Unit 1: Analysis and Interpretation of Financial Statements.

Topie 1:- Vertical Financial statements

Vertical Format of BalanceSheet:

S.N. Particular
D SOURCES OFFUND;
1) Owned fund/ Proprietors Fund/V
Shareholder Fund:
a) Share capital:
Equity share capital
Preference share capital
b) Add: Reserves & surplus
Add/less: Profit / loss
Less: Preliminary Expenses
Total Share Capital

2) Borrowed Fund/ Loan Fund:

a) Secured Loan:
b) Unsecured Loan:
Total Borrowed Fund

TOTAL SOURCES OF FUND (1+2)

I) |APPLICATIONOF FUND:
1) Fixed Assets:
(Tangible +Intangible)
Total Fixed Assets

2) Investment: ( Long Term investment)

Total Investment

3) Working Capital :( CA-CL)

Current Assets:
Current Assets Quick: (eg. Cash,
bank, Debtors)
Current Assets Non-Quick: (eg.
Stock, Prepaid Exp.)
Current Liabilities:
CurrentLiabilities Quick:
(Creditors, proposed Dividend)

Current Liabilities Non-quick: (eg. |

Bank O.D)
Total Working Capital: (CA-CL)

TOTALAPPLICATION OFFUND: (1+2+3)

 Vertical Income Statemnent
Particular
Sales
Less: sales Return
Net sales Return
Less:Cost of Goods Sold
(OpeningStock+ Purchases+ Direct Expenses
closing Stock)
Gross Profit
Less: Operating Expenses:
Administration Expenses: (Office
salaries, Rent, Electricity)
Selling and Distribution Expenses:
(Salaries to salesmen, Travelling/ van
exp, Advertisements.)
Finance Expenses: (Cash Discount, bad
debts)
Total Operating Expenses
Operating Profit
Add: Non-operating Income
(Profit on sales of assets, Interest/Dividend on
investment)
Less: Non-operating Expenses
(Loss on sales of FA)
Earning Before interest and Tax ( EBIT)
Less: Interest
Earning BeforeTax(EBT)V Profit before Tax(PAT)_
Less: Tax
Earning After Tax(EAT)/ (PAT)
Topic 2:. Common Size Comparative & Trend Analysis

1) Comparative Analysis :
Comparative Financial Statements are statements of the financial position
of a business so designed as to facilitate comparison of different

accounting variables for drawing useful inferences.

Financial Statement of a particular business enterprise may be compared

over a period of years. This is Knows as 'Horizontal Analysis.

PREPARATIONS:
Step 1: Prepare vertical income statement and Balance Sheet.

Step 2: Draw Increase or Decrease Amount & Percentage (%) column.

How to calculate Increase or Decrease %

Dfference in Amount X 100

Amount of base years( Pervlous year)

Questions:
Q.1) Following is the summarized financial position of Jayesh Ltd. as on 31
march

Liabilities 2016R|2017 ( Assets 2016 (T) |2017 ( |

Share capital |50,000 80,000 |FixedAssets 60,000 75,000
Reserves & 15,000 20,000 Investment 10,000 20,000
Surplus
12% 30,000 24,000 Current Assets 50,000 40,000
Debentures
Current 30,000 15,000 Miscellaneous |5,000 4,000
Liabilities Expenditure
1.25,000|1.39.000| |1.25.000 1,39,000
From the above information prepare comparative balance sheet in vertical form.
 2) Common-size Statement:

This facilitates comparison of two or more business entities with a

common base. In the case of Balance Sheet, total assets or liabilities or

capital can be taken as the common base and in the case of income
statement, net sales can be taken as the base.

STEP TO PREPARATION OF COMMON SIZE INCOME

STATEMENT:
Step 1: Convert the given P/L account into vertical income statement.

Step 2: Select Sales as the Base, which is considered equal to 100%.

Step 3: Calculate the % of each item to sale and mention it in the

separate column provided after amount column.

Item inthe P/L account 100

Sales
STEP TO PREPARATION OF COMMON SIZE INCOME
STATEMENT:
Step 1: Convert the given Balance sheet into vertical Balance statement.
Step 2: Select total capital Employed OR Total Asset/ Total Net Asset/

Total Liabilities which is considered equal to 100%.

Step 3: Calculate the % of each item to the base i.e Capital Employed.

% Itemin the BalanceSheet 00

Capltal Employed/ Total Assets/Total Liabiltles

Questions:
Q.1) Following is the Balance sheet of M/s Surendra Ltd. as on 31 march

2020.

Balance sheet as on 31t march 2020

Liabilities 2020 () Assets 2020()_

Equity Share Capital 2,50,000 Land & Building 2,00,000
10% Preference Sharee 1,50,000 Machinery 2,50,000
Capital Furniture 2,00,000
General Reserve 2,00,000 Investment 90,000
8% Debenture 1,50,000 Stock 35,000
Creditors 1,00,000 Debtors 50,000
Bills Payable 50,000 Cash 40.000
 3) Trend Analysis
Method of Calculation:

1. Any of the statements is taken as the base. (Normally starting / first year
taken as base).

2. Every item in the base statement is stated as 100.

3. Trend ration are computed by dividing each amount in the statement with

the corresponding item in the base statement and the result is expressed as
a percentage.

Eg.: 2019.2020,2021 is given 2019 is base year

So calculate

Amount of 2020
(2020 6)= Amount of 2019
* 100

Amount of 2021
(2021 %) =- * 100
Amount of 2019