ABSTRACT

I am pleased to submit this project work in Fundamental of Management Accounting for class
XII. I am extremely grateful to CHSE for introducing this project in Fundamental of Management
Accounting.

This project has given me a large and copious opportunity to observe the process of analysing
financial statements by using Common-size Statement Analysis technique, followed by business
enterprises, which is increased my understanding of the concepts studied. This has resulted m
enhancing my analytical, interpreting and creative skills.

The salient features of this project are Concept clarification about Common-size statements,
Clarification regarding various types of Common-s-ze statements, Clarification about the merits and
demerits of Common-size statements, Clarification regarding differences between Comparative and
Common-size statements, Preparation of Common-size P & L account and Common-size Balance
Sheet.

This project has helped me to understand the conceptual portion of preparing common-size
statement and helps to understand how to use it.
 TABLE OF CONTENTS

Sl. No. Topics Page No.

1. Meaning of Common-size statement 21

a
.L Types of Common-size Statement 21

3 Advantages of Common-size statement 2

3

4. Limitations of Common-size statement 34

-
5. Comparison of Comparative and Common-size statement 6
5
analysis
6. Practical application of Common-size statement analysis 7
6-10
technique
7 Conclusion 11
t2
8. References 12
13

Page | 2
MEANING OF COMMON-SIZE STATEMENT

Common size statement analysis, also referred as vertical analysis, is a tool that financial
managers use to analyze financial statements. It evaluates financial statements by expressing each

line item as a percentage of the base amount for that period. The analysis helps to understand the
impact of each item in the financial statement and its contribution to the resulting figure.

These statements are also known as component percentage or 100 per cent statements
because every individual item is stated as a percentage of the total 100. The short-comings in
comparative statements and trend percentages where changes in items could not be compared with
the totals have been covered up. The analyst is able to assess the figures in relation to total values.

TYPES OF COMMON-SIZE STATEMENTS

(i) Common-Size Balance Sheet:

A statement in which balance sheet items are expressed as the ratio of each asset to total
assets and the ratio of each liability is expressed as a ratio of total liabilities is called common-size
balance sheet.

For example, following assets are shown in a common-size balance sheet:

Assets { Percentage

Cash in hand & at Bank 5,000 2.5

Sundry debtors 20,000 l0

Stock 25,000 12.50

Land & Building 50,000 25

Plant & Machinery 1,00,000 50

Total assets 2.00.000 100"/"

Page | 3
1
 The total figure ofassets Rs 2,00,000, is taken as 100 and all other assets are expressed as

a percentage oftotal assets. The relation ofeach asset to total assets is expressed in the statement.

The relation of each liability to total liabilities is similarly expressed.

The common-size balance sheet can be used to compare companies of differing size. The
comparison of figures in different periods is not useful because total figures may be affected by a
number of factors. It is not possible to establish standard norms for various assets. The trends of
figures from year to year may not be studied and even they may not give proper results.

(ii) Common Size Income Statement:

The items in income statement can be shown as percentages of sales to show the relation
of each item to sales. A significant relationship can be established between items of income

statement and volume of sales. The increase in sales will certainly increase selling expenses and

not administrative or financial expenses.

In case the volume of sales increases to a considerable extent, administrative and financial
expenses may go up. In case the sales are declining, the selling expenses should be reduced at

once. So, a relationship is established between sales and other items in income statement and this

relationship is helpful in evaluating operational activities of the enterprise.

ADVANTAGES OF COMMON.SIZE STATEMENT:

The advantages of Common-Size Statement are:

(a) Easy to Understand:

Common-size Statement helps the users of financial statement to make clear about the ratio
or percentage of each individual item to total assets/liabilities of a firm. For example, if an analyst
wants to know the working capital position, he may ascertain the percentage of each individual
component of current assets against total assets of a firm and also the percentage share of each
individual component of current liabilities.

(b) Helpful for Time Series Analysis:

Page | 4
2
 A Common-Size Statement helps an analyst to find out a trend relating to percentage share
of each asset in total assets and percentage share of each liability in total Iiabilities.

(c) Comparison at a Glance:

An analyst can compare the financial performances at a glance since percentage of increase
or decrease of each individual component of cost, assets, liabilities etc. are available and he can
easily ascertain his required ratio.

(d) Helpful in analyzing Structural Composition:

A Common-Size Statement helps the analyst to ascertain the structural relations of various
components of cost/expenses/assets/liabilities etc. to the required total of assets/liabilities and

capital.

LIMITATIONS OF COMMON-SIZE STATEMENT:

Common-Size Statement is not free from snags. Some of them are:

(a) Standard Ratio:

Common-Size Statement does not help to take decisions since there is no standard
ratio/percentage regarding the change of percentage in the various component of assets, liabilities,

sales etc.

(b) Change in Price-level:

Common-Size statement does riot recogni ze the change in price level i.e. inflationary
effect. So, it supplies misleading information's since it is based on historical cost.

(c) Following Consistency:

If consistency in the accounting principle, concepts, conventions is not maintained then

Common Size Statement becomes useless.

(d) Seasonal Fluctuation:

Page I 5
3
 Common-Size Statement fails to convey proper records during seasonal fluctuations in
various components of sales, assets liabilities etc. e.g. sales and closing stock significantly vary.
Thus, the statement fails to supply the real information to the users of financial statements.

(e) Window Dressing:

Effect of window dressing in financial statements cannot be ignored and Common-Size

Statements fail to supply the real positions of sales, assets, liabilities etc. due to the evil effects of
window dressing appearing in the financial statements.

(0 Qualitative Element:

Common-Size Statement fails to recognize the qualitative elements, e.g. quality of works,
customer relations etc. while measuring the performance of a firm although the same should not
be ignored.

(g) Liquidity and Solvency Position:

Liquidity and solvency position cannot be measured by Common-Size Statement. It

considers the percentage of increase or decrease in various components of sales, assets, liabilities

etc. In other words, it does not help to ascertain the Current Ratio, Liquid Ratio, Debt Equity
Capital Ratio, Capital Gearing Ratio etc. which are applied in testing liquidity and solvency
position of a firm.

Page | 5
4
COMPARATTVE STATEMENT ANALYSrc VS. COMMON.SIZE STATEMENT
ANALYSIS

Basis of Comparative Statement Analysis Common-size Statement Analysis

Difference

Meaning It refers to the comparison of an item It refers to the comparison of items of

of the financial statement of one the financial statement to the

period or periods to its corresponding common item of the same accounting

item of the base accounting period. period.

Another name It is also known as Horizontal It is also known as Vertical analysis.

Analysis.

Expression of In it, change in the item is expressed In it, change in the item is expressed
Change either in absolute figures or in either in ratio or in percentage terms.
percentage or in both terms.

Benefits The benefit of horizontal analysis is Vertical analysis helps in predicting

that it indicates growth or decline of and determining the future relative
the firm. proportion of an item to the common
item.

Purpose Its purpose is to determine the change Its purpose is to determine the
in an item during an accounting proportion of item to the common
period. item of the same accounting period.

5
Page | 7
PRACTICAL APPLICATION OF COMMON-SIZE STATEMENT AI\ALYSIS

a) Common-size Balance Sheet

The Balance Sheets of Shree Durga Clothe Store Pvt. Ltd. and Subash Textiles Pvt. Ltd. as
at 31.03.21 are given as follows:

Liabilities Shree Durga Clothe Store Subash Textiles

t{I trl
Preference Share Capital 1,20,000 1,60,000
Equity Share Capital 1,50,000 4,00,000
Reserv e & Surpluses 14,000 18,000

Long-term loans I ,l 5,000 1,30,000

Bills Payable 2,000
Sundry creditors 12,000 4,000
Outstanding expenses 15,000 6,000
Proposed dividend 10,000 90,000
Total 4.38.000 8.08.000
Assets

Land & Building 80,000 1,23,000

Plant & machinery 3,34,000 6,00,000
Temporary Investments 1,000 40,000
Inventories . 10,000 25,000
Book-debts 4,000 8,000
Prepaid expenses 1,000 2,000
Cash & bank balances 8,000 I0,000
Total 4.38.000 8.08.000

I have made a comparison of the above two Balance sheets by using Common-size statement
analysis techniques as follows;

Page | 8
6
 Common-sizeBalance Sheet as on 31.03.2019

Particulars Ot
Shree Durga Clothe Store Subash Textiles

Amount [t] o/ Amount o/

/o [t] /o

Fixed Assets
Land & Building 80,000 18.26 1,23,000 15.22

Plant & Machinery 3,34,000 76.26 6,00,000 74.62

Total Fixed Assets 4.14.000 94.52 7.23.000 89.48

Current Assets
Temporary Investments 1,000 0.23 40,000 4.95

Inventories 10,000 2.28 25,000 3.08

Book-debts 4,000 0.9 r 8,000 0.99
Prepaid expenses 1.000 0.23 2,000 0.25

Cash & bank balances 8,000 l .83 10,000 1.25

Total Current Assets 24.000 5.48 85.000 10.52

Total Assets 4.38.000 100.00 8.08.000 100.00

Share capital & Reserryes

Preference share Capital 1,20,000 27.39 1,60,000 19.80

Equity share capital 1,50,000 34.25 4,00,000 49.50

Reserves & Surpluses 14,000 3.19 18,000 2.20

Total Capital & reserres 2.84.000 64.83 5.78.000 71.53

Long-term loans 1,15,000 26.25 1,30,000 16.09

Current liabilities
Bills Payable 2,000 0.46

Sundry creditors 12,000 2.74 4,000 0.49

Outstanding expenses 15,000 3.44 6,000 0.7 4

Proposed dividend 10,000 2.28 90,000 lr.l5

Total Current Liabilities 39.000 8.92 1.00.000 12.38

Total Liabilities 4.38.000 100.00 8.08.000 100.00

7
Page | 9
Interpretation:

1) An analysis of pattern of financing of both the companies shows that Subahs Textiles Pvt.
Ltd. is more traditionally financed as compared to Shree Durga Cloth Store Pvt. Ltd. The
former company has depended more on its own funds as is shown by balance sheet. Out of
total investments, Tl.53% of the funds are proprietor's funds and outsiders' funds account
only for 28.47%.

In Shree Durga Cloth Store Pvt. Ltd. proprietors' funds are 64.83yo while outsiders' share
is 35.17Yowhich shows that this company has depended more upon outsiders' funds. In the

present-day economic world, generally, companies depend more on outsiders' funds. In

this context both the companies have good financial planning but Subahs Textiles Pvt. Ltd.
is more financed on traditional lines.

2) Both the companies are suffering from inadequacy of working capital. The percentage of
current liabilities is more than the percentage of current assets in both the companies. The
first company is suffering more from working capital position than the second company
because current liabilities are more than current assets by 3.44% and this percentage is
1.86% in the case of second company.

3) A close look at the balance sheets shows that investments in fixed assets have been financed
from working capital in both the companies. In Shree Durga Cloth Store Pvt. Ltd. fixed
assets account for94.52Yo of total assets while long- term funds account for 91.08% of
total funds. In Subahs Textiles Pvt. Ltd. fixed assets account for 89.48o/o whereas long term
funds account for 87.62% of total funds Instead of using long-term funds for working
capital purposes the companies have used working capital for purchasing fixed assets.

4) Both the companies face working capital problem and immediate steps should be taken to
issue more capital or raise long-term loans to raise working capital position.

8
Page I 10
b) Common-size Income Statement

Following are the Income Statements of Shree Durga Cloth Stores Pvt. Ltd. & Subahs
Textiles Pvt Ltd. for the years ending Mar, 31,20192

Particulars Shree Durga Cloth Stores Pvt. Subahs Textiles Pvt. Ltd.

IrI ITI
Sales s00 700
Miscellaneous income 20 l5
Expenses:

Cost of sales 325 5r0

Office expenses 20 25

Selling expenses 30 45

I nterest 25 30
Corporate Income Tax 20 35

Net Profit r00 70

I have made a comparison of the above two Balance sheets by using Common-size statement
analysis techniques as follows;

Common-size Income Statement for the year ending 31.03.2019

Particulars Shree Durga Clothe Store Subash Textiles

Amount [t] o/o of Sales Amount [t] o/" of Sales
Sales 500 100.00 700 100.00
Less: Cost of sales 325 65.00 510 72.86

Gross Profit 175 3 s.00 r90 27.14

Less : Operating Bxpenses
Office Expenses 20 4 25 3.57
Selling Expenses 30 6 45 6.43
Operating profit 125 25 120 t7 .14
Add: Non-operating Income 20 4 l5 2.14
Total Profit 145 29 135 19.28

Page I 11
9
 Less : Non-operating Expenses 25 5 30 4.28

Net Profit Before Tax 120 24 r05 l5

Less: Corporate Income Tax 36 7.2 31.5 4.5

Net Profit after Tax 84 16.8 73.5 10.5

Interpretation:

(f ) The sales amount of Shree Durga Cloth Stores is less than the sales of Subash Textiles but
o%
the gross Profit Yo is more of Shree Durga Cloth Stores because of lower of cost of sale
than Subash Textiles.

(2) Operating expenses of Shree Durga Cloth Stores (10%) and Subash Textiles (10%o\ are
equal.

(3) Operating profit of Shree Durga Cloth Stores (25%) is more than Subash Textiles (17.14\
by 7.860/o.

(4) Non-Operating Income of Shree Durga Cloth Stores (4%) is more than Subash Textiles
(2.14)by 1.86%.

(5) Non-Operating Expenses of Shree Durga Cloth Stores (5%) is more than Subash Textiles
(4.28)by 0.72%o.

(6) Net Profits of Shree Durga Cloth Stores is also more than Subash Textiles, both in absolute
and percentage (%) terms.

(7) The overall profitability position of Shree Durga Cloth Stores Pvt. Ltd is quite better than
Subash Textiles Pvt. Ltd.

Page I 12
10
 CONCLUSIONS SUGGESTIONS
Shree Durga Cloth Stores P\4. Ltd should focus on increase in its sales revenue. Subash
Textile should. focus on cost of sales to minimize it as possible. Both the companies are
suffering from inadequacy of working capital. So, the management of both the companies
should take cme of it. Subahs Textiles hrt. Ltd. is more financed on traditional lines. So, it
should also focus on some outsider's source of fimds.

In conclusiorl it can be said that the common size income statement facilitates easy
comparison. It makes analysis much easier such that the analyst can see what is actually
driving the profrt of a company, and then compare that performance to its peers. It allows an
analyst to look at how the perforrrance has changed over the period of time. From an
investor's perspective, a comrnon sire income statement helps in spotting patterns in the
performance of the company that a raw income statement may not uncover.

Common Size Income Statement presents each and every line item which is available in the
income statement of the company in form of the relative percentage of sales and helps in
analysing the items that are drirring the profits of the company.

Page 13
11
 BIBLIOGRAPHY
BOOKS REFERREI)
o Amitabha Basu, Financial Accounts, Volume - 3, Edition - August- 2017, accounting
ratios for financial statement analysis, page - 829 - 835.
o Sarat Kumar Sahu, Pradeep Kumar Prusty, Edition -2017, Fundamental of Management
Accounting, page 4.1 * 4.90
o Pradeep Kumar Prusty, Suresh Chan{ Prasad Kumar Sahu: 2018: Nano Publication
Home: Pg.568-579

SITE VISITED

o https://www.ibef.org/industrv/steel.aspx
o https://money.rediff.com/index.html
o http://www.business-standard.com/article/companies/make-in-india-in-public-
procurement-companies-bas-rs:50-bn-govt-contracts- I I 804030 I 360 I .html

L4 12