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NIOS Class 12 Accountancy Chapter 31 Financial Statements Analysis – An Introduction
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Financial Statements Analysis – An Introduction
Chapter: 31
| Module – 6: Analysis of Financial Statements |
INTEXT QUESTIONS 31.1
I. Fill in the blanks with suitable word/words :
(i) Financial statements are __________ and ___________.
Ans: Statement of Profit and Loss and Balance Sheet.
(ii) The term financial analysis include both __________ and _________.
Ans: Analysis and Interpretation.
(iii) In order to ascertain the financial status of the business every enterprise prepares _________ statements.
Ans: Financial statements.
(iv) Financial statements are mainly prepared for _________ purposes.
Ans: Decision making purposes.
II. Two columns are given below. Column I lists the parties interested in analysis and column II states the subject of their interest. Match the two columns.
| Column I | Column II |
| (i) Management | (a) about solvency of the business |
| (ii) Employees | (b) Profitability |
| (iii) Shareholders | (c) Performance of the enterprise as a whole |
| (iv) Suppliers and creditors | (d) Better remunerations |
Ans:
| Column I | Column II |
| (i) Management | (c) Performance of the enterprise as a whole |
| (ii) Employees | (d) Better remunerations |
| (iii) Shareholders | (b) Profitability |
| (iv) Suppliers and creditors | (a) About solvency of the business |
III. State whether the following statements are true or false :
(i) If two firms adopt different accounting policies, the comparison between the two will be unreliable.
Ans: True.
(ii) Figures given in the financial statements do not speak by themselves.
Ans: True.
(iii) Financial statements are records of past events and historical facts.
Ans: True.
INTEXT QUESTIONS 31.2
I. Fill in the blanks with appropriate word/words :
(i) Time series analysis is a technique of ____________.
Ans: Financial statement analysis.
(ii) Comparative statement is a __________ for financial statement analysis.
Ans: Tool.
(iii) __________ is the comparison of the financial statements of business with the previous years financial statements.
Ans: Comparative statement.
(iv) Comparative __________ shows the different assets and liabilities of the firm on different dates to make comparison of balances from one date to another.
Ans: Balance sheet.
(v) ________ income statement gives an idea of the progress of a business over a period of time.
Ans: Comparative.
INTEXT QUESTIONS 31.3
I. Fill in the blanks with appropriate word/words
(i) _________ statement shows analytical percentage. (comparative, common size)
Ans: Common size.
(ii) __________ balance sheet items are expressed in the ratio of each asset to total assets and ratio of each liability to total liabilities. (comparative, common size)
Ans: Common size.
(iii) ___________ analysis is a technique of studying several financial statements over a series of years. (Trend, time series)
Ans: Trend.
(iv) Trend percentage is calculated on the basis of __________ year. (current, base)
Ans: Base.
| TERMINAL EXERCISE |
1. State any four tools which are commonly used for analysing and interpreting financial statements.
Ans: A number of tools and techniques are used for analysing and interpreting financial statements in order to establish meaningful relationships between different items.
The important tools commonly used are as follows:
(i) Comparative Financial Statements: These statements are prepared to compare the financial data of two or more periods. They show the increase or decrease in various items and help in analysing the progress and performance of the business over time.
(ii) Common Size Statements: In these statements, all items are expressed as percentages of a common base such as total assets or total sales. This helps in comparing financial statements of different firms or different periods in a meaningful way.
(iii) Ratio Analysis: This involves establishing relationships between different items of financial statements through ratios. It helps in assessing profitability, liquidity, solvency and efficiency of the business.
(iv) Trend Analysis: This technique studies the trend of financial data over a number of years. It helps in identifying the direction of change and in forecasting future performance of the business.
(v) Fund Flow Analysis: It analyses the movement of funds within the business and shows the sources and uses of funds during a period.
(vi) Cash Flow Analysis: It shows the inflow and outflow of cash and helps in understanding the liquidity position of the business.
2. What are the main limitations of financial Analysis? Explain in detail.
Ans: Financial analysis is useful but it suffers from certain limitations which must be kept in mind:
(i) Limitations of financial statements: Financial analysis is based on financial statements, which themselves may contain incomplete or inaccurate information and are based on accounting concepts and conventions.
(ii) Affected by window-dressing: Companies may manipulate financial statements to show a better financial position, which leads to misleading analysis.
(iii) Different accounting policies: Different firms follow different accounting methods, making comparison unreliable.
(iv) Difficulty in forecasting: Financial statements are based on past data and may not be useful for predicting future conditions.
(v) Lack of qualitative analysis: Only monetary information is recorded, ignoring qualitative factors like management efficiency, goodwill, etc.
(vi) Limited use of single year analysis: Analysis of only one year does not give meaningful results; comparison with previous years is necessary.
3. How do limitations of financial statements became limitation of analysis of financial statements.
Ans: Financial analysis is based on the information provided in financial statements. If financial statements have limitations such as incomplete data, use of accounting assumptions, or lack of qualitative information, then the analysis based on such statements will also be affected.
Thus, any defect or shortcoming in financial statements directly becomes a limitation of financial analysis. For example, if financial statements are not reliable or are manipulated, the conclusions drawn from their analysis will also be misleading and incorrect.
4. State any three limitations of analysis of financial statements.
Ans: Financial analysis, though useful, has certain limitations which must be considered while interpreting results:
(i) Affected by window-dressing: Sometimes companies manipulate their financial statements to present a better financial position, which may lead to misleading conclusions.
(ii) Different accounting policies: Different firms adopt different accounting methods such as depreciation or stock valuation, which makes comparison difficult and unreliable.
(iii) Based on past data: Financial analysis is based on historical information and may not be useful for predicting future conditions accurately.
(iv) Ignores qualitative factors: Financial statements consider only monetary aspects and ignore qualitative factors like management efficiency, goodwill and reputation.
5. Briefly explain the limitations of analysis of financial statements.
Ans: Financial analysis has certain limitations which reduce its usefulness. It depends on financial statements which may be incomplete or based on assumptions. The results may be misleading if companies use window-dressing techniques. Differences in accounting policies also affect comparability. Moreover, financial analysis is based on historical data and does not consider qualitative factors such as management efficiency and goodwill. Therefore, results should be interpreted carefully.
6. What are the main techniques of financial statement analysis?
Ans: The main techniques of financial statement analysis are:
(i) Cross-sectional analysis: Comparison of one firm with another firm in the same period.
(ii) Time series analysis: Comparison of financial data of the same firm over different years.
(iii) Cross-sectional cum time series analysis: Combination of both types for better analysis.
7. Briefly explain the parties interested in analysis of financial statements.
Ans: Various parties are interested in financial statement analysis for different purposes:
(i) Investors: To know profitability and future prospects.
(ii) Management: To assess performance and take decisions.
(iii) Trade unions: To negotiate wages and bonuses.
(iv) Lenders: To know solvency and repayment capacity.
(v) Suppliers and creditors: To check creditworthiness.
(vi) Tax authorities: To determine tax liability.
(vii) Researchers: For study and analysis.
(viii) Employees: To know profit growth and demand better benefits.
(ix) Government: To regulate business activities.
(x) Stock exchange: To analyse company performance.
8. Write a brief note on comparative statement, common size statement and trend analysis.
Ans: Comparative Statement: It is the comparison of financial statements of different years to identify changes in financial position. It shows increase or decrease in figures and helps in analysing performance over time.
Common Size Statement: In this statement, all items are expressed as a percentage of a common base (like total assets or sales). It helps in comparing financial statements of different firms or years.
Trend Analysis: It is a technique of analysing financial statements over a number of years to identify trends. It shows the direction of growth or decline in financial performance and helps in forecasting future conditions.
9. Following are the Balance Sheets of Radha Ltd. as at 31st March, 2014 and 2013 :
| Particulars | 31st March, 2014 (₹) | 31st March, 2013 (₹) |
| EQUITY AND LIABILITIES | ||
| 1. Shareholders’ Funds | ||
| (a) Share Capital | 15,00,000 | 10,00,000 |
| (b) Reserves and Surplus | 10,00,000 | 10,00,000 |
| 2. Non-current Liabilities | ||
| Long-term Borrowings | 8,00,000 | 2,00,000 |
| 3. Current Liabilities | ||
| Trade Payables | 5,00,000 | 3,00,000 |
| Total (A) | 38,00,000 | 25,00,000 |
| ASSETS | ||
| 1. Non-current Assets | ||
| Fixed Assets: | ||
| (a) Tangible Assets | 25,00,000 | 15,00,000 |
| (b) Intangible Assets | 5,00,000 | 5,00,000 |
| 2. Current Assets | ||
| (a) Trade Receivables | 6,00,000 | 3,50,000 |
| (b) Cash and Cash Equivalents | 2,00,000 | 1,50,000 |
| Total (B) | 38,00,000 | 25,00,000 |
You are required to prepare Comparative Balance Sheet on the basis of the information given in the above Balance Sheets.
Ans:
Comparative Balance Sheet of Radha Ltd.
(31st March 2014 and 2013)
(A) Equity and Liabilities:
| Particulars | 2013 (₹) | 2014 (₹) | Increase / Decrease (₹) |
| Share Capital | 10,00,000 | 15,00,000 | +5,00,000 |
| Reserves & Surplus | 10,00,000 | 10,00,000 | Nil |
| Long-term Borrowings | 2,00,000 | 8,00,000 | +6,00,000 |
| Trade Payables | 3,00,000 | 5,00,000 | +2,00,000 |
| Total | 25,00,000 | 38,00,000 | +13,00,000 |
(B) Assets
| Particulars | 2013 (₹) | 2014 (₹) | Increase / Decrease (₹) |
| Tangible Assets | 15,00,000 | 25,00,000 | +10,00,000 |
| Intangible Assets | 5,00,000 | 5,00,000 | Nil |
| Trade Receivables | 3,50,000 | 6,00,000 | +2,50,000 |
| Cash & Cash Equivalents | 1,50,000 | 2,00,000 | +50,000 |
| Total | 25,00,000 | 38,00,000 | +13,00,000 |
10. Prepare Comparative Balance Sheet of Deepankur Ltd.:
| Particulars | March 31, 2014 (₹) | March 31, 2013 (₹) |
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders’ Funds | ||
| (a) Share Capital | 9,00,000 | 7,50,000 |
| (b) Reserves and Surplus | 3,30,000 | 2,85,000 |
| 2. Non-Current Liabilities | ||
| Long-term Borrowings: | ||
| 12% Debentures, Secured | 3,00,000 | 4,50,000 |
| 3. Current Liabilities | ||
| (a) Short-term Borrowings | 1,40,000 | 1,70,000 |
| (b) Trade Payables | 2,00,000 | 1,50,000 |
| (c) Other Current Liabilities | 60,000 | 45,000 |
| (d) Short-term Provisions | 20,000 | 10,000 |
| Total | 19,50,000 | 18,60,000 |
| II. ASSETS | ||
| 1. Non-Current Assets | ||
| (a) Fixed Assets | 9,55,000 | 10,45,000 |
| (b) Non-Current Investments | 2,00,000 | 2,00,000 |
| 2. Current Assets | ||
| (a) Inventories | 2,50,000 | 2,00,000 |
| (b) Trade Receivables | 2,50,000 | 2,25,000 |
| (c) Cash and Cash Equivalents | 1,95,000 | 1,10,000 |
| (d) Other Current Assets | 1,00,000 | 80,000 |
| Total | 19,50,000 | 18,60,000 |
Ans:
Comparative Balance Sheet of Deepankur Ltd.
(as on 31 March 2014 and 31 March 2013)
I. EQUITY AND LIABILITIES
| Particulars | 2014 (₹) | 2013 (₹) | Increase / Decrease (₹) | % Change |
| 1. Shareholders’ Funds | ||||
| Share Capital | 9,00,000 | 7,50,000 | +1,50,000 | +20% |
| Reserves and Surplus | 3,30,000 | 2,85,000 | +45,000 | +15.79% |
| Total Shareholders’ Funds | 12,30,000 | 10,35,000 | +1,95,000 | +18.84% |
| 2. Non-Current Liabilities | ||||
| 12% Debentures | 3,00,000 | 4,50,000 | –1,50,000 | –33.33% |
| 3. Current Liabilities | ||||
| Short-term Borrowings | 1,40,000 | 1,70,000 | –30,000 | –17.65% |
| Trade Payables | 2,00,000 | 1,50,000 | +50,000 | +33.33% |
| Other Current Liabilities | 60,000 | 45,000 | +15,000 | +33.33% |
| Short-term Provisions | 20,000 | 10,000 | +10,000 | +100% |
| Total Current Liabilities | 4,20,000 | 3,75,000 | +45,000 | +12% |
| Total Equity & Liabilities | 19,50,000 | 18,60,000 | +90,000 | +4.84% |
II. ASSETS
| Particulars | 2014 (₹) | 2013 (₹) | Increase / Decrease (₹) | % Change |
| 1. Non-Current Assets | ||||
| Fixed Assets | 9,55,000 | 10,45,000 | –90,000 | –8.61% |
| Non-Current Investments | 2,00,000 | 2,00,000 | 0 | 0% |
| 2. Current Assets | ||||
| Inventories | 2,50,000 | 2,00,000 | +50,000 | +25% |
| Trade Receivables | 2,50,000 | 2,25,000 | +25,000 | +11.11% |
| Cash & Cash Equivalents | 1,95,000 | 1,10,000 | +85,000 | +77.27% |
| Other Current Assets | 1,00,000 | 80,000 | +20,000 | +25% |
| Total Assets | 19,50,000 | 18,60,000 | +90,000 | +4.84% |
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