Complete Summary and Solutions for Analysis of Financial Statements – NCERT Class XII Accountancy, Chapter 4 – Techniques, Tools, Comparative and Common Size Statements, Trend Analysis
Detailed summary and explanations of Chapter 4 'Analysis of Financial Statements' from the NCERT Class XII Accountancy textbook, including nature and significance of financial analysis, objectives, tools and techniques such as comparative statements, common size statements, trend analysis, along with examples, illustrations, and NCERT questions and answers.
Updated: 2 days ago
Categories: NCERT, Class XII, Accountancy, Chapter 4, Financial Statements Analysis, Comparative Statements, Common Size Statements, Trend Analysis, Tools of Financial Analysis, Summary, Questions, Answers
All terms from chapter; detailed with examples, relevance. Expanded: 30+ terms grouped by subtopic; added advanced like "Horizontal Analysis", "Vertical Analysis" for depth/easy flashcards.
Financial Statement Analysis
Critical eval of FS for decisions. Ex: Relationships study. Relevance: Insight profitability.
Comparative Statements
FS for periods comparative. Ex: Abs/% change. Relevance: Horizontal, trends.
Common Size Statements
Items % of base. Ex: Sales 100%. Relevance: Vertical, comparisons.
Trend Analysis
% changes over years. Ex: Base year 100. Relevance: Long-run view.
Not current. Ex: Past figures. Relevance: Limitation.
Tip: Group by tools/limitations; examples for recall. Depth: Debates (e.g., historical vs real-time). Historical: FS evolution. Interlinks: To Ch5 Ratios. Advanced: Cash flow. Real-Life: Analyst reports. Graphs: % changes. Coherent: Evidence → Interpretation. For easy learning: Flashcard per term with TYU snippet.
60+ Questions & Answers - NCERT Based (Class 12) - From TYU & Variations
Based on chapter + expansions (e.g., TYU-I). Part A: 10 (1 mark, one line), Part B: 10 (3 marks, four lines), Part C: 10 (4 marks, six lines), Part D: 10 (6 marks, eight lines). Answers point-wise in black text. Include proformas where apt.
Part A: 1 Mark Questions (10 Qs - Short)
1. Define financial analysis.
1 Mark Answer:
Critical eval of FS for decisions.
2. Analysis without interpretation is?
1 Mark Answer:
Useless.
3. Comparative is also known as?
1 Mark Answer:
Horizontal.
4. Common size base for P&L?
1 Mark Answer:
Sales 100%.
5. Trend uses what base?
1 Mark Answer:
Base year 100%.
6. % change formula?
1 Mark Answer:
(Abs/first) x100.
7. Limitation: Price changes?
1 Mark Answer:
Ignored.
8. Cash flow = ?
1 Mark Answer:
Inflow - outflow.
9. Vertical analysis?
1 Mark Answer:
Common size.
10. Users include?
1 Mark Answer:
Investors.
Part B: 3 Marks Questions (10 Qs - Medium, Exactly 4 Lines Each)
1. State 3 objectives of analysis.
3 Marks Answer:
Assess profitability/efficiency.
Relative importance components.
Reasons for changes.
Ex: Debt ability.
2. Differentiate horizontal vs vertical.
3 Marks Answer:
Horizontal: Time compare (comp).
Vertical: % total (common).
Ex: Trends vs structure.
Both useful.
3. Significance to lenders.
3 Marks Answer:
Long solvency/survival.
Profitability/cash gen.
Ex: Interest/principal pay.
Capital structure.
4. Steps for comparative stmt.
3 Marks Answer:
List figures col 2/3.
Abs change col 4.
% change col 5.
Ex: Exhibit 4.1.
5. Common size for BS base?
3 Marks Answer:
Total assets/liab 100%.
Intra/inter firm.
Ex: Ill 7 XRI.
Structure insight.
6. 3 limitations of analysis.
3 Marks Answer:
Price level ignore.
Acct changes mislead.
Monetary only.
Ex: Historical.
7. Trend analysis use.
3 Marks Answer:
Ops results over years.
% to base year.
Ex: Ratio constant/rising.
Detect problems.
8. TYU-I (1): Analysis means?
3 Marks Answer:
Simplifying data.
Methodical classification.
Ex: FS regroup.
With interpretation.
9. Cash flow stmt shows?
3 Marks Answer:
Cash receipts/payments.
Sources/purposes.
Ex: Inflow positive.
Position changes.
10. Inter-firm comparison.
3 Marks Answer:
Common size use.
Size diff compare.
Ex: Industry same year.
Operating/financing.
Part C: 4 Marks Questions (10 Qs - Medium-Long, Exactly 6 Lines Each)
1. Explain significance (3 users).
4 Marks Answer:
Finance mgr: Efficiency/credit.
Top mgmt: Resource use/control.
Trade payables: Short liquidity.
Ex: Deviations correct.
Lenders: Solvency.
Diff purposes vary.
2. List 4 tools with brief.
4 Marks Answer:
Comparative: Periods compare (horiz).
Common size: % base (vert).
Trend: % changes series.
Ratio: Relationships.
Ex: Cash flow movement.
Ch5/6 detail.
3. Steps for common size (Ill5).
4 Marks Answer:
List abs col2/4.
Base sales 100%.
% calc col3/5.
Ex: Gross profit 52%.
Changes over time.
Intra/inter.
4. Objectives of analysis.
4 Marks Answer:
Current prof/eff.
Components importance.
Change reasons.
Debt/liquidity assess.
Ex: Forecast prospects.
Econ/govt use.
5. Comparative BS example (Ill3).
4 Marks Answer:
Share cap +33.33%.
Reserve -25%.
Total +29.63%.
Ex: Assets match.
Abs/per changes.
Trends identify.
6. 4 limitations.
4 Marks Answer:
No price changes.
Acct procedure unknown.
Report study only.
Monetary ignore.
Ex: Historical not current.
Window dressing.
7. TYU-II (2): Tools include?
4 Marks Answer:
Horizontal, vertical, ratio.
All above.
Ex: Comp/common/trend.
Cash flow too.
Comparative dynamic.
Annual to shareholders.
8. Significance to investors.
4 Marks Answer:
Earnings focus.
Present/future prof.
Capital structure risk.
Ex: Mgmt efficiency.
Buy/sell/hold.
Large cos limited.
9. Trend analysis importance.
4 Marks Answer:
Ops/fin pos over years.
% to base.
Ex: Ratio fall/rise.
Basic changes detect.
Good/poor mgmt.
Long run view.
10. TYU-III (c): Common size/ratios vertical?
4 Marks Answer:
True, vertical tools.
Ratio between stmts.
Ex: % base.
Cash flow tool.
FS include cash.
Comp horizontal.
Part D: 6 Marks Questions (10 Qs - Long, Exactly 8 Lines Each)
1. Explain meaning/significance.
6 Marks Answer:
Meaning: Eval relationships for insight.
Analysis + interpret.
Judgemental, estimate future.
Signif: Strengths/weak via relations.
Users: Mgr efficiency, payables liquidity.
Ex: Lenders solvency.
Cross/time series.
Diff interests.
2. Describe 5 tools briefly.
6 Marks Answer:
Comp: Periods abs/% (horiz).
Common: % base (vert).
Trend: Series % base year.
Ratio: Item relations prof/solv.
Cash flow: In/out net.
Ex: Sources/purposes.
First 3 here, others Ch5/6.
Intra/inter use.
3. Prepare comparative P&L (Ill1 BCR).
6 Marks Answer:
Revenue: 60L to 75L, +15L, +25%.
Other inc: 1.5L to 1.2L, -0.3L, -20%.
Total rev: +23.90%.
Expenses: +15%.
PBT: +46.29%, tax +67.18%.
PAT: +35.03%.
Proforma table.
Trends positive.
4. Explain objectives with econ use.
6 Marks Answer:
Prof/eff assess.
Components relative.
Changes reasons.
Debt/liquidity judge.
Ex: Forecast prospects.
Econ: Power concentration.
Govt: Tax/price controls.
Mgr decisions enable.
5. Common size P&L (Ill6).
6 Marks Answer:
Rev: 100% both.
Other inc: 13% to 12.5%.
Emp exp: 33% to 22.5%.
Other exp: 8% to 5%.
PBT: 72% to 85%.
PAT: 50.4% to 68%.
Proforma %.
Improvements show.
6. Full limitations (5).
6 Marks Answer:
Price changes not consider.
Acct changes mislead.
Reports study only.
Monetary, non-mon ignore.
Historical, not current.
Ex: Concepts/conventions.
Personal judgement.
FS limits apply.
7. TYU-III full: T/F validate.
6 Marks Answer:
(a) True, FS include cash.
(b) True, comp horizontal.
(c) True, vertical tools.
(d) True, between stmts.
(e) True, any enterprise.
(f) False, all users.
(g) True, period performance.
(h) True, decisions aid.
8. Significance to mgmt/labour.
6 Marks Answer:
Mgmt: Success measure, control.
Individual perf appraise.
Labour: Wage increase afford.
Productivity/price absorb.
Ex: Resources efficient.
Broad scope.
Deviations causes.
Corrective action.
9. Comparative BS prep (Ill4 Amrit).
6 Marks Answer:
Share cap +33.33%.
Reserve -7.14%.
LT borrow +18.75%.
Total +17.02%.
Tangible +33.33%.
Inventories -7.14%.
Proforma table.
Balanced changes.
10. Tools distinction: Comp vs common.
6 Marks Answer:
Comp: Abs/% changes periods.
Common: % common base.
Comp: Direction/trends.
Common: Structure/compare sizes.
Ex: Comp horiz, common vert.
Intra/inter both.
Principles same comp.
Trend extends comp.
Tip: Include proformas in ans; practice calcs. Additional 30 Qs: Variations on Ill, TYU, practice Qs.
Key Concepts - In-Depth Exploration
Core ideas with examples, pitfalls, interlinks. Expanded: All concepts with steps/examples/pitfalls for easy learning. Depth: Debates, analysis.
Meaning/Analysis
Steps: 1. Eval info, 2. Relate facts, 3. Interpret. Ex: FS relationships. Pitfall: No interpret useless. Interlink: To tools. Depth: Judgemental future est.
Significance
Steps: 1. Identify user, 2. Focus need. Ex: Liquidity for payables. Pitfall: One tool all. Interlink: Objectives. Depth: Diff interests.
Proforma Examples & Tables - From Text with Simple Explanations
Expanded with evidence, analysis; focus on proformas. Added variations for practice.
Example 1: Comparative Statement Format (Exhibit 4.1)
Simple Explanation: Abs/% changes for trends.
Particulars
Yr1 (Rs.)
Yr2 (Rs.)
Abs Change (Rs.)
% Change
Item
xxx
xxx
+/- xxx
+/- xx%
Step 1: List Yr1/Yr2.
Step 2: Abs = Yr2 - Yr1.
Step 3: % = (Abs/Yr1) x100.
Simple Way: Direction spot.
Example 2: Comparative P&L (Ill1 BCR)
Simple Explanation: Revenue/expenses changes.
Particulars
2015-16
2016-17
Abs
%
Revenue
60,00,000
75,00,000
15,00,000
25.00
Other Inc
1,50,000
1,20,000
(30,000)
(20.00)
Total Rev
61,50,000
76,20,000
14,70,000
23.90
Expenses
44,00,000
50,60,000
6,60,000
15.00
PBT
17,50,000
25,60,000
8,10,000
46.29
Tax
6,12,500
10,24,000
4,11,500
67.18
PAT
11,37,500
15,36,000
3,98,500
35.03
Step 1: Calc tax @rate.
Step 2: Changes positive.
Step 3: Growth insight.
Simple Way: Profit up.
Example 3: Comparative BS (Ill3 J Ltd, Rs. Lakhs)
Simple Explanation: Equity/liab/assets changes.
Particulars
2016
2017
Abs
%
Share Cap
15
20
5
33.33
Reserve
4
3
(1)
(25)
LT Borrow
6
9
3
50
Trade Pay
2
3
1
50
Total
27
35
8
29.63
Tangible
15
20
5
33.33
Intangible
6
9
3
50
Inventories
4
3
(1)
(25)
Cash
2
3
1
50
Step 1: Balance totals.
Step 2: % on first yr.
Step 3: Expansion show.
Simple Way: Assets grow.
Example 4: Common Size Income (Ill5)
Simple Explanation: % of net sales.
Particulars
2015-16 (Rs.)
2016-17 (Rs.)
2015-16 (%)
2016-17 (%)
Revenue
25,00,000
18,00,000
100
100
COGS
12,00,000
10,00,000
48
55.56
Gross Profit
13,00,000
8,00,000
52
44.44
Op Exp
1,20,000
80,000
4.80
4.44
Op Income
11,80,000
7,20,000
47.20
40
Non-Op Exp
15,000
12,000
0.60
0.67
Profit
11,65,000
7,08,000
46.60
39.33
Step 1: Base revenue.
Step 2: % each item.
Step 3: Compare years.
Simple Way: Margin decline.
Example 5: Common Size BS (Ill7 XRI)
Simple Explanation: % total assets.
Particulars
2016 (Rs.)
2017 (Rs.)
2016 (%)
2017 (%)
Share Cap
15,00,000
12,00,000
36.14
36.93
Reserve
5,00,000
5,00,000
12.05
15.38
LT Borrow
6,00,000
5,00,000
14.46
15.38
Trade Pay
15,50,000
10,50,000
37.35
32.31
Total
41,50,000
32,50,000
100
100
Tangible
14,00,000
8,00,000
33.73
24.62
Goodwill
16,00,000
12,00,000
38.55
36.92
Invest
10,00,000
10,00,000
24.10
30.77
Inventories
1,50,000
2,50,000
3.62
7.69
Step 1: Base total.
Step 2: % liab/assets.
Step 3: Structure shifts.
Simple Way: Payables down.
Example 6: Tools Quick Ref
Simple Explanation: Overview distinctions.
Tool
Type
Base
Use
Comparative
Horizontal
Abs/% change
Trends
Common Size
Vertical
Sales/Assets 100
Structure
Trend
Time Series
Base yr 100
Patterns
Ratio
Relation
Items
Prof/Solv
Cash Flow
Movement
In/Out
Liquidity
Step 1: Select tool.
Step 2: Apply data.
Step 3: Interpret.
Simple Way: Multi-tool.
Tip: Practice Ill; troubleshoot (e.g., % calc). Added for tools, limitations.
Interactive Quiz - Master Financial Analysis
10 MCQs in full sentences; 80%+ goal. Covers meaning, tools, limitations.
Quick Revision Notes & Mnemonics
Concise, easy-to-learn summaries for all subtopics. Structured in tables for quick scan: Key points, examples, mnemonics. Covers meaning, signif, objectives, tools, limitations. Bold key terms; short phrases for fast reading.
PA MH W (Price Acct Monetary Hist Window). Tip: "Prices Alter, Money Historical – Watch Windows" – Cautious use.
Overall Tip: Use CRI-MPLLI-PECD-CCTRC-LAP-BP%-BP R-PAMHW for full scan (5 mins). Flashcards: Front (term), Back (points + mnemonic). Print table for wall revision. Covers 100% chapter – easy for exams!
Step-by-step breakdowns of core processes, structured as full questions followed by detailed answers with steps. Visual descriptions for easy understanding; focus on actionable Q&A with examples from chapter.
Question 1: How to prepare comparative statements (Exhibit 4.1)?
