FINANCIAL STATEMENT

ANALYSIS

DR. P.SRI RAM

DEPARTMENT OF COMMERCE
GOA UNIVERSITY
 INTRODUCTION

• Financial Statement Analysis is a method of reviewing

and analyzing a company’s accounting reports (financial
statements) in order to gauge its past, present or
projected future performance.
• This process of reviewing the financial statements
allows for better economic decision making.
• Globally, publicly listed companies are required by law
to file their financial statements with the relevant
authorities.
 INTRODUCTION

• Firms are also obligated to provide their

financial statements in the annual report
that they share with their stakeholders.
• As financial statements are prepared in
order to meet requirements, the second
step in the process is to analyze them
effectively so that future profitability and
cash flows can be forecasted.
 INTRODUCTION

• Therefore, the main purpose of financial

statement analysis is to utilize information
about the past performance of the company in
order to predict how it will fare in the future.
• Another important purpose of the
analysis of financial statements is to
identify potential problem areas and
troubleshoot those.
 OBJECTIVES AND IMPORTANCE OF FSA

• To assess the earning capacity or profitability of the firm.

• To assess the operational efficiency and managerial effectiveness.
• To assess the short term as well as long term solvency position of
the firm.
• To identify the reasons for change in profitability and financial position
of the firm.
• To make inter-firm comparison.
• To make forecast about future prospects of the firm.
• To assess the progress of the firm over a period of time.
• To help in decision making and control.
• To guide or determine the dividend action.
• To provide important information for granting credit.
 Parties interested in FSA

• Investors
• Management
• Creditors or suppliers
• Bankers and financial institutions
• Employees
• Government
• Trade associations
• Stock exchanges
• Economists and researchers
• Taxation authorities.
 Types of FSA

Types of FSA

Basis of material Basis Of Modus

used Operations

External Internal Horizontal Vertical

analysis analysis Analysis analysis
 External Analysis

• Is done by outsiders who don't have access.

• Depends on published data.
• Whose purpose is limited.
• Example:
– Investors
– Creditors
– Government Agencies
– Credit rating Agencies
– General Public
 Internal Users

• Who have access to the internal records.

• Depends on the purpose of analysis.
• Example:
– Executives
– Managers
– Employees
– Government
 Horizontal Analysis

• Comparison of financial data of a company for several years.

• The figures for this type of analysis are presented horizontally over
a number of columns.
• The figures of the various years are compared with standard or base
year.
• A base year a year chosen as the beginning point.
• This type of analysis is also called “Dynamic Analysis”.
• The horizontal analysis makes it possible to focus attention on items
that have changed significantly during the period under review.
• Comparison of an item over several period with a base year may
show a trend developing.
• Comparative Statements and Trend Percentages are two tools
employed in horizontal analysis.
 Vertical analysis

• It refers to the study of relationship of the various items

in the financial statements of one accounting period.
• In this type of analysis the figures from financial
statement of a year compared with a base selected from
he same year’s statement.
• It is also known as “Static Analysis”.
• Common-size Financial Statement Analysis and
Financial Ratios are the two tools employed in vertical
analysis.
 Other types of FSA – Basis of Entities

• Cross – Sectional or Inter-firm analysis:

– Comparison of financial data of a firms
(competitors) or industry averages for the
same time period.
• Time Series or intra-firm analysis.
– Involves the study of performance of the same
firm over a period of time.
 Basis of Time
• Short-term Analysis:
• It measures the liquidity position of a firm
• Long-term Analysis:
• It measures the Solvency position of a firm
 Pre-cautions for the preparation of FSA

• Precautions to be taken for the following items

before the preparations of FSA.
– The impact of Price level changes.
– Window dressing of FSA.
– Changes in Accounting Policies.
– Accounting concepts and conventions.
– Personal judgment.
 Limitations of FSA

• It is only a study of interim reports.

• Financial analysis is based upon only monetary
information and non-monetary factors are ignored.
• It does not consider changes in price levels.
• As the financial statements are prepared on the basis of a
Going Concern, it does not give exact position. Thus
accounting concepts and conventions cause a serious
limitations to financial analysis.
• Changes in accounting procedure by a firm may often
make financial analysis misleading.
 Methods of of FSA
• Comparative Statements
• Trend analysis
• Common-Size Statements
• Ratio Analysis
• Funds-Flow analysis
• Cash-Flow analysis
• Cost-Volume-Profit Analysis
 Comparative Statements
• Its financial position at different periods of time.
• Give an idea of financial position at two or more
periods.
• Not only the comparison of the figures of two periods
but also be relationship between Balance Sheet and
Income Statement.
 Comparative Statements
• The Comparative Statement may show:
– Absolute figures (Rupee amounts)
– Changes in absolute i.e., increase or
decrease in absolute figures.
– Absolute data in terms of percentages.
– Increase or decrease in terms of
percentages.
Comparative Balance Sheet
 Comparative Balance Sheet

• It 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.
• The changes can be observed by comparison of the
balance sheet at the beginning and at the end of a
period and these changes can help in forming an
opinion about the progress of an enterprise.
 Comparative Balance Sheet

• The comparative balance sheet has two

columns for the data of original balance
sheets.
• A third column is used to show increase in
figures or decrease.
• The fourth column may be added for
giving percentages of increases or
decreases.
 Guidelines for
Comparative Balance Sheet

• Study the following aspects:

–Current Financial position and
Liquidity position.
–Long-term financial Position.
–Profitability of the Concern
 Current Financial
and
Liquidity Positions

• Compute Working Capital for both years.

• Compute Liquidity position of the firm,
in-terms of Cash, Debtors and Receivables.
• Analyze in terms of increase or decrease
and comment on financial position.
 Long-term Financial Position

• Compute Changes in fixed Assets, Long-term Liabilities

and Capital.
• Check the financing of Fixed Assets with Long-term
financing of Company, in terms of Debt or Share Capital.
• Check Fixed Assets with Working Capital Financing if
long-term financing is not enough.
• If the long-term financing is more than the amount of
Fixed Assets means, the part of working capital is
financed by long term financing.
• Check the Hedging Technique of the business.
• Check the increase/decrease of assets/liabilities and
analyze the impact.
 Profitability Position

• Check the retained earnings of the business.

• Check the reserves of the company.
• Check the profit and loss account and accumulated
profits if any.
• If the profits are increases will mean an increase in
profitability to the concern and
• If the profits decreases means that issue of dividend,
issue of bonus shares or deterioration in profitability of
the concern.
 Conclusions

• Comment on Short term and long term financial

positions.
• If short term financial position is good and long term
financial position is poor.
• If short term financial position is bad and long term
financial position is good
• Both are good.
• Both are bad.
 Particulars Base Second Absolute Percentage
Year/First Year Increase (+) Increase (+)
or Decrease or Decrease

Year (₹) (₹) (–) (₹) (–) (%)

Assets
Current Assets
Stock
Debtors
Bills Receivables
Prepaid Expenses
Cash at Bank
Cash in Hand
Total Current Assets (A)
Fixed Assets (B)
Total Assets (A+B)
Liabilities
Current Liabilities
Bank Overdraft
Creditors
Provision for Taxation
Proposed Dividend
Total Current Liabilities
(A)
Equity Capital
Preference Capital
Reserves
P&L
Shareholder Fund (B)
Total Liabilities and
Shareholder Fund (A+B)
 Illustration - 1

Liabilities 2010 (₹) 2011 (₹) Assets 2010 (₹) 2011 (₹)
Equity Capital 1,20,000 1,85,000 Fixed Assets 1,40,000 1,95,000

Preference Capital 70,000 95,000 Stock 40,000 45,000

Reserves 30,000 35,000 Debtors 70,000 82,500
P&L 17,500 20,000 Bills 20,000 50,000
Receivables
Bank Overdraft 35,000 45,450 Prepaid 6,000 8,000
Expenses
Creditors 25,000 35,000 Cash at Bank 40,000 48,500

Provision for 15,000 22,500 Cash in Hand 5,000 29,000

Taxation
Proposed Dividend 8,500 20,050

3,21,000 4,58,000 3,21,000 4,58,000

 Particulars 2010 (₹) 2011 (₹) Absolute Increase (+) or Percentage
Decrease (–) (₹) Increase (+) or Decrease (–
) (%)
Assets
Current Assets
Stock 40,000 45,000 +5,000 +12.50
Debtors 70,000 82,500 +12,500 +17.86
Bills Receivables 20,000 50,000 +30,000 +150.00
Prepaid Expenses 6,000 8,000 +2,000 +33.33
Cash at Bank 40,000 48,500 +8,500 +21.25
Cash in Hand 5,000 29,000 +24,000 +480.00
Total Current Assets (A) 1,81,000 2,63,000 +82,000 +45.30
Fixed Assets (B) 1,40,000 1,95,000 +55,000 +39.29
Total Assets (A+B) 3,21,000 4,58,000 +1,37,000 +42.68
Liabilities
Current Liabilities
Bank Overdraft 35,000 45,450 +10,450 +29.86
Creditors 25,000 35,000 +10,000 +40.00
Provision for Taxation 15,000 22,500 +7,500 +50.00
Proposed Dividend 8,500 20,050 +11,550 +135.88
Total Current Liabilities (A) 83,500 1,23,000 +39,500 +47.31

Equity Capital 1,20,000 1,85,000 +65,000 +54.17

Preference Capital 70,000 95,000 +25,000 +35.71
Reserves 30,000 35,000 +5,000 +16.67
P&L 17,500 20,000 +2,500 +14.29
Shareholder Fund (B) 2,37,500 3,35,000 +97,500 +41.05
Total Liabilities and Shareholder Fund (A+B) 3,21,000 4,58,000 +1,37,000 +42.68
 Illustration - 2

Liabilities 2012 2013 Assets 2012 2013

Bills payable 500 750 Cash 1,000 1,400

Sundry Creditors 1,500 2,000 Debtors 2,000 3,000

Tax payable 1,000 1,500 Stock 2,000 3,000

6% debenture 1,000 1,500 Land 1,000 1,000

6% preference share 3,000 3,000 Building 3,000 2,700

Equity capital 4,000 4,000 Plant 3,000 2,700

Reserves 2,000 2,450 furniture 1,000 1,400

13,000 15,200 13,000 15,200

 Year ending Year ending 31st Increase/ Increase Increase/
31st 2012 2013 Decrease Decrease
amount Percentage

I CURRENT ASSETS
Cash 1,000 1,400 + 400 + 40
Debtors 2,000 3,000 + 1,000 + 50
Stock 2,000 3,000 + 1,000 + 50
Total of current assets 5,000 7,400 + 2,400 + 48
II FIXED ASSETS
Land 1,000 1,000 - -
Building 3,000 2,700 - 300 -10
Plant 3,000 2,700 - 300 -10
furniture 1,000 1,400 + 400 +40
Total fixed assets 8,000 7,800 +200 +2.5
TOTAL ASSETS 13,000 15,200 +2,200 + 16.92
I Liabilities & Capital :
Bills payable 500 750 +250 +50
Sundry Creditors 1,500 2,000 +500 +33.33
Tax payable 1,000 1,500 +500 +50
Total current liability 3,000 4,250 +1,250 + 41.67
II
6% debenture 1,000 1,500 +500 +50
6% preference share 3,000 3,000 - -
Total liability 4,000 4,500 +500 +50
III
Equity capital 4,000 4,000 - -
Reserves 2,000 2,450 +450 +23
Total owners equity 6,000 6,450 +450 +23
TOTAL LIABILITY 13,000 15,200 +2,200 +16.92
 Illustration - 3
LIABILITIES 1998 1999 ASSETS 1998 1999
RS. RS. RS. RS.
Share capital 6,00,000 8,00,000 Land and building 3,70,000 2,70,000

Reserves and surplus 3,30,000 2,22,000 Plant and machinery 4,00,000 6,00,000

Debenture 2,00,000 3,00,000 Furniture and fixtures 20,000 25,000

Long term loans on 1,50,000 2,00,000 Other fixed assets 25,000 30,000
mortgage
Bills payable 50,000 45,000 Cash in hand cash at 20,000 80,000
bank
Sundry creditors 1,00,000 1,20,000 Bills receivable 1,50,000 90,000

Other current liabilities 5,000 10,000 Sundry debtors 2,00,000 2,50,000

Stock 2,50,000 3,50,000

Prepaid expenses - 2,000

14,35,000 16,97,000 14,35,000 16,97,000
solution
 Particulars Year ending 31st Increase/decrease Increase/decrease
December (amount) (percentage)
1998 1999
ASSETS
Current assets:
Cash in hand cash at 20,000 80,000 60,000 300
bank
Bills receivable 1,50,000 90,000 (60,000) (40)
Sundry debtors 2,00,000 2,50,000 50,000 25
Stock 2,50,000 3,50,000 1,00,000 40
Prepaid expenses - 2,000 2,000
Total current assets 6,20,000 7,72,000 1,52,000 24.52
Fixed assets:
Land and building 3,70,000 2,70,000 (1,00,000) (27.03)
Plant and machinery 4,00,000 6,00,000 2,00,000 50.00

Furniture and 20,000 25,000 5000 25.00

fixtures
Other fixed assets 25,000 30,000 5000 20.00
Total fixed assets 8,15,000 9,25,000 1,10,000 13.49

Total assets 14,35,000 16,97,000 2,62,000 18.26

LIABILITIES AND CAPITAL

Current liabilities:

Bills payable 50,000 45,000 (5,000) (10)

Sundry creditors 1,00,000 1,20,000 20,000 20
Other current 5,000 10,000 5,000 100
liabilities

Total current 1,55,000 1,75,000 20,000 12.9

liabilities

Debentures 2,00,000 3,00,000 1,00,000 50

Long-term loans on 1,50,000 2,00,000 50,000 33
mortgage

Total liabilities 5,05,000 6,75,000 1,70,000 33.66

Equity share capital 6,00,000 8,00,000 2,00,000 33

Reserves and 3,30,000 2,22,000 (1,08,000) (32.73)
surplus

Total 14,35,000 16,97,000 2,62,000 18.26

Comparative Income Statement
 Comparative Income Statement

• It gives an idea of Progress of Business over a

period of time.
• It analyses the Profitability of the business.
• It has the same format like Comparative Balance
Sheet.
 Guide lines

1. The increase/decrease of Sales should be compared with the

increase or decrease in Cost of Goods Sold.
• Analyse the impact of Sales, Cost of Goods Sold and the Gross
Profit.
• Analyse the Operating Profits of the Business.
• An increase in operating profit controls the operating expenses.
• The change in individual expenses such as,
– Office and Administrative,
– Selling and Distributional Expenses,
– Financing Expenses etc.,.
• Find-out the expenses for expansion and the expenses due to in-
efficiency.
 Guide lines

• The increase/decrease in net profit will give an idea

about the overall profitability of the concern.
• Analyse the impact Non-Operating Expenses such
as
– Interest paid,
– Losses from sale of Asset,
– Writing off of deferred expenses,
– Payment of tax, etc.,.
• Analyse the impact of Non-Operating Income if
any.
 Format of Income Statement
Particulars First year Second Absolute Change in
(₹) year Change Percentage
(₹)
Gross Sales
(–) Sales return
Net Sales
(–) Cost of Goods Sold
Gross Profit
(–) Operating Expenses
Selling and Distribution Expenses

Administrative Expenses
Total Expenses
Income from Operations
(+) Non-operating Income
Total Income
(–) Non-operating Expenses
Net Profit
 Problem - 1
Particulars 2010 (₹) 2011(₹)
Gross Sales 7,25,000 815000
(–) Sales return (25000) (15000)
Net Sales 700000 800000
Cost of Goods Sold 595000 615000
Gross Profit 105000 185000
Other Expenses
Selling and Distribution Expenses 23000 24000
Administrative Expenses 12700 12500
Total Expenses 35700 36500
Operating Income 69300 148000
Other Income 1200 8050
70500 156550
Non-operating Expenses 1750 1940
Net Profit 68750 154610
 Solution
Particulars 2010 (₹) 2011(₹) Absolute Change in
Change Percentage
Gross Sales 7,25,000 8,15,000 90,000 12.41
(–) Sales return (25,000) (15,000) (10,000) (40.00)
Net Sales 7,00,000 8,00,000 1,00,000 14.28
(–) Cost of Goods Sold 5,95,000 6,15,000 (20,000) (3.36)
Gross Profit 1,05,000 18,5,000 80,000 76.19
(–) Operating Expenses
Selling and Distribution 23,000 24,000 1,000 4.34
Expenses
Administrative Expenses 12,700 12,500 (200) (1.57)
Total Expenses 35,700 36,500 800 2.24
Income from Operations 69,300 14,8000 79,200 114.28
(+) Non-operating Income 1,200 8,050 6,850 570.83
Total Income 70,500 1,56,550 86,050 122.05
(–) Non-operating Expenses 1,750 1,940 (190) (10.85)
Net Profit 68,750 1,5,4610 85,860 124.88
 Problem - 2
Particulars 1993 1994
Rs(000) Rs(000)

Net sales 785 900

Cost of goods sold 450 500
Operating expenses:
General and administrative 70 72
expenses
Selling expenses 80 90
Non-operating expenses:
Interest paid 25 30
Income tax 70 80
 Solution
Paritculars 31st December Increase(+) Increase(+)
Decrease(-) Decrease(-)

1993 1994
Net sales 785 900 115 14.65
Less:cost of goods sold 450 500 50 11.0
Gross profit 335 400 65 19.40
Operating expenses:
General & administrative 70 72 2 2.8
expenses
Selling expenses 80 90 10 12.5
Total operating expenses 150 162 12 8.0
Operating profit 185 238 53 28.65
Less:other deduction 25 30 5 20

Interest paid
Net profit before tax 160 208 48 30.0
Less: income tax 70 80 10 14.3
Net profit after tax 90 128 38 42.22
Trend Analysis
 Trend Analysis

• The financial statements may be analyzed

by computing Trends of series of
information.
• This method determines the direction
upwards or downwards and involves the
computation of the percentage
relationship that each statement item
bears to the same item in base year.
 Trend Analysis

• The information for a number of years is

taken up and one year, generally the first
year, is taken as a base year.
• The figures of the base year are taken as
100 and trend ratios for other years are
calculated on the basis of base year.
• The analyst is able to see the trend of
figures, whether up ward or down ward.
 Procedure for Calculating Trends

1. One year is taken as a base year. Generally, the firs or

the last is taken as base year.
2. The figures of base year are taken as 100.
3. Trend percentages are calculated in relation to base
year.
4. If figure in lateral years is less than the figure in base
year, the trend percentage will be less than 100 and vice
versa.
5. Each year’s figure is divided by the base year’s figure.
 Guide lines
• The mere increase or decrease in trend percentage may
give misleading result if studied in isolation.
• Example:
– An increase of 20% in Current Assets may be treated
favorable. If this increase in Current Assets is
accompanied by an equivalent increase in Current
Liabilities, then this increase will be unsatisfactory.
– The increase in sales may not increase profits if the
cost of production has also gone up.
• Base period should be carefully selected.
From the following data relating to the ABC & Co. for the year 2007 to 2010,
calculate the trend percentages (taking 2007 as the base year).

2007 2008 2009 2010

Net sales 2,00,000 1,90,000 2,40,000 2,60,000
Less: cost of goods 1,20,000 1,17,800 1,39,200 1,45,600
sold
Gross profit 80,000 72,200 1,00,800 1,14,400
Less: expenses 20,000 19,400 22,000 24,000
Net profit 60,000 52,800 78,800 90,400
 Solution
2007 2008 2009 2010
Net sales 100 95.0 120.0 130.0
Less: cost of goods sold 100 98.2 115.8 121.3
Gross profit 100 90.3 126.0 143.0
Less: expenses 100 97.0 110.0 120.0
Net profit 100 88.0 131.3 150.6

In the year 2008, the sales have reduced by 5% but the cost of goods sold and the
expenses have decreased by 1.8% and 3% respectively.
There is a decrease in the net profit by 12%.
The position was recovered in 2009 but there is a positive growth in 2009 and
2010.
In 2009 there is increase in net profit by 31.3% and 2010 an increase by 50.6%. the
sales have increased by 20% and 30% respectively.
 Problem - 2

Calculate the trend percentage from the following figures of X Ltd. taking 1989
as the base and interpret them.

(Rs. in Lakhs)

Year Sales Stock Profit before tax

1989 1,881 709 321
1990 2,340 781 435
1991 2,655 816 458
1992 3,021 944 527
1993 3,768 1,154 672
Solution

Year Sales Stock Profit before tax

Amount Trend Amount Trend Amount Trend
(Rs. in percenta (Rs. in percent (Rs. in percentage
lakhs) ge lakhs) age lakhs)

89 1,881 100 709 100 321 100

90 2340 124 781 110 435 136

91 2655 141 816 115 458 143
92 3021 161 944 133 527 164
93 3768 200 1154 162 672 209
 Interpretations

• The sales have continuously increased in all the years’ up to

1993. The percentage in 1993 in 200 as compared to 100 in
1989. The increase in sales is quite satisfactory.
• The figure of stock has also increased from 1989 to 1993. The
increase in stocks is more in 1992 and 1993 as compared to
earlier years.
• Profit before tax has substantially increased. In five years
period it has more than doubled. The comparative increase
in profits is much higher in 1992 and 1993 as compared in
1991.
• The expansion of firm is good and it has doubled its sales
and profits in just five years’ time. The profits have
increased more than sales which show that there is a proper
control over cost of goods sold.
Common-Size Statements
Introduction

• These statements are shown in analytical

percentages.
• The figures are shown as percentages of total
assets, total liabilities and total sales.
• The total assets are expressed as a percentage of
the total.
• Similarly, various liabilities are taken as a part of
total liabilities.
• The analyst is able to assess the figures in
relation to total values.
 Common-Size Balance Sheet

• A statement in which balance sheet items

are expressed as the ratio of each asset to
total assets and the ratio of each liability is
expressed as a ratio of total liabilities is
called common-size balance sheet.
 Problem - 1
Liabilities 2011 2012 (₹) Assets 2011 (₹) 2012 (₹)
(₹)
Share Capital 2,400 3,600 Land and Buildings 1,620 1,040
Reserves & 1,872 2,124 Plant and Machinery 1,860 4,716
Surplus
Debentures 300 600 Furniture and Fixtures 54 108
Long Term 900 1,530 Other Fixed Assets 120 180
Debt
Bills Payable 1,530 702 Long Term Loans 276 354
Other Current 42 60 Cash and Bank Balances 708 60
Liabilities
Bills Receivables 1,254 1,120
Stock 960 780
Prepaid Expenses 18 18
Other Current Assets 174 240
7,044 8,616 7,044 8,616
 Solution
Particulars 2011 (₹) 2012(₹)
(₹) % (₹) %
Fixed Assets
Land and Buildings 1,620 23.00 1,040 12.07
Plant and Machinery 1,860 26.41 4,716 54.73
Furniture and Fixtures 54 0.77 108 1.25
Other Fixed Assets 120 1.70 180 2.09
Total Fixed Assets (A) 3,654 51.88 6,044 70.14
Investments (B)
Long Term Loans 276 3.91 354 4.12
Current Assets
Cash and Bank Balances 708 10.05 60 0.70
Bills Receivables 1,254 17.80 1,120 13.00
Stock 960 13.63 780 9.05
Prepaid Expenses 18 0.26 18 0.21
Other Current Assets 174 2.47 240 2.78

Total Current Assets (C) 3,114 44.21 2,218 25.74

Total Assets (A+B+C) 7,044 100.00 8,616 100.00
Current Liabilities

Bills Payable 1,530 21.72 702 8.14

Other Current Liabilities 42 0.59 60 0.70

Total Current 1,572 22.31 762 8.84

Liabilities
Long Term External Liabilities

Debentures 300 4.26 600 6.96

Long Term Debt 900 12.77 1,530 17.76

Total Long Term External 1,200 17.03 2,130 24.72

Liabilities
Shareholders Fund

Share Capital 2,400 34.07 3,600 41.78

Reserves & Surplus 1,872 26.57 2,124 24.66

4,272 60.64 5,724 66.44

Total Liabilities 7,044 100.00 8,616 100.00

 Comments

• In spite of decrease in current assets and current

liabilities, the current ratio has improved
• Decrease in cash and cash bank balances
indicates that there will be delay in payments.
• Increase in fixed assets and share capital shows
that assets are purchased with long term sources
of finance.
 Problem - 2

Balance sheet
Particulars X co. (₹) Y co.(₹)
Cash 40,000 60,000
Sundry debtors 1,50,000 2,00,000
Stock 60,000 80,000
Prepaid expenses 10,000 10,000
Fixed assets 5,00,000 6,00,000
Total assets 7,60,000 9,50,0000
Creditors 50,000 70,000
Bills payable 40,000 20,000
Fixed liabilities 2,00,000 3,00,000
Capital 4,70,000 5,60,000
Total liabilities 7,60,000 9,50,000
 Solution
X co. Y co.
Particulars ₹ Percentage ₹ Percentage
(%)
(%)
Current assets:
Cash 40,000 5.26 60,000 6.31
Debtors 1,50,000 19.74 2,00,000 21
Prepaid expenses 10,000 1.316 10,000 1.05
Stock 60,000 7.89 80,000 8.42
Total current asset 2,60,000 34.21 3,50,000 36.84
Fixed assets 5,00,000 65.79 6,00,000 63.16
Total assets 7,60,000 100 9,50,000 100
Current liabilities:
Creditors 50,000 6.58 70,000 7.37
Bills payable 40,000 5.26 20,000 2.10
Total current liabilities 90,000 11.84 90,000 9.47

Fixed liabilities 2,00,000 26.31 3,00,000 31.58

Capital 4,70,000 61.84 5,60,000 58.97
Total liabilities 7,60,000 100 9,50,000 100
 Interpretations
• In X co. share capital consist of 61.84% total investments while the
percentage is 58.97% in Y company .X co. has relied more on
shareholders funds.
• Y company has 58.97% investment from shareholders and have
relied on outsiders for other funds .So financial structure of
company X has more safe compared to Y company.
• Both companies follows the policy of financing fixed asset &long-
term funds. In X co. fixed assets are 65.79% and long term funds are
38.15%, these figures in Y co. fixed assets are 63.16 & long term
funds are 41.05%
• Both companies have good working capital position . X co. has
current assets of 34.12% while current liabilities are 11.84% and Y co.
fixed assets are 36.84% while current liabilities are 9.47%
• To conclude it can be said that financial position of company X is
better than company Y.
Common-Size Income Statement
 Introduction

• The items in Income Statement can be shown as

percentages of sales to show the relation of each item to
sales.
• A significant relationship can be established between
items of income statement and volume of sale.
• The increase in sales will certainly increase to a
considerable extent administrative and financial
expenses may go up.
• In case the sales are declining, the selling expenses
should be reduced at once.
Common-Size Income Statement

Particulars 2010 (₹) 2011 (₹)

Gross Sales 30,600 36,720
(–) Sales return (600) (700)
Net Sales 30,000 36,020
(–) Cost of Goods Sold (18,200) (20,250)
Gross Profit 11,800 15,770
(–) Operating Expenses
Administrative Expenses (3,000) (3,400)
Sales Expenses (6,000) (6,600)
Total Expenses 9,000 10,000
Income from Operations 2,800 5,770
(+) Net Operating Income 300 400
Total Income 3,100 6,170
(–) Non-operating Expenses (400) (600)
Net Profit 2,700 5,570
 Solution
Particulars 2010 (₹) 2011 (₹)
Gross Sales 30,600 36,720
(–) Sales return (600) (700)
Net Sales 30,000 36,020
(–) Cost of Goods Sold (18,200) (20,250)
Gross Profit 11,800 15,770
(–) Operating Expenses
Administrative Expenses (3,000) (3,400)
Sales Expenses (6,000) (6,600)
Total Expenses 9,000 10,000
Income from Operations 2,800 5,770
(+) Net Operating Income 300 400
Total Income 3,100 6,170
(–) Non-operating Expenses (400) (600)
Net Profit 2,700 5,570
 Problem - 2

Particulars 1998 1999

Rs. Rs.
Gross sales 7,25,000 8,15,000
Less: sales returns 25,000 15,000
Net sales 7,00,000 8,00,000
Cost of sales 5,92,000 6,15,000
Gross profit 1,05,000 1,85,000
Operating expenses:
Selling and distribution expenses 23,000 24,000
Administrative expenses 12,700 12,500
Total expenses 35,700 36,500
Operating income 69,300 1,48,500
Other income 1,200 8,050
70,500 1,56,550
Non-operating expenses 1,750 1,940
Net profit during the year 68,750 1,54,610
 Solution
Particulars 1998 1999
Rs. % Rs. %

Net sales 7,00,000 100.00 8,00,000 100.00

Less: cost of sales 5,95,000 85.00 6,15,000 76.87
Gross profit 1,05,000 15 .00 1,85,000 23.13
Operating expenses:
Selling and distribution expenses 23,000 3.29 24,000 3.00

Administrative expenses 12,700 1.81 12,500 1.56

Total expenses 35,700 5.10 36,500 4.56
Operating income 69,300 9.90 1,48,500 18.56
Other income 1,200 0.17 8,050 1.00
Total income 70,500 10.07 1,56,550 19.56
Less: non-operating expenses 1,750 0.25 1,940 0.24
Net profit during the year 68,750 9.82 1,54,610 19.32
 Interpretation:

• The gross profit ratio has improved in 1999 because the company
has been able to reduce cost of sales. The cost of sales which was
85% of sales in 1998 was brought down to 76.87% in 1999.
• The concern has been able to reduce operational expenses too; this
has helped the company to increase the operating profit from 9.9%
to 18.56%
• Net profit ratio has almost doubled from 9.82% to 19.32% in just one
year period.
• Profitability of the company has improved allot in1999. This has
been possible for two reasons, one is that the company has increased
sales by Rs. 1,00,000 in 1999 from 1998 the second reason is that the
company has not only controlled but reduced its operating cost.
• The profitability of the company is very good.