Analysis of Financial Statements — NCERT Solutions

True.

Financial analysis provides meaningful insights into the financial health, profitability, and efficiency of an enterprise, which helps analysts, investors, and management arrive at informed decisions.

True.

Cash Flow Statement is one of the important tools of financial statement analysis. It analyses the actual movement of cash (inflows and outflows) during an accounting period and helps assess the liquidity position of the enterprise.

True.

In a Common Size Statement, each item is expressed as a percentage of a common base — Revenue from Operations in the case of Statement of Profit and Loss, and Total Assets (or Total Liabilities) in the case of Balance Sheet.

Techniques of Financial Statement Analysis:

The following are the main techniques (tools) used for financial statement analysis:

1. Comparative Statements (Horizontal Analysis): Financial statements of two or more periods are placed side by side to compare absolute and percentage changes.

2. Common Size Statements (Vertical Analysis): Each item in the financial statement is expressed as a percentage of a common base (e.g., revenue from operations or total assets).

3. Trend Analysis: Percentage changes in financial data over a series of years are studied with reference to a base year to identify trends.

4. Ratio Analysis: Significant relationships between various items of the Balance Sheet and Statement of Profit and Loss are established to assess profitability, solvency, and efficiency.

5. Cash Flow Analysis: The actual movement of cash (inflows and outflows) during an accounting period is analysed to assess the liquidity and cash position of the enterprise.

Distinction between Vertical and Horizontal Analysis:

Meaning of Analysis:

Analysis of financial statements means simplifying the financial data contained in the financial statements by methodically classifying the data given in the financial statements. It involves breaking down complex financial information into simpler components to make it more understandable and comparable.

Meaning of Interpretation:

Interpretation means explaining the meaning and significance of the data so simplified. It involves drawing conclusions from the analysed data, identifying the financial strengths and weaknesses of the enterprise, and making the data meaningful for decision-making purposes.

Relationship: Analysis and interpretation are complementary processes. Analysis without interpretation is incomplete, and interpretation without proper analysis may be misleading. Together, they help users understand the financial health and performance of an enterprise.

Importance of Financial Analysis:

Financial analysis is important for the following reasons:

1. Assessment of Profitability: It helps in assessing the earning capacity and profitability of the enterprise over different periods.

2. Assessment of Solvency: It helps in determining the short-term and long-term solvency (ability to meet obligations) of the enterprise.

3. Efficiency Evaluation: It helps in evaluating the operational efficiency of the management in utilising the resources of the enterprise.

4. Comparative Study: It enables comparison of the financial performance of the enterprise with that of other enterprises (inter-firm) or with its own past performance (intra-firm).

5. Decision Making: It provides useful information to various stakeholders — investors, creditors, management, employees, and government — to make informed decisions.

6. Trend Identification: It helps in identifying trends in financial performance, which is useful for forecasting and planning.

7. Detection of Problems: It helps in detecting financial problems and weaknesses at an early stage so that corrective action can be taken.

Meaning of Comparative Financial Statements:

Comparative Financial Statements are those statements which show the financial data of two or more years side by side in order to make comparison easy. They are also known as Horizontal Analysis or Dynamic Analysis.

Features:

• They present financial data for two or more periods in adjacent columns.
• They show the absolute change (increase or decrease in rupees) and the percentage change between the two periods.
• They help in identifying trends and changes in the financial position and performance of the enterprise.

Types:

1. Comparative Balance Sheet: Shows changes in assets, liabilities, and equity over two periods.
2. Comparative Statement of Profit and Loss: Shows changes in revenues, expenses, and profit over two periods.

Formula:
$$\text{Absolute Change} = \text{Current Year Figure} - \text{Previous Year Figure}$$
$$\text{Percentage Change} = \frac{\text{Absolute Change}}{\text{Previous Year Figure}} \times 100$$

Meaning of Common Size Statements:

Common Size Statements, also known as Component Percentage Statements or Vertical Analysis, are financial statements in which each item is expressed as a percentage of a common base figure.

Common Base:

• In the Common Size Statement of Profit and Loss: Revenue from Operations is taken as 100, and all other items are expressed as a percentage of it.
• In the Common Size Balance Sheet: Total Assets (or Total Liabilities) is taken as 100, and each item is expressed as a percentage of it.

Formula:
$$\text{Percentage of item} = \frac{\text{Individual Item}}{\text{Common Base (Revenue/Total Assets)}} \times 100$$

Usefulness:

1. Facilitates inter-firm comparison even when firms differ substantially in size.
2. Helps in understanding the structure and composition of financial statements.
3. Enables identification of changes in the proportion of various items over time.
4. Useful for comparing a company's position with the industry average.

Techniques of Financial Analysis:

1. Comparative Statements (Horizontal Analysis):
Comparative statements show the financial data of two or more periods side by side. They show absolute changes (in rupees) and percentage changes between periods. They help in identifying trends and changes in financial position and performance.

2. Common Size Statements (Vertical Analysis):
In common size statements, each item is expressed as a percentage of a common base (revenue from operations for P&L; total assets for Balance Sheet). They facilitate inter-firm comparison and help understand the composition of financial statements.

3. Trend Analysis:
Trend analysis studies the operational results and financial position over a series of years. A base year is selected and trend percentages are calculated for each subsequent year. It helps in identifying whether a particular item is rising, falling, or remaining constant over time.

4. Ratio Analysis:
Ratio analysis establishes relationships between various items of financial statements to assess profitability, solvency, liquidity, and efficiency of the enterprise. Examples include Current Ratio, Debt-Equity Ratio, Gross Profit Ratio, etc.

5. Cash Flow Analysis:
Cash flow analysis studies the actual movement of cash into and out of the organisation. It helps in assessing the liquidity position and the ability of the enterprise to generate and use cash.

Limitations of Financial Analysis:

1. Price Level Changes Ignored: Financial analysis does not consider changes in price levels (inflation/deflation), which may distort comparisons over time.

2. Misleading due to Accounting Policy Changes: If a firm changes its accounting policies (e.g., method of depreciation), the financial analysis may be misleading without knowledge of such changes.

3. Based on Historical Data: Financial statements are based on historical cost and past data. They do not reflect the current market value or future prospects.

4. Non-Monetary Aspects Ignored: Financial analysis considers only monetary information. Non-monetary factors such as employee morale, management quality, and brand value are ignored.

5. Window Dressing: Companies may manipulate financial statements to present a better picture than reality (window dressing), making analysis unreliable.

6. Accounting Concepts and Conventions: Financial statements are prepared on the basis of accounting concepts and conventions (e.g., going concern, conservatism), which may not reflect the true financial position.

7. Qualitative Factors Ignored: Financial analysis is purely quantitative and ignores qualitative factors that may significantly affect the performance of the enterprise.

8. Lack of Standard Definitions: Different firms may define and classify items differently, making inter-firm comparison difficult.

Meaning of Trend Analysis:

Trend analysis is a technique of studying the operational results and financial position of a business enterprise over a series of years. A base year is selected and the figures of subsequent years are expressed as percentages of the base year figures. These percentages are called Trend Percentages or Trend Ratios.

Formula:
$$\text{Trend Percentage} = \frac{\text{Figure of Current Year}}{\text{Figure of Base Year}} \times 100$$

Usefulness of Trend Percentages:

1. Identification of Trends: Trend percentages help in identifying whether a particular item (e.g., sales, profit, expenses) is showing an upward trend, downward trend, or remaining constant over time.

2. Detection of Problems: By observing a declining trend in profitability or an increasing trend in expenses, management can detect problems at an early stage and take corrective action.

3. Long-Run View: Trend analysis provides a long-run view of the financial performance, which is more meaningful than a single-year analysis.

4. Forecasting and Planning: Trend percentages help in forecasting future performance and in making plans and budgets based on past trends.

5. Comparison: Trend analysis enables comparison of the performance of the enterprise over different periods, helping to assess whether the enterprise is improving or deteriorating.

6. Sign of Good or Poor Management: A consistently rising trend in sales and profits indicates good management, while a declining trend may indicate poor management.

7. Basic Changes in Business: Trend analysis may point to basic changes in the nature of the business, such as a shift in product mix or market conditions.

Example:
If sales in the base year (2013-14) = Rs. 10,00,000 and in 2016-17 = Rs. 15,00,000, then:
$$\text{Trend Percentage} = \frac{15,00,000}{10,00,000} \times 100 = 150\%$$
This indicates a 50% increase in sales over the base year.

Meaning of Comparative Statements:

Comparative statements are financial statements that present financial data for two or more periods side by side, showing absolute changes (in rupees) and percentage changes. They are also known as horizontal analysis.

Importance of Comparative Statements:

1. Identification of Trends: They help in identifying trends in revenues, expenses, and profits over time.

2. Comparison Made Easy: By placing data side by side, comparison between periods becomes easy and meaningful.

3. Detection of Strengths and Weaknesses: They help in identifying the financial strengths and weaknesses of the enterprise.

4. Basis for Forecasting: Past trends revealed by comparative statements serve as a basis for future forecasting and planning.

5. Intra-firm Comparison: They enable comparison of the enterprise's performance with its own past performance.

6. Inter-firm Comparison: They can also be used to compare the performance of two different enterprises.

7. Decision Making: They provide useful information to management, investors, and creditors for decision making.

Illustration — Comparative Statement of Profit and Loss:

Comparative Statement of Profit and Loss of XYZ Ltd.
For the years ended March 31, 2016 and March 31, 2017

Interpretation: Revenue from operations increased by 20%, while gross profit increased by 25%, indicating improved efficiency in managing cost of goods sold. Profit after tax increased by 28%, showing overall improvement in profitability.

Meaning of Analysis of Financial Statements:

Analysis of financial statements means simplifying the complex financial data contained in the financial statements by methodically classifying the data. It involves breaking down the financial information into simpler, more understandable components. For example, grouping all current assets together or calculating ratios from balance sheet figures.

Meaning of Interpretation of Financial Statements:

Interpretation means explaining the meaning and significance of the data so simplified through analysis. It involves drawing conclusions, identifying financial strengths and weaknesses, and making the data meaningful for decision-making. Interpretation goes beyond mere analysis — it explains what the figures mean and what action should be taken.

Relationship between Analysis and Interpretation:
Analysis and interpretation are complementary and interdependent. Analysis without interpretation is incomplete, and interpretation without proper analysis may be misleading.

Importance of Analysis and Interpretation of Financial Statements:

1. Assessment of Profitability: Helps in assessing the earning capacity and profitability of the enterprise over different periods.

2. Assessment of Solvency: Helps in determining the short-term liquidity and long-term solvency of the enterprise.

3. Efficiency Evaluation: Helps in evaluating how efficiently the management is utilising the resources of the enterprise.

4. Comparative Study: Enables comparison of the enterprise's performance with competitors (inter-firm) and with its own past performance (intra-firm).

5. Decision Making: Provides useful information to various stakeholders — investors (for investment decisions), creditors (for lending decisions), management (for operational decisions), and government (for regulatory purposes).

6. Trend Identification: Helps in identifying trends in financial performance, which is useful for forecasting and planning.

7. Detection of Problems: Helps in detecting financial problems and weaknesses at an early stage so that corrective action can be taken.

8. Basis for Forecasting: Past trends and ratios revealed by analysis serve as a basis for future forecasting and budgeting.

9. Investor Confidence: Proper analysis and interpretation of financial statements builds investor confidence and helps in raising capital.

Meaning of Common Size Statements:

Common Size Statements are financial statements in which each item is expressed as a percentage of a common base figure. They are also known as Component Percentage Statements or Vertical Analysis.

Procedure for Preparing Common Size Statements:

1. List absolute figures for two periods (Year 1 and Year 2) in separate columns.
2. Choose a common base:

• For Statement of Profit and Loss: Revenue from Operations = 100
• For Balance Sheet: Total Assets (or Total Liabilities) = 100

3. Calculate percentage of each item with respect to the common base:

$$\text{Percentage} = \frac{\text{Individual Item}}{\text{Common Base}} \times 100$$

4. Record percentages in separate columns alongside the absolute figures.

Example — Common Size Statement of Profit and Loss:

Interpretation: Although absolute profit remained the same, the profit as a percentage of revenue declined from 18% to 15%, indicating that operating expenses increased disproportionately (from 10% to 15% of revenue).

Usefulness:

• Facilitates inter-firm comparison even when firms differ in size.
• Helps understand the composition and structure of financial statements.
• Enables identification of changes in proportions over time.

Given: Balance Sheet data of Alpha Ltd. for March 31, 2016 and March 31, 2017.

Formula:
$$\text{Absolute Change} = \text{2017 figure} - \text{2016 figure}$$
$$\text{Percentage Change} = \frac{\text{Absolute Change}}{\text{2016 figure}} \times 100$$

Calculations:

Equity and Liabilities:

• Share Capital: Change = 4,00,000 − 2,00,000 = +2,00,000; % = $\frac{2,00,000}{2,00,000} \times 100 = +100\%$
• Reserve & Surplus: Change = 1,50,000 − 1,00,000 = +50,000; % = $\frac{50,000}{1,00,000} \times 100 = +50\%$
• Long Term Borrowings: Change = 3,00,000 − 2,00,000 = +1,00,000; % = $\frac{1,00,000}{2,00,000} \times 100 = +50\%$
• Short term borrowings: Change = 70,000 − 50,000 = +20,000; % = $\frac{20,000}{50,000} \times 100 = +40\%$
• Trade Payables: Change = 60,000 − 30,000 = +30,000; % = $\frac{30,000}{30,000} \times 100 = +100\%$
• Other Current Liabilities: Change = 10,000 − 20,000 = −10,000; % = $\frac{-10,000}{20,000} \times 100 = -50\%$
• Short Term Provisions: Change = 20,000 − 20,000 = 0; % = 0%
• Total: Change = 10,20,000 − 6,20,000 = +4,00,000; % = $\frac{4,00,000}{6,20,000} \times 100 = +64.52\%$

Assets:

• Fixed Assets: Change = 5,00,000 − 2,00,000 = +3,00,000; % = $\frac{3,00,000}{2,00,000} \times 100 = +150\%$
• Non-Current Investments: Change = 1,25,000 − 1,00,000 = +25,000; % = $\frac{25,000}{1,00,000} \times 100 = +25\%$
• Current Investments: Change = 80,000 − 60,000 = +20,000; % = $\frac{20,000}{60,000} \times 100 = +33.33\%$
• Inventories: Change = 1,55,000 − 1,35,000 = +20,000; % = $\frac{20,000}{1,35,000} \times 100 = +14.81\%$
• Trade Receivables: Change = 90,000 − 60,000 = +30,000; % = $\frac{30,000}{60,000} \times 100 = +50\%$
• Cash and Cash Equivalents: Change = 10,000 − 25,000 = −15,000; % = $\frac{-15,000}{25,000} \times 100 = -60\%$
• Short term Loans & Advances: Change = 60,000 − 40,000 = +20,000; % = $\frac{20,000}{40,000} \times 100 = +50\%$

Comparative Balance Sheet of Alpha Ltd.
As at March 31, 2016 and March 31, 2017

Note: The OCR shows the Total for Equity & Liabilities as Rs. 1,10,000 for 2016 and Rs. 7,00,000 for 2017, which appears to be a printing error. The correct total (sum of all items) for 2016 = 4,00,000 + 1,50,000 + 3,00,000 + 70,000 + 60,000 + 1,10,000 + 10,000 = Rs. 11,00,000 and for 2017 = 3,00,000 + 1,00,000 + 1,00,000 + 50,000 + 30,000 + 1,00,000 + 20,000 = Rs. 7,00,000. We use these corrected totals.

Formula:
$$\text{Absolute Change} = \text{2017 figure} - \text{2016 figure}$$
$$\text{Percentage Change} = \frac{\text{Absolute Change}}{\text{2016 figure}} \times 100$$

Calculations:

Equity and Liabilities:

• Share Capital: Change = 3,00,000 − 4,00,000 = −1,00,000; % = $\frac{-1,00,000}{4,00,000} \times 100 = -25\%$
• Reserves & Surplus: Change = 1,00,000 − 1,50,000 = −50,000; % = $\frac{-50,000}{1,50,000} \times 100 = -33.33\%$
• Long term IDBI: Change = 1,00,000 − 3,00,000 = −2,00,000; % = $\frac{-2,00,000}{3,00,000} \times 100 = -66.67\%$
• Short term borrowings: Change = 50,000 − 70,000 = −20,000; % = $\frac{-20,000}{70,000} \times 100 = -28.57\%$
• Trade payables: Change = 30,000 − 60,000 = −30,000; % = $\frac{-30,000}{60,000} \times 100 = -50\%$
• Other current liabilities: Change = 1,00,000 − 1,10,000 = −10,000; % = $\frac{-10,000}{1,10,000} \times 100 = -9.09\%$
• Short term provisions: Change = 20,000 − 10,000 = +10,000; % = $\frac{10,000}{10,000} \times 100 = +100\%$
• Total: Change = 7,00,000 − 11,00,000 = −4,00,000; % = $\frac{-4,00,000}{11,00,000} \times 100 = -36.36\%$

Assets:

• Fixed Assets: Change = 2,20,000 − 4,00,000 = −1,80,000; % = $\frac{-1,80,000}{4,00,000} \times 100 = -45\%$
• Non-current Investments: Change = 1,00,000 − 2,25,000 = −1,25,000; % = $\frac{-1,25,000}{2,25,000} \times 100 = -55.56\%$
• Current Investments: Change = 60,000 − 80,000 = −20,000; % = $\frac{-20,000}{80,000} \times 100 = -25\%$
• Inventories: Change = 90,000 − 1,05,000 = −15,000; % = $\frac{-15,000}{1,05,000} \times 100 = -14.29\%$
• Trade Receivables: Change = 60,000 − 90,000 = −30,000; % = $\frac{-30,000}{90,000} \times 100 = -33.33\%$
• Cash and Cash Equivalents: Change = 85,000 − 1,00,000 = −15,000; % = $\frac{-15,000}{1,00,000} \times 100 = -15\%$
• Short term Loans & Advances: Change = 85,000 − 1,00,000 = −15,000; % = $\frac{-15,000}{1,00,000} \times 100 = -15\%$

Comparative Balance Sheet of Beta Ltd.
As at March 31, 2016 and March 31, 2017

Step 1: Identify relevant items for Statement of Profit and Loss.

For a Comparative Statement of Profit and Loss, we need:

• Revenue from Operations (Net Sales)
• Cost of Revenue from Operations (Cost of Goods Sold)
• Gross Profit
• Operating Expenses
• Other Income / Other Expenses
• Profit before tax
• Tax
• Profit after tax

Step 2: Calculate Revenue from Operations (Net Sales)

Gross Sales = Cash purchases + Credit purchases + Stock adjustment + Manufacturing expenses + Gross Profit

Actually, let us work backwards from Gross Profit:

Gross Profit = Net Sales − Cost of Goods Sold

Cost of Goods Sold = Cash Purchases + Credit Purchases + Manufacturing Expenses + Stock Adjustment

• 2015-16: 80,000 + 60,000 + 50,000 + (−60,000) = 1,30,000
• 2016-17: 60,000 + 20,000 + 20,000 + 30,000 = 1,30,000

Gross Profit (given):

• 2015-16: −30,000 (Gross Loss)
• 2016-17: 90,000

Net Sales = Cost of Goods Sold + Gross Profit

• 2015-16: 1,30,000 + (−30,000) = 1,00,000
• 2016-17: 1,30,000 + 90,000 = 2,20,000

Return Inward (deducted from Gross Sales to get Net Sales):

• 2015-16: 8,000
• 2016-17: 4,000

So Gross Sales:

• 2015-16: 1,00,000 + 8,000 = 1,08,000
• 2016-17: 2,20,000 + 4,000 = 2,24,000

Step 3: Operating Expenses (Indirect Expenses)

Note: Interest on debentures = 10% of debenture value.

• 2015-16: 10% × 20,000 = 2,000
• 2016-17: 10% × 10,000 = 1,000

Other Income:

• Profit on sale of furniture: 2015-16 = 20,000; 2016-17 = 10,000

Step 4: Profit before tax

Profit before tax = Gross Profit − Operating & Other Expenses + Other Income

• 2015-16: −30,000 − 1,72,000 + 20,000 = −1,82,000 (Loss)
• 2016-17: 90,000 − 1,11,000 + 10,000 = −11,000 (Loss)

Step 5: Tax (Tax is levied only on profit; if there is a loss, tax = 0)

• 2015-16: No tax (loss)
• 2016-17: No tax (loss)

Step 6: Profit/Loss after tax

• 2015-16: −1,82,000 (Net Loss)
• 2016-17: −11,000 (Net Loss)

Comparative Statement of Profit and Loss of the Company
For the years ended March 31, 2016 and March 31, 2017

Step 1: Calculate missing figures for 2015-16

Opening Stock (2015-16): Given = Rs. 30,000

Closing Stock (2015-16): = 150% of Opening Stock = 150% × 30,000 = Rs. 45,000

Credit Purchases (2015-16): Given = Rs. 1,50,000

Cash Purchases (2015-16): = 80% of Credit Purchases = 80% × 1,50,000 = Rs. 1,20,000

Returns Outward (2015-16): = Rs. 4,000 (out of credit purchases)

Net Purchases (2015-16): = Cash Purchases + Credit Purchases − Returns Outward
= 1,20,000 + 1,50,000 − 4,000 = Rs. 2,66,000

Depreciation on Building (2015-16): = 20% × 1,00,000 = Rs. 20,000

Interest on 10% Debentures (2015-16): = 10% × 2,00,000 = Rs. 20,000

Step 2: Calculate missing figures for 2016-17

Closing Stock (2016-17): Given = Rs. 1,00,000

Opening Stock (2016-17): = 60% of Closing Stock = 60% × 1,00,000 = Rs. 60,000

Cash Purchases (2016-17): Given = Rs. 40,000

Credit Purchases (2016-17): = 150% of Cash Purchases = 150% × 40,000 = Rs. 60,000

Returns Outward (2016-17): = Rs. 6,000 (out of cash purchases)

Net Purchases (2016-17): = Cash Purchases + Credit Purchases − Returns Outward
= 40,000 + 60,000 − 6,000 = Rs. 94,000

Depreciation on Building (2016-17): = 10% × 2,00,000 = Rs. 20,000

Interest on 10% Debentures (2016-17): = 10% × 20,00,000 = Rs. 2,00,000

Step 3: Calculate Cost of Goods Sold (COGS)

$$\text{COGS} = \text{Opening Stock} + \text{Net Purchases} + \text{Manufacturing Expenses} - \text{Closing Stock}$$

• 2015-16: 30,000 + 2,66,000 + 35,000 − 45,000 = Rs. 2,86,000
• 2016-17: 60,000 + 94,000 + 80,000 − 1,00,000 = Rs. 1,34,000

Step 4: Calculate Gross Profit

$$\text{Gross Profit} = \text{Net Sales} - \text{COGS}$$

Note: Sales given are net sales (no returns inward mentioned separately).

• 2015-16: 9,60,000 − 2,86,000 = Rs. 6,74,000
• 2016-17: 4,50,000 − 1,34,000 = Rs. 3,16,000

Step 5: Calculate Operating and Other Expenses

Note: Loss on sale of personal car is a personal expense and is NOT included in the company's Statement of Profit and Loss.

Other Income:

• Profit on sale of copyright: 2015-16 = Rs. 10,000; 2016-17 = Rs. 20,000

Step 6: Profit before tax

$$\text{Profit before tax} = \text{Gross Profit} + \text{Other Income} - \text{Operating Expenses}$$

• 2015-16: 6,74,000 + 10,000 − 75,000 = Rs. 6,09,000
• 2016-17: 3,16,000 + 20,000 − 2,60,000 = Rs. 76,000

Step 7: Tax

• 2015-16: 50% × 6,09,000 = Rs. 3,04,500
• 2016-17: 40% × 76,000 = Rs. 30,400

Step 8: Profit after tax

• 2015-16: 6,09,000 − 3,04,500 = Rs. 3,04,500
• 2016-17: 76,000 − 30,400 = Rs. 45,600

Comparative Statement of Profit and Loss
For the years ended March 31, 2016 and March 31, 2017

Step 1: Calculate Gross Profit

$$\text{Gross Profit} = \text{Revenue from Operations} - \text{Cost of Revenue from Operations}$$

• 2015-16: 6,00,000 − 4,28,000 = Rs. 1,72,000
• 2016-17: 8,00,000 − 7,28,000 = Rs. 72,000

Step 2: Calculate Indirect Expenses

$$\text{Indirect Expenses} = 25\% \times \text{Gross Profit}$$

• 2015-16: 25% × 1,72,000 = Rs. 43,000
• 2016-17: 25% × 72,000 = Rs. 18,000

Step 3: Calculate Net Profit before tax

$$\text{Profit before tax} = \text{Gross Profit} - \text{Indirect Expenses} + \text{Other Income}$$

• 2015-16: 1,72,000 − 43,000 + 10,000 = Rs. 1,39,000
• 2016-17: 72,000 − 18,000 + 12,000 = Rs. 66,000

Step 4: Calculate Tax

• 2015-16: 30% × 1,39,000 = Rs. 41,700
• 2016-17: 30% × 66,000 = Rs. 19,800

Step 5: Calculate Profit after tax

• 2015-16: 1,39,000 − 41,700 = Rs. 97,300
• 2016-17: 66,000 − 19,800 = Rs. 46,200

Step 6: Calculate Percentages (Base = Revenue from Operations = 100)

$$\text{Percentage} = \frac{\text{Item}}{\text{Revenue from Operations}} \times 100$$

2015-16 (Base = 6,00,000):

• Cost of revenue: $\frac{4,28,000}{6,00,000} \times 100 = 71.33\%$
• Gross Profit: $\frac{1,72,000}{6,00,000} \times 100 = 28.67\%$
• Indirect Expenses: $\frac{43,000}{6,00,000} \times 100 = 7.17\%$
• Other Income: $\frac{10,000}{6,00,000} \times 100 = 1.67\%$
• Profit before tax: $\frac{1,39,000}{6,00,000} \times 100 = 23.17\%$
• Tax: $\frac{41,700}{6,00,000} \times 100 = 6.95\%$
• Profit after tax: $\frac{97,300}{6,00,000} \times 100 = 16.22\%$

2016-17 (Base = 8,00,000):

• Cost of revenue: $\frac{7,28,000}{8,00,000} \times 100 = 91.00\%$
• Gross Profit: $\frac{72,000}{8,00,000} \times 100 = 9.00\%$
• Indirect Expenses: $\frac{18,000}{8,00,000} \times 100 = 2.25\%$
• Other Income: $\frac{12,000}{8,00,000} \times 100 = 1.50\%$
• Profit before tax: $\frac{66,000}{8,00,000} \times 100 = 8.25\%$
• Tax: $\frac{19,800}{8,00,000} \times 100 = 2.48\%$
• Profit after tax: $\frac{46,200}{8,00,000} \times 100 = 5.78\%$

Common Size Statement of Profit and Loss of Shefali Ltd.
For the years ended March 31, 2016 and March 31, 2017

Observation: Although revenue from operations increased from Rs. 6,00,000 to Rs. 8,00,000, the cost of revenue increased disproportionately (from 71.33% to 91%), resulting in a significant decline in profit after tax as a percentage of revenue (from 16.22% to 5.78%).

Concept: In a Common Size Balance Sheet, each item is expressed as a percentage of Total Assets (or Total Liabilities), which is taken as 100.

$$\text{Percentage} = \frac{\text{Individual Item}}{\text{Total Assets}} \times 100$$

Calculations for Aditya Ltd. (Total = Rs. 10,00,000):

• Equity share capital: $\frac{6,00,000}{10,00,000} \times 100 = 60.00\%$
• Reserves and surplus: $\frac{3,00,000}{10,00,000} \times 100 = 30.00\%$
• Current liabilities: $\frac{1,00,000}{10,00,000} \times 100 = 10.00\%$
• Fixed assets: $\frac{4,00,000}{10,00,000} \times 100 = 40.00\%$
• Current assets: $\frac{6,00,000}{10,00,000} \times 100 = 60.00\%$

Calculations for Anjali Ltd. (Total = Rs. 12,00,000):

• Equity share capital: $\frac{8,00,000}{12,00,000} \times 100 = 66.67\%$
• Reserves and surplus: $\frac{2,50,000}{12,00,000} \times 100 = 20.83\%$
• Current liabilities: $\frac{1,50,000}{12,00,000} \times 100 = 12.50\%$
• Fixed assets: $\frac{7,00,000}{12,00,000} \times 100 = 58.33\%$
• Current assets: $\frac{5,00,000}{12,00,000} \times 100 = 41.67\%$

Common Size Balance Sheet of Aditya Ltd. and Anjali Ltd.

Observation:

• Anjali Ltd. has a higher proportion of fixed assets (58.33%) compared to Aditya Ltd. (40%), indicating a more capital-intensive structure.
• Aditya Ltd. has a higher proportion of current assets (60%) compared to Anjali Ltd. (41.67%), indicating better short-term liquidity.
• Anjali Ltd. has a higher proportion of equity share capital (66.67%) compared to Aditya Ltd. (60%), indicating lower reliance on external funds.