particulars

Year (2007)
(Rs)

%

Year (2006)
(Rs)

%

 

 

 

 

 

 

 

Method 2
Amount Columns are shown first and their percentage columns are shown  after the Amount Columns.

Particulars Years (2007) (Rs) Years (2007) (Rs) % 2007 % 2008
         

The preparation of the Common Size Statements can be better understood by the help of the following example.

 

Particulars

Note No.

2012

2013

I. Equity and Liabilities

 

 

 

1. Shareholders’ Funds

 

 

 

(a) Equity Share Capital

 

4,00,000

6,00,000

(b) Reserves and Surplus

 

1,00,000

1,50,000

2. Non-Current Liabilities

 

 

 

(a) Long-Term Borrowings

 

3,00,000

3,20,000

3. Current Liabilities

 

 

 

(a) Trade Payables

 

2,00,000

2,50,000

Total

 

10,00,000

13,20,000

II. Assets

 

 

 

1. Non-Current Assets

 

 

 

(a) Fixed Assets

 

 

 

(i) Tangible Assets

 

5,00,000

6,75,000

(ii) Intangible Assets

 

1,00,000

1,20,000

(b) Non-Current Investments

 

1,50,000

2,00,000

2. Current Assets

 

2,50,000

3,25,000

Total

 

10,00,000

13,20,000

Common Size Balance Sheet
as on…. 

Particulars

Note No.

Absolute Amount

Percentage of

Balance Sheet Total

2012

(Rs)

2013

(Rs)

2012

(%)

2013

(%)

I. Equity and Liabilities

 

 

 

 

 

1. Shareholders’ Funds

 

 

 

 

 

(a) Equity Share Capital

 

4,00,000

6,00,000

40

45.45

(b) Reserves and Surplus

 

1,00,000

1,50,000

10

11.36

2. Non-Current Liabilities

 

 

 

 

 

(a) Long-Term Borrowings

 

3,00,000

3,20,000

30

24.24

3. Current Liabilities

 

 

 

 

 

(a) Trade Payables

 

2,00,000

2,50,000

20

18.94

Total

 

10,00,000

13,20,000

100

100

II. Assets

 

 

 

 

 

1. Non-Current Assets

 

 

 

 

 

(a) Fixed Assets

 

 

 

 

 

(i) Tangible Assets

 

5,00,000

6,75,000

50

51.14

(ii) Intangible Assets

 

1,00,000

1,20,000

10

9.09

(b) Non-Current Investments

 

1,50,000

2,00,000

15

15.15

2. Current Assets

 

2,50,000

3,25,000

25

24.62

Total

 

10,00,000

13,20,000

100

100

Working Note

`"Percentage (Previous Year)" = "Precious year Absolute Figure"/"Balance Sheet Total of Previous Year" xx 100`

`"Percentage (Current Year)" = "Current  year Absolute Figure"/"Balance Sheet Total of Current Year" xx 100`

For example,

Percentage of Equity Share Capital (Previous Year)= `400000/1000000 xx 100 = 40%`

Percentage of Equity Share Capital (Current Year)= `600000/1320000 xx 100 = 45.45%`

Preparation

Step 1: Title of the Common Size Statement, i.e. ‘Common Size Balance Sheet’ is written on the top of the statement.

Step 2: In the ‘Particulars’ column, the various items of the Balance Sheet are shown under the headings of ‘Assets’ and ‘Equity and Liabilities’.

Step 3: In the ‘Amount’ column, amount of the items are shown in the ‘Year’ column to which they belong

Step 4: The Assets and Liabilities are totaled and are shown separately for each year.

Step 5: In the ‘Percentage’ column, the percentage of each item in comparison to the Total of Balance Sheet are shown. 

Concept: Common Size Statements
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APPEARS IN

NCERT Class 12 Accountancy - Company Accounts and Analysis of Financial Statements
Chapter 4 Analysis of Financial Statements
Long Answer Questions | Q 5 | Page 184

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