CBSE Class 12 Accountancy: Analysis of Financial Statements NCERT Solutions

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NCERT Solutions PDF Class 12 PDF

This section provides NCERT Solutions for Class 12 Accountancy, Chapter 4, focusing on the Analysis of Financial Statements. It covers fundamental concepts like data simplification and interpretation, distinguishing between comparative (horizontal) and common-size (vertical) analysis. The solutions also touch upon cash flow analysis. A key part of this chapter involves practical application through the preparation of comparative income statements and balance sheets, demonstrating how to calculate absolute changes and percentage changes between two financial periods. These solutions are designed to help students understand the techniques used to evaluate a company's financial health and performance, aiding in exam preparation by offering clear, step-by-step guidance.

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Quick info

BoardCBSE
ClassClass 12
SubjectAccountancy
Session2026
LanguageEnglish
TypeNCERT Solutions
ChapterPart 2 - 4. Analysis of Financial Statements

Chapter summary

Chapter 4 of the Class 12 Accountancy syllabus, Analysis of Financial Statements, introduces students to the essential techniques for interpreting financial data. This chapter covers the basic definitions of analysis and interpretation, and differentiates between comparative (horizontal) and common-size (vertical) analysis methods. It also briefly mentions cash flow analysis. The core of the chapter lies in practical exercises, such as preparing comparative income statements and balance sheets, which require calculating absolute and percentage changes in financial figures over different periods.

Learning outcomes

  • Understand the basic meaning of financial statement analysis and interpretation.
  • Differentiate between comparative (horizontal) and common-size (vertical) analysis.
  • Identify the purpose of cash flow analysis.
  • Prepare a comparative income statement showing absolute and percentage changes.
  • Prepare a comparative balance sheet showing absolute and percentage changes.
  • Calculate absolute and percentage changes in financial statement items.

Topics covered

Paper topics

  • Meaning of Analysis
  • Meaning of Interpretation
  • Comparative Analysis (Horizontal Analysis)
  • Common-size Analysis (Vertical Analysis)
  • Cash Flow Analysis
  • Preparation of Comparative Income Statement
  • Preparation of Comparative Balance Sheet
  • Absolute Change Calculation
  • Percentage Change Calculation

Important topics

  • Comparative Income Statement Preparation
  • Comparative Balance Sheet Preparation
  • Understanding Horizontal vs. Vertical Analysis
  • Calculating Absolute and Percentage Changes
  • Meaning of Analysis and Interpretation

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Questions and Solutions

Test Your Understanding I - Question 1

Question 1. Analysis simply means——data.
Solution: Analysis in the context of financial statements refers to the process of simplifying complex financial data. This simplification makes the data easier to understand, compare, and draw conclusions from, forming the basis for further interpretation.

Answer: Simplification

Test Your Understanding I - Question 2

Question 2. Interpretation means———-data.
Solution: Interpretation is the step that follows analysis. It involves explaining the meaning and significance of the simplified financial data. This helps in understanding the underlying reasons for financial performance and position, and in making informed decisions.

Answer: Explaining

Test Your Understanding I - Question 3

Question 3. Comparative analysis is also known as————Analysis.
Solution: Comparative analysis involves comparing financial data of a company across different accounting periods. This method highlights trends and changes over time. It is also referred to as Horizontal Analysis because it examines trends across rows (periods) in financial statements.

Answer: Horizontal

Test Your Understanding I - Question 4

Question 4. Common size analysis is also known as————Analysis
Solution: Common-size analysis, also known as Vertical Analysis, restates each item in a financial statement as a percentage of a chosen base figure within the same accounting period. For the income statement, net sales is typically the base, and for the balance sheet, total assets (or total liabilities and equity) is the base. This method helps in understanding the relative proportion of different items.

Answer: Vertical

Test Your Understanding I - Question 5

Question 5. The analysis of actual movement of money inflow and outflow in an organisation is called——-analysis.
Solution: The analysis that specifically tracks the movement of cash into and out of an organization is known as Cash Flow Analysis. This technique is crucial for understanding a company's liquidity and its ability to generate cash from its operations, investments, and financing activities.

Answer: Cash Flow

Do It Yourself I - Question 1

From the following balance sheet and income statement of Day Dreaming Co.Ltd., for the year ending 2002 and 2003, prepare the comparative statements.

Income Statement (₹ in lakhs)

Particulars 2006 2005
Net Sales 1,050 900
Cost of Goods Sold 850 650
Administrative Expenses 40 40
Selling Expenses 20 20
Net Profit 140 190

Balance Sheet (₹ in lakhs)

Particulars 2006 2005
Equity Share Capital 600 600
6% Preference Share capital 500 500
Reserves 445 400
Debenture 350 300
Bills Payable 275 250
Creditors 200 150
Tax Payable 200 150
Total Liabilities 2,570 2,350
Land 300 300
Buildings 470 500
Plant 470 400
Furniture 340 300
Stock 500 400
Cash 490 450
Total Assets 2,570 2,350
Solution:

To prepare the comparative statements, we need to calculate the absolute change and the percentage change for each item between the years 2005 and 2006. The formulas used are:

Absolute Change = Amount in Current Year (2006) - Amount in Previous Year (2005)

Change in % = \frac{\text{Absolute change}}{\text{Previous year (2005)}} \times 100

Comparative Income Statement of Day Dreaming Company Limited for the year ended 2005 and 2006

Particulars 2005 (₹ Lakhs) 2006 (₹ Lakhs) Absolute Change (₹ Lakhs) Change in %
Net Sales 900 1,050 150 16.67%
(-) Cost of Goods Sold (650) (850) (200) (30.77)%
Gross Profit (A) 250 200 (50) (20.00)%
(-) Operating Expenses:
Administrative Expenses (40) (40) 0 0.00%
Selling Expenses (20) (20) 0 0.00%
Operating Profit (B) 190 140 (50) (26.31)%

Comparative Balance Sheet of Day Dreaming Company Limited as on year ended 2005 and 2006

Particulars 2005 (₹ Lakhs) 2006 (₹ Lakhs) Absolute Change (₹ Lakhs) Change in %
Assets
Current Assets
Stock 400 500 100 25.00%
Cash 450 490 40 8.89%
Total Current Assets 850 990 140 16.47%
Fixed Assets
Land 300 300 0 0.00%
Buildings 500 470 (30) (6.00)%
Plant 400 470 70 17.50%
Furniture 300 340 40 13.33%
Total Fixed Assets 1,500 1,580 80 5.33%
Total Assets 2,350 2,570 220 9.36%
Liabilities
Current Liabilities
Bills Payable 250 275 25 10.00%
Creditors 150 200 50 33.30%
Tax Payable 150 200 50 33.30%
Total Current Liabilities 550 675 125 22.73%
Non-Current Liabilities
Debentures 300 350 50 16.67%
Total External Liabilities 850 1,025 175 20.59%
Owners' Funds
Equity Share Capital 600 600 0 0.00%
6% Preference Share capital 500 500 0 0.00%
Reserves 400 445 45 11.25%
Total Liabilities 2,350 2,570 220 9.36%

Working Note:

The calculations for Absolute Change and Change in % are performed for each line item as shown in the tables above. For example:

  • Net Sales: Absolute Change = 1050 - 900 = 150. Change in % = (150 / 900) * 100 = 16.67%.
  • Cost of Goods Sold: Absolute Change = 850 - 650 = 200. Change in % = (200 / 650) * 100 = 30.77%. (Note: The source shows negative for COGS, which is unusual for a cost, but the calculation is based on the provided numbers.)
  • Stock: Absolute Change = 500 - 400 = 100. Change in % = (100 / 400) * 100 = 25.00%.
  • Creditors: Absolute Change = 200 - 150 = 50. Change in % = (50 / 150) * 100 = 33.30%.

Common mistakes

  • Confusing the terms 'analysis' and 'interpretation'.
  • Incorrectly applying the formula for percentage change in comparative statements.
  • Errors in classifying current and non-current assets/liabilities in the balance sheet.
  • Calculation mistakes when determining absolute changes between financial periods.

Revision tips

  • Clearly define and differentiate between analysis and interpretation in your own words.
  • Practice calculating absolute and percentage changes for both income statements and balance sheets.
  • Pay close attention to the formulas for calculating changes and ensure accuracy.
  • Review the classification of items in the balance sheet (current vs. non-current) for comparative analysis.

Practice MCQs

Q1. What is the primary meaning of 'analysis' in the context of financial statements?

Q2. Which type of analysis is also known as Horizontal Analysis?

Q3. Vertical Analysis is another name for which type of analysis?

Q4. What does 'interpretation' mean in financial statement analysis?

Q5. In comparative statements, the formula for calculating 'Change in %' is:

Frequently asked questions

What is the main goal of analyzing financial statements?

The main goal is to simplify and interpret financial data to understand a company's performance, financial position, and cash flows over different periods.

What is the difference between comparative analysis and common-size analysis?

Comparative analysis (horizontal) shows changes in absolute amounts and percentages over time, while common-size analysis (vertical) expresses each item as a percentage of a base figure within a single period.

How are comparative statements prepared?

Comparative statements are prepared by calculating the absolute change and percentage change for each item between two consecutive financial periods (e.g., current year vs. previous year).

What is the formula for calculating the percentage change in a comparative statement?

The percentage change is calculated as: (Absolute Change / Previous Year's Amount) * 100.

Why is understanding financial statement analysis important for Class 12 students?

It helps students grasp how to evaluate a company's financial health, which is a key topic in Accountancy and crucial for understanding business operations and investment decisions.

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