Tools of Financial Statement

CHAPTER 3

COMPARATIVE STATEMENTS AND COMMON-SIZE STATEMENTS

The various tools used for analysis of financial statements are:

1.     Comparative Statement: Financial Statements of two years are compared and changes in absolute terms and in percentage terms are calculated. It is a form of Horizontal Analysis. (chapter 3)

2.     Common Size statement: Figures of Financial statements are converted into percentage with respect to some common base. It is Vertical Analysis. (chapter 3)

3.     Ratio Analysis: It is a technique of Study of relationship between various items in the Financial Statements. (chapter 4)

4.     Cash Flow Statement: It is a statement that shows the inflow and outflow of cash and cash equivalents during a particular period which helps in finding out the causes of changes in cash position between the two balance sheet dates. (chapter 5)

COMPARATIVE BALANCE SHEET

Comparative Balance Sheet is the analysis of Balance Sheet which is used for comparing Assets, Equity and Liabilities for two or more accounting periods.

STEPS TO PREPARE COMPARATIVE BALANCE SHEET – CORELATE WITH FORMAT

1.     Copy the Equity and Liabilities and the Assets exactly as given in the question.

2.     Interchange the Current Year and the Previous Year:

In the question - Current Year figures are given first, Previous Year figures are given later.

In the solution - first write the Previous Year figures, then write the Current Year figures.

(this step is most important)

3.     Column C :

Absolute Change (C)= Current Year (B) – Previous Year (A) Answer can be positive or negative.

If Negative , put it in brackets.

4.     Column D :

Percentage Change = column C/column A * 100.

If Column C has brackets, then Column D also has to have brackets.

COMPARATIVE STATEMENT OF PROFIT AND LOSS (INCOME STATEMENT)

Comparative Statement of Profit and Loss or Comparative Income Statement is the horizontal analysis of Income Statement which shows the operating results for more than one accounting period so that changes in absolute amounts and percentages from one period to another are known.

STEPS TO PREPARE COMPARATIVE STATEMENT OF PROFIT AND LOSS – CORELATE WITH FORMAT

1.     Copy the Items exactly as given in the question.

2.     Interchange the Current Year and the Previous Year:

In the question - Current Year figures are given first, Previous Year figures are given later.

In the solution - first write the Previous Year figures, then write the Current Year figures.

(this step is most important)

3.     Column C :

Absolute Change(C) = Current Year (B) – Previous Year (A) Answer can be positive or negative.

If Negative, put it in brackets.

4.     Column D :

Percentage Change = column C/column A * 100.

If Column C has brackets, then Column D also has to have brackets.

COMMON-SIZE STATEMENT OF PROFIT AND LOSS (INCOME 

STATEMENT)

In the Common-Size Statement of Profit and Loss, Revenue from Operations (Net Sales) is taken as 100 and all amounts are expressed as percentage of Revenue from Operations (Net Sales). Common-size statement of Profit and Loss may be prepared for different periods of the firm or for same period of two firms.

NOTE- All the items are divided by revenue from operations of that year to calculate the percentage.

It is also called a 100% statement because RFO is taken as 100%.

STEPS TO PREPARE COMMON SIZE STATEMENT OF PROFIT AND LOSS – CORELATE WITH FORMAT

1.     Copy the Items exactly as given in the question.

2.     Interchange the Current Year and the Previous Year:

 In the question - Current Year figures are given first, Previous Year figures are given 


later.

In the solution - first write the Previous Year figures, then write the Current Year figures.

(this step is most important)

3.     Column C : Revenue From Operations to be taken as 100%. Every other item will be expressed as a Percentage of Revenue from Operation. (Previous Year)

4.     Column D : Revenue From Operations to be taken as 100%. Every other item will be expressed as a Percentage of Revenue from Operation. (Current Year)

COMMON SIZE BALANCE SHEET

Common-size Balance Sheet shows the percentage relation of each asset/liability to total assets/total liabilities including capital (i.e. equity and liabilities).

NOTE- All the items are divided by the total of balance sheet to calculate the percentage.

STEPS TO PREPARE COMMON SIZE BALANCE SHEET – CORELATE 

WITH FORMAT

1.     Copy the Items exactly as given in the question.

2.     Interchange the Current Year and the Previous Year:

In the question - Current Year figures are given first, Previous Year figures are given later.

In the solution - first write the Previous Year figures, then write the Current Year figures.

(this step is most important)

3.     Column C : Total Assets and Total Liabilities to be taken as 100%. Every other item will be expressed as a Percentage of Total Assets or Total Liabilities. (Previous Year)

4.     Column D : Total Assets and Total Liabilities to be taken as 100%. Every other item will be expressed as a Percentage of Total Assets or Total Liabilities. (Current Year)

MCQ