Here are the steps to calculate the key ratios: 1. Gross Profit Ratio = Gross Profit/Net Sales x 100 = 201000/560000 x 100 = 35.89% 2. Operating Expenses Ratio = (Administrative Expenses + Selling and Distribution Expenses)/Net Sales x 100 = (20000 + 89000)/560000 x 100 = 18.75% 3. Operating Profit Ratio = Gross Profit - Operating Expenses/Net Sales x 100 = 201000 - (20000 + 89000)/560000 x 100 = 17.14% 4. Net Profit Ratio = Net Profit/Net Sales x 100 = 800/560000 x 100 = 0.14%

1. ACCT602-MANAGEMENT ACCOUNTING
ANALYSIS OF FINANCIAL STATEMENTS
MBA (Semester 1) ,2020
GROUP MEMBERS:
-Piyasa Ghosh (A91801920029)
-Sudeep Das (A91801920030)
-Megha Sharma (A91801920031)
-Adwait De (A91801920032)
-Anushka Tarani (A91801920033)
-Sanskriti Singh (A91801920034)
-Avideep Karmakar (A91801920035)
-Sana Aruz (A91801920036)
-Partha Pratim Mitra (A91801920037)
-Rohan Deb (A91801920038)
-Lakshay Agarwal (A91801920039)
-Srishti Bose (A91801920040)
-Mukund Thakur (A91801920041)

2. 2
CONTENTS
PARTICULARS Pg.no
1 ACCOUNTING RATIOS
Theory..........................................................................................................
Formula of Ratio Analysis.........................................................................
Sums on Ratio Analysis...........................................................................
3
9
14
2 CASH FLOW
Theory......................................................................................................
Format of Cash flow...............................................................................
Sums on Cash Flow
21
30
31
3 TREND ANALYSIS
Theory...................................................................................................
Sums on Trend Analysis............................................................................
36
44
4 COMPARATIVE FINANCIAL STATEMENT
Theory...................................................................................................
Sums on Comparative Financial Statement........................................
48
55
5 INTER FIRM COMPARISON 61
6 COMMON SIZE FINANCIAL STATEMENT
Theory.........................................................................................................
Format............................................................................................................
Practical sums on Common Size.................................................................
66
68
69
7 CONCLUSION 73
8 BIBLIOGRAPHY 74

3. 3
ACCOUNTING RATIOS
-MEGHA SHARMA (A91801920031)
Accounting ratios, or financial ratios, are comparisons made between one set of figures from a company’s
financial statement with another.
We use accounting ratios to determine whether a business can pay its debt and how profitable it is. Additionally,
accounting ratios are used to predict whether a company is likely to go bankrupt soon. Overall, the aim when
studying these ratios is to analyze trends.
Accounting ratios are indicators of a commercial entity’s performance and financial situation. We calculate the
majority of ratios from data that the firm’s financial statements provide.
Financial ratio sources could be the balance sheet, income statement, or statement of cash flows. The statement of
changes in equity is also a source. The data comes from either within the company’s financial statements or its
accounting statements.

4. 4
There are many different types of accounting ratios. They tell us how healthy/unhealthy a company is. Apart
from determining whether a firm can meet its financial obligations, they tell us how profitable it is. Furthermore,
we are better able to predict whether it will thrive or sink in the near future.
Most common accounting ratios
There are many types of accounting ratios, depending on the information they contain. Here is a list of the ratios
we use most frequently:
• Absolute Liquid Ratio is the relationship between absolute liquid, or super quick current assets, and
liabilities.
• Activity Ratios measure a company’s ability to convert different accounts within its balance sheets into
cash or sale.
• Asset Turnover Ratios measure the efficiency of a commercial entity’s use of its assets in generating
sales revenue to the business.
• Current Cash Debt Coverage Ratio measures the relationship between net cash that operating activities
provide and the average current liabilities of the firm.
• Current Ratio or Working Capital Ratio measures a business’ ability to pay short- and long-term
obligations.
• Debt Service Coverage Ratio, also known as DSCR, is the ratio of liquid cash available for debt servicing
to interest, principal, and lease payments. It measures a firm’s ability to service its current debts. We
determine this by comparing its net operating income to its total debt service obligation.
• Dividend Policy Ratios: the most common are Dividend Payout Ratio, Dividend Yield and Dividend
Cover. The Dividend Payout Ratio tells us how well earnings support dividend payouts.
• Financial Leverage Ratios measure the overall debt load of a commercial enterprise and compare it with
the assets or equity.
• Liquidity Ratios tell us what the cash levels of a firm are. Additionally, we can learn whether it can turn
assets into cash to pay off debts and current obligations. This type of ratio tells us how well a company
can pay off both its current liabilities as they become due.
• Profitability Ratios are measures that tell us how well a company is performing. In other words, it tells us
whether the business can generate profit.
• Quick Ratio or Acid Test Ratio measures a firm’s liquidity and ability to meet its financial obligations.
Business people view it as a sign of a business’ financial strength or weakness.

5. 5
Expressing ratios
We can express ratios as numbers or percentage values. We quote some ratios, such as earnings yield, as
percentages. These ratios are the ones that are always less than one.
We typically quote ratios that are more than one in decimal numbers (1.0, 1.1, 1.2, etc.). An example is the P/E
ratio.
You can take any ratio’s reciprocal. In other words, if that ratio is above one, the reciprocal will be below one,
and vice versa. Sometimes the reciprocal may be easier to understand.
Why do we use accounting ratios?
We use accounting ratios:
• to make comparisons between different accounting periods of the same company,
• when we compare one company with the average within its industry,
• when making a comparison between different companies, as well as
• To compare one industry with another.
A ratio is only useful if we benchmark it against something else, like another company or past performance.
What is Ratio Analysis?
Ratio analysis is the process of examining and comparing financial information by calculating meaningful
financial statement figure percentages instead of comparing line items from each financial statement.
Managers and investors use a number of different tools and comparisons to tell whether a company is doing well
and whether it is worth investing in. The most common ways people analysis a company’s performance
are horizontal analysis, vertical analysis, and ratio analysis. Horizontal and vertical analyzes compare a
company’s performance over time and to a base or set of standard performance numbers.

6. 6
Importance/Significance/Merits Of Ratio Analysis:
The main points of importance are as follows:
1. Test of Solvency. The use of ratio is useful in testing the solvency position of the company. When
percentage of gross profit to sales is increasing it shows the efficiency of profitability. Likewise, when
ratio of current assets to current liabilities shows upward trend, it means sufficient working capital. Thus,
the claim of creditors can be paid easily.
2. Helpful in decision making. The main object of financial statement is to tell the financial position of the
company upon which management takes decision.
3. Helpful in financial forecasting and planning. The ratios are of utmost use in financial planning.
forecasting and work as a future guide. The ratios are used for drawing conclusions such as: Current ratio
is 5:1, it means blocking up of capital as the ideal ratio is 2:1 whereas we have 5:1, thus, $3 are
unnecessarily blocked.
4. Useful in knowing profitability. The ratios are most useful when comparison is made between
companies for profitability. Two types of comparisons of present ratio with past ratio and the second
comparison of several previous years are computed with the objective of knowing improvements or
downfalls in the financial position.
5. Liquidity position. With the use of ratio analysis the meaningful conclusion regarding the sound liquidity
position of the firm. The liquidity position is sound if it has the ability to pay its debts when these are due
for payments.
6. Helpful in knowing operating efficiency. The ratios are important from management point of view
wherein the management measures the efficiency of the assets. The sale and its percentage to net profit is
increasing every year is a test of increase in efficiency.
7. Business trend. The ratio analysis speaks of the financial discipline of the firm with regard to additions
and downfall. When the trend is for downfall the management can take corrective actions.

7. 7
ADVANTAGES OF RATIO ANALYSIS:
When employed correctly, ratio analysis throws light on many problems of the firm and also highlights some
positives. Ratios are essentially whistleblowers; they draw the management’s attention towards issues needing
attention. Let us take a look at some advantages of ratio analysis.
• Ratio analysis will help validate or disprove the financing, investment and operating decisions of the
firm. They summarize the financial statement into comparative figures, thus helping
the management to compare and evaluate the financial position of the firm and the results of their
decisions.
• It simplifies complex accounting statements and financial data into simple ratios of operating
efficiency, financial efficiency, solvency, long-term positions etc.
• Ratio analysis helps identify problem areas and bring the attention of the management to such areas.
Some of the information is lost in the complex accounting statements, and ratios will help pinpoint
such problems.
• Allows the company to conduct comparisons with other firms, industry standards, intra-firm
comparisons etc. This will help the organization better understand its fiscal position in the economy.

8. 8
Limitations of Ratio Analysis
-Srishti Bose (A91802920040)
Some of the most important limitations of Ratio Analysis are as follows:
● Historical Information: Information used in the analysis is based on real past results that are released by
the company. Therefore, ratio analysis metrics do not necessarily represent future company performance.
● Inflationary effects: Financial statements are released periodically and, therefore, there are time
differences between each release. If inflation has occurred in between periods, then real prices are not
reflected in the financial statements. Thus, the numbers across different periods are not comparable until
they are adjusted for inflation.
● Changes in accounting policies: If the company has changed its accounting policies and procedures, this
may significantly affect financial reporting. In this case, the key financial metrics utilized in ratio analysis
are altered and the financial results recorded after the change are not comparable to the results recorded
prior to the change. It is up to the analyst to be up to date with changes to accounting policies. Changes
made are generally found in the notes to the financial statements section.
● Operational changes: A company may significantly change its operational structure, anything from their
supply chain strategy to the product that they are selling. When significant operational changes occur, the
comparison of financial metrics before and after the operational change may lead to misleading
conclusions about the company’s performance and future prospects.
● Seasonal effects: An analyst should be aware of seasonal factors that could potentially result in
limitations of ratio analysis. The inability to adjust the ratio analysis to the seasonality effects may lead to
false interpretations of the results from the analysis.
● Manipulation of financial statements: Ratio analysis is based on information that is reported by the
company in its financial statements. This information may be manipulated by the company’s management
to report a better result than its actual performance. Hence, ratio analysis may not accurately reflect the
true nature of the business, as the misrepresentation of information is not detected by simple analysis. It is
important that an analyst is aware of these possible manipulations and always completes extensive due
diligence before reaching any conclusions.

9. 9
The Formulae of Ratio Analysis
I) Liquidity Ratio: It is essential for a firm to be able to meet its obligations as they become due. Liquidity
Ratios help in establishing a relationship between cash and other current assets to current obligations to provide a
quick measure of liquidity. It can be divided into three subparts:
● Current Ratio
● Quick Ratio
● Cash Ratio
A. Current Ratio/Working Capital Ratio : The current ratio is also known as the working capital ratio. It will
measure the relationship between current assets and current liabilities. It measures the firm’s ability to pay for all
its current liabilities, due within the next one year by selling off all their current assets. The formula for it, is:
Current Ratio = Current Assets
Current Liabilities
The ideal current ratio, according to the industry standard is 2:1. That means that a firm should hold at least twice
the amount of current assets than its current liabilities. However, if the ratio is very high it may indicate that
certain current assets are lying idle and not being utilized properly. So maintaining the correct balance between
the two is crucial.
B. Quick Ratio/Acid Test Ratio/Liquid Ratio : The other important one of the liquidity ratios is Quick Ratio, also
known as a liquid ratio or acid test ratio. This ratio will measure a firm’s ability to pay off its current liabilities
(minus a few) with only selling off their quick assets.
Now Quick assets are those which can be easily converted to cash with only 90 days notice. Not all current assets
are quick assets. Quick assets generally include cash, cash equivalents, and marketable securities. The formula is:
Quick Ratio = Liquid Assets
Liquid Liabilities
(Quick Assets = All Current Assets – Stock – Prepaid Expenses

10. 10
Quick Liabilities = All Current Liabilities – Bank Overdraft – Cash Credit)
The ideal quick ratio is considered to be 1:1, so that the firm is able to pay off all quick assets with no liquidity
problems, i.e. without selling fixed assets or investments. Since it does not take into consideration stock, which is
one of the biggest current assets for most firms. It is a stringent test of liquidity. Many firms believe it is a better
test of liquidity than the current ratio since it is more practical.
C. Absolute Cash Ratio : This is an even more rigorous liquidity ratio than quick ratio. Here we measure the
availability of cash and cash equivalents to meet the short-term commitment of the firm. We do not consider all
current assets, only cash. The formula is:
Absolute Liquid Ratio = Absolute Liquid Assets
Current Liabilities
This ratio measures the cash availability of the firm to meet the current liabilities. There is no ideal ratio, it helps
the management understand the level of cash availability of the firm and make any changes required. However,
if the ratio is greater than 1 it indicates poor resource management and very high liquidity. And high liquidity
may mean low profitability.
II) Profitability Ratio : These ratios convey how well a company can generate profits from its operations. Profit
margin, return on assets, return on equity, return on capital employed, and gross margin ratios are all examples of
profitability ratios.
The formulae for the profitable Ratios are as follows:
● Gross Profit Ratio = Gross Profit x 100
Net Sales
● Net Profit = Operating Profit x 100
Net Sales
● Operating Cost Ratio = Operating Cost x 100
Net Sales
(Here, Operating Cost = Cost of goods Sold + Operating expenses)

11. 11
● Operating Profit Ratio = Operating profit x 100
Net Sales
● Return on Investment Ratio = Net Profit after Interest and Shares x 100
Shareholders’ Funds or Investment
(Here, Shareholders fund = Equity Capital + General Reserve + Profit/Loss Account)
● Return on Capital Employed ratio = Net Profit after Taxes x 100
Gross Capital Employed
Or, Capital Employed = Shared Capital + Reserve + Debenture
Or, Capital Employed = Fixed Asset + Current Asset - Current Liability
● Price Earnings Ratio = Market Value per Share
Earnings per Share
III) Capital Structures Ratio : Capital structure is how a company funds its overall operations and growth. It
basically analyses how structurally a firm uses the capital or funds.
The formulae are:
● Debt Equity Ratio = Total Long Term Debts
Shareholders Fund
● Proprietary Ratio = Shareholders Fund
Total Assets
● Capital Gearing Ratio = Equity Share Capital
Fixed Interests Bearing Funds

12. 12
● Debt Service Ratio = Net Profit before Interest and Taxes
Fixed Interest Charges
IV) Turnover Ratios : The turnover ratio or turnover rate is the percentage of a mutual fund or other portfolio's
holdings that have been replaced in a given year. The formulae are:
● Inventory Ratio/ Inventory Turnover Ratio/ Stock Turnover Ratio = Net Sales
Inventory
Or, Inventory Ratio = Cost of Goods Sold
Inventory or Average Stock
(The ratio establishes the relationship between the Cost of Goods Sold during a given period and the average
amount of stock carried during the period)
● Debtors Turnover Ratio = Total Sales
Account Receivables
Or, Debtors Turnover Ratio = Credit Sale
Average Debtors
(Here, Average Debtors = Opening Debtor + Closing Debtor)
2
● Debt Collection Ratio = Receivables x Days or Months in a Year
Net Credit or Sales for the Year
● Creditors Turnover Ratio = Net Credit Purchases
Average Account Payable
Or, Creditors Turnover Ratio = Credit Purchase
Average Debtors

13. 13
● Working Capital Ratio = Net Sales
Working Capital
● Fixed Assets Turnover Ratio = Cost of Goods Sold
Total Fixed Assets
Or, Fixed Assets Turnover Ratio = Sales
Net Fixed Assets
● Capital Turnover Ratio = Cost of Sales
Capital Employed
Or, Capital Turnover Ratio = Sales
Total Capital Employed
(Here, Total Capital Employed = Equity Capital + Reserves + Debentures + Long Term Loans -
Fictitious Assets - Non Operating Inventory

14. 14
PRATICAL SUMS OF RATIO ANALYSIS
-Anushka Tarani (A91801920033)
Problem: 1
Following is the Profit and Loss Account to Royal Matrix Ltd. for the ended 31st December 2016.
Dr Cr
Particulars Rs. Particulars Rs.
To Opening stock
To Purchases
To Wages
To Gross Profit c/d
100000
350000
9000
201000
By Sales
By Closing Stock
560000
100000
660000 660000
To Administrative Expenses
To Selling and Distribution Expenses
To Non-Operating Expenses
To Net Profit
20000
89000
30000
80000
By Gross Profit b/d
By Interest on Investments
(outside business)
By Profit On Sales of
Investments
201000
1000
8000
219000 219000
You are required to calculate:
1. Gross Profit Ratio
2. Net Profit Ratio
3. Operating Ratio
4. Operating Profit Ratio
5. Administrative Expenses Ratio.

15. 15
Solution:
1. Gross Profit Ratio = (Gross Profit / Net Sales) x 100
= (201000 / 560000) x 100
= 35.9%
Generally, the higher the gross profit margin the better. A high gross profit margin means that the company
did well in managing its cost of sales. It also shows that the company has more to cover for operating,
financing, and other costs.
2. Net Profit Ratio = (Net profit (after tax) / Net sales) x 100
= (80000 / 560000) x 100
= 14.3%
Alternatively, Net Profit Ratio = (Net operating profit /Net sales) x 100
= [(80000 + 30000) – (10000 + 8000)/ 560000] x 100
= (92000 / 560000 x 100)
= 16.4%
A high ratio indicates the efficient management of the affairs of business. There is no norm to interpret this ratio.
To see whether the business is constantly improving its profitability or not, the analyst should compare the ratio
with the previous years’ ratio and the industry’s budgeted net profit ratio.
3. Operating Ratio
= Cost of goods sold + operating Exp. / Net sales
Where, Cost of Goods Sold
= Op. stock + Purchases + Wages - Closing Stock
= 100000+350000 + 9000 – 100000 = Rs. 359000
Where, Operating Expenses
= Administrative + Selling & Distribution Exp.
= 20000 + 89000 = 109000

16. 16
Therefore,
Operating Ratio = 359000 + 109000 / 560000 x 100
= 83.6%
The operating ratio is used to measure the operational efficiency of the management. It shows whether or not
the cost component in the sales figure is within the normal range. A low operating ratio means a high net
profit ratio (i.e., more operating profit) and vice versa.
4. Operating Profit Ratio = 100 – Operating Ratio
= 100 – 83.6%
= 16.4%
A high ratio may indicate better management of resources i.e. a higher operational efficiency leading to higher
operating profits in the company. A low ratio may indicate operational flaws and improper management of
resources, it is an indicator that the profit generated from operations are not enough as compared to the total
revenue generated from sales.
5. Administrative Expenses Ratio
= (Administrative Expense / Net sales) x 100
= 20000 / 560000 x 100
= 3.6%
A lower ratio means more profitability and a higher ratio means less profitability.
Problem 2:

17. 17
The following is the Balance Sheet of a company as on 31st March:
Calculate:
(1) Current Ratio
(2) Quick Ratio
(3) Inventory To Working Capital
(4) Debt To Equity Ratio
(5) Proprietary Ratio
(6) Capital Gearing Ratio
(7) Current Assets To Fixed Assets
Solution:
Liabilities Rs Assets Rs
Share Capital
Profit & Loss Account
General Reserve
12% Debenture
Sundry Creditors
Bills Payable
2,00,000
30,000
40,000
4,20,000
1,00,000
50,000
Land and Buildings
Plant and Machinery
Stock
Sundry Debtors
Bills Receivable
Cash at Bank
1,40,000
3,50,000
2,00,000
1,00,000
10,000
40,000
8,40,000 8,40,000

18. 18
(1) Current Ratio = Current Assets / Current Liabilities
= Rs 3, 50,000 / Rs 1, 50,000
= 2.33:1
If the current ratio computation results in an amount greater than 1, it means that the company has adequate
current assets to settle its current liabilities. A high current ratio is generally considered a favourable sign for the
company.
Creditors are more willing to extend credit to those who can show that they have the resources to pay obligations.
However, a current ratio that is too high might indicate that the company is missing out on more rewarding
opportunities.
(2) Quick Ratio = Liquid Assets / Liquid Liabilities
= 1, 50,000/ 1, 50,000
= 1:1
As a rule of thumb or as a convention quick ratio of 1: 1 is considered satisfactory. It is generally thought that if
quick assets are equal to current liabilities then the concern may be able to meet its short-term obligations.
(3) Inventory To Working Capital = Inventory / Working Capital
= 2, 00,000 / 2, 00,000
= 1:1
Where, Working Capital
= Current Assets – Current Liabilities
= 3, 50,000 – 1, 50,000
= 2, 00,000
Inventory to working capital ratio measures how well a company can generate additional cash using its net
working capital at its current inventory level. The company might be in an inventory-dependent industry. Also,
some companies can have a very high ratio due to financial limitations.

19. 19
These companies might be more comfortable with a ratio close to 1 in inventory to working capital. The results
vary widely across and between industries and companies. Therefore, you should benchmark a company against
its industry average.
(4) Debt To Equity Ratio
= Long Term Debts / Shareholder’s Fund + Long Term Debts
= 4, 20,000 / 2, 70,000 + 4, 20,000
= 0.6:1
A less than 1 ratio indicates that the portion of assets provided by stockholders is greater than the portion of
assets provided by creditors and a greater than 1 ratio indicates that the portion of assets provided by creditors is
greater than the portion of assets provided by stockholders. Creditors usually like a low debt to equity ratio
because a low ratio (less than 1) is the indication of greater protection to their money. But stockholders like to get
benefit from the funds provided by the creditors therefore they would like a high debt to equity ratio.
(5) Proprietary Ratio = Shareholder’s Fund / Total Assets
= 2, 70,000 / 8, 40,000
= 0.32:1
A high proprietary ratio, therefore, indicates a strong financial position of the company and greater security for
creditors. A low ratio indicates that the company is already heavily depending on debts for its operations. Having
a very high proprietary ratio does not always mean that the company has an ideal capital structure. A company
with a very high proprietary ratio may not be taking full advantage of debt financing for its operations that is also
not a good sign for the stockholders.
(6) Capital Gearing Ratio
= Fixed Assets Bearing Securities / Equity Share Capital
= 4, 20,000 / 2.00.000
= 2.1:1
A highly geared company is considered a risky investment by the potential investors because such a company has
to pay more interest on loans and dividend on preferred stock and, therefore, may have to face problems in
maintaining a good level of dividend for common stockholders during the period of low profits.

20. 20
(7) Current Assets To Fixed Assets Ratio
= Current Assets / Fixed Assets
= 3, 50,000 / 4, 90,000
= 0.71:1
Proportion of fixed assets are higher than the current assets i.e., the company has more long term assets in its
business which it can use in longer run for earning good amount of returns in future.

21. 21
CASH FLOW
-Piyasa Ghosh (A91801920029)
What is Cash flow?
Cash flow is the real or virtual movement of money. The amount of cash or cash-equivalent which the company
receives or gives out by the way of payment(s) to the creditors is known as cash flow.
If the difference is negative it means that you have less amount of cash at the end of a given period when
compared with the opening balance at the starting of a period.
OBJECTIVES OF CASH FLOW
The main objective of preparing cash flow for a particular time period is to present information regarding the
inflow and outflow of cash. Besides, it presents the investment and financial activities of a concern for a
particular period.
• Measurement of cash –Inflows of cash and outflows of cash can be measured annually which arise from
operating activities, investing activities, financial activities.
• Generating Inflow of cash – Timing and certainty of generating the inflow of cash can be known which
directly helps the management to take decisions in future.
• Classification of activities- All the activities are classified into operating activities, investing activities,
financial activities which help a firm to analyze and interpret its various inflows and outflows of the cash.
• Prediction of future- A cash flow statement, no doubt, forecasts the future cash flow which helps the
management to take various financial decisions since synchronization of cash is possible.
• Assessing liquidity and solvency position- Both the inflows and outflows of cash and cash-equivalents
can be known, such as liquidity and solvency position of a firm can also be maintained as timing and
certainty of cash generation.

22. 22
• Evaluation of future flows- Cash flow from operating activities are quite sufficient in future to meet the
various payments e.g., expenses/debts/dividends/taxes.
• Help the management to ascertain cash planning- It helps the management to prepare its cash planning
for the future and also to avoid the unnecessary trouble.
• Supply general information to the users- It assesses the ability of a firm to pay its obligation when it
becomes due and also to analyze and interpret all the transactions for future courses of action.
STATEMENTS OF CASH FLOW
A cash flow statement tells how much cash is entering or leaving from the business along, with the balance sheet
and income statement. It reports also informs the leader of the business cash position. Cash flow statement also
known as Statement of cash flows.
There are three categories of cash flows they are;
✓ Operating activities- It includes cash activities related to net income.
✓ Investing activities- It includes cash activities related to non-current assets.
✓ Financial activities- It includes preference share, equity share etc.

23. 23
ADVANTAGES OF CASH FLOW
• Cash flow analysis together with ratio analysis helps measure the profitability and financial position in
the business.
• Cash flow statement helps in internal financial management as it is useful in formulation of financial
plans.
• Any discrepancy in the financial reporting can be gauged through the cash flow statements by comparing
the cash position.
• Cash flow is the basis of all financial operations. Therefore, a projected cash flow statement will enable
to plan the management to plan and control the financial operations properly.
• As the liquidity position is known, any shortfall can be arranged for or excess can be used for the growth
of the business.
• Cash flow statements help in knowing the liquidity /actual cash position of a company which funds flow
and profit and loss are unable to specify.

24. 24
DISADVANTAGES OF CASH FLOW
• Ignores non –cash items- True net income cannot be obtained because cash flow statements ignore non-
cash items.
• Chance of inaccuracy- It may provide wrong information if there is wrong data in the balance sheet.
• No complete information - Cash flow statement cannot provide complete or up-to-date work to the firm.
• Historical data- It uses historical financial data from balance sheet and income statement. So, it may not
be suitable for future forecasting and financial planning.
• Ignore accounting concept- Cash flow statement ignores accrual concept of accounting.
PURPOSE OF CASH FLOW
The purpose of cash flow statement is to show where an entities cash being generated, and where the cash is
being spent (cash flows), over a specific period of time(quarterly/annually). It is important for analyzing the
liquidity and long-term solvency of a company.
It basically uses cash basis accounting instead of accrual basis accounting which is used for the balance sheet and
income statement by most of the companies. This can produce profit and tax payable but not provide the
resources to stay solvent.
IMPORTANCE OF CASH FLOW
The cash flow report is important because it informs the reader the actual position in the business, a business
needs money all the time to be successful as it needs cash to pay is daily expenses, rent, salaries, bank loans,
taxes and also to buy asset for the future. A cash flow statement defines whether a company has enough money to
do all this or not.
Cash is the key of the business to stay solvent, when a company has no longer enough cash to run it is called as
bankrupt. So, maintain the expenses require a lot of calculation which only done by cash flow.

25. 25
Cash Flow Activities
-Sanskriti Singh (A91801920034)
Cash Flow Activities can be briefly described as that transaction which involve the increase or decrease in the
cash balance of an organisation. Any additions to property, plant, equipment, capitalized software expense, cash
paid in mergers and acquisitions, purchase of marketable securities, and proceeds from the sale of assets are all
examples of entries that should be included in the cash flow statement.
These Cash Flow Activities can be further divided into three categories depending on the nature of the
transaction, namely:
1. Operating Activities: These include cash activities related to net income. For example, cash generated
from the sale of goods (revenue) and cash paid for merchandise (expense) are operating activities because
revenues and expenses are included in net income.
Interest received from loans and dividends from interests are also considered operating activities. The
operating activities section of the statement of cash flows is generally regarded as the most important
section since it provides cash flow information related to the daily operations of the business.
2. Investing Activities: These include cash activities related to noncurrent assets. Noncurrent assets include
- Long-term investments;
- Property, plant, and equipment
- The principal amount of loans made to other entities.
For example, cash generated from the sale of land and cash paid for an investment in another company,
loans granted to other entities, purchase of property, plant, equipment, etc are included in this category.
These activities provide minor cash flow in the firm when compared with operating activities but have a
great impact on the profitability of the firm. Cash flow from investment activities helps in the growth of
capital also creates stability of the firm.
3. Financing Activities: These include cash activities related to noncurrent liabilities and owners’ equity.
Noncurrent liabilities and owners’ equity items include
- The principal amount of long-term debt
- Stock sales and repurchases
- Dividend payments.

26. 26
These activities are confined mainly to financial activities of the firm like trading of company’s shares,
repaying investors, adding or changing loans, or issuing more stock whenever required. Most importantly
these activities change the capital and borrowings of the firm.
Cash Flow from Financing activity = Cash Received from Issuing shares or debts – Cash Paid as Dividends
and Reacquiring of shares or debts
These three activities help us to assess the financial position of a firm and also help to know various cash and
cash equivalent transactions incurred. Each of these activities, there can be a further division between inflow and
outflow of each type of cash flow activities which is
- Inflow Activities - which can be briefly described as the incoming transactions of the business -
revenue made, interest received, etc
- Outflow Activities - which can be briefly describes as the outgoing cash transactions of the
business - expenses, dividend paid, etc.

27. 27
Therefore, each activity includes two types of cash flows, inflow and outflow.
Cash flow Activities Inflow Outflow
1. Operating Activities - Sale of goods and services
- Interest received from loans
- Dividends received from
investments
- Merchandise purchased
from suppliers
- Income Taxes
- Interest paid to lenders
- Employee Payroll
- Materials used to
manufacture products
2. Investing Activities - Sale of long-term investments
- Sale of property, plant and
equipments
- Collection of principals for loans
made to other entities
- Purchase of long term
investments
- Purchase of property, plant
and equipments
- Loans made to other
entities
3. Financing Activities - Issuance of Notes
- Issuance of Bonds
- Issuance of Common stock
- Principal amount of loans
- Principal amount of bonds
- Cash Dividends
- Repurchase of common
stock

28. 28
METHODS FOR PREPARING CASH FLOW STATEMENTS :
Two methods are available to prepare a statement of cash flows: the indirect and direct methods. The Financial
Accounting Standards Board (FASB) prefers the direct method, while many businesses prefer the indirect
method. Regardless of which method one uses, the cash balance is the same, and it has to equal the amount of
cash one shows on the balance sheet.
The last step in compiling the statement of cash flows is to verify that the ending balance in the cash flow
statement equals the ending balance in the cash account on the balance sheet. If they don’t agree, there must be a
mistake or missing cash transactions in the cash flow statement. This is the process used for both the direct and
indirect method.
In the direct method, all individual instances of cash that is received or paid out are tallied up and the total is the
resulting cash flow. In the indirect method, the accounting line items such as net income, depreciation, etc. are
used to arrive at cash flow.
Direct Method:
In the direct method, all individual instances of cash that is received or paid out are tallied up and the total is the
resulting cash flow. While preparing the Cash Flow Statement as per Direct Method, actual cash receipts from
operating revenues and actual cash payments for operating activities are arranged and presented in the cash flow
statement. The difference between cash receipts and cash payments is the net cash flow from operating activities
under the direct method. In other words, it is an income statement (Profit & Loss A/c) prepared on cash basis
under the Direct Method.
Items like Depreciation, Amortisation of Intangible Assets, Preliminary Expenses, Debenture Discount etc are
ignored from Cash Flow Statement since the Direct Method includes only Cash Transactions and Non-Cash
Transactions are omitted.
Likewise, no adjustment is made for loss/gain on the sale of fixed assets and investments while preparing the
Cash Flow Statement as per the Direct Method.

29. 29
Indirect Method :
In the indirect method, the accounting line items such as net income, depreciation, etc. are used to arrive at cash
flow. While preparing the Cash Flow Statement as per the indirect Method, the net profit/loss for the period is
used as the base and then adjustments are made for items that affected the Income Statement but did not affect
the cash
While preparing the Cash Flow Statement as per the Indirect Method, non cash and non Operating charges in the
income statement are added back to the net profits while non-cash & non-operating credits are deducted to
calculate the operating profit before working capital changes. The Indirect Method of preparation of Cash Flow
Statement is a partial conversion of accrual basis profit to Cash basis profit. Further, necessary adjustments are
made for Increase/Decrease in current assets and current liabilities to obtain net cash flows from operating
activities as per the Indirect Method.
APPLICABILITY OF AS3 IN CASH FLOW STATEMENTS:
The applicability of Cash flow statement has been defined under the Companies Act, 2013. As per the definition
in the act, a financial statement includes the following:
i. Balance sheet
ii. Profit and loss account / Income and expenditure account
iii. Cash flow statement
iv. Statement of changes in equity
v. Explanatory notes
Thus, cash flow statements are to be prepared by all companies but the act also specifies a certain category of
companies which are exempted from preparing the same. According to AS3, preparing a cash flow statement only
applies to enterprises having a turnover of more than Rs 50 crores in a financial year.

30. 30
FORMAT OF CASH FLOW STATEMENT
Particulars Amount (in INR) Amount (in INR)
Cash from operating activity XXX
Net profit XXX
Depreciation expense (XXX)
Gain on sale of Fixed Asset XXX
Loss on sales of Fixed Asset (XXX)
Increase in account receivables XXX
Decrease in account receivables XXX
Increase in amount payable (XXX)
Decrease in amount payable XXX
Provision for income tax (XXX)
Income tax paid XXX
Net cash flow from operating activity XXXX
Cash From Investing activity
Sale of fixed asset XXX
Purchase of asset (XXX)
Interest income XXX
Net cash flow from investing activity XXX
Cash from financing activity
Issue of share capital (Equity/Preference) XXX
Buy-back of shares (XXX)
Issue of bonds XXX
Payment of bonds (XXX)
Payment of Interest/Dividend (XXX)
Net cash flow from financing activity XXX
Net change in cash XXX
Add : Opening cash balance XXX
Closing cash balance XXX
PRATICAL SUMS OF CASH FLOW STATEMENT

31. 31
-Lakshay Agarwal (A91801920039)
Illustration1
The summarized balance sheet of Jay Ltd as on 31.12.06 and 31.12.2007 are as follows:
Liabilities 2006 2007 Assets 2006 2007
Share capital 1,00,000 1,00,000 Building 46,800 45,000
General Reserve 38,400 42,000 Plant and Machinery 38,280 42,030
Creditors 9,750 6,380 Goodwill 13,000 13,000
Tax provision 19,000 21,000 Investment 10,000 11,250
Prov. for doubtful debt 1,000 1,200 Stock 30,000 28,000
Debtor 22,070 22,300
Cash 8,000 9,000
1,68,150 1,70,580 1,68,150 1,70,580
Aftertakingthefollowinginformationintoaccount,prepareacashflowstatementfor the year ending
31.12.2007
1. Theprofitfor2006‐2007wasRs.8,600againstthishadbeenchargedDep.Rs.3,050 and
increaseinprovision fordoubtful debt Rs.200
2. IncometaxRs.18, 000waspaidduringtheyearchargedagainsttheprovisionandin addition
Rs.20, 000waschargedagainstprofitandcarriedtotheprovision.
3. Aninterim dividend OfRs.5,000 was paid in January2007
4. AdditionalplanwaspurchasedinSeptember 2006forRs.5,000
5. Investments(costRs.5, 000)weresold2007forRs.4800andon1st
march2007
anotherinvestment was made forRs. 6,250.

32. 32
Solution:
Cash flow statement for the year ended 31.12.2007
Particular Rs. Rs.
1.Cash flows from operating activities:
Net profit before tax 28,800
Adjustment for:
Depreciation 3,050
Inc. in provision for d/d 200
Dec. in stock 2,000
Dec. in creditor (3,370)
Inc. in debtor (230)
Income tax paid (18,000)
Net cash from operating activities 12,450
2. Cash flows from investing activities:
Investment purchased
Saleofinvestment
Plantpurchased
(6,250)
4,800
(5,000)
Net cash from investing activities (6,450)
3.Cash flows from financing activities
Payment of interim dividend (5,000)
Net inc. in cash equivalents 1,000
Add: opening cash balance 8,000
Closing cash balance 9,000

33. 33
Adjusted profit and loss A/c
Particulars Rs Particulars Rs
To Provision for tax 20,000 By profit 28,800
To Generalreserve 3,600
To Loss on sale of Invest. 200
To interimdividend 5,000
28,800 28,800
Provision for tax A/c
Particulars Rs Particulars Rs
ToBank(taxpaid)
ToBalancec/d
18,000
21,000
By Balance b/d
By P & L A/c.
(provision)
19,000
20,000
39,000 39,000
Illustration ‐ 2
From the following Balance‐Sheet prepare cash flow statement for the year 2012.
Liabilities 1‐1‐2012 31‐12‐2012 Assets 1‐1‐2012 31‐12‐2012
Share Capital 1,25,000 1,53,000 Cash 10,000 7,000
Creditors 40,000 44,000 Debtors 30,000 50,000
Loan from X 25,000 ‐ Stock 40,000 25,000
Loan frombank 40,000 50,000 Machinery 80,000 55,000
Land 35,000 50,000
Building 35,000 60,000
2,30,000 2,47,000 2,30,000 2,47,000
DuringtheyearamachinecostingRs.10,000 withaccumulateddepreciation Rs.3,000 was sold
for Rs. 5,000.

34. 34
Solution:
Cash flow statement for the year ended on December 2012
Particulars Amount
Rs.
Amount
Rs.
(1) Cash Flow from Operating Activities:
Capital at the end of the year 1,53,000 ‐
Less: Capital at the beginning of the year (1,25,000)
Profit for the year 28,000
Add: Loss on sale of machinery 2,000
Depreciation 18,000
Profit before changes in working capital 48,000
Add: Increase in creditors 4,000
Decrease in stock 15,000
Less: Increase in debtors (20,000)
NET CASH PROVIDED BY OPERATING ACTIVITIES
(A)
47,000
(2)Cash Flow From Investing Activities:
Sale of Machinery 5,000
Purchase of land (15,000)
Purchase of Building (25,000)
NET CASH PROVIDED BY INVESTING ACTIVITIES
(B)
(35,000)
(3)Cash Flow From Financing Activities:
Loan from bank 10,000
Repayment of loan from X (25,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES
(C)
(15,000)
NET CASH FLOW FROM ALL ACTIVITES (A+B+C) (3,000)
Add:‐ Opening balance of cash & bank 10,000
Closing balance of cash & bank 7,000

35. 35
Working Note-
Machinery Account
Particular Amount Particular Amount
To Balance b/d 80,000 By Bank a/c 5,000
By Loss on sale 2,000
By Depreciation 18,000
By Balance c/f 55,000
80,000 80,000

36. 36
TREND ANALYSIS
-Sana Aruz (A91801920036)
What is Trend Analysis?
• Trend Analysis is a technique used to visualize the past, current and future movement of
events by analysing data from the considered amount of time.
• It involves the comparison of data over a specific period of time to spot a pattern or trend.
• Trend analysis methods can predict the performance of a business in coming days.
• Trend analysis is based on the idea of what has happened in the past, might happen in the
future. In turn, gives traders a birds-eye view of what is actually happening, or will
happen.
• The most general form of trend analysis could be: Stock Market Investments, Mutual
Funds, Gold Prices, Fuel Price, etc.
Trend analysis involves the collection of information from multiple time periods and plotting the
information on a horizontal line for further review. The intent of this analysis is to spot actionable
patterns in the presented information. In business, trend analysis is typically used in two ways,
which are as follows:
Revenue and cost analysis: Revenue and cost information from a company's income statement
can be arranged on a trend line for multiple reporting periods and examined for trends and
inconsistencies. For example, a sudden spike in expense in one period followed by a sharp decline
in the next period can indicate that an expense was booked twice in the first month. Thus, trend
analysis is quite useful for examining preliminary financial statements for inaccuracies, to see if
adjustments should be made before the statements are released for general use.
Investment analysis: An investor can create a trend line of historical share prices and use this
information to predict future changes in the price of a stock. The trend line can be associated with
other information for which a cause-and-effect relationship may exist, to see if the causal
relationship can be used as a predictor of future stock prices. Trend analysis can also be used for
the entire stock market, to detect signs of an impending change from a bull to a bear market, or the
reverse. The logic behind this analysis is that moving with a trend is more likely to generate
profits for an investor.
When trend analysis is being used to predict the future, keep in mind that the factors formerly
impacting a data point may no longer be doing so to the same extent. This means that an
extrapolation of a historical time series will not necessarily yield a valid prediction of the future.
Thus, a considerable amount of additional research should accompany trend analysis when using
it to make predictions.

37. 37
TYPES OF TREND ANALYSIS
There are basically 3 types of trend:
• Uptrend
• Downtrend
• Sideways Trend
Uptrend:
✓ Whenever the movements of next peak are higher than the current peaks it forms higher
highs and higher lows. This trend is known as Uptrend.
✓ Consecutive peaks higher than the previous peaks are termed as Higher highs. The
bottoms higher than the previous peaks are termed as Higher lows.
✓ Uptrend basically indicates the improvement in performance of a business.
Downtrend:
✓ Whenever the movement of consecutive peaks are lower than the current peaks it forms
lower highs and lower lows. This trend is known as Downtrend.
✓ Consecutive peaks lower than the previous peaks are termed as Lower highs. The bottoms
lower than the previous peaks are termed as Lower lows.
✓ Downtrend basically indicates the degradation of performance in a business.

38. 38
Sideways Trend:
✓ The horizontal movements of peaks are known as Sideways trend.
✓ Consecutive peaks are almost parallel to the previous peaks Sideways Trend represents the
stability of a business. The incomings and outgoings are balanced.

39. 39
Importance of Trend Analysis:
• Trend analysis can be used to compare the company’s performance e with the
industry average.
• Trend analysis makes it simpler to ascertain the strengths and weaknesses of a
particular business/firm. As a result, companies can quickly identify the holes and
implement necessary changes.
• Trend analysis can be used as a comparative study to measure the financial
performances of a firm over a period of time. Through this the management can take
decisions for the future and alter their decisions accordingly.
• Using market trend analysis, companies can measure their profitability positions over
a given period of time.
• Trend analysis is more effective when compared to the absolutes data, facilitating top
management in better decision-making.
• Trend analysis methods help analysts to make suitable comparisons between two or
more firms over a period of time. It also helps understand the strengths or weaknesses
of a particular organization in comparison with other related organizations in the
industry.
• Trend analysis methods, with the help of financial trend ratios, help the analyst to
understand the short-term liquidity position as well as the long-term solvency position
of a company over the years.
• Trend analysis methods with the help of some related financial trend ratios like Net
Profit Ratio, Operating Ratio, Gross Profit Ratio, etc. also helps to measure the
profitability position of a firm over the years.
• Trend analysis identifies current and future movements of an investment or group of
investments.
• It is comparing past and current financial ratios as they related to various institutions
to project how long the current trend will continue.
• It is helpful to investors who wish to make the most of their investments.
• The process of a trend analysis begins with identifying the category of the
investments that are under consideration.
• It is possible to determine if all or most of those factors are still exerting an influence.

40. 40
CALCULATION
Okay, but how information can be obtained from trend analysis?
Let us understand this by an example. Consider the following trend:
Year Sales Stock EBT
2008 1881 709 321
2009 2340 781 435
2010 2655 816 458
2011 3021 944 527
2012 3768 1154 672
Steps:
1. Select a Base Year (Usually the first entry of the period). In our case, its 2008.
2. Assign all figures of the Base Year as 100.
3. Apply the formula accordingly in the consecutive years to calculate the Trend
Percentage.
4. Note down the Percentages as shown below.
Trend Percentage= 𝒄𝒚 ∗
𝟏𝟎𝟎
𝒃𝒚
where, cy: Current year by base year

41. 41
Graphical Representation of Trend Analysis:
0
50
100
150
200
250
2008 2009 2010 2011 2012
TrendPercentage
Year
Chart Title
Sales Stocks EBT
Year Sales Stock E
B
T
Amount Percentage Amount Percentage Amount Percentag
e
2008 1881 100 709 100 321 100
2009 2340 124 781 110 435 136
2010 2655 141 816 115 458 143
2011 3021 161 944 133 527 164
2012 3762 200 1154 162 672 209

42. 42
USE OF TREND ANALYSIS
-Mukund Thakur (A91801920041)
It is important to understand the concept of trend analysis because it helps in the assessment
of the future movement based on historical figures. It is also helpful in identifying any
stark deviation which can be an indication of irregularity in financial reporting or business
downtrend. A market is said to be on the uptrend if the asset prices move in the upward
direction, i.e. keep increasing over a certain period of time. On the other hand, a downtrend
market indicates that asset prices are moving in the downward direction, i.e. decreasing.
Uses of trend analysis are as follows:
• Examine revenue patterns to see if sales are declining for certain products,
customers, or sales regions. Examine expense report claims for evidence
of fraudulent claims.
• Examine expense line items to see if there is any unusual expenditure in a
reporting period that require additional investigation. Extend revenue and
expense line items into the future for budgeting purposes, to estimate
future results.
• When trend analysis is being used to predict the future, keep in mind that
the factors formerly impacting a data point may no longer be doing so to
the same extent. This means that an extrapolation of a historical time
series will not necessarily yield a valid prediction of the future. Thus, a
considerable amount of additional research should accompany trend
analysis when using it to make predictions.

43. 43
The term “Trend Analysis” refers to one of the most useful analytical tools employed for
financial analysis of statements such as income statement balance sheets, and cash flow
statements. In other words, trend analysis compares the movement in each line
Item across time periods in order to draw actionable insights. It basically indicates
the change either in terms of amount or as percentage change year over year (Y-o-
Y).
The formula for trend analysis (change in amount) can be derived by subtracting
the base year amount from the current year amount.
Mathematically, it is represented as,
Formula –
Change in Amount = Current Year Amount – Base Year Amount The
formula for trend analysis (percentage change) can be derived by dividing the
difference between the current year amount and the base year amount by the base
year amount. Mathematically, it is represented as,

44. 44
Formula –
Percentage Change = [(Current Year Amount – Base Year Amount) / Base Year
Amount]
Example of Trend Analysis Formula
Let’s take an example to understand the calculation of Trend Analysis Formula in a better
manner.
Trend Analysis Formula – Example-1
Let us take the example of a company DFG Inc. which is engaged in the
manufacturing of customized machine parts. The following income statement
information is available for the last five years:
Solution: Trend Analysis is calculated using the change in amount formula given
below
Change In Amount (millions) 2014 2015
Net sales NA =C5-B5
Gross Profits NA
Operating Incomes NA
Net Incomes NA

45. 45
Change in amount =Current year amount-Base year amount
Particular(millions) 2014 2015 2016 2017 2018
Net Sales $202.75 $195.89 $180.50 $220.80 $250.40
Gross Profits $83.58 $79.25 $80.30 $97.30 $118.45
Operating Income $42.50 $38.25 $37.50 $42.00 $52.95
Net Income $18.80 $18.50 $18.17 $19.90 $27.05
Change in amounts(millions) 2014 2015 2016 2017 2018
Net sales NA -$6.86 -
$15.39
$40.30 $29.60
Gross profits NA -$4.33 -$1.05 $17.00 $21.15
Operating Income NA -$4.25 -$0.75 $4.50 $10.95
Net Income NA -$0.30 -$0.33 $1.73 $7.15
Change in Amount = Current Year Amount – Base Year Amount

46. 46
Year 2015 is calculated using the above-given formula
Particular(millions) 2014 2015
Net Sales $202.75 $195.89
Gross Profits $83.58 $79.25
Operating Income $42.50 $38.25
Trend Analysis is calculated using the change in amount formula given below
Change in amount = current year amount –Base year Amount
Change In Amount(millions) 2014 2015
Net Sales NA -$6.B6
Gross Profits NA -$4.33
Operating Income NA -$4.25
Net Income NA -$0.30
Similarly calculated the year 2016, 2017 and 2018 by the given formula. Trend
Analysis is calculated using the percentage change formula given below
Percentage Change = [(Current Year Amount – Base Year Amount) / Base
Year Amount
Net Income $18.80 $18.50

47. 47
Explanation
The Trend Analysis Formula can be calculated by using the following steps:
Step 1: Firstly, decide the base year and then note down the value of the subject
line item in the base year.
Step 2: Next, note down the value of the line item in the current year.
Step 3: Now, the formula for trend analysis in terms of change in amount can be
derived by subtracting the base year amount (step 1) from the current year amount
(step 2) as shown below.
Change in Amount = Current Year Amount – Base Year Amount
Step 4: On the other hand, the formula for trend analysis in terms of percentage
change can be derived by dividing the change in amount (step 3) by the base year
amount (step 1) as shown below.

48. 48
COMPARATIVE FINANCIAL STATEMENTS
-Sudeep Das (A91801920030)
Introduction
Business organizations prepare the financial statement in order to determine their financial
position for a particular financial year. The primary purpose of preparing these financial
statements is to get an idea about the financial soundness of the organization.
The comparative statements for comparative financial statements are one of the very common
tools that are used to undergo the analysis of financial statements generated by the
businesses.
WHAT IS A COMPARATIVE FINANCIAL STATEMENT?
Comparative financial statements are the statements of the financial position of a company at
different financial periods. These statements help in determining the profit and viability of a
business by comparing the financial data from two or more accounting or financial years. The
data from the financial years are updated side by side which is why it is also known as
horizontal analysis. The advantage of search analysis could be that it helps the investor to
identify the Trends of the business, check the company's progress, and compare it with its
competitors.
Comparative statement is also used to report information for each of the 12 preceding months
on a rolling basis. Comparative financial statements are quite useful for the following
reasons:
● It provides a comparison of the company's financial performance over multiple
periods so that we can determine trends. This statement may also reveal unusual facts
in the reported information that can indicate the presence of accounting errors.
● It provides a comparison of expenses to revenues and the proportion of various items
on the balance sheet over multiple periods of time. This information can be used for
the cost management purposes.

49. 49
● It will be helpful for predicting future performance though we should rely more on
the operational indicators and leading indicators than the historical performance for
this type of analysis.
It is customary to issue a comparative financial statement with additional columns containing
the variance between period as well as percentage change between the period.
The point to be noted that the financial data will only be considered to be comparative when
the company follows the same set of Accounting Principles while preparing statements.
TYPES OF COMPARATIVE FINANCIAL STATEMENTS
There are two types of comparative financial statement:
1. Comparative Income Statement
2. Comparative Balance Sheet.
Now let us discuss both of these types briefly below:
1. COMPARATIVE INCOME STATEMENT:
Income Statement provides the detailed results of the operations carried by the business and
comparative income statement provides the progress made by the business or company over a
period of few years. This statement will also help the manager in ascertaining the changes
that occur in each line item of the income statement over different periods.
The comparative income statement not only shows the operational efficiency of the
organisation but also helps in comparing the results with its competitors over a different
period.
The following points should be stated when we are analysing the comparative financial
statements:
❖ Compare the increase or decreases in save with a relative increase in the cost of
goods sold.
❖ Studying the operational profit of the company
❖ Overall profitability of the company by analysing the increase or decrease in its net
profit.

50. 50
While preparing Comparative Income Statement, the following step should be followed to
prepare correct and accurate comparative income statement:
➢ Specify absolute figures of all items related to accounting period over consideration
➢ Determining the absolute changes that have occurred in the item of the income
statement can be achieved by finding the difference between the previous year with
real values and the current year values or by subtracting in both of these values with
each other.
➢ Calculate the percentage change in the atoms present in the current statement with
respect to the previous year statement.

51. 51
COMPARATIVE INCOME STATEMENT
For the year ended 2020
Particulars
31st March
2019
31st March
2020
Absolute
Change
Percentage Change
(Rs.) (Rs.)
Increase or decrease )
(Rs.)
Increase or decrease
)
(%)
I. Revenue from Operations XXX XXX XXX XXX
II. Other Income XXX XXX XXX XXX
III. Total Revenue (I+II) XXX XXX XXX XXX
IV. Expenses
(a) Cost of Materials consumed XXX XXX XXX XXX
(b) Purchases of Stock -in-
Trade XXX XXX XXX XXX
(c) Changes in Inventories of
Finished Goods, Work-in-
Progress
and Stock-in-Trade XXX XXX XXX XXX
(d) Employees Benefits
Expenses XXX XXX XXX XXX
(e) Finance Cost XXX XXX XXX XXX
(f) Depreciation and
Amortisation XXX XXX XXX XXX
Total Expenses XXX XXX XXX XXX
V. Profit before Tax (III-IV) XXX XXX XXX XXX
(-) Income Tax XXX XXX XXX XXX
VI. Profit after Tax XXX XXX XXX XXX

52. 52
FORMULA TO FIND OUT THE PERCENTAGE CHANGE :
Absolute Increase or Decrease ( Col.4)
------------------------------------------------------- X 100
First year absolute figure (Col. 2)
2. COMPARATIVE BALANCE SHEET:
Comparative Balance Sheet is used for the analysis of the Assets and the liabilities of the
company for the current year and also helps in comparing the increase or decrease in them in
relative as well as absolute parameters.
A Comparative Balance Sheet not only provides the state of Assets and liabilities at a
different time period but also provides the changes that take place in individual Assets and
individual liabilities over different time periods.
the following points should be studied it when we analyse the comparative balance sheet:
❖ Present financial and liquidity position or working capital of the company
❖ Financial position of the company in the long term
❖ The profitability of the company
Following are the steps that has to be followed while preparing the comparative balance
sheet:
➢ Determine the absolute value of the Assets and Liabilities related to the accounting
periods
➢ Determine the absolute changes in the terms of the balance sheet related to accounting
periods in the given question.
➢ Calculate the percentage change in the acids and bases by comparing current values
with the values of the previous accounting period.

53. 53
COMPARATIVE BALANCE SHEET
For the year ended 2020
Particulars
31st March
2019
31st March
2020
Absolute
Change
Percentage
Change
(Rs.) (Rs.)
Increase or
decrease )
(Rs.)
Increase or
decrease )
(%)
I. EQUITY AND LIABILITIES
1. Shareholder's Funds
(a) Share Capital
(i) Equity Share Capital XXX XXX XXX XXX
(ii) Preference Share Capital XXX XXX XXX XXX
(b) Reserves and Surplus XXX XXX XXX XXX
2. Non-Current Liabilities
(a) Long-term Borrowings XXX XXX XXX XXX
(b) Long-term Provisions XXX XXX XXX XXX
3. Current Liabilities
(a) Short-term Borrowings XXX XXX XXX XXX
(b) Trade Payables XXX XXX XXX XXX
(c) Other Current Liabilities XXX XXX XXX XXX
(d) Short-term Provisions XXX XXX XXX XXX
TOTAL XXX XXX XXX XXX
II. ASSETS
1. Non-current Assets
(a) Fixed assets
(i) Tangible Assets XXX XXX XXX XXX
(ii) Intangible Assets XXX XXX XXX XXX

54. 54
(b) Non-current Investments XXX XXX XXX XXX
(c) Long-term Loans & Advances XXX XXX XXX XXX
2. Current Assets
(a) Current Investments XXX XXX XXX XXX
(b) Inventories XXX XXX XXX XXX
(c) Trade Receivables XXX XXX XXX XXX
(d) Cash & Cash Equivalents XXX XXX XXX XXX
(e) Short-term Loans & Advances XXX XXX XXX XXX
(f) Other Current Assets XXX XXX XXX XXX
TOTAL XXX XXX XXX XXX
CONCLUSION:
A Comparative Financial Statement allows the company management to analyse the
operating performance of the businesses more efficiently since the reporting period is flexible
enough does the statement reflect the more recent information about the organisation. It also
provides an advantage to the managers and analysts, which allows more efficient and detailed
analysis of the company's performance. While the normal financial statements are a static
reflection of the current financial position of the company, Comparative Financial Statement
deflected dynamics in its development and allowed it to find the Trends and Forecast
changes.

55. 55
PRATICAL SUMS OF COMPARATIVE STATEMENT
-Adwait De (A91801920032)
Illustration 1:
Prepare comparative income statement or statement of profit and loss of Sai Ltd from the
following statement of profit and loss and additional.
Particulars Note No Amount
(2012)
Amount
(2013)
I. Income
Revenue from Operations (Net Sales)
Other Income
Total
II. Expenses
Cost of Materials consumed
Changes in Inventories of Finished Goods and WIP
Employees Benefit Expenses
Finance Cost
Depreciation and Amortisation
Other Expenses
Total
III. Profit (I-II)
1
50,00,000
80,000
50,80,000
30,00,000
20,000
4,80,000
1,40,000
50,000
5,32,000
42,22,000
8,58,000
60,00,000
80,000
60,80,000
36,00,000
(30,000)
4,80,000
1,80,000
45,000
6,04,000
48,79,000
12,01,000

56. 56
Notes to Accounts
Particulars Amount(2012) Amount(2013)
1.Other Expenses
Power and fuel
Carriage Outwards
License Free
Selling and Distribution
Provision for Tax
72,000
15,000
5,000
3,40,000
1,00,000
5,32,000
80,000
19,000
5,000
3,80,000
1,20,000
6,04,000

57. 57
Solution:
Comparative Statement of Profit and Loss
For the years ended 31st March, 2012 and 2013
Particulars 31st
March,2012
Amount
31st
March,2013
Amount
Absolute
Change
(Increase or
Decrease)
(Amount)
Percentage
Change
(Increase or
Decrease)
(%)
I. Revenue from Operations
II. Other Income
III. Total Revenue (I+II)
IV. Expenses
(a) Cost of Materials Consumed
(b) Changes in Inventories of Finished
Goods and WIP
(c) Employees Benefit Expenses
(d) Finance Cost
(e) Depreciation and Amortisation
(f) Other expenses
Total Expenses
V. Profit before Tax (III-IV)
(-) Provision for Tax
VI. Profit after Tax
50,00,000
80,000
50,80,000
30,00,000
20,000
4,80,000
1,40,000
50,000
4,32,000
41,22,000
9,58,000
1,00,000
8,58,000
60,00,000
80,00,000
60,80,000
36,00,000
(30,000)
4,80,000
1,80,000
45,000
4,84,000
47,59,000
13,21,000
1,20,000
12,01,000
10,00,000
-------
10,00,000
6,00,000
(50,000)
-------
40,000
(5,000)
52,000
6,37,000
3,63,000
20,000
3,43,000
20.00
------
19.69
20.00
(250.00)
-------
28.57
(10.00)
12.04
15.45
37.89
20.00
38.98
Interpretation:
1. The comparative statement of profit and loss of the company reveals that revenue from
operation has been increased by Rs 10, 00,000 as in 2012 it was Rs 50, 00,000 and 2013 it is
Rs 60, 00,000 which states the company is making good sales.
2 There is a visible decline in Depreciation and Amortisation in 2013 of Rs 5000 from the
previous financial year.

58. 58
3. There is a hike in Total Expenses by Rs 6, 37,000 and decrease in Change in Inventories of
Finished goods and WIP by 30,000.
4. The Company made a profit of Rs 12,01,000 in 2013 after paying the taxes, which is Rs
3,43,000 more than the previous year which shows that the profit margin of the company has
increased.
Illustration 2:
From the balance sheet of Saransh Ltd, as 31st
March, 2016 and 2017, prepare a comparative
balance sheet
Particulars Note
No
Amount
(2016)
Amount
(2017)
I. EQUITY AND LIABILITIES
1.Shareholder’s Funds
(a) Share Capital
(b) Reserves and Surplus
2. Non-current Liabilities
Long-term Borrowings
3. Current Liabilities
Trade Payables
Total
II. ASSETS
1.Non-Current Assets
(a) Fixed Assets
(i) Tangible Asset
(ii) Intangible Asset
(b) Non-Current Investments
2. Current Assets
(a) Inventories
(b) Cash and cash Equivalents
Total
1,80,000
1,00,000
20,000
30,000
3,30,000
1,80,000
30,000
50,000
30,000
40,000
3,30,000
2,80,000
1,00,000
80,000
50,000
5,10,000
2,80,000
50,000
80,000
70,000
30,000
5,10,000

59. 59
Solution:
Comparative Balance Sheet
For the years ended 31st
March, 2016 and 2017
Particulars 2015-2016
(Amount)
2016-2017
(Amount)
Absolute
Change
(Increase or
Decrease)
(Amount)
Percentag
e Change
(Increase
or
Decrease)
(%)
I. EQUITY AND LIABILITIES
1.Shareholder’s Funds
(a) Share Capital
(b) Reserve and Surplus
2. Non-current Liabilities
Long-term Borrowings
3. Current Liabilities
Trade Payables
Total
II. ASSETS
1.Non-Current Assets
(a) Fixed Assets
(i) Tangible Asset
(ii) Intangible Asset
(b) Non-Current Investments
2. Current Assets
(a) Inventories
(b) Cash and cash Equivalents
Total
1,80,000
1,00,000
20,000
30,000
3,30,000
1,80,000
30,000
50,000
30,000
40,000
3,30,000
2,80,000
1,00,000
80,000
50,000
5,10,000
2,80,000
50,000
80,000
70,000
30,000
5,10,000
1,00,000
-------
60,000
20,000
1,80,000
1,00,000
20,000
30,000
40,000
(10,000)
1,80,000
55.55
-------
300
66.67
54.54
55.55
66.67
60
133.33
(25)
54.54

60. 60
Interpretation:
1. The comparative balance sheet of the company reveals that there is no change in Reserve
and Surplus from the year 2016 to 2017 which represent there is no hike in profit margin of
the company from one financial year to another.
2. There is a increase of Rs 60,000 in Non-Current Liabilities as in 2016 it was Rs 20,000
where as in 2017 it is Rs 80,000.
3. The comparative balance sheet of the company reveals that there is a hike in Tangible
Asset by Rs1,00,000 as in 2016 it was Rs 1,80,000 and in 2017 it is Rs 2,80,000 which
shows that there is a purchase of Asset in 2017 for company’s usage.
4. There is a visible decline in Cash and cash equivalents under Current Assets.

61. 61
INTER FIRM COMPARISON
-Partha Pratim Mitra (A91801920037)
Inter-firm comparison is a natural outcome of uniform costing system. Uniform costing is the
foundation stone over which the structure of IFC is developed and adopted in a large scale.
Inter-firm comparison can be defined as the technique of evaluating the relative performance,
efficiency, costs and profits of firms in a given industry’. The meaning of IFC can be easily
explained by considering the main object of the system. The firms are carefully screened and
put into different size groups, their figures examined from a close range, comparative
performance of each firm of the group drawn up showing the strong and weak points of its
operations, and finally the reports are published without disclosing their identity, but using
only codes and expressed in terms of certain well established ratios and percentages.
In other words IFC consists –
(a) Data are collected from participating organization or firm by their trade organization or
centre of inter-firm comparison.
(b) The management of an organisation is provided with information which will allow them
to determine the efficiency being achieved, measured by comparing the performances of
other business.
(c) An attempt is made to show why results vary from one business to another, i.e., any
weakness is highlighted.
(d) Extensive use is made of financial and cost ratios.

62. 62
Objects of Inter Firm Comparison:
The main purpose of IFC is improvement of efficiency by showing the management of
participating firm its present achievements and possible weaknesses. These firms have to
contribute their data to the central body which acts as a neutral body. This central body
ensures confidence and it gives report regarding comparisons only to participants.
Following are important objectives of inter-firm comparison:
(a) IFC analyses costs of different firms with a view to spot out relative efficiency.
(b) IFC provides aid to management in enforcing and reviewing budgetary control and
standard costing. These techniques enforced in one firm are compared with those in other
firms making more efficient use of the same. Inadequacies of standard costing and budgetary
control are located by making inter-firm comparisons and remedial measures are introduced.
(c) IFC helps to prepare a comprehensive and detailed plan for firms or units to obtain
optimum use of human and material resources.
The main objection of IFC is the improvement of efficiency and identification of weak
points. IFC is a scheme consisting of exchange of information with regard to cost, profit,
productivity and efficiency between the participating firms through a central organisation.
IFC focuses the remedial measure of a number of problems related to profit, sales and
production.

63. 63
The Advantages of Inter Firm Comparison
1. Improvement in efficiency: Fixation of performance standards creates meaningful
comparison. It assists to reveal the internal inefficiencies and assists to convert them into
efficiency.
2. Increased productivity: Inter firm comparison forces to accept new production
techniques, technical know-how. Result of this is the productivity of the individual firm and
the industry also rises.
3. Reliable information: Inter firm comparison is relies on the uniform costing. That is why
it is reliable information for decision making process.
4. R & D: Inter firm comparison make easy research and development. Individual firms and
the group of them undertake dissimilar R & D projects to raise the competitiveness.
Therefore it more R & D is possible.
5. Assistance to Government: Inter firm comparison assists Government to make out true
fact of industry in general and particularly to a firm also. The Government can design just
and fair industrial policies, tax policies along with help of the data presented from the Inter
firm comparison.
1. Other benefits:
✓ Inter-firm comparison eliminates disparities and carries stability in the cost structure
and presentation of information.
✓ Cost consciousness is formed among the participating firms and they are cautious at
every level.
✓ Inter-firm comparison assists management to control the costs; efforts are made to
decrease them if they go beyond in the firm in comparison to the other firms.
✓ Productivity is enhanced while the spheres of weaknesses or uneconomies are located.

64. 64
Limitation of Inter Firm comparison :
✓ The success of inter-firm comparison or intra firm comparison is fully based on the
co-operation of participation companies or departments. The degree of co-
operation is responsible for degree of success.
✓ Some accounting data are confidential in nature. Such data are not available to the
analyst for proper inter-firm comparison. If so, no benefit is available through inter
firm comparison.
✓ Misuse of ratios may lead to misleading results.
✓ .Fruitful results cannot be obtained if the companies are not of the same size and
character.
✓ There is no use of inter firm comparison when different forms of business
organization are compared.
✓ Accounting procedures and policies followed by participating companies may not be
uniform and as such accounting ratios used for comparison may not give proper
results.
✓ Every ratio has its own limitations. These are applicable to inter firm comparison also.

65. 65
Utility or Approach for Inter-Firm Comparison:
Firms wishing to obtain the benefits of inter-firm comparison have to approach the central
body or apex body constituted for IFC. A fee may be charged for carrying out comparisons.
The method of approach adopted by the central body will be governed by the type of industry
or trade and the problems and circumstances present.
The possible procedure may be as below:
1. Firms which are to participate in an inter-firm comparison have to submit their data to the
central body. These figures are compiled on the basis of uniform definitions of terms,
procedures, methods and accounting periods.
2. After all necessary steps have been taken to ensure that the participating firms can benefit
from the comparison, a number of ratios are compiled. These ratios are shown in a summary
form distinguishing.
(a) Ratios for the group of firm participating in the inter-firm comparison.
(b) Ratios for a single firm.
Each firm is given a report compiled along these lines.
3. The ratios for the group and the ratios for the single firm are compared one by one.
4. Once any significant deviation from the norm (average return on capital employed) is
established, the possible reasons for this deviation may be located by examining other ratios.

66. 66
Common Size Financial Statement
-Avideep Karmakar (A91801920035)
When financial statements figures for two or more years are placed side-by-side to
facilitate comparison, these are called ‘Comparative Financial Statements. Such
statements not only show the absolute figures of various years but also provide for
columns to indicate the increase or decrease in these figures from one year to another.
Common size statement is a form of analysis and interpretation of the financial statement. It
is also known as vertical analysis. This method analyses financial statements by taking into
consideration each of the line items as
a percentage of the base amount for that particular accounting period
Common size statements are not any kind of financial ratios but are a rather easy way to
express financial statements, which makes it easier to analyse those statements.
Common size statements are always expressed in the form of percentages. Therefore, such
statements are also called 100 per cent statements or component percentage statements as all
the individual items are taken as a percentage of 100.Types of Common Size Statements
There are two types of common size statements:
1. Common size income statement
2. Common size balance statement
1. Common Size Income Statement
This is one type of common size statement where the sales are taken as the base for all
calculations. Therefore, the calculation of each line item will take into account the sales as a
base, and each item will be expressed as a percentage of the sales.
2. Common-Size Balance Sheet:
A common size balance sheet is a statement in which balance sheet items are being calculated
as the ratio of each asset in relation to the total assets. For the liabilities, each liability is being
calculated as a ratio of the total liabilities.

67. 67
Common-size balance sheets can be used for comparing companies that differ in size. The
comparison of such figures for the different periods is not found to be that useful because the
total figures seem to be affected by a number of factors.
Standard values for various assets cannot be established by this method as the trends of the
figures cannot be studied and may not give proper results.
Preparing Common Size Statements
(1) Take the total of assets or liabilities as 100
(2) Each individual asset is expressed as a percentage of the total assets, i.e., 100 and
different liabilities are also calculated as per total liabilities. For example, suppose total assets
are around Rs 4 lakhs, and inventory value is Rs 1 lakh. In that case, it will be counted as
25% of the total assets.
IMPORTANCE OF COMPARATIVE FINANCIAL STATEMENT
1. Make the Data Simpler and More Understandable: When data for a number of years are
put side-by-side in a comparative ‘form it becomes easier to understand them and the
conclusions regarding the profitability and financial position of the concern can be drawn
very easily.
2. To Indicate the Trend: This helps in indicating the trend of change by putting the figures of
production, sales, expenses, profits etc. for number of year’s side-by-side.
3. To Indicate the Strong Points and Weak Points of the Concern: It may also indicate the
strong points and weak points of the firm. Management can then investigate and find out the
reasons for the weak areas and can take corrective measures.
4. To Compare the Firm’s Performance with the Average Performance of the
Industry: Comparative financial statements help a business unit to compare its’ performance
with the average performance of the industry.
5. To Help in Forecasting: Comparative study of the changes in the key figures over a period
helps the management in forecasting the profitability and financial soundness of the business.

68. 68
Format of Common Size Statement of Profit and Loss
Common Size Statement of Profit and Loss
For the years ended.....
Particulars Absolute Change Percentage of Revenue
from Operations
(Net Sales)
Previous
year(Amount)
Current
year(Amount)
Previous
year (%)
Current
year (%)
I. Revenue from Operations (Net sales)
II. Other Income
III. Total Revenue (I+II)
IV. Expenses
a) Cost of Materials Consumed
b) Purchases of Stock-in Trade
c) Changes in Inventories
d) Employees Benefit Expenses
e) Finance Cost
f) Depreciation and Amortisation
g) Other Expenses
Total Expenses
V. Profit before Tax (III-IV)
VI. (-) Income Tax
VII. Profit after tax
--------
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69. 69
PRATICAL SUMS OF COMMON SIZE STATEMENTS
-Rohan Deb (A91801920038)
QUESTION 1:-
Prepare Common-size Statement of Profit and Loss from the following Statement of Profit
and Loss:
Particulars Note No.
31st
March,
2018 (₹)
I. Income
Revenue from Operations 15,00,000
Other Income
Total Revenue
II. Expenses
Purchases of Stock-in-Trade
60,000
15,60,000
7,50,000
Change in Inventories of Stock-in-Trade 50,000
Other Expenses
Total
III. Net Profit before Tax (I-II)
2,10,000
10,10,000
5,50,000

70. 70
ANSWER
Particulars
Absolute
Amount
(Rs)
Percentage of
Revenue of Revenue
from
Operations
(%)
I. Revenue from Operations 15,00,000 100.00
II. Other Incomes
Total Revenue (I +II)
IV. Expenses
a. Purchases of Stock-in-Trade
60,000 4.00
15,60,000 104.00
7,50,000 50.00
b. Change in Inventories of Stock-in-
Trade
50,000 3.33
c. Other Expenses
Profit before Income Tax
2,10,000 14.00
5,50,000 36.67
Less: Income Tax
Profit after Income Tax
– –
5,50,000 36.67
COMMENTS:-
1. Other income is 4%
2. Purchases of stock in trade is 50%
3. Change in inventory is 3.33%
4. Other expenses is 14%
5. PBT and PAT are same i.e 36.67%

71. 71
QUESTION 2:-
Prepare Common-size Statement of Profit and Loss from
the following Statement of Profit and loss
Particulars Note No.
Year I
(₹)
Year II
(₹)
I. Income
Revenue from Operations (Net Sales)
II. Expenses
Purchases of Stock-in-Trade
14,00,000 16,00,000
9,00,000 10,00,000
Change in Inventories of Stock-in-Trade 1,00,000 1,80,000
Finance Costs 80,000 80,000
Other Expenses
Total
III. Net Profit (I-II)
90,000 1,30,000
11,70,000 13,90,000
2,30,000 2,10,000
IV. Less: Tax
V. Net Profit After Tax (III-IV)
40,000 36,000
1,90,000 1,74,000

72. 72
ANSWER
Common Size Income Statement
for the year ended…..
Particulars
Absolute Amount
(Rs)
Percentage of
Revenue
(%)
Year 1 Year II Year 1 Year II
I. Revenue from Operations 14,00,000 16,00,000 100.00 100.00
II. Expenses
a. Purchases of Stock-in-Trade 9,00,000 10,00,000 64.28 62.5
b. Change in Inventories of Stock-in-
Trade
1,00,000 1,80,000 7.14 11.25
c. Finance Cost 80,000 80,000 5.71 5.00
d. Other Expenses
Profit before Income Tax
90,000 1,30,000 6.43 8.12
2,30,000 2,10,000 16.43 13.13
Less: Income Tax
Profit after Income Tax
40,000 36,000 2.84 2.25
1,90,000 1,74,000 13.57 10.88
COMMENTS:-
1. Purchases of stock in trade has decreased in the 2nd year, as it was 64.28 % in
the 1st and 62.5 % in the 2nd year
2. 2nd year’s change in inventory was greater than the 1st year i.e 11.25 % and 7.14
%
3. Finance cost was greater in the 1st year compared to the 2nd year i.e 5.71 % and
5 %
4. Other expenses increased in 2nd year being 8.12 % and 6.43 % in the 1st year
5. PBIT has decreased as it was 16.43 % in the 1st year and 13.13 % in the 2nd year
6. PAT also decreased as it was 13.57 % in the 1st year and 10.88 % in the 2nd year

73. 73
CONCLUSION
Financial analysis determines a company’s health and stability, providing an understanding of
how the company conducts its business. But it is important to know that financial statement
analysis has its limitations as well. Different accounting methods adopted by different firms’
changes the visible health and profit levels for either better or worse. Different analysts may
get different results from the same information. Hence, we must conclude that financial
statement analysis is only one of the tools (although a major one) while taking an investment
decision.

74. 74
BIBLIOGRAPHY
www.accountingverse.com
www.toppr.com
T S GREWAL Solutions for Class 11-Accountancy
DK Geol. Solutions Accountancy Part 2
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