Accounting for Managerial Decision (As per the New Syllabus of Mumbai University for S.Y. BMS, Semester III)

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2 Accounting for Managerial Decision (As per the New Syllabus of Mumbai University for S.Y. BMS, Semester III) Rinky R. Rajwani M.Com., B.Ed., PGDFM, NET, Assistant Professor in Birla College of Arts, Science & Commerce, Kalyan (W). Manoj V. Bhatia M.Com., MBA (Finance), ICWAI (Inter), NET, BSCM, CPSM Visiting Faculty in Birla College of Arts, Science and Commerce, Kalyan (W). Mr. Shrichand Hinduja M.Com., SET, ICWAI (Inter) Assistant Professor in Shree Narayan Guru College, Mumbai. MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

3 Authors No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the publisher. First Edition : 2015 Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd., Ramdoot, Dr. Bhalerao Marg, Girgaon, Mumbai Phone: / , Fax: himpub@vsnl.com; Website: Branch Offices : New Delhi : Pooja Apartments, 4-B, Murari Lal Street, Ansari Road, Darya Ganj, New Delhi Phone: , ; Fax: Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur Phone: , ; Telefax: Bengaluru : No. 16/1 (Old 12/1), 1st Floor, Next to Hotel Highlands, Madhava Nagar, Race Course Road, Bengaluru Phone: , , , Hyderabad : No , Lingampally, Besides Raghavendra Swamy Matham, Kachiguda, Hyderabad Phone: , Chennai : New-20, Old-59, Thirumalai Pillai Road, T. Nagar, Chennai Mobile: Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth (Near Prabhat Theatre), Pune Phone: / ; Mobile: Lucknow : House No 731, Shekhupura Colony, Near B.D. Convent School, Aliganj, Lucknow Phone: ; Mobile: Ahmedabad : 114, SHAIL, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura, Ahmedabad Phone: ; Mobile: Ernakulam : 39/176 (New No: 60/251) 1 st Floor, Karikkamuri Road, Ernakulam, Kochi Phone: , Mobile: Bhubaneswar : 5 Station Square, Bhubaneswar (Odisha). Phone: , Mobile: Indore : Kesardeep Avenue Extension, 73, Narayan Bagh, Flat No. 302, IIIrd Floor, Near Humpty Dumpty School, Indore (M.P.). Mobile: Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank, Kolkata , Phone: , Mobile: Guwahati : House No. 15, Behind Pragjyotish College, Near Sharma Printing Press, P.O. Bharalumukh, Guwahati , (Assam). Mobile: , , DTP by : Asha Printed at : Rose Fine Art, Mumbai. On behalf of HPH.

4 This book is dedicated to God, Our Parents, Our Gurus & Our Relatives

5 Preface We are happy to present the book Accounting for Managerial Decision to the students of Semester III of S.Y. BMS to the teachers and the readers. This book is written according to the syllabus prescribed by the University of Mumbai. Outstanding Features: 1. As per the guidelines of University of Mumbai 2. Simple and lucid language 3. Bird s eye view boxes given in the text provides a snapshot of the subject matter covered 4. Diagrammatic representation 5. Sufficient practical illustrations 6. University illustrations 7. Self study illustrations 8. Objectives 9. In-depth information 10. Typical Illustrations 11. Followed a method of simple to complex. Authors

6 Acknowledgements The success of this book is not due to the solo efforts but many people have played the role from editing to selling. We are thankful to all those who have helped to make this book a success. We wish to thank first and foremost to our parents and family members for their valuable support, believe, motivation and cooperation for making this attempt a success. We express our special thanks to Ms. Diya Rajwani, Ms. Juhi Rajwani, Mr. Jeet D. Joshi, Dinesh, Ayush, Rohan, Riya, Misha Bhatia and Tushar S. Shetty for their valuable support throughout. We are thankful to the staff members of Himalaya Publishing House Pvt. Ltd., especially Mr. S.K. Shrivastava, Miss Archana, Miss Lalita, Mr. Rakesh and the other team mates of HPH for the continuous support from editing to selling. We express our deep gratitude to the Principal of Birla College Dr. Naresh Chandra, Principal of Shree Narayan Guru College Dr. Ravindran Karathadi and Vice Principals of Birla College Dr. Swapna Samel and Dr. Avinash Patil for their constant support, inspiration and believe in us. Heartfelt thanks to the Professors of Birla College, Mr. Anil Tiwari, Mr. Anand Dharmadhikari, Mrs. Madhu Shukrey, Mrs. Sheetal Kejriwal, Mr. Suraj Agarwala, Ms. Fleur D souza and Dr. Chandra Iyer. It is with immense gratitude that we acknowledge the support of Professors Dr. Renuka Shewkani, Mrs. Lakishta Soni and Mr. Kailash Tharwani. We are thankful to Dr. Himanshi Mansukhani, Dr. Sonia Lal, Mr. Durgesh Kumar Dubey, Mrs. Lavina Bhatija, Mr. N.K. Shree Varahan, Mrs. Kajal Bhojwani, Mrs. Laksha Ailani, Mrs. Jyoti Jangir and Dr. Alka Choubey for continuous motivation. A warm thanks to Mr. Rohit Jha, Shrikant Srinivasn, Joee de Choudhary, Neelanchal Panigrahi and to all the readers and students for believing us. Last but not the least thanking to all those who have helped directly or indirectly in making this book a success. Please feel free to provide us with your valuable suggestions for the further improvement of the book. Authors

7 Learning Objectives: Syllabus Accounting for Managerial Decision [60 Lectures: 3 Credit] 1. To acquaint management learners with basic accounting fundamentals. 2. To develop financial analysis skills among learners. 3. The course aims at explaining the core concepts of business finance and its importance in managing a business. Unit No. Name of the Topic No. of Lectures Unit 1 Analysis and Interpretation of Financial Statements: Study of Balance Sheet of Limited Companies Schedule VI (New). Study of Manufacturing, Trading, Profit and Loss A/c of Limited Companies Schedule VI (New). 2. Vertical Form of Balance Sheet and Profit & Loss A/c, Trend Analysis, Comparative Statement and Common Size. Unit 2 Ratio Analysis and Interpretation (Based on Vertical Form of 15 Financial Statements) Including Conventional and Functional Classification Restricted to: 1. Balance Sheet Ratios: Current Ratio, Liquid Ratio, Stock Working Capital Ratio, Proprietory Ratio, Debt Equity Ratio, Capital Gearing Ratio. 2. Revenue Statement Ratios: Gross Profit Ratio, Expenses Ratio, Operating Ratio, Net Profit Ratio, Net Operating Profit Ratio, Stock Turnover Ratio, Debtors Turnover, Creditors Turnover Ratio. 3. Combined Ratios: Return on Capital Employed (Including Long-term Borrowings), Return on Proprietors Fund (Shareholders Fund and Preference Capital), Return on Equity Capital, Dividend Payout Ratio, Debt Service Ratio. 4. Different Modes of Expressing Ratios: Rate, Ratio, Percentage, Number. Limitations of the Use of Ratios. Unit 3 Preparation of Cash Flow Statement [Accounting Standard 3 (Revised)]. 15 Unit 4: Working Capital: Concept, Estimation of Requirements in Case of Trading and Manufacturing Organizations. Receivables Management: Meaning and Importance, Credit Policy Variables, Methods of Credit Evaluation (Traditional and Numerical Credit Scoring); Monitoring the Debtors Techniques (DSO, Ageing Schedule). 15

8 Paper Pattern Maximum Marks: 75 Time: 2.5 Hours Notes: 1. All questions are compulsory subject to internal choice. 2. Figures to right indicate full marks. Q.1. Attempt any 2 Questions (a) (b) (c) Q.2. Attempt any 2 Questions (a) (b) (c) Q.3. Attempt any 2 Questions (a) (b) (c) Q.4. Attempt any 2 Questions (a) (b) (c) Q.5. Case Studies (15 Marks) (7.5 Marks) (7.5 Marks) (7.5 Marks) (15 Marks) (7.5 Marks) (7.5 Marks) (7.5 Marks) (15 Marks) (7.5 Marks) (7.5 Marks) (7.5 Marks) (15 Marks) (7.5 Marks) (7.5 Marks) (7.5 Marks) (15 Marks)

9 Contents 1. Analysis and Interpretation of Financial Statements Ratio Analysis and Interpretation Preparation of Cash Flow Statement Working Capital Management Receivables Management

10 CHAPTER 1 Analysis and Interpretation of Financial Statements Structure: Introduction to Financial Statements Features of Financial Analysis Significance or Importance of Financial Analysis Purpose of Financial Analysis Income Statement Accounts Introduction Classification of Revenue and Expenses Need Vertical Format Balance Sheet Introduction Sources and Application of Funds Vertical Format Common Size Income Statement Comparative Statement Trend Analysis Solved Sums Vertical Forms Vertical Balance Sheet Vertical Income Statement Combine Balance Sheet and Profit and Loss A/c Comparative Financial Statements Balance Sheet Profit & Loss

11 Trend Analysis Balance Sheet Profit and Loss A/c Combine Balance Sheet and Profit and Loss A/c Missing Figures Common Size Statements Balance Sheet Profit and Loss A/c Combine Balance Sheet and Profit and Loss A/c Objectives Unsolved Sums INTRODUCTION TO FINANCIAL STATEMENTS The term analysis is methodical classification of data given in the financial statements. Financial analysis is the process of identifying the financial strength and weakness of the firm by properly establishing relationship between the item of balance sheet and profit and loss account. Financial analysis can be undertaken by the firm or by outside parties, firm s owner, creditors, investors and other. Actually, the nature of analysis depends upon the parties. Financial analysis consists in separating facts according to some definite plan, arranging them in groups according to certain circumstances, and then presenting them in a convenient and easily read and understandable form. According to Finney and Miller, Financial statement analysis is largely a study of relationship among the various financial factors in a business, as disclosed by a single set of statements and a study of the trends of these factors, as shown in a series of statements. FEATURES OF FINANCIAL ANALYSIS 1. To presents a complex data contained in the financial statement in simple and understandable form. 2. To classify the item contained in the financial statement in the convenient and rational groups. 3. To make comparison between various groups to draw various conclusion. SIGNIFICANCE OR IMPORTANCE OF FINANCIAL ANALYSIS Significance for Managers: Planning and Control are the two most important ingredients to a successful business. A Business Plan takes most of the guesswork out of Business Strategy and Control through solid financial analysis. Financial Data provides a way to gauge where you are in your Strategic Plan, telling you where changes in your Plan are necessary. Because of this, Financial Data Analysis and Management are vitally important to run a business successfully. Significance for Investors: Investors are generally considered one of the primary users of financial statements. They use the financial statements to determine the current profitability of the

12 firm and attempt to predict its future profitability. Their interest is in the future growth of a company s stock price and/or the likelihood of the company paying dividends to the owner. Significance for Creditors: In the ongoing relationship between suppliers and a firm, financial statement can play several roles. Consider the relationship between a firm and the suppliers to its loan capital, e.g., a bank in the initial loan granting stage of the relationship, financial statement typically are an important items. Significance for Regulatory Agency: The demand by these bodies can arise in diverse set of areas such as revenue raising, e.g., for income tax, sales tax, value added tax collection, government intervention, etc. determines whether to provide a government backed loan agreement to a financially distressed firm. Significance for Employees: They are the part of the organization and feel that their effort contributed to the firm s profit. They would, therefore, prefer to give bonuses and salary increase. This also increase the expenses of the firm Significance for Other Parties: The set of party that demand for financial analysis information of corporation is open ended. Diverse party such as academic, environmental protection organization, and other special interest lobbying groups approach cooperation for detail relating to their financial and other affairs. Significance for Government: Various ministries and departments have interest in the firm s payments of taxes. PURPOSE OF FINANCIAL ANALYSIS The purpose of analysis of financial statements depends upon the need of a person who analyze these statements. These needs may be: 1. To know the earning capacity or profitability. 2. To know the solvency. 3. To know the financial strength. 4. To make comparative study with other firms. 5. To know the capability of payment of interest and dividend. 6. To know the trend of business. INCOME STATEMENT ACCOUNTS The Chart of Accounts is normally arranged or grouped by the major types of accounts. The Balance Sheet Accounts (assets, liabilities and equity) are presented first, followed by the Income Statement Accounts (revenues and expenses). Here, we are going to discuss the Income Statement portion of the Chart of Accounts (revenues and expenses) and how it is organized. The Income Statement portion of the Chart of Accounts normally begins by listing Revenue Accounts followed by the Expense Accounts. The revenues are grouped or classified based on whether they are related to the normal operations of the business (primary business activities) called Operating Revenue or result from incidental (secondary business activities) called Non-operating Revenue.

13 Likewise, the expenses are grouped or classified based on whether they are related to the normal operations of the business (primary business activities) called Cost of Goods Sold and Operating Expenses or result from incidental (secondary business activities) called Non-operating Expenses. While most revenue and expense accounts that need to be set up are common to all businesses, some depend on the type of business. Cost of Sales is needed for those businesses that produce and sell goods or inventoriable services as well as those that just buy and resell the goods. Revenue Formal Definition: The gross increase in owner s equity resulting from the operations and other activities of the business. Informal Definition: Amounts a business earns by selling services and products and investing. Amounts billed to customers for services and/or products. Operating Revenue Revenues resulting from the normal operations of a business such as the revenues resulting from the sale of products and services to your customers. Sales, Products, Services, Sales Discounts (Contra Revenue Account), Sales Returns and Allowances (Contra Revenue Account) Non-operating revenue accounts include all types of income that you receive that are not part of your main line of business. In other words, revenues or gains resulting from something other than from normal business operations. Interest Income, Dividends, Commissions, Rental Income, Gain on Sale of Assets, Gains Other Unusual, Royalty received, Share Transfer fees received Formal Definition: Decrease in owner s equity resulting from the cost of goods, fixed assets, and services and supplies consumed in the operations of a business. Informal Definition: The costs of doing business. The stuff we used and had to pay for or charge to run our business. Cost of Sales or Cost of Goods Sold Cost of Goods Sold: The cost of the products purchased or manufactured and sold by a business. Cost of Goods Purchased and Sold Purchases A temporary account used in the periodic inventory system to record the purchases of merchandise for resale. This account reports the gross amount of purchases of merchandise. A net purchase is the amount of purchases minus purchase returns, purchase allowances, and purchase discounts. While the Purchases Accounts are normally classified as temporary expense accounts, they are actually hybrid accounts. The purchase accounts are used along with freight and the beginning and ending inventory to determine the Cost of Goods Sold. Purchase Discounts (Contra Account), Purchase Returns and Allowances (Contra Account), Freight, Cost of Goods Manufactured and Sold and Operating Expenses Operating Expenses: The expenses related to normal daily operations such as wages, rent, advertising, insurance, etc. These expenses are related to the normal operations of the business (primary activities) and are incurred in order to earn normal operating revenues. In other words, amounts spent on products and services related to normal business operations. While not absolutely necessary, the Operating Expenses are often grouped into two main functional areas of operation:

14 Direct Expenses The expenses which are directly related to the manufacturing or trading of the product are termed as direct expenses. These are shown under Cost of Sales. Examples: Freight/Carriage Inwards, Octroi Duty, Commission on Purchase, Import/Custom Duty, Wages and Bonus Paid to Workers, Factory Rent, Rate and Taxes, Power or Fuel, Royalty on Production, Excise Duty, Water, Gas, Depreciation on Machinery, Depreciation on Factory Building, Depreciation on Patents, Depreciation on Loose Tools, etc. Indirect Expenses These expenses are such expenses which are not directly related to the production activity. These are further classified in three ways. They are: Office and Administration Expenses: These expenses are related to the general operations or overall administration of the business. Examples are administrative salaries and wages (officers, office, accounting, management, and human resources), fringe benefits, supplies, rent, utilities, telephone, travel, entertainment, depreciation, office supplies, postage, legal and accounting fees, etc. The following listing of types of expenses, where needed, can be used and included in both groups. There are no rigid rules as to the order that the operating expenses are listed within a category. Salaries and Wages, Salaries Other, Salaries Officers, Director s Fees, Incentive Pay, Bonus, Employer Medicare, Employer Provided Health Insurance, Employer Provided Life Insurance, Employer Provided Pensions and Retirement, Other Employer Provided Benefits, Employee Recruitment, Travel, Lodging, Meals, Rent, Land, Leasing Expense, Repairs and Maintenance, Fees, Licenses, and Permits, Postage and Telegram, Printing and Stationery, Professional Fees, Legal Fees, Auditor Fees, Electricity, Telephone, Internet Access and Services, Depreciation Office Equipment, Depreciation Computer Equipment, Depreciation Furniture and Fixtures, Depreciation Computer Software, etc. Selling and Distribution Expenses: Selling Expenses are expenses incurred and related to making sales. Examples are: Sales, Salaries and Wages, Fringe Benefits, Advertising, Travel Expenses, Entertainment Expenses, Catalogue Expenses, Showroom Rent, Commission to Salesman, Warehousing, Depreciation on Delivery Van, Freight/Carriage Outward, Exhibition Expenses, etc. Finance Charges: The expenses with the financial aspects of the organisation are called as Finance Charges. Examples are: Interest on Short-term Loans, Interest on Long-term Loans, Interest on Bank Overdraft, Bank Charges, Bad Debts and R.D.D. Non-operating Expenses and Losses Amounts spent on products and services not related to normal business operations (secondary activities). In other words, expenses and losses resulting from something other than from normal business operations. Donations, Penalties and Fines, Loss on Sale of Assets, Losses Other Unusual, Cost of Shares Transfer, Fictitious Assets written off like Goodwill, Preliminary Expenses etc., and Compensation and Damages. Need of Income Statement 1. To ascertain the cost of production, gross profit, gross loss/net profit and net loss. 2. To ascertain the cost of goods sold and establishing its relationship with sales. 3. To ascertain the profitability of the business by establishing relationship of gross profit and net profit with sales.

15 Format of Vertical Income Statement Vertical Income Statement Particulars ` ` ` ` Gross Sales Cash Credit Less: Returns Net Sales Less: Cost of Goods Sold Opening Stock Raw Materials Work-in-progress Finished Goods Total Opening Stock Add: Purchases Less: Returns Less: Closing Stock Raw materials Work-in-progress Finished Goods Total Closing Stock Add: Direct Expenses Depreciation on Machinery Wages Total Cost of Goods Sold Gross Profit/Gross Loss Less: Operating Expenses Administrative Expenses Staff Salaries Printing and Stationery Depreciation on Furniture Telephone Expenses Director s Fees Total Administrative Expenses Selling Expenses Advertising Sales Salaries Total Selling Expenses Financial Expenses Bank Charges Bad Debts and R.D.D. Interest on Borrowings Total Financial Expenses Total Operating Expenses Operating Net Profit

16 Add: Non-operating Income Profit on Sale of Shares Less: Non-operating Expenses Loss on Sale of Bonds Net Profit before Tax Less: Provision for Tax Net Profit after Tax Add: Retained Earnings of Last Year Less: Appropriations Transfer to Reserves Interim Dividend Proposed Dividend Retained Earnings transferred to Balance Sheet BALANCE SHEET Form of Balance Sheet Part 1 to Schedule VI of the Indian Companies Act, 1956 gives the format in which the balance sheet is to be prepared. The schedule gives two types of formats the horizontal format and the vertical format. A company can prepare its balance sheet in either of the two formats. In the horizontal format, the liabilities including the share capital are placed on the left side and assets of all types on the right. The main heads in this form are arranged as under: Liabilities Assets (a) Share Capital (a) Fixed Assets (b) Reserves and Surplus (b) Investments (c) Loans (c) Current Assets, Loans and Advances (d) Current Liabilities and Provisions (d) Miscellaneous Expenditure to the Provisions Extent Not Written off or Adjusted (e) Profit and Loss Account Total In the vertical format, the various heads of liabilities and assets are arranged vertically and current liabilities are shown as deduction, from current assets. Whatever information is required to be given in the horizontal format must also be given in the vertical format. Summarized prescribed vertical form of balance sheet is given below:

17 Balance Sheet Sources of Funds Application of Funds Owned Funds Borrowed Funds Fixed Assets Investments Working Capital (C.A.- C.L) Total Funds Available Total Funds Available Sources of Funds Application of Funds (1) Shareholders Funds (2) Loan Funds Total Capital Available (1) Fixed Assets (2) Investments (3) Current Assets, Loans and Advances Less: Current Liabilities and Provisions Total Capital employed Shareholders Funds It is also called as Owner s Funds, Proprietor s Funds, Net Worth or Own Funds. It means the amount contributed by the owners or the shareholders in the company. It is calculated in the following way: Equity Share Capital + Preference Share Capital + Reserves and Surplus Fictitious Assets Note: 1. Equity share capital and preference capital should exclude calls in arrears. 2. Reserves and surplus is added in the capital as it indicates the profit which is not distributed as dividend to the shareholders or some other reserves which are created from the profits and it belongs to the owners of the company, i.e., the shareholders of the company (for examples, see the format of balance sheet). 3. Fictitious Assets are not really the assets of the company but these indicate the expenses which are not written off at a single time but for a period of 5 years. So, it indicates that the assets which are not written off will be still reflected in the balance sheet and are to be written off from the revenue profits, due to which the profit will decrease and it will affect the dividend of the shareholders. Hence, it is subtracted from the reserves (for examples, see the format of balance sheet). Loan Funds/Borrowed Funds It is also known as owed funds/long-term borrowings. When the company needs some funds over the owned funds, then the company borrows it from financial institutions. It is suggested that the

18 company should have more owned funds in comparison to the borrowed funds, as the company has to pay interest on these borrowed funds. These funds are classified as secured loans and unsecured loans. Secured Loans The loans which are secured against some securities are called as secured loans. Examples: Debentures or Bonds Loans from Banks Loans from other Financial Institutions Unsecured Loans The loans which are not secured against any security are called as unsecured loans. Examples: Public Deposits Fixed Deposit Applications of Funds Fixed Assets A fixed asset is an asset of a business intended for continuing use, rather than a short-term, temporary asset such as stocks. Fixed assets must be classified in a company s balance sheet as intangible or tangible. Tangible Assets have a physical form. Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory. The opposite of a tangible asset is an intangible asset. Examples of tangible fixed assets include land and buildings, plant and machinery, fixtures and fittings, motor vehicles and IT equipment. Intangible assets are typically non-physical in nature and not easily assigned a value. According to Section 197 of the Internal Revenue Code, there are numerous qualifying intangible assets, but the most common are goodwill, the value of a worker s knowledge, trademarks, trade and franchise names, non-competitive agreements related to business acquisitions and a company s human capital. Examples of intangible assets include goodwill, patents, and trademarks. The benefits that a business obtains from a fixed asset extend over several years. For example, a company may use the same piece of production machinery for many years, whereas a company-owned motor car used by a salesman probably has a shorter useful life. By accepting that the life of a fixed asset is limited, the accounts of a business need to recognise the benefits of the fixed asset as it is consumed over several years. This consumption of a fixed asset is referred to as depreciation. Current Assets Definition A balance sheet item which equals the sum of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year. A company s creditors will often be interested in how much that company has in

19 current assets, since these assets can be easily liquidated in case the company goes bankrupt. In addition, current assets are important to most companies as a source of funds for day-to-day operations. 1. A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash. 2. In personal finance, current assets are all assets that a person can readily convert to cash to pay outstanding debts and cover liabilities without having to sell fixed assets. In the United Kingdom, current assets are also known as current accounts. Examples: Stock, Prepaid Expenses, Bills Receivable, Cash, Bank and Debtors. Current Assets are classified in two types Quick Assets and Non-quick Assets Quick Assets: The assets which can be easily converted into cash are called as Quick assets. All current assets are quick except prepaid expenses and stock. Non-quick Assets: These are opposite to quick assets. Examples are Stock and Prepaid Expenses. Current Liabilities A company s debts or obligations that is due within one year. Current liabilities appear on the company s balance sheet and include short-term debts, accounts payable, accrued liabilities and other debts. Essentially, these are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities. Examples: Creditors, Bank Overdraft, Proposed Dividend, Provision for Tax and Outstanding Expenses. Current Liabilities are classified in two types Quick Liabilities and Non-quick Liabilities Quick Liabilities: The liabilities which are to be quickly paid are called as Quick Liabilities. All current liabilities are quick except Bank Overdraft. Non-quick Liabilities: These are opposite to Quick Liabilities. Examples are Bank Overdraft. Contingent Liabilities A contingent liability is a liability which may or may not arise in the future depending on the happening or non-happening of an event. This contingent liability we not consider in Balance Sheet because may be some times it will be happening or may not be happening. We will make a one note for contingent liabilities in audit file. A possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or A present obligation that arises from past events but is not recognised because: 1. It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. 2. A reliable estimate of the amount of the obligation cannot be made. Format of Vertical Balance Sheet

20 Particulars ` ` ` I. Sources of Funds: 1. Owners Funds: (A) Capital: (i) Equity Share Capital (-) Calls in Arrears (ii) Preference Share Capital Total Capital Add: (B) Reserves and Surplus: (i) Capital Reserve (ii) Capital Redemption Reserve (iii) Share Premium (iv) General Reserve (v) Profit & Loss A/c (Cr. Balance) (vi) Sinking Fund/Other Funds Total Reserves and Surplus Less: (C) Losses & Fictitious Assets: (i) Profit & Loss A/c (Dr. Balance) (ii) Miscellaneous Expenditure not written off Preliminary Expenses Share Issue Expenses Discount on Issue of Shares and Debentures Deferred Revenue Expenditure Total Losses and Fictitious Assets () Total Owners Funds 2. Borrowed Funds: (A) Secured Loans: (i) Debentures or Bonds (ii) Loans from Banks (iii) Loans from other Financial Institutions Total Secured Loans (B) Unsecured Loans: (i) Public Deposits (Fixed Deposits from Public) (ii) Other Loans Total Unsecured Loans Total Borrowed Funds Total Funds Available/Capital Employed II. Application of Funds: 1. Net Fixed Assets: (A) Tangible: (i) Land and Building (Cost) Less: Depreciation (ii) Leaseholds (Cost) Less: Depreciation

21 (iii) Plant & Machinery (Cost) Less: Depreciation (iv) Furniture & Fittings (Cost) Less: Depreciation (v) Vehicles (Cost) Less: Depreciation Net Tangible Assets (B) Intangible: (i) Goodwill (ii) Patents, Trademarks & Designs Net Intangible Assets (C) Capital Work-in-progress: Total Net Fixed Assets 2. Long-term Investments: (i) Trade Investments (ii) Investments in Immoveable Properties (iii) Investments in Capital of Firms 3. Working Capital: Current Liabilities Quick Assets: (a) Cash & Bank (b) Debtors (Net) (c) Bills Receivable (d) Accrued Income (e) Short-term/Marketable Investments Total Quick or Liquid Assets Add: Non-quick Assets (i) Inventory (ii) Pre-payments (Prepaid Expenses, Advance Tax etc..) Total Current Assets Less: Current Liabilities Quick Liabilities (a) Creditors (b) Bills Payable (c) Advances Received (d) Outstanding Expenses (e) Accrued Interest (f) Provision for Taxation (g) Unclaimed Dividend (h) Proposed Dividend Total Quick Liabilities Add: Non-quick Liabilities Bank Overdraft Total Current Liabilities () Net Current Assets or Working Capital Total Assets or Total Funds Employed x

22 Proforma of Revised Balance Sheet under Schedule VI of Companies Act PART I FORM OF BALANCE SHEET Name of the Company: Balance Sheet as at : Particular s I. EQUITY AND LIABILITIES 1. Shareholder s Funds (a) Share Capital (b) Reserves and Surplus (c) Money Received against Share Warrants 2. Share Application Money Pending Allotment 3. Non-current Liabilities (a) Long-term Borrowings (b) Deferred Tax Liabilities (Net) (c) Other Long-term Liabilities (d) Long-term Provisions 4. Current Liabilities (a) Short-term Borrowings (b) Trade Payables (c) Other Current Liabilities (d) Short-term Provisions II. ASSETS 1. Non-current Assets (a) Fixed Assets 1. Tangible Assets 2. Intangible Assets 3. Capital Work-in-progress 4. Intangible Assets under Development (b) Non-current Investment (c) Deferred Tax Assets (Net) (d) Long-term Loans and Advances (e) Other Non-current Assets 2. Current Assets (a) Current Investments (b) Inventories (c) Trade Receivables (d) Cash and Cash Equivalents (e) Short-term Loans and Advances (f) Other Current Assets Note No. A B C D E F G H I J K L M N O P Q R S Figures as at the end of the current reporting period (Rupees in ) Figures as at the end of the previous reporting period

23 PART II FORM OF STATEMENT OF PROFIT AND LOSS Name of the Company: Profit and Loss Statement for the year ended Particulars Note No. 1. Revenue from Operations T 2. Other Income U 3. Total Revenue (1 + 2) 4. Expenses: Cost of Material Consumed V Purchases of Stock-in-trade Changes in Inventories of Finished Goods Work-in-progress and Stock-in-trade Employee Benefits Expense Finance Costs Depreciation and Amortisation Expenses Other Expenses Total Expenses 5. Profit before Exceptional and Extraordinary Items and Tax (3 4) 6. Exceptional Items 7. Profit before Extraordinary Items and Tax (5 6) 8. Extraordinary Items 9. Profit before Tax (7 8) 10. Tax Expenses (a) Current Tax (b) Deferred Tax 11. Profit or Loss for the Period from Continuing Operations (9 10) 12. Profit or Loss from Discontinuing Operations 13 Tax Expenses of Discontinuing Operations 14. Profit or Loss from Discontinuing Operations (after Tax) 15. Profit or Loss for the Period 16. Earning per Equity Share (a) Basic (b) Diluted Figures for the current reporting period COMMON SIZE INCOME STATEMENT W X Y Z (Rupees in ) Figures for the previous reporting period An income statement in which each account is expressed as a percentage of the value of sales. This type of financial statement can be used to allow for easy analysis between companies or between time period of a company. Particulars Sales 1, , % 100% COGS 14,000 9,800 72% 66% Gross Profit 5,500 5,000 28% 34%

24 Taxes 2,500 2,000 13% 14% Total Profit 3,000 3,000 15% 20% Common size income statement analysis allows an analyst to determine how the various components of the income statement affect a company s profit. Common Size Balance Sheet A company balance sheet that displays all items as percentages of a common base figure. This type of financial statement can be used to allow for easy analysis between companies or between time periods of a company. Particulars Cash 1,000 1,200 15% 18% Inventory 2,300 2,000 34% 30% Receivables 1,500 2,000 22% 30% Investments 2,000 1,500 29% 22% Total Assets 6,800 6, % 100% The image above illustrates the difference between a regular balance sheet and a common size balance sheet. In the normal balance sheet, account values are expressed in dollar terms, while in the common size one, each value is listed as a percentage of total assets. This is also done for liabilities, where each liability account is a percentage of total liabilities. When analyzing financial statements, the simplest form of data is the easiest conveyed. The common size balance sheet is a simple view of a balance that allows for easy comparison with competitors because this type of balance sheet uses percentages to convey a company s financial standing. You can transform a standard balance sheet into a common size balance sheet in Microsoft. Importance of Common Size Statements Analysis of financial statement with the help of common size statement is more useful. Because the financial statements of different firms can be converted into uniform common size format irrespective of the size of individual items. Common Size Income Statement establishes relationship between sales and other items of income statement and this relationship is helpful in evaluating operational activities of a business firm. Whereas, a Common Size Balance Sheet is very useful for comparing the profitability and financial position of two or more business firms. COMPARATIVE STATEMENT A statement which compares financial data from different periods of time. The comparative statement lines up a section of the income statement, balance sheet or cash flow statement with its corresponding section from a previous period. It can also be used to compare financial data from different companies over time, thus revealing the trend in the financials. Analysts like comparative statements because they show the effect business decisions have on a company s bottom line. Analysts can identify trends and evaluate the performance of managers, new lines of business and new products on one statement instead of having to flip through individual financial statements from different periods of time. When comparing different companies, a comparative statement can show how businesses react to market conditions affecting an entire industry. In order to analyze the financial statements for a business, more information is needed from the balance sheets. The owner must look at the last two years of the firm s balance sheets and compare the differences between the two in order to develop the Statement of Cash Flows. The table below

25 gives you sample Comparative Balance Sheets for a firm. With sample information from an income statement and the information from these comparative balance sheets, you can develop your Statement of Cash Flows. Comparative Analysis of Balance sheet Particulars ` (2002) ` (2003) Absolute Increase/Decrease % Increase/Decrease Sources of Funds Owners Funds Share Capital 4,00,000 5,20,000 1,20,000 30% Add: Reserves & Surplus Reserves 1,00,000 1,00,000 Profit & Loss A/c 79,380 82,440 3, % 5,79,380 7,02,440 1,23, % Less: Fictitious Assets Total Owners funds 5,79,380 7,02,440 1,23, % Borrowed Funds Total Funds Available 5,79,380 7,02,440 1,23, % The business owner must also have information from both the income statement. The primary information needed from the income statement is net income (or loss) and depreciation as both are considered cash flows to the firm. Analysis of Comparative Balance Sheets In order to analyze your comparative balance sheets and develop your Statement of Cash Flows, you should first consider any increases or decreases in your current asset and current liability accounts between the two years of balance sheet information. TREND ANALYSIS Trend analysis calculates the percentage change for one account over a period of time of two years or more. In financial analysis, the direction of changes over a period of years is of crucial importance. Time series or trend analysis of ratios indicates the direction of change. This kind of analysis is particularly applicable to the items of profit and loss account. For the trend analysis, the use of index numbers is generally advocated. The procedure followed is to assign the number 100 to the items of the base year and to calculate percentage changes in each item of other years in relation to the base year. This procedure may be called as Trend Percentage Method. Percentage Change To calculate the percentage change between two periods: 1. Calculate the amount of the increase/(decrease) for the period by subtracting the earlier year from the later year. If the difference is negative, the change is a decrease and if the difference is positive, it is an increase. 2. Divide the change by the earlier year s balance. The result is the percentage change. Calculation of Percentage Change Particulars Increase/(Decrease) Percent Change Cash 6,950 6, % Accounts Receivable, net 18,567 19,330 (763) (3.9%) Sales 129, ,000 26, %

26 Rent Expense 10, ,000 N/M Net Income (Loss) 8,130 (1,400) 9,530 N/M Calculation Notes: is the earlier year so the amount in the 2000 column is subtracted from the amount in the 2001 column. 2. The percent change is the increase or decrease divided by the earlier amount (2000 in this example) times 100. Written as a formula, the percentage change is: 2001 amount 2000 amount % = amount 3. If the earliest year is zero or negative, the per cent calculated will not be meaningful. N/M is used in the above table for not meaningful. 4. Most perc ents are rounded to one decimal place unless more are meaningful. 5. A small absolute dollar item may have a large percentage change and be considered misleading. Trend Percentages To calculate the change over a longer period of time for example, to develop a sales trend follow the steps below: 1. Select the base year. 2. For each line item, divide the amount in each non-base year by the amount in the base year and multiply by In the following example, 1997 is the base year, so its percentages (see bottom-half of the following table) are all The percentages in the other years were calculated by dividing each amount in a particular year by the corresponding amount in the base year and multiply by 100. Calculation of Trend Percentages Particulars Historical Data Inventory 12,309 12,202 12,102 11,973 11,743 Property and Equipment 74,422 78,938 64,203 65,239 68,450 Current Liabilities 27,945 30,347 27,670 28,259 26,737 Sales 129,000 97,000 95,000 87,000 81,000 Cost of Goods Sold 70,950 59,740 48,100 47,200 45,500 Operating Expenses 42,600 38,055 32,990 29,690 27,050 Net Income (Loss) 8,130 (1,400) 7,869 5,093 3,812 Trend Percentages Inventory Property & Equipment Current Liabilities Sales Cost of Goods Sold Operating Expenses Net Income (Loss) (36.7)

27 Calculation Notes: 1. The base year trend percentage is always 100.0%. A trend percentage of less than 100.0% means the balance has decreased below the base year level in that particular year. A trend percentage greater than 100.0% means the balance in that year has increased over the base year. A negative trend percentage represents a negative number. 2. If the base year is zero or negative, the trend percentage calculated will not be meaningful. In this example, the sales have increased 59.3% over the five-year period while the cost of goods sold has increased only 55.9% and the operating expenses have increased only 57.5%. The trends look different if evaluated after four years. At the end of 2000, the sales had increased almost 20%, but the cost of goods sold had increased 31%, and the operating expenses had increased almost 41%. These 2000 trend percentages reflect an unfavourable impact on net income because costs increased at a faster rate than sales. The trend percentages for net income appear to be higher because the base year amount is much smaller than the other balances. SOLVED SUMS Vertical Balance Sheet 1. The following is the balance sheet of R Ltd. as on Liabilities ` Assets ` 1,00,000 Equity Shares of ` 10 each 10,00,000 Machinery 8,00,000 General Reserve 4,00,000 Factory Shed 3,14,580 Profit & Loss 2,44,580 Vehicles 2,00,000 Bank Overdraft 4,50,000 Furniture 50,000 Creditors 5,00,000 Stock 4,00,000 Debtors 7,50,000 Bank Balance 60,000 Preliminary Expenses 20,000 25,94,580 25,94,580 Convert the above balance sheet in vertical form. Solution: In the Books of R Ltd. Balance Sheet as on Particulars ` ` ` Sources of Funds Owner s Funds Equity Share Capital 10,00,000 Add: Reserves & Surplus General Reserve 4,00,000 Profit & Loss 2,44,580 6,44,580 Less: Fictitious Assets Preliminary Expenses 20,000 6,24,580 Total Owner s Funds 16,24,580 Borrowed Funds Total Funds Available 16,24,580

28 Application of Funds Fixed Assets Machinery 8,00,000 Factory Shed 3,14,580 Vehicles 2,00,000 Furniture 50,000 Total Fixed Assets 13,64,580 Investments Working Capital Current Assets Stock 4,00,000 Debtors 7,50,000 Bank Balance 60,000 Total Current Assets 12,10,000 Less: Current Liabilities Bank Overdraft 4,50,000 Creditors 5,00,000 Total Current Liabilities (9,50,000) Net Working Capital 2,60,000 Total Funds Employed 16,24, Following is the Balance Sheet of M/s ABC Ltd. as on Rearrange it in a vertical suitable form: Liabilities ` Assets ` Equity Share Capital 2,50,000 Patents & Trademarks 25,000 Rehabilitation Reserve 50,000 Land & Building 3,00,000 Capital Redemption Reserve 25,000 Plant & Machinery 1,50,000 8% Debentures 1,50,000 Debtors 35,000 Accrued Interest 2,000 Stock 2,000 Unclaimed Dividend 3,000 Discount on Issue of Shares 1,500 Creditors 25,000 Marketable Investments 15,000 Provision for Tax 15,000 Cash In Hand 1,500 Provision for Depreciation 10,000 5,30,000 5,30,000 Solution: In the Books of ABC Ltd. Balance Sheet as on Particulars ` ` ` ` SOURCES OF FUNDS Owner s Funds Equity Share Capital 2,50,000 Add: Reserves & Surplus Rehabilitation Reserve 50,000 Capital Redemption Reserve 25,000 75,000 Less: Fictitious Assets Discount on Issue of Shares 1,500 73,500 Total Owner s Funds 3,23,500

29 Borrowed Funds 8% Debentures 1,50,000 Total Borrowed Funds 1,50,000 Total Funds Available 4,73,500 APPLICATION OF FUNDS Fixed Assets Plant & Machinery 1,50,000 Patents 25,000 Land & Building 3,00,000 4,75,000 Less: Depreciation Provision 10,000 Total Fixed Assets 4,65,000 Investments Working Capital Current Assets Stock 2,000 Debtors 35,000 Marketable Investment 15,000 Cash 1,500 Total Current Assets 53,500 Less: Current Liabilities Accrued Interest 2,000 Unclaimed Dividend 3,000 Creditors 25,000 Provision for Tax 15,000 Total Current Liabilities 45,000 Net Working Capital 8,500 Total Funds Employed 4,73, The following is the Balance Sheet of C Ltd. as on Liabilities ` Assets ` 1, % Cumulative Preference Shares of ` 100 each 20,000 Equity Shares of ` 10 each fully paid 1,00,000 Gross Block Less: Depreciation 4,96,600 78,000 4,18,600 2,00,000 Stock-in-trade 1,97,000 Security Premium A/c 20,000 Trade Debtors 1,90,000 General Reserve 90,000 Bills Receivable 34,000 Profit & Loss A/c 1,30,000 Cash 13,000 Trade Creditors 1,50,000 Share Issue Expenses 600 Bank Overdraft 40,200 9% Debentures 80,000 Fixed Deposits 20,000 Provision for Tax 17,000 Reserve for Doubtful Debts 6,000 8,53,200 8,53,200 Rearrange the above Balance Sheet in a vertical suitable form. Solution: In the Books of C Ltd.

30 Balance Sheet as on Particulars ` ` ` SOURCES OF FUNDS Owner s Funds 20,000 Equity Shares of ` 10 each fully paid 2,00,000 1, % Cumulative Preference Shares of ` 100 each 1,00,000 3,00,000 Add: Reserves & Surplus Security Premium A/c 20,000 General Reserve 90,000 Profit & Loss A/c 1,30,000 2,40,000 Less: Fictitious Assets Share Issue Expenses 600 2,39,400 Total Owner s Funds 5,39,400 Borrowed Funds 9% Debentures 80,000 Fixed Deposits 20,000 Total Borrowed Funds 1,00,000 Total Funds Available 6,39,400 APPLICATION OF FUNDS Fixed Assets Gross Block 4,96,600 Less: Depreciation Provision 78,000 Total Fixed Assets 4,18,600 Investments Working Capital Current Assets Stock-in-trade 1,97,000 Trade Debtors 1,90,000 Less: Reserve for Doubtful Debts 6,000 1,84,000 Bills Receivable 34,000 Cash 13,000 Total Current Assets 4,28,000 Less: Current Liabilities Trade Creditors 1,50,000 Bank Overdraft 40,200 Provision for Tax 17,000 Total Current Liabilities 2,07,200 Net Working Capital 2,20,800 Total Funds Employed 6,39, From the following information, you are required to prepare vertical Balance Sheet of D Ltd. Balance Sheet as on Liabilities ` Assets ` Equity Share Capital 1,25,000 Land & Building. 2,50,000 10% Preference Share Capital 50,000 Plant & Machinery 4,00,000

31 General Reserve 2,00,000 Furniture 1,85,000 Profit & Loss A/c 25,000 Stock 40,000 14% Debentures 5,00,000 Debtors 2,00,000 Creditors 1,50,000 Bills Receivable 50,000 Bank Overdraft 75,000 Bank 35,500 Outstanding Expenses 20,000 Cash 15,000 Bills Payable 50,000 Preliminary Expenses 19,500 11,95,000 11,95,000 Solution: In the Books of D Ltd. Balance Sheet as on Particulars ` ` ` SOURCES OF FUNDS Owner s Funds Equity Share Capital 1,25,000 10% Preference Share Capital 50,000 1,75,000 Add: Reserves & Surplus General Reserve 2,00,000 Profit & Loss A/c 25,000 2,25,000 Less: Fictitious Assets Preliminary Expenses 19,500 2,05,500 Total Owner s Funds 3,80,500 Borrowed Funds 14% Debentures 5,00,000 Total Borrowed Funds 5,00,000 Total Funds Available 8,80,500 APPLICATION OF FUNDS Fixed Assets Land & Building. 2,50,000 Plant & Machinery 4,00,000 Furniture 1,85,000 Total Fixed Assets 8,35,000 Investments Working Capital Current Assets Stock 40,000 Debtors 2,00,000 Bills Receivable 50,000 Bank 35,500 Cash 15,000 Total Current Assets 3,40,500 Less: Current Liabilities Creditors 1,50,000 Bank Overdraft 75,000 Outstanding Expenses 20,000 Bills Payable 50,000 Total Current Liabilities 2,95,000

32 Net Working Capital 45,500 Total Funds Employed 8,80, From the following information, you are required to prepare vertical Balance Sheet of RJ Ltd. Balance Sheet as on Liabilities ` Assets ` Equity Share Capital 12,50,000 Land & Building 15,00,000 12% Preference Share Capital 2,50,000 Plant & Machinery 6,80,000 General Reserve 5,35,000 Furniture 4,58,000 Profit & Loss A/c 4,56,000 Stock 6,75,000 10% Bank Loan 6,50,000 Goodwill 5,84,000 Fixed Deposit 5,00,000 Trade Mark 6,35,000 Proposed Dividend 1,25,000 10% Government Bonds 5,45,000 14% Debentures 5,00,000 Debtors 6,89,000 Creditors 6,80,000 Bills Receivable 4,50,000 Bank Overdraft 3,50,000 Bank 5,35,000 Outstanding Expenses 2,50,000 Cash 2,15,000 Bills Payable 3,50,000 Preliminary Expenses 2,50,000 Provision for Depreciation: Plant & Machinery Furniture 68,000 45,800 1,13,800 Calls in Arrears on Equity 10% Preference Capital 83,800 30,000 1,13,800 Sinking Fund 6,50,000 Commission on Issue of Shares 1,25,000 Advance Received 2,35,000 Sinking Fund Investment Accrued Interest 5,35,000 Accrued Income Capital Redemption Reserve 6,50,000 Miscellaneous Expenses 4,35,000 80,79,800 80,79,800 Solution: In the Books of RJ Ltd. Balance Sheet as on Particulars ` ` ` SOURCES OF FUNDS Owner s Funds Equity Shares Capital 12,50,000 ( ) Calls in Arrears 83,800 11,66,200 12% Preference Share Capital 2,50,000 ( ) Calls in Arrears 30,000 2,20,000 13,86,200 Add: Reserves & Surplus General Reserve 5,35,000 Profit & Loss A/c 4,56,000 Capital Redemption Reserve 6,50,000 Sinking Fund 6,50,000 Total Reserves & Surplus 22,91,000 Less: Fictitious Assets Preliminary Expenses 2,50,000 Commission on Issue of Shares 1,25,000

33 Miscellaneous Expenses 4,35,000 8,10,000 14,81,000 Total Owner s Funds 28,67,200 Borrowed Funds 10% Bank Loan 6,50,000 Fixed Deposit 5,00,000 14% Debentures 5,00,000 Total Borrowed Funds 16,50,000 Total Funds Available 45,17,200 APPLICATION OF FUNDS Fixed Assets Land & Building. 15,00,000 Plant & Machinery 6,80,000 ( ) Depreciation Provision 68,000 6,12,000 Furniture 4,58,000 ( ) Depreciation Provision 45,800 4,12,200 Goodwill 5,84,000 Trade Mark 6,35,000 Total Fixed Assets 37,43,200 Investments 10% Government Bonds 5,45,000 Sinking Fund Investment 65,000 Total Investments 6,10,000 Working Capital Current Assets Stock 6,75,000 Debtors 6,89,000 Bills Receivable 4,50,000 Bank 5,35,000 Cash 2,15,000 Accrued Income 1,25,000 Total Current Assets 26,89,000 Less: Current Liabilities Creditors 6,80,000 Bank Overdraft 3,50,000 Outstanding Expenses 2,50,000 Bills Payable 3,50,000 Proposed Dividend 1,25,000 Advance Received 2,35,000 Accrued Interest 5,35,000 Total Current Liabilities 25,25,000 Net Working Capital 1,64,000 Total Funds Employed 45,17,200 Vertical Income Statement 6. Prepare Income statement in vertical form from the given information: Particulars ` Particulars ` To Opening Stock 80,000 By Net Sales 5,00,000

34 To Purchases 3,20,000 By Closing Stock 95,000 To Wages 9,000 By Profit on Sale of Shares 5,000 To Staff Salaries 28,500 To Printing & Stationery 3,000 To Advertising 3,000 To Depreciation on Furniture 9,000 To Telephone Expenses 3,300 To Director s Fees 12,500 To Income Tax 4,500 To loss on Sale of Bonds 1,000 To Depreciation on Machinery 1,750 To Sales Salaries 20,000 To Net Profit 1,04,450 6,00,000 6,00,000 Solution: Vertical Income Statement Particulars ` ` ` Sales 5,00,000 Less: Cost of Goods Sold Opening Stock 80,000 Purchases 3,20,000 4,00,000 Less: Closing Stock (95,000) 3,05,000 Add: Direct Expenses Depreciation on Machinery 1,750 Wages 9,000 10,750 Total Cost of Goods Sold (3,15,750) Gross Profit 1,84,250 Less: Operating Expenses Administrative Expenses Staff Salaries 28,500 Printing & Stationery 3,000 Depreciation on Furniture 9,000 Telephone Expenses 3,300 Director s Fees 12,500 Total Administrative Expenses 56,300 Selling Expenses Advertising 3,000 Sales Salaries 20,000 Total Selling Expenses 23,000 Financial Expenses Total Operating Expenses (79,300) Operating Net Profit 1,04,950 Add: Non-operating Income Profit on Sale of Shares 5,000 1,09,950 Less: Non-operating Expenses Loss on Sale of Bonds (1,000)

35 Net Profit before Tax 1,08,950 Less: Provision for Tax (4,500) Retained Earnings 1,04, Following is The Profit & Loss A/c of A Ltd. for the year Particulars ` Particulars ` To Opening Stock 76,250 By Sales 5,10,000 To Purchases 3,15,250 Less: Returns 10,000 To Freight & Carriage Outward 7,000 Net Sales 5,00,000 To Staff Salaries 24,700 By Closing Stock 98,500 To Office Electricity 3,900 By Profit on Sale of Shares 9,150 To General Reserve 2,500 To Cash Discount Allowed to Customers 2,400 To Depreciation on Furniture 9,300 To Salesmen s Travelling Expenses 3,350 To Director s Fees 8,900 To Bad Debts 4,400 To Bank Charges 4,000 To Depreciation on Machinery 1,650 To Sales Salaries 15,300 To Net Profit 1,28,750 6,07,650 6,07,650 Solution: Vertical Income Statement Particulars ` ` ` Gross Sales 5,10,000 ( ) Returns 10,000 Net Sales 5,00,000 Less: Cost of Goods Sold Opening Stock 76,250 Purchases 3,15,250 3,91,500 Less: Closing Stock (98,500) 2,93,000 Add: Direct Expenses Depreciation on Machinery 1,650 Total Cost of Goods Sold (2,94,350) Gross Profit 2,05,350 Less: Operating Expenses Administrative Expenses Staff Salaries 24,700 Office Electricity 3,900 Depreciation on Furniture 9,300 Director s Fees 8,900 Total Administrative Expenses 46,800 Selling Expenses Salesmen s Travelling Expenses 3,350 Sales Salaries 15,300 Bad Debts 4,400

36 Freight & Carriage Outward 7,000 Total Selling Expenses 30,050 Financial Expenses Cash Discount 2,400 Bank Charges 4,000 6,400 Total Operating Expenses (83,250) Operating Net Profit 1,22,100 Add: Non-operating Income Profit on Sale of Shares 9,150 1,31,250 Less: Non-operating Expenses Net Profit before Tax 1,31,250 Less: Provision for Tax Net Profit after Tax 1,31,250 Less: Appropriations General Reserve 2,500 Retained Earnings 1,28, Following is The Profit & Loss A/c of A Ltd. for the year Particulars ` Particulars ` To Opening Stock 40,200 By Sales 19,40,000 To Purchases 16,50,200 Less: Returns 4,800 To Freight & Carriage Inward 33,220 By Net Sales 19,35,200 To Wages 32,272 By Closing Stock 24,100 To Gross Profit c/d 2,03,408 19,59,300 19,59,300 To Staff Salaries 92,500 By Gross Profit c/d 2,03,408 To Sales Salaries 15,000 By Profit on Sale of Plant 2,000 To Depreciation on Furniture 2,560 To Reserve for Doubtful Debts 16,050 To Salesmen s Travelling Expenses 2,220 To Audit Fees 17,465 To Penalty for the Breach of Contract 3,250 To Depreciation on Machinery 3,916 To Transfer to General Reserve 5,705 To Income Tax 13,000 To Net Profit 33,742 2,05,408 2,05,408 Solution: Vertical Income Statement Particulars ` ` ` Gross Sales 19,40,000 (-) Returns 4,800 Net Sales 19,35,200 Less: Cost of Goods Sold Opening Stock 40,200 Purchases 16,50,200 16,90,400

37 Less: Closing Stock (24,100) 16,66,300 Add: Direct Expenses Depreciation on Machinery 3,916 Freight and Carriage Inward 33,220 Wages 32,272 69,408 Total Cost of Goods Sold (17,35,708) Gross Profit 1,99,492 Less: Operating Expenses Administrative Expenses Staff Salaries 92,500 Depreciation on Furniture 2,560 Audit Fees 17,465 Total Administrative Expenses 1,12,525 Selling Expenses Sales Salaries 15,000 Salesmen s Travelling Expenses 2,220 Total Selling Expenses 17,220 Financial Expenses Reserve for Doubtful Debts 16,050 Total Operating Expenses (1,45,795) Operating Net Profit 53,697 Add: Non-operating Income Profit on Sale of Plant 2,000 55,697 Less: Non-operating Expenses Penalty for the Breach of Contract (3,250) Net Profit Before Tax 52,447 Less: Provision for tax (13,000) Net Profit AFTER Tax 39,447 Less: Appropriations General Reserve (5,705) Retained Earnings 33, Following is the Profit & Loss A/c of A Ltd. for the year Particulars ` Particulars ` To Opening Stock: Raw Material Semi-finished Goods Finished Goods 35,000 25,000 40,000 1,00,000 By Closing Stock: Raw Material Semi-finished Goods Finished Goods 25,000 75,000 1,25,000 2,25,000 To Purchases 16,50,200 By Sales 35,00,000 Less: Returns 50,200 16,00,000 Less: Returns 20,000 To Freight & Carriage Inward 2,500 By Net Sales 34,80,000 To Wages 58,500 By Dividend on Shares 75,000 To Power 4,500 By Interest on Debentures 65,000 To Rent 12,000 By Damages Received 20,000

38 To Bad Debts 1,500 By Royalty Received 1,00,000 To Depreciation on Delivery 25,000 Van To Depreciation on Patterns 12,500 To Office Salaries 1,00,000 To Sales Salaries 75,000 To Depreciation on Furniture 15,000 To Reserve for Doubtful 2,250 Debts To Proposed Dividend 10,000 To Delivery Van Expenses 1,500 To Audit Fees 1,25,000 To Penalty for the Breach of 10,000 Contract To Depreciation on 45,000 Machinery To Telephone Charges 5,000 To Sales Discount 2,500 To Bank Charges 500 To Advertisement 7,500 To Showroom Expenses 4,500 To Transfer to General Reserve 45,000 To Net Profit 16,99,750 39,65,000 39,65,000 Additional Information: (a) 50% of the Power is for factory and remaining for office (b) 50% of the Rent paid is for Factory, 35% for office and 15% for the showroom. (c) 30% of the telephone expenses were for factory, 20% for advertising and remaining for the office. (d) Provide 35% on net profit. Convert it in a vertical form. Solution: Vertical Income Statement Particulars ` ` ` Gross Sales 35,00,000 Less: Returns 20,000 Net Sales 34,80,000 Less: Cost of Goods Sold Opening Stock: Raw Material 35,000 Semi-finished Goods 25,000 Finished Goods 40,000 1,00,000 Purchases 16,50,200 Less: Returns 50,200 16,00,000 17,00,000 Less: Closing Stock: Raw Material 25,000

39 Semi-finished Goods 75,000 Finished Goods 1,25,000 2,25,000 (2,25,000) 14,75,000 Add: Direct Expenses Depreciation on Machinery 45,000 Freight & Carriage Inward 2,500 Wages 58,500 Power (W.N. 1) 2,250 Rent (W.N. 2) 6,000 Telephone Charges ( W.N.3) 1,500 Depreciation on Patterns 12,500 1,28,250 Total Cost of Goods Sold (16,03,250) Gross Profit 18,76,750 Less: Operating Expenses Administrative Expenses Office Salaries 1,00,000 Depreciation on Furniture 15,000 Audit Fees 1,25,000 Power (W.N. 1) 2,250 Rent (W.N. 2) 4,200 Telephone Charges ( W.N.3) 2,500 Total Administrative Expenses 2,48,950 Selling Expenses Sales Salaries 75,000 Bad Debts 1,500 Depreciation on Delivery Van 25,000 Sales Discount 2,500 Rent (W.N. 2) 1,800 Telephone Charges ( W.N.3) 1,000 Delivery Van Expenses 1,500 Advertisement 7,500 Showroom Expenses 4,500 Total Selling Expenses 1,20,300 Financial Expenses Reserve for Doubtful Debts 2,250 Bank Charges 500 Total Financial Expenses 2,750 Total Operating Expenses (3,72,000) Operating Net Profit 15,04,750 Add: Non-operating Income Dividend on Shares 75,000 Interest on Debentures 65,000 Damages Received 20,000 Royalty Received 1,00,000 Total Non-operating Income 2,60,000 Less: Non-operating Expenses 17,64,750 Penalty for the Breach of Contract (10,000)

40 Net Profit before Tax 17,54,750 Less: Provision for tax (35% of 17,54,750) 6,14,163 Net Profit after Tax 11,40,587 Less: Appropriations General Reserve 45,000 Proposed Dividend 10,000 (55,000) Retained Earnings 10,85,587 Working Notes: 1. Allocation of Power Power ` 4,500 50% ` 2,250 50% ` 2,250 Rent ` 12,000 50% ` 6,000 35% ` 4,200 15% ` 1,800 Telephone ` 5,000 30% ` 1,500 50% ` 2,500 20% ` 1, Following is the Profit & Loss A/c of A Ltd. for the year Particulars ` Particulars ` To Opening Stock: Raw Material Semi-finished Goods Finished Goods 50,000 25,000 1,25,000 2,00,000 By Closing Stock: Raw Material Semi-finished Goods Finished Goods 25,000 75,000 1,25,000 2,25,000 To Purchases 10,20,000 By Sales 25,30,000 Less: Returns 20,000 10,00,000 Less: Returns 30,000 To Octroi Duty 35,000 By Net Sales 25,00,000 To Wages 1,20,000 By Dividend on Shares 25,000 To Commission on Purchases 25,000 By Interest on Debentures 45,000 To Factory Rent 1,00,000 By Rent Received 1,20,000 To Customs Duty 25,000 By Royalty Received 1,00,000

41 To Depreciation on Delivery 23,000 By Profit on Sale of 65,000 Van Investments To Depreciation on Patents 17,000 By Sale of Scrap 25,000 To Depreciation on Loose 15,000 By Goods Destroyed by Fire 20,000 Tools To Office Salaries 80,000 To Sales Salaries 65,000 To Depreciation on Furniture 25,000 To Reserve for Doubtful 10,000 Debts To Proposed Dividend 25,000 To Delivery Van Expenses 12,500 To Legal Fees 8,500 To Goodwill w/off 5,000 To Compensation Paid 2,500 To Depreciation on 12,500 Machinery To Telephone Charges 12,000 To Petty Expense 2,300 To Stationery 500 To Advertisement 45,000 To Showroom Expenses 13,000 To Transfer to General 22,000 Reserve To Net Profit 12,24,200 31,25,000 31,25,000 Solution: Vertical Income Statement Particulars ` ` ` Gross Sales 25,30,000 Less: Returns 30,000 Net Sales 25,00,000 Less: Cost of Goods Sold Opening Stock: Raw Material Semi-finished Goods Finished Goods 50,000 25,000 1,25,000 2,00,000 Purchases 10,20,000 Less: Returns 20,000 10,00,000 12,00,000 Less: Closing Stock: Raw Material Semi-finished Goods Finished Goods 25,000 75,000 1,25,000 2,25,000 Sale of Scrap 25,000 Goods Destroyed 20,000 45,000 (2,70,000) 9,30,000 Add: Direct Expenses Depreciation on Machinery 12,500

42 Octroi Duty 35,000 Wages 1,20,000 Commission on Purchases 25,000 Factory Rent 1,00,000 Customs Duty 25,000 Depreciation on Patents 17,000 Depreciation on Loose Tools 15,000 3,49,500 Total Cost of Goods Sold (12,79,500) Gross Profit 12,20,500 Less: Operating Expenses Administrative Expenses Office Salaries 80,000 Depreciation on Furniture 25,000 Legal Fees 8,500 Telephone Charges 12,000 Petty Cash 2,300 Stationery 500 Total Administrative Expenses 1,28,300 Selling Expenses Depreciation on Delivery Van 23,000 Sales Salaries 65,000 Van Expenses 12,500 Advertisement 45,000 Showroom Expenses 13,000 Total Selling Expenses 1,58,500 Financial Expenses Reserve for Doubtful Debts 10,000 Goodwill w/o 5,000 Total Financial Expenses 15,000 Total Operating Expenses (3,01,800) Operating Net Profit 9,18,700 Add: Non-operating Income Dividend on Shares 25,000 Interest on Debentures 45,000 Rent Received 1,20,000 Royalty Received 1,00,000 Profit on Sale of Investment 65,000 Total Non-operating Income 3,35,000 Less: Non-operating Expenses 12,73,700 Compensation Paid (2,500) Net Profit before Tax 12,71,200 Less: Provision for tax Net Profit after Tax 12,71,200 Less: Appropriations Proposed Dividend 25,000 Transfer to General Reserve 22,000 (47,000) Retained Earnings 12,24,200

43 Combine Balance Sheet and Profit & Loss A/c 11. From the following financial statement of ABC Ltd., you are required to calculate: Balance Sheet of ABC Ltd. as on Liabilities ` Assets ` Equity Share Capital 50,000 Fixed Assets 1,25,000 Reserves 50,000 Stock 1,25,000 10% Debentures 1,00,000 Debtors 50,000 Creditors 50,000 Bank 25,000 8% Preference Share Capital 50,000 Bills Payable 25,000 3,25,000 3,25,000 Income Statement Particulars ` Particulars ` To Opening Stock 75,000 By Net Sales 4,00,000 To Purchases 1,67,000 By Closing Stock 1,25,000 To Manufacturing Expenses 50,000 By Profit on Sale of Shares 25,000 To Direct Wages 1,00,000 To Administrative Expenses 35,000 To Selling Expenses 35,000 To Loss on Sale of Asset 28,000 To Interest on Debentures 10,000 To Net Profit 50,000 5,50,000 5,50,000 Solution: Vertical Balance Sheet as on Particulars ` ` ` SOURCES OF FUNDS Owner s Funds Equity Share Capital 50,000 8% Preference Share Capital 50,000 1,00,000 Add: Reserves & Surplus Reserves 50,000 Less: Fictitious Assets Total Owner s Funds 1,50,000 Borrowed Funds 10% Debentures 1,00,000 Total Funds Available 2,50,000 APPLICATION OF FUNDS Fixed Assets 1,25,000 Investments Working Capital Current Assets Stock 1,25,000 Debtors 50,000 Bank 25,000 Total Current Assets 2,00,000 Less: Current Liabilities

44 Bills Payable 25,000 Creditors 50,000 Total Current Liabilities 75,000 Net Working Capital 1,25,000 Total Funds Employed 2,50,000 Vertical Income Statement as on Particulars ` ` ` Sales 4,00,000 Less: Cost of Goods Sold Opening Stock 75,000 Purchases 1,67,000 2,42,000 Less: Closing Stock (1,25,000) 1,17,000 Add: Direct Expenses Wages 1,00,000 Manufacturing Expenses 50,000 1,50,000 Total Cost of Goods Sold (2,67,000) Gross Profit 1,33,000 Less: Operating Expenses Administrative Expenses 35,000 Selling Expenses 35,000 Financial Expenses Total Operating Expenses (70,000) Operating Net Profit 63,000 Add: Non-operating Income Profit on Sale of Shares 25,000 88,000 Less: Non-operating Expenses Loss on Sale of Plant (28,000) Net Profit before Interest and Tax 60,000 Interest on Debentures (10,000) Net Profit before Tax 50,000 Less: Tax Net Profit after Tax 50,000 Less: Appropriations Retained Earnings 50, From the following financial statement of XYZ Ltd., you are required to calculate: Profit & Loss A/c Particulars 2009 Particulars 2009 To Opening Stock 76,250 By Gross Sales: To Purchases 3,15,250 Cash Sales 1,00,000 To Wages 7,000 Credit Sales 4,00,000 To Office Salaries 27,700 By Net Sales 5,00,000 To General Reserve 4,900 By Closing Stock 98,500 To Income Tax 4,400 By Income Tax Refund 1,150 To Loss on Sale of Bonds 48,900 By Dividend Received 3,000 To Octroi Duty 10,950 To Salesmen s Travelling Expenses 3,350 To Director s Fees 8,900

45 To Sales Salaries 15,300 To Net Profit 79,750 6,02,650 6,02,650 Balance Sheet Liabilities 2009 Assets 2009 Equity Share Capital 3,00,000 Building 3,00,000 10% Debentures 2,00,000 Goodwill 2,00,000 Capital Redemption Reserve 80,000 Machinery 1,30,000 Profit & Loss A/c (Last Year + Current Year) 1,50,000 Cash & Bank 90,000 Creditors 1,50,000 Debtors 1,00,000 Bank Overdraft 50,000 Stock 1,00,000 Preliminary Expenses 10,000 9,30,000 9,30,000 Solution: Vertical Income Statement for the year 2009 Particulars ` ` ` Gross Sales Cash 1,00,000 Credit 4,00,000 Net Sales 5,00,000 Less: Cost of Goods Sold Opening Stock 76,250 Purchases 3,15,250 3,91,500 Less: Closing Stock 98,500 2,93,000 Add: Direct Expenses Wages 7,000 Octroi Duty 10,950 17,950 Total Cost of Goods Sold (3,10,950) Gross Profit 1,89,050 Less: Operating Expenses Administrative Expenses Office Salaries 27,700 Director s Fees 8,900 36,600 Selling Expenses Salesmen s Travelling Expenses 3,350 Sales Salaries 15,300 18,650 Financial Expenses Total Operating Expenses 55,250 Operating Net Profit 1,33,800 Add: Non-operating Income Income Tax Refund 1,150 Dividend Received 3,000 Total Non-operating Income 4,150 1,37,950 Less: Non-operating Expenses Loss on Sale of Bonds 48,900 Net Profit before Interest and Tax 89,050

46 Interest on Debentures Net Profit before Tax 89,050 Less: Tax 4,400 Net Profit after Tax 84,650 Less: Appropriations General Reserve 4,900 Retained Earnings 79,750 Vertical Balance Sheet for the year 2009 Particulars ` ` ` SOURCES OF FUNDS Owner s Funds Equity Share Capital 3,00,000 Add: Reserves & Surplus Capital Redemption Reserves 80,000 Profit & Loss A/c 1,50,000 2,30,000 Less: Fictitious Assets Preliminary Expenses 10,000 2,20,000 Total Owner s Funds 5,20,000 Borrowed Funds 10% Debentures 2,00,000 Total Funds Available 7,20,000 APPLICATION OF FUNDS Fixed Assets Building 3,00,000 Goodwill 2,00,000 Machinery 1,30,000 Total Fixed Assets 6,30,000 Investments Working Capital Current Assets Cash & Bank 90,000 Debtors 1,00,000 Stock 1,00,000 Total Current Assets 2,90,000 Less: Current Liabilities Bank Overdraft 50,000 Creditors 1,50,000 Total Current Liabilities 2,00,000 Net Working Capital 90,000 Total Funds Employed 7,20,000 Comparative Financial Statements Balance Sheet 13. Following is the summarized balance sheet of M/s X Ltd. as on 31st March, 2002 and Prepare a comparative analysis of Balance Sheet.

47 Particulars Liabilities Share Capital 4,00,000 5,20,000 Reserves 1,00,000 1,00,000 Profit & Loss A/c 79,380 82,440 Bank Overdraft 1,19,020 Sundry Creditors 79,000 82,270 Bills Payable 67,560 23,050 Provision for Tax 80,000 1,00,000 9,24,960 9,07,760 Assets Buildings 2,97,000 2,88,500 Machinery 2,25,900 2,32,400 Stock 2,22,080 1,46,720 Debtors 1,74,980 1,94,740 Cash 5,000 5,400 Goodwill 40,000 9,24,960 9,07,760 Solution: Comparative Analysis of Balance Sheet Particulars ` (2002) ` (2003) Absolute Increase/ Decrease % Increase/ Decrease SOURCES OF FUNDS Owner s Funds Share Capital 4,00,000 5,20,000 1,20,000 30% Add: Reserves & Surplus Reserves 1,00,000 1,00,000 Profit & Loss A/c 79,380 82,440 3, % 5,79,380 7,02,440 1,23, % Less: Fictitious Assets Total Owner s Funds 5,79,380 7,02,440 1,23, % Borrowed Funds Total Funds Available 5,79,380 7,02,440 1,23, % APPLICATION OF FUNDS Fixed Assets Buildings 2,97,000 2,88,500 (8,500) (2.86%) Machinery 2,25,900 2,32,400 6, % Goodwill 40,000 40,000 Total Fixed Assets (A) 5,22,900 5,60,900 38, % Investments Working Capital Current Assets Stock 2,22,080 1,46,720 (75,360) (33.93%) Debtors 1,74,980 1,94,740 19, % Cash 5,000 5, % Total Current Assets (B) 4,02,060 3,46,860 (55,200) (13.73%) Less: Current Liabilities Bank Overdraft 1,19,020 (1,19,020) (100%)

48 Sundry Creditors 79,000 82,270 3, % Bills Payable 67,560 23,050 (44,510) (65.88%) Provision for Tax 80,000 1,00,000 20,000 25% Total Current Liabilities (C) 3,45,580 2,05,320 (1,40,260) (4.61%) Net Working Capital (B C) = D 56,480 1,41,540 85, % Total Funds Employed (A + D) 5,79,380 7,02,440 1,23, % 14. From the following details, you are required to prepare the comparative Balance sheet in a vertical form. Balance Sheet Liabilities Assets Equity Share Capital 2,40,000 3,20,000 Goodwill 80,000 1,64,000 10% Preference Share Capital 1,20,000 1,00,000 Land & Building 1,60,000 1,70,000 Capital Reserve 30,000 Plant 64,000 General Reserve 32,000 40,000 Investment 16,000 84,000 Profit & Loss A/c 24,000 39,000 Debtors 1,22,000 1,48,000 Creditors 20,000 38,000 Stock 62,000 87,000 Proposed Dividend 34,000 40,000 Bills Receivable 16,000 24,000 Bills Payable 16,000 13,000 Cash 12,000 24,000 Liability for Expenses 24,000 29,000 Bank 18,000 Provision for Tax 32,000 40,000 Preliminary Expenses 2,000 Provision for Doubtful Debts 10,000 12,000 5,52,000 7,01,000 5,52,000 7,01,000 Solution: Comparative Analysis of Balance Sheet Particulars ` (2000) ` (2001) Absolute Increase/ Decrease % Increase/ Decrease SOURCES OF FUNDS Owner s Funds Equity Share Capital 2,40,000 3,20,000 80, ,33% 10% Preference Share Capital 1,20,000 1,00,000 (20,000) (16.67%) (A) 3,60,000 4,20,000 60, % Add: Reserves & Surplus Capital Reserve 30,000 30,000 General Reserve 32,000 40,000 8,000 25% Profit & Loss A/c 24,000 39,000 15, % (B) 56,000 1,09,000 53, Less: Fictitious Assets Preliminary Expenses (C ) 2,000 (2,000) (100%) Total Owner s Funds (A + B C) 4,14,000 5,29,000 1,15, % Borrowed Funds Total Funds Available 4,14,000 5,29,0000 1,15, % APPLICATION OF FUNDS Fixed Assets Goodwill 80,000 1,64,000 84, % Land & Building 1,60,000 1,70,000 10, % Plant 64,000 (64,000) (100%) Total Fixed Assets (D) 3,04,000 3,34,000 30, %

49 Investment (E) 16,000 84,000 68, % Working Capital Current Assets Debtors ( W.N.1) 1,12,000 1,36,000 24, % Stock 62,000 87,000 25, % Bills Receivable 16,000 24,000 8, % Cash 12,000 24,000 12, % Bank 18,000 (18,000) (100%) Total Current Assets (F) 2,20,000 2,71,000 51, % Less: Current Liabilities Creditors 20,000 38,000 18,000 90% Proposed Dividend 34,000 40,000 6, % Bills Payable 16,000 13,000 (3,000) (18.75%) Liability for Expenses 24,000 29,000 5, % Provision for Tax 32,000 40,000 8,000 25% Total Current Liabilities (G) 1,26,000 1,60,000 34, % Net Working Capital (F - G) = H 94,000 1,11,000 17, % Total Funds Employed (D + E + H) 4,14,000 5,29,000 1,15, % Working Note: Particulars Debtors 1,22,000 1,48,000 Less: Provision for Doubtful Debts 10,000 12,000 Net Debtors 1,12,000 1,36,000 Profit & Loss A/c 15. From the following Income Statement of XYZ Ltd., you are required to prepare the comparative Income statement in a vertical form. Particulars Particulars To Opening Stock 44,000 40,000 By Sales 1,90,000 2,00,000 To Purchases 84,000 72,000 By Closing Stock 46,000 44,000 To Wages 40,000 36,000 By Interest Received 20,000 To Factory Expenses 32,000 28,000 To Factory Rent 8,000 6,000 To Management Expenses 2,000 2,000 To Selling Expenses 6,000 10,000 To Interest 6,000 8,000 To Income Tax 22,000 24,000 To Loss on Sale of Bonds 2,000 2,000 To Net Profit 10,000 16,000 2,56,000 2,44,000 2,56,000 2,44,000 Solution: Particulars 2000 ` Comparative Income Statement 2001 ` Absolute Increase/ Decrease % Increase/ Decrease Net Sales (A) 1,90,000 2,00,000 10, % Less: Cost of Goods Sold Opening Stock 44,000 40,000 (4,000) (9.09%) Purchases 84,000 72,000 (12,000) (14.29%)

50 1,28,000 1,12,000 (16,000) (12.5%) Less: Closing Stock 46,000 44,000 (2,000) (4.35%) (B) 82,000 68,000 (14,000) (17.07%) Add: Direct Expenses Wages 40,000 36,000 (4,000) (10%) Factory Expenses 32,000 28,000 (4,000) (12.5%) Factory Rent 8,000 6,000 (2,000) (25%) Total Direct Expenses (C) 80,000 70,000 (10,000) (12.5%) Total Cost of Goods Sold (B + C) = D 1,62,000 1,38,000 (24,000) (14.81%) Gross Profit (A - D) = E 28,000 62,000 34, % Less: Operating Expenses Administrative Expenses Management Expenses (F) 2,000 2,000 Selling Expenses Selling Expenses (G) 6,000 10,000 4, % Financial Expenses Interest (H) 6,000 8,000 2, % Total Operating Expenses (F + G + H) = I 14,000 20,000 6, % Operating Net Profit (E I) = J 14,000 42,000 28, % Add: Non-operating Income Interest Received 20,000 (20,000) (100%) 34,000 42,000 8, % Less: Non-operating Expenses Loss on Sale of Bonds 2,000 2,000 Net Profit before Tax 32,000 40,000 8,000 25% Less: Tax 22,000 24,000 2, % Net Profit after Tax 10,000 16,000 6,000 60% Less: Appropriations Retained Earnings 10,000 16,000 6,000 60% 16. Prepare Comparative Income statement in Vertical form from the given information Particulars Particulars To Opening Stock 75,000 80,000 By Net Sales 5,00,000 5,05,000 To Purchases 3,16,500 3,20,000 By Closing Stock 98,500 95,000 To Wages 7,900 9,000 By Profit on Sale of Shares 9,150 To Office Salaries 23,500 28,500 To Postage 2,700 3,000 To Advertising 4,900 4,000 To Depreciation on Furniture 9,300 9,000 To Telephone Expenses 3,400 3,300 To Director s Fees 11,100 12,500 To Income Tax 4,400 4,500 To Loss on Sale of Furniture 48,000 To Depreciation on Van 1,650 1,750 To Sales Salaries 15,300 20,000

51 To Net Profit 84,000 1,04,450 6,07,650 6,00,000 6,07,650 6,00,000 Additional Information: (a) Telephone expenses are to be allocated equally for office and selling in both years. Solution: Comparative Income Statement Particulars ` (2000) ` (2001) Absolute Increase/ Decrease % Increase/ Decrease Net Sales (A) 5,00,000 5,05,000 5,000 1% Less: Cost of Goods Sold Opening Stock 75,000 80,000 5, % Purchases 3,16,500 3,20,000 3, % 3,91,500 4,00,000 8, % Less: Closing Stock 98,500 95,000 (3,500) (3.55%) (B) 2,93,000 3,05,000 12, % Add: Direct Expenses Wages 7,900 9,000 1, % Total Direct Expenses (C) 7,900 9,000 1, % Total Cost of Goods Sold (B + C) = D 3,00,900 3,14,000 13, % Gross Profit (A D) = E 1,99,100 1,91,000 (8,100) (4.07%) Less: Operating Expenses Administrative Expenses Office Salaries 23,500 28,500 5, % Postage 2,700 3, % Depreciation on Furniture 9,300 9,000 (300) (3.23%) Telephone Expenses 1,700 1,650 (50) (2.94%) Director s Fees 11,100 12,500 1, % Total Administrative Expenses (F) 48,300 54,650 (6,350) (13.15%) Selling Expenses Telephone Expenses 1,700 1,650 (50) (2.94%) Depreciation on Van 1,650 1, % Sales Salaries 15,300 20,000 4, % Total Selling Expenses (G) 18,650 23,400 4, % Financial Expenses (H) Total Operating Expenses (F + G + H) = I 66,950 78,050 11,100 16,57% Operating Net Profit (E I) = J 1,32,150 1,12,950 (19,200) (14.53%) Add: Non-operating Income Profit on Sale of Shares 9,150 (9,150) (100%) 1,41,300 1,12,950 (28,350) (20.06%) Less: Non-operating Expenses Loss on Sale of Furniture 48,000 (48,000) (100%) Net Profit before Tax 93,300 1,12,950 19,650 21,06% Less: Tax 4,400 4, % Net Profit after Tax 88,900 1,08,950 20, % Less: Appropriations Retained Earnings 88,900 1,08,950 20, %

52 Trend Analysis Balance Sheet 17. From the following Balance Sheet, prepare Trend Analysis. Balance Sheet Liabilities Assets Equity Share Capital 3,00,000 4,00,000 Building 3,00,000 5,00,000 10% Debentures 2,00,000 2,00,000 Goodwill 2,00,000 1,60,000 Capital Redemption Reserve 80,000 80,000 Machinery 1,30,000 1,25,000 Profit & Loss A/c 1,50,000 2,00,000 Cash & Bank 90,000 91,000 Creditors 1,50,000 2,00,000 Debtors 1,00,000 1,25,000 Bank Overdraft 50,000 20,000 Stock 1,00,000 91,000 Preliminary Expenses 10,000 8,000 9,30,000 11,00,000 9,30,000 11,00,000 Solution: Trend Analysis Particulars % 2010% SOURCES OF FUNDS Owner s Funds Equity Share Capital (A) 3,00,000 4,00, Add: Reserves & Surplus Capital Redemption Reserve 80,000 80, Profit & Loss A/c 1,50,000 2,00, (B) 2,30,000 2,80, Less: Fictitious Assets Preliminary Expenses (C) 10,000 8, (C + B) = D 2,20,000 2,72, Total Owner s Funds (A + D) 5,20,000 6,72, Borrowed Funds 10% Debentures 2,00,000 2,00, Total Funds Available 7,20,000 8,72, APPLICATION OF FUNDS Fixed Assets Building 3,00,000 5,00, Goodwill 2,00,000 1,60, Machinery 1,30,000 1,25, Total Fixed Assets (E) 6,30,000 7,85, Investments Working Capital Current Assets Cash & Bank 90,000 91, Debtors 1,00,000 1,25, Stock 1,00,000 91, Total Current Assets (F) 2,90,000 3,07, Less: Current Liabilities Bank Overdraft 50,000 20, Creditors 1,50,000 2,00,

53 Total Current Liabilities (G) 2,00,000 2,20, Net Working Capital (F G = H) 90,000 87, Total Funds Employed (E + H) 7,20,000 8,72, Profit & Loss A/c 18. From the following Income Statement, prepare Trend Analysis. Income Statement Particulars Particulars To Opening Stock 75,000 1,00,000 By Net Sales 4,00,000 6,00,000 To Purchases 1,67,000 2,25,000 By Closing Stock 1,25,000 2,00,000 To Direct Wages 1,50,000 1,95,000 By Profit on Sale of Shares 25,000 20,000 To Administrative Expenses 65,000 75,000 To Selling Expenses 35,000 45,000 To Finance Charges 8,000 20,000 To Net Profit 50,000 1,60,000 5,50,000 8,20,000 5,50,000 8,20,000 Solution: Vertical Income Statement as on Particulars % 2010% Sales (A) 4,00,000 6,00, Less: Cost of Goods Sold Opening Stock 75,000 1,00, Purchases 1,67,000 2,25, ,42,000 3,25, Less: Closing Stock 1,25,000 2,00, ,17,000 1,25, Add: Direct Expenses Wages 1,50,000 1,95, Total Cost of Goods Sold (B) 2,67,000 3,20, Gross Profit (A B = C) 1,33,000 2,80, Less: Operating Expenses Administrative Expenses 65,000 75, Selling Expenses 35,000 45, Financial Expenses 8,000 20, Total Operating Expenses (D) 1,08,000 1,40, Operating Net Profit (C D) 25,000 1,40, Add: Non-operating Income Profit on Sale of Shares 25,000 20, Retained Earnings 50,000 1,60, Combine Balance Sheet & Profit & Loss 19. From the following Income Statement, prepare Trend Analysis. Income Statement Particulars Particulars To Administrative Expenses 1,05,000 1,75,000 By Gross Profit 6,25,000 10,00,000 To Selling Expenses 85,000 1,45,000 By Profit on Sale of Shares 25,000 20,000 To Finance Charges 80,000 1,20,000

54 To Net Profit 3,80,000 5,80,000 6,50,000 10,20,000 6,50,000 10,20,000 Balance Sheet Liabilities Assets Equity Share Capital 3,00,000 4,00,000 Fixed Assets 6,30,000 7,85,000 10% Debentures 2,00,000 2,00,000 Current Assets 3,00,000 3,15,000 Reserves 2,30,000 2,80,000 Current Liabilities 2,00,000 2,20,000 9,30,000 11,00,000 9,30,000 11,00,000 Solution: Trend Analysis of Balance Sheet Particulars % 2010% SOURCES OF FUNDS Owner s Funds Equity Share Capital 3,00,000 4,00, Add: Reserves & Surplus 2,30,000 2,80, ,30,000 6,80, Less: Fictitious Assets Preliminary Expenses 10,000 8, Total Owner s Funds 5,20,000 6,72, Borrowed Funds 10% Debentures 2,00,000 2,00, Total Funds Available 7,20,000 8,72, APPLICATION OF FUNDS Fixed Assets (A) 6,30,000 7,85, Investments (B) Working Capital Current Assets 2,90,000 3,07, Less: Current Liabilities 2,00,000 2,20, Net Working Capital (C) 90,000 87, Total Funds Employed (A + B + C) 7,20,000 8,72, Trend Analysis of Income Statement Particulars % 2010% Gross Profit (A) 6,25,000 10,00, Less: Operating Expenses Administrative Expenses 1,05,000 1,75, Selling Expenses 85,000 1,45, Finance Expenses 80,000 1,20, Total Operating Expenses (B) 2,70,000 4,40, Operating Profit (A B) 3,55,000 5,60, Profit on Sale of Shares 25,000 20, Retained Earnings 3,30,000 5,40, Missing Figures 20. Complete the following Trend Statement. Particulars

55 ` % ` % ` % ` % Fixed Assets???????? ( ) 15% on Original Cost?? 1,875? 2,025??? Written Down Value 8,500????? 12,750? Current Assets???????? ( Current Liabilities???????? Working Capital 1,500? 2,000? 2,400??? Capital Employed???????? Share Capital????? 110? 140 Reserves 1,500?? 120???? Net Worth???????? Debts (20% on Capital Employed)???????? Capital Employed???????? Current Assets and Current Liabilities are in the ratio of 3 : 2. In Year 2006, current assets and current liabilities are double of the year Solution: Trend Analysis Particulars ` % ` % ` % ` % Fixed Assets 10, , , , ( 15% on 1, , , , Original Cost Written Down Value (A) 8, , , , Current Assets 4, , , , ( ) Current Liabilities 3, , , , Working Capital (B) 1, , , , Capital Employed (A + B) 10, , , , Share Capital 6, , , , Reserves 1, , , , Net Worth 8, , , , Debts (20% on Capital Employed) 2, , , , Capital Employed 10, , , , Complete the following trend statement of M/s RJ Industries Ltd. Particulars Amount in Lakhs Percentage Net Sales 1, ,000??? Cost of Goods Sold 800??? 125? Gross Profit 400???? 200 Operating Expenses 200? 400? 120? Operating Net Profit? 360???? Non-operating Income 80??? Non-operating Expenses???? Net Profit before Tax 240??? Income Tax 80????? Net Profit after Tax ??? Solution: Trend Analysis Particulars Amount in Lakhs Percentage

56 Net Sales 1,200 1,600 2, Less: Cost of Goods Sold 800 1,000 1, Gross Profit Less: Operating Expenses Operating Net Profit Add: Non-operating Income Less: Non-operating Expenses Net Profit before Tax Less: Income Tax Net Profit after Tax Complete the following Trend Statement. Particulars ` % ` % ` % ` % Fixed Assets???????? ( ) 10% on Original Cost?? 1,500? 2,000??? Written Down Value 9,000????? 20,250? Current Assets???????? ( ) Current Liabilities???? 2,400??? Working Capital 3,000? 4,000????? Capital Employed???????? Share Capital????? 110? 140 Reserves 1,600?? 120???? Net Worth???????? Debts (20% on Capital Employed)???????? Capital Employed???????? Current Assets and Current Liabilities are in the ratio of 3 : 1. In Year 2003, current assets and current liabilities are double of the year Solution: Trend Analysis Particulars ` % ` % ` % ` % Fixed Assets 10, , , , ( ) 10% on Original Cost 1, , , , Written Down Value (A) 9, , , , Current Assets 4, , , , ( ) Current Liabilities 1, , , , Working Capital (B) 3, , , , Capital Employed (A + B) 12, , , , Share Capital 8, , , , Reserves 1, , , , Net Worth 9, , , , Debts (20% on Capital Employed) 2, , , , Capital Employed 12, , , , Complete the following trend statement of M/s J Industries Ltd. Particulars Amount in Lakhs Percentage

57 Sales 20,000? 24,000 26, ? 130 Less: Cost of Sales?? 17,700?? 109?? Gross Profit 5,000?? 6,950?? 126? Administrative Expenses?? 2,280?? 117?? Sales Expenses 450?? 900? 133?? Total Operating Expenses 2,050? 3,030 3,475???? Net Profit before Tax??? 3,475? 108?? Income Tax? 1,272??? 108? 118 Net Profit after Tax 1,770? 1,962? 100??? Solution: Trend Analysis Particulars Amount in Lakhs Percentage Sales 20,000 22,000 24,000 26, Less: Cost of Sales 15,000 16,350 17,700 19, Gross Profit (A) 5,000 5,650 6,300 6, Administrative Expenses 1,600 1,872 2,280 2, Sales Expenses Total Operating Expenses (B) 2,050 2,471 3,030 3, Net Profit before Tax (A B) 2,950 3,179 3,270 3, Income Tax 1,180 1,272 1,308 1, Net Profit after Tax 1,770 1,907 1,962 2, Common Size Statements Balance Sheet 24. The following is the balance sheet of R Ltd. as on Liabilities ` Assets ` Equity Share Capital 10,00,000 Machinery 8,50,000 General Reserve 4,00,000 Goodwill 1,50,000 Profit & Loss 2,00,000 Furniture 1,50,000 Bank Overdraft 50,000 Stock 2,50,000 Creditors 5,00,000 Debtors 6,00,000 Bank Balance 1,00,000 Share Issue Expenses 50,000 21,50,000 21,50,000 From the above information, prepare a common size balance sheet. Solution: In the Books of R Ltd. Common Size Balance Sheet as on Particulars ` ` % % SOURCES OF FUNDS Owner s Funds Equity Share Capital 10,00, Add: Reserves & Surplus General Reserve 4,00, Profit & Loss 2,00, ,00,

58 Less: Fictitious Assets Share Issue Expenses 50,000 5,50, Total Owner s Funds 15,50, Borrowed Funds Total Funds Available 15,50, APPLICATION OF FUNDS Fixed Assets Machinery 8,50, Goodwill 1,50, Furniture 1,50, Total Fixed Assets 11,50, Investments Working Capital Current Assets Stock 2,50, Debtors 6,00, Bank Balance 1,00, Total Current Assets (A) 9,50, Less: Current Liabilities Bank Overdraft 50, Creditors 5,00, Total Current Liabilities (B) 5,50, Net Working Capital (A B) 4,00, Total Funds Employed 15,50, Profit & Loss 25. From the following, prepare common size Income statement in vertical form: Particulars ` Particulars ` To Opening Stock 80,000 By Net Sales 5,00,000 To Purchases 3,20,000 By Closing Stock 95,000 To Wages 9,000 By Profit on Sale of Shares 5,000 To Staff Salaries 28,500 To Printing and Stationery 3,000 To Advertising 3,000 To Depreciation on Furniture 9,000 To Telephone Expenses 3,300 To Director s Fees 12,500 To Income Tax 4,500 To Loss on Sale of Bonds 1,000 To Depreciation on Machinery 1,750 To Sales Salaries 20,000 To Net Profit 1,04,450 6,00,000 6,00,000 Solution: Vertical Income Statement Particulars ` ` % % Sales 5,00,

59 Less: Cost of Goods Sold Opening Stock 80, Purchases 3,20, ,00, Less: Closing Stock (95,000) 19 (A) 3,05, Add: Direct Expenses Depreciation on Machinery 1, Wages 9, (B) 10, Total Cost of Goods Sold (A + B) (3,15,750) Gross Profit 1,84, Less: Operating Expenses Administrative Expenses Staff Salaries 28, Printing and Stationery 3, Depreciation on Furniture 9, Telephone Expenses 3, Director s Fees 12, Total Administrative Expense (C) 56, Selling Expenses Advertising 3, Sales Salaries 20,000 4 Total Selling Expenses (D) 23, Financial Expenses (E) Total Operating Expense (C+D+E) (79,300) Operating Net Profit 1,04, Add: Non-operating Income Profit on Sale of Shares 5, ,09, Less: Non-operating Expenses Loss on Sale of bonds (1,000) 0.2 Net Profit before Tax 1,08, Less: Provision for tax (4,500) 0.9 Retained Earnings 1,04, Combine Balance Sheet and Profit & Loss A/c 26. From the following financial statement of XYZ Ltd., you are required to prepare the common size statements: Profit & Loss A/c Particulars 2009 Particulars 2009 To Opening Stock 76,250 By Gross Sales To Purchases 3,15,250 Cash Sales 1,00,000 To Wages 7,000 Credit Sales 4,00,000 To Office Salaries 27,700 By Net Sales 5,00,000 To General Reserve 4,900 By Closing Stock 98,500 To Income Tax 4,400 By Income Tax Refund 1,150

60 To Loss on Sale of Bonds 48,900 By Dividend Received 3,000 To Octroi Duty 10,950 To Salesmen s Travelling Expenses 3,350 To Director s Fees 8,900 To Sales Salaries 15,300 To Net Profit 79,750 6,02,650 6,02,650 Balance Sheet Liabilities 2009 Assets 2009 Equity Share Capital 3,00,000 Building 3,00,000 10% Debentures 2,00,000 Goodwill 2,00,000 Capital Redemption Reserve 80,000 Machinery 1,30,000 Profit & Loss A/c (Last Year + Current Year) 1,50,000 Cash & Bank 90,000 Creditors 1,50,000 Debtors 1,00,000 Bank Overdraft 50,000 Stock 1,00,000 Preliminary Expenses 10,000 9,30,000 9,30,000 Solution: Common Size Income Statement Particulars ` ` % % Gross Sales Cash 1,00, Credit 4,00, Net Sales 5,00, Less: Cost of Goods Sold Opening Stock 76, Purchases 3,15, ,91, Less: Closing Stock 98, (A) 2,93, Add: Direct Expenses Wages 7, Octroi Duty 10, (B) 17, Total Cost of Goods Sold (A + B) (3,10,950) Gross Profit 1,89, Less: Operating Expenses Administrative Expenses Office Salaries 27, Director s Fees 8, Total Administrative Expenses (C) 36, Selling Expenses Salesmen s Travelling Expenses 3, Sales Salaries 15, Total Selling Expenses (D) 18, Financial Expenses (E) Total Operating Expenses (C + D + E) (55,250) Operating Net Profit 1,33,

61 Add: Non-operating Income Income Tax Refund 1, Dividend Received 3, Total Non-operating Income 4, ,37, Less: Non-operating Expenses Loss on Sale of Bonds 48, Net Profit before Interest and Tax 89, Interest on Debentures Net Profit before Tax 89, Less: Tax 4, Net Profit after Tax 84, Less: Appropriations General Reserve 4, Retained Earnings 79, Common Size Balance Sheet Particulars ` ` % % SOURCES OF FUNDS Owner s Funds Equity Share Capital 3,00, Add: Reserves & Surplus Capital Redemption Reserve 80, Profit & Loss A/c 1,50, ,30, Less: Fictitious Assets Preliminary Expenses 10,000 2,20, Total Owner s Funds 5,20, Borrowed Funds 10% Debentures 2,00, Total Funds Available 7,20, APPLICATION OF FUNDS Fixed Assets Building 3,00, Goodwill 2,00, Machinery 1,30, Total Fixed Assets 6,30, Investments Working Capital Current Assets Cash & Bank 90, Debtors 1,00, Stock 1,00, Total Current Assets (A) 2,90, Less: Current Liabilities Bank Overdraft 50, Creditors 1,50, Total Current Liabilities (B) 2,00,

62 Net Working Capital (A B) 90, Total Funds Employed 7,20, University Questions 27. Following balances from the books of account of Chetan Ltd. for the year ended , you are required to prepare vertical Income Statement and vertical Balance Sheet: Particulars Amount (`) Particulars Amount (`) Advertising 25,000 Sales Return 10,000 Interest Received 6,000 Bills Payable 43,000 Sales 12,00,000 10% Preference Share Capital 1,50,000 Equity Share Capital 9,00,000 Debenture Interest 24,000 Salaries 1,80,000 Wages 1,85,000 Furniture and Fixture 2,00,000 Cash and Bank Balance 80,000 Outstanding Expenses 25,000 Debtors 2,00,000 Profit & Loss A/c (Credit. Balance) 1,30,000 Opening Stock 50,000 Bad Debts 5,000 General Reserve 75,000 Purchases 6,00,000 Creditors 1,00,000 Machinery 7,50,000 8% Debenture 4,00,000 Preliminary Expenses 10,000 Income Tax 10,000 Land and Building 7,00,000 Closing Stock on is ` 1, (T.Y. B.Com., March 2007) Solution: In the Books of Chetan Ltd. Vertical Income Statement for the year ended Particulars ` ` ` Gross Sales 12,00,000 Less: Sales Return 10,000 Net Sales 11,90,000 Less: Cost of Goods Sold Opening Stock 50,000 Purchases 6,00,000 6,50,000 Less: Closing Stock (1,50,000) 5,00,000 Add: Direct Expenses Wages 1,85,000 Total Cost of Goods Sold (6,85,000) Gross Profit 5,05,000 Less: Operating Expenses Office and Administrative Expenses Salaries 1,80,000 Selling Expenses Advertisements 25,000 Bad Debts 5,000 30,000

63 Financial Expenses Debenture Interest 24,000 Total Operating Expenses (2,34,000) Operating Net Profit 2,71,000 Add: Non-operating Income Interest Received 6,000 2,77,000 Less: Non-operating Expenses Net Profit before Tax 2,77,000 Less: Tax (10,000) Net Profit after Tax 2,67,000 Add: Last Year s Profit 1,30,000 Retained Earnings 3,97,000 Vertical Balance Sheet on Particulars ` ` ` SOURCES OF FUNDS Owner s Funds Equity Share Capital 9,00,000 10% Preference Share Capital 1,50,000 10,50,000 Add: Reserves & Surplus General Reserves 75,000 Profit and Loss A/c 3,97,000 Less: Fictitious Assets 4,72,000 Preliminary Expenses (10,000) 4,62,000 Total Owner s Funds 15,12,000 Borrowed Funds 8% Debentures 4,00,000 Total Funds Available 19,12,000 APPLICATION OF FUNDS Fixed Assets Furniture 2,00,000 Machinery 7,50,000 Land and Building 7,00,000 16,50,000 Investments Working Capital Current Assets Stock 1,50,000 Debtors 2,00,000 Bank 80,000 4,30,000 Total Current Assets Less: Current Liabilities Outstanding Expenses 25,000 Bills Payable 43,000 Creditors 1,00,000 Total Current Liabilities (1,68,000) Net Working Capital 2,62,000 Total Funds Employed 19,12,000

64 28. From the following Profit and Loss Account information for year ending 2004 and 2005, prepare Common Size Statement in vertical form suitable for analysis. Particulars 2004 (`) 2005 (`) Sales 10, 00,000 15, 00,000 Closing Stock 2, 50,000 3, 00,000 Opening Stock 1, 50,000 2, 50,000 Purchases 3, 00,000 4, 50,000 Wages 2, 00,000 3, 00,000 Manufacturing Expenses 1, 00,000 1, 50,000 Administrative Expenses 50,000 50,000 Selling and Distribution Expenses 50,000 75,000 Loss on Sale of Furniture 25,000 0 Interest on Debentures 10,000 10,000 Profit on Sale of Shares 50,000 0 (T.Y. B.Com., May 2006) Solution: Common Size Income Statement Particulars 2004 (`) 2005 (`) 2004 % 2005 % Sales (A) 10, 00,000 15, 00, Less: Cost of Goods Sold Opening Stock 1, 50,000 2, 50, Purchases 3, 00,000 4, 50, ,50,000 7,00, Less: Closing Stock 2, 50,000 3, 00, (B) 2,00,000 4,00, Add: Direct Expenses Wages 2, 00,000 3, 00, Manufacturing Expenses 1, 00,000 1, 50, (C) 3,00,000 4,50, Total Cost of Goods Sold (B + C) = D 5,00,000 8,50, Gross Profit (A D) = E 5,00,000 6,50, Less: Operating Expenses Administrative Expenses 50,000 50, Selling and Distribution Expenses 50,000 75, Financial Charges Interest on Debentures 10,000 10, Total Operating Expenses (F) 1,10,000 1,35, Operating Net Profit (E F) 3,90,000 5,15, Add: Non-operating Income Profit on Sale of Shares 50, ,40,000 5,15, Less: Non-operating Expenses Loss on Sale of Furniture 25, Retained Earnings 4,65,000 5,15,

65 OBJECTIVES Fill in the Blanks: 1. To know about the earning capacity or is the purpose of Financial Analysis. 2. To know the solvency is the purpose of Analysis. 3. Revenues resulting from the normal operations of a business such as the revenues resulting from the sale of products and services to your customers are called as. 4. revenue accounts include all types of income that you receive that are not part of your main line of business. 5. expenses are the expenses related to normal daily operations such as wages, rent, advertising, insurance, etc. 6. Direct expenses which are directly related to the or trading of the product are termed as direct expenses. 7. expenses are such expenses which are not directly related to the production activity. 8. expenses are expenses related to the general operations or overall administration of the business. 9. are expenses incurred and related to making sales. 10. expenses and losses are resulting from something other than from normal business operations. 11. Funds is also called as owner s funds, proprietor s funds, net worth or own funds. 12. Shareholders Funds = Equity Share Capital + Preference Share Capital + Reserves & Surplus. 13. are not really the assets of the company but these indicates the expenses which are not written off at a single time but for a period of 5 years. 14. Equity share capital and preference capital should exclude. 15. Fund is also known as owed funds, long-term borrowings or borrowed funds. 16. The loans which are secured against some securities are called as loans. 17. The loans which are not secured against any security are called as loans. 18. The assets which can be easily converted into cash are called as assets. 19. are opposite to quick assets. Examples are Stock and Prepaid Expenses. 20. The liabilities which are to be quickly paid are called as Liabilities. 21. liabilities are opposite to quick liabilities. Examples are Bank Overdraft. 22. A is a liability which may or may not arise in the future depending on the happening or non-happening of an event.

66 23. Current assets are classified in two types: assets and assets. 24. analysis calculates the percentage change for one account over a period of time of two years or more. Ans: 1. Profitability, 2. Financial, 3. Operating Revenue, 4. Non-operating, 5. Operating, 6. Manufacturing, 7. Indirect, 8. Office and administration, 9. Selling Expenses, 10. Non-operating, 11. Shareholders, 12. Fictitious Assets, 13. Fictitious Assets, 14. calls in arrears, 15. Loan, 16. Secured, 17. Unsecured, 18. Quick, 19. Non-quick Assets, 20. Quick, 21. Non-quick, 22. contingent liability, 23. Quick and Non-quick, 24. Trend. State Whether the Following Statements are True or False: 1. Not to know about the earning capacity or profitability is the purpose of Financial Analysis. 2. To know the solvency is the purpose of Financial Analysis. 3. To know the competitive strength is the purpose of Financial Analysis. 4. To make comparative study with other firms is the purpose of Financial Analysis. 5. To know the capability of payment of interest and dividend is the purpose of Financial Analysis. 6. To know the trend of business is the purpose of Financial Analysis. 7. Revenues resulting from the normal operations of a business such as the revenues resulting from the sale of products and services to your customers are non-operating revenue. 8. Non-operating revenue accounts include all types of income that you receive that are not part of your main line of business. 9. Non-operating Expenses the expenses related to normal daily operations such as wages, rent, advertising, insurance, etc. 10. Indirect expenses which are directly related to the manufacturing or trading of the product are termed as direct expenses. 11. Direct expenses are such expenses which are not directly related to the production activity. 12. Office and administration expenses are expenses related to the general operations or overall administration of the business. 13. Selling Expenses are expenses incurred and related to making sales. 14. Expenses and losses resulting from something other than from normal business operations are non-operating expenses 15. Borrowed Funds is also called as owner s funds, proprietor s funds, net worth or own funds. 16. Shareholders Funds = Equity Share Capital + Preference Share Capital + Reserves & Surplus Fictitious Assets. 17. Current Assets are not really the assets of the company but these indicates the expenses which are not written off at a single time but for a period of 5 years. 18. Equity share capital and preference capital should exclude calls in arrears. 19. Loan Fund is also known as owed funds or long-term borrowings. 20. The loans which are secured against some securities are called as secured loans. 21. The loans which are not secured against any security are called as unsecured loans.

67 22. The assets which can be easily converted into cash are called as non-quick assets. 23. The assets which are opposite to quick assets are non-quick assets 24. The liabilities which are to be quickly paid are called as Quick Liabilities. 25. The liabilities which are opposite to Quick Liabilities is Bank Overdraft. 26. A current liability is a liability which may or may not arise in the future depending on the happening or non-happening of an event. 27. Fixed assets are classified in two types: quick assets and non-quick assets. 28. Trend analysis calculates the percentage change for one account over a period of time of two years or more. Ans: 1. False, 2. True, 3. False, 4. True, 5. True, 6. True, 7. False, 8. True, 9. False, 10. False, 11. False, 12. True, 13. True, 14. True, 15. False, 16. True, 17. False, 18. True, 19. True, 20. True, 21. True, 22. False, 23. True, 24. True, 25. True, 26. False, 27. False, 28. True. Match the Following: Sr. No. Column A Column B 1 Cash and Bank Balance (a) Non Quick asset 2 Creditors (b) Non Quick Liability 3 Closing stock (c) Quick Asset 4 Goodwill (d) Quick Liability 5 Furniture (e) Intangible fixed Asset 6 Bank Overdraft (f) Borrowed Funds 7 Debentures (g) Tangible fixed Asset (h) Owned Funds Ans: 1. (c), 2. (d), 3. (a), 4. (e), 5. (g), 6. (b), 7. (f). UNSOLVED SUMS 1. The following is the balance sheet of R Ltd. as on Liabilities ` Assets ` 1,00,000 Equity Shares of ` 10 each 10,00,000 Machinery 8,00,000 General Reserve 4,00,000 Factory Shed 3,14,580 Profit & Loss 2,44,580 Vehicles 2,00,000 Bank Overdraft 4,50,000 Furniture 50,000 Creditors 5,00,000 Stock 4,00,000 Debtors 7,50,000 Bank Balance 60,000 Preliminary Expenses 20,000 25,94,580 25,94,580 Convert the above balance sheet in vertical form. 2. The following has been extracted from the books of Slim Traders for the year ended : Income Statement Particulars ` Sales (20% on Cash) 5,00,000 Less: Cost of Goods Sold 3,75,000

68 Gross Profit 1,25,000 Less: Operating Expenses 75,000 Net Profit before Tax 50,000 Less: 50% Tax 25,000 Net Profit after Tax 25,000 Balance Sheet of ABC Ltd. as on Liabilities ` Assets ` 62,500 Equity Shares of ` 10 each 6,25,000 Fixed Assets 6,25,000 Net Profit after Tax 25,000 Stock 1,25,000 Long-term Loans 1,25,000 Debtors 1,00,000 Creditors 75,000 8,50,000 8,50,000 Prepare Balance Sheet and Income Statement in a vertical form. 3. From the following, prepare a set of final accounts in vertical form for the year ended 31st December, Trading and Profit & Loss A/c Particulars ` Particulars ` To Opening Stock 1,50,000 By Sales 15,00,000 To Purchases 12,90,000 By Closing Stock 1,50,000 To Gross Profit 2,10,000 16,50,000 16,50,000 To Operating Expenses * 1,50,000 By Gross Profit 2,10,000 To Net Profit 60,000 2,10,000 2,10,000 Balance Sheet of Surya Ltd. as at 31st Dec Liabilities ` Assets ` Share Capital 4,40,000 Fixed Assets 6,00,000 Net Profit 60,000 Current Assets: Loans 3,50,000 Stock 1,50,000 Creditors 30,000 Debtors 1,00,000 Outstanding Liability 1,20,000 Cash 75,000 Short-term Investments 75,000 10,00,000 10,00, From the following, prepare common size final accounts in vertical form for the year ended 31st December, Profit & Loss A/c Particulars 2009 Particulars 2009 To Opening Stock 76,250 By Gross Sales To Purchases 3,15,250 Cash Sales 1,00,000 To Freight & Carriage Outward 7,000 Credit Sales 4,00,000 To Staff Salaries 27,700 By Net Sales 5,00,000 To General Reserve 4,900 By Closing Stock 98,500 To Income Tax 4,400 By Profit on Sale of Shares 9,150 To Loss on Sale of Bonds 48,900 To Depreciation on Machinery 10,950

69 To Salesmen s Travelling Expenses 3,350 To Directors Fees 8,900 To Sales Salaries 15,300 To Net Profit 84,750 6,07,650 6,07,650 Balance Sheet Liabilities 2009 Assets ,000 Equity Share Capital 3,00,000 Building 3,00,000 10% Debentures 2,00,000 Goodwill 2,00,000 Capital Redemption Reserve 80,000 Machinery 1,30,000 Profit & Loss A/c 1,50,000 Cash & Bank 90,000 Creditors 1,50,000 Debtors 1,00,000 Bank Overdraft 50,000 Stock 1,00,000 Preliminary Expenses 10,000 9,30,000 9,30,000 Convert both in a vertical form. 5. The following trial balance is extracted form the books of A Ltd. for the year ended 31st December, 2003: Debit Balances ` Credit Balances ` Debtors 47,000 Sales 2,30,000 Office Expenses 7,300 Return Outwards 3,500 Opening Stock 30,000 Commission Received 3,100 Motor Car 26,350 Rent Received 1,200 Land 14,500 Dividend Received 5,700 Equipment 17,400 Loan from Bank 29,000 Bank Balance 29,600 Capital 1,50,000 Bad Debts 3,000 Interest Received 4,900 Sales Expenses 2,160 Creditors 17,190 Insurance 9,900 Fixed Deposit 30,000 Return Inwards 5,000 Bank Overdraft 4,960 Carriage Outwards 2,550 Building Repairs 8,690 Loss on Sale of Assets 10,754 Purchases 1,83,000 Stationery Expenses 1,000 Electricity Charges 4,900 Machinery 21,700 Cash Balance 42,700 Rent Paid 6,746 Wages Paid 4,400 Damages Paid 900 Total 4,79,550 Total 4,79,550 Prepare Income statement for the year ended 31st December, 2003 and a balance sheet as on that date in a vertical form. 6. Following is the summarized balance sheet of M/s X Ltd. as on 31st March, 2002 and 2003.

70 Particulars Liabilities Share Capital 8,00,000 7,00,000 Reserves 2,00,000 1,00,000 Profit & Loss A/c 1,58,760 82,440 Bank Overdraft 2,38,040 Sundry Creditors 1,58,000 82,270 Bills Payable 1,35,120 23,050 Provision for Tax 1,60,000 1,00,000 18,49,920 10,87,760 Assets Buildings 5,94,000 4,68,500 Machinery 4,51,800 2,32,400 Stock 4,44,160 1,46,720 Debtors 3,49,960 1,94,740 Cash 10,000 5,400 Goodwill 40,000 18,49,920 10,87,760 From the above information, prepare: (i) Comparative Statements and (ii) Trend Analysis. 7. From the following Income Statement of XYZ Ltd., prepare: (i) Comparative Statements and (ii) Trend Analysis. Particulars Particulars To Opening Stock 44,000 40,000 By Sales 1,90,000 2,00,000 To Purchases 84,000 72,000 By Closing Stock 46,000 44,000 To Wages 40,000 36,000 By Interest Received 20,000 To Factory Expenses 32,000 28,000 To Factory Rent 8,000 6,000 To Management Expenses 2,000 2,000 To Selling Expenses 6,000 10,000 To Interest 6,000 8,000 To Income Tax 22,000 24,000 To Loss on Sale of Bonds 2,000 2,000 To Net Profit 10,000 16,000 2,56,000 2,44,000 2,56,000 2,44, Following is the Profit & Loss A/c of A Ltd. for the year Prepare a common size Income Statement. Particulars ` Particulars ` To Opening Stock 40,200 By Sales 19,40,000 To Purchases 16,50,200 Less: Returns 4,800 To Freight & Carriage Inward 33,220 By Net Sales 19,35,200 To Wages 32,272 By Closing Stock 24,100 To Gross Profit c/d 2,03,408 19,59,300 19,59,300 To Staff Salaries 92,500 By Gross Profit c/d 2,03,408

71 To Sales Salaries 15,000 By Profit on Sale of Plant 2,000 To Depreciation on Furniture 2,560 To Reserve for Doubtful Debts 16,050 To Salesmen s Travelling Expenses 2,220 To Audit Fees 17,465 To Penalty for the Breach of Contract 3,250 To Depreciation on Machinery 3,916 To Transfer to General Reserve 5,705 To Income Tax 13,000 To Net Profit 33,742 2,05,408 2,05, From the following information, you are required to prepare a common size Balance Sheet of A Ltd. Balance Sheet as on Liabilities ` Assets ` Equity Share Capital 1,25,000 Land & Building 2,50,000 10% Preference Share Capital 50,000 Plant & Machinery 4,00,000 General Reserve 2,00,000 Furniture 1,85,000 Profit & Loss A/c 25,000 Stock 40,000 14% Debentures 5,00,000 Debtors 2,00,000 Creditors 1,50,000 Bills Receivable 50,000 Bank Overdraft 75,000 Bank 35,500 Outstanding Expenses 20,000 Cash 15,000 Bills Payable 50,000 Preliminary Expenses 19,500 11,95,000 11,95, Complete the following trend statement of M/s J Industries Ltd. Particulars Amount in lakhs Percentage Sales 10,000? 12,000 13, ? 130 Less: Cost of Sales?? 8,850?? 109?? Gross Profit 2,500?? 3,475?? 126? Administrative Expenses?? 1,140?? 117?? Sales Expenses 225?? 450? 133?? Total Operating Expenses 1,025? 1,515 1,737???? Net Profit before Tax??? 1,738? 108?? Income Tax? 636??? 108? 118 Net Profit after Tax 885? 981? 100??? 11. Complete the following trend statement of M/s R Industries Ltd. Particulars Amount in lakhs Percentage Net Sales , ?? Cost of Goods Sold 400??? 125? Gross Profit 200???? 200 Operating Expenses 100? 200? 120? Operating Net Profit? 180????

72 Non-operating Income 40??? Non-operating Expenses??? Net Profit before Tax 120??? Income Tax 40????? Net Profit after Tax ??? 12. Complete the following Trend Statement. Particulars ` % ` % ` % ` % Fixed Assets???????? ( ) 15% on Original Cost?? 1,875? 2,025??? Written Down Value 8,500????? 12,750? Current Assets???????? ( ) Current Liabilities???????? Working Capital 1,500? 2,000? 2,400??? Capital Employed???????? Share Capital????? 110? 140 Reserves 1,500?? 120???? Net Worth???????? Debts (20% on Capital Employed)???????? Capital Employed???????? Current Assets and Current Liabilities are in the ratio of 3 : 2. In Year 2006, current assets and current liabilities are double of the year The financial position of a company is: Particulars 2005 (`) 2006 (`) Liabilities Equity Share Capital 2,00,000 2,50,000 10% Preference Share Capital 2,00,000 1,50,000 Reserve Fund 80,000 1,00,000 Profit and Loss Account 1,00,000 1,50,000 12% Debentures 2,00,000 3,00,000 Creditors 1,00,000 1,20,000 Bank Overdraft 50,000 20,000 Assets Building 3,00,000 3,20,000 Machinery 1,50,000 1,80,000 Furniture 40,000 35,000 Investment 1,00,000 1,50,000 Stock 1,50,000 2,00,000 Debtors 1,00,000 1,20,000 Bank Balance 90,000 85,000 From the above information of Santhan Ltd. as at 31st March, 2005 and 2006, you are required to comment with the help of comparative statement, after rearranging in suitable form for analysis. (T.Y. B.Com., March 2007) 14. Balance Sheets of Star Ltd. for the year ended 31st December, 2006 and 31st December, 2007 are as follows: Liabilities 31st Dec st Dec. 07 Assets 31st Dec st Dec. 07

73 ` ` ` ` Equity Share Capital 8,00,000 8,00,000 Building 6,00,000 5,40,000 10% Preference Share Capital 6,00,000 6,00,000 Land 2,00,000 2,00,000 General Reserves 4,00,000 4,90,000 Plant 6,00,000 5,40,000 15% Debentures 2,00,000 3,00,000 Furniture 2,00,000 2,80,000 Creditors 3,00,000 4,00,000 Stock 4,00,000 6,00,000 Bills Payable 1,00,000 1,50,000 Debtors 4,00,000 6,00,000 Tax Payable 2,00,000 3,00,000 Cash 2,00,000 2,80,000 26,00,000 30,40,000 26,00,000 30,40,000 Prepare Comparative Balance Sheet in vertical form and offer your comments in brief on fixed Assets. (T.Y. B.Com., March 2008) 15. A and B carrying on partnership business. Their position as on 31st March 2005, 2004 and 2003 is as follows: (T.Y. B.Com., May 2006) (i) Balance Sheets as at 31st March (` in Lakhs) Particulars Assets Fixed Assets (at Cost less Depreciation) Investment Stock-in-trade Accounts Receivable Loans & Advances Cash & Bank Balances Liabilities Partners Capital Accounts Partner s Current Accounts Bank Loans Sundry Creditors (ii) Summarized Income Statements for the year ended 31st March: (` in Lakhs) Particulars Net Sales Less: Cost of Sales Gross Margin Less: Operating Expenses Net Profit before Tax Prepare Trend Analysis Statement taking earliest year as the base. Writing Balance Sheet in vertical form suitable for analysis in Trend Statement is necessary. 16. The following are the Balance sheets of Hayat Ltd. for the year ending 31st March, 2004 and Liabilities (`) (`) Assets (`) (`) Equity Share Capital 4,00,000 4,00,000 Fixed Assets Less Depreciation 4,80,000 9,20,000 Preference Share Capital 2,00,000 2,00,000 Stock 80,000 40,000

74 Reserves 40,000 60,000 Debtors 2,00,000 1,50,000 Profit and Loss Account 30,000 40,000 Bills Receivable 40,000 60,000 Bank Overdraft 1,00,000 4,60,000 Prepaid Expenses 20,000 24,000 Creditors 80,000 1,00,000 Cash at Bank 1,00,000 1,66,000 Provision for Taxation 40,000 50,000 Proposed Dividend 30,000 50,000 9,20,000 13,60,000 9,20,000 13,60,000 From the above, prepare Vertical Balance Sheet suitable for analysis and do Horizontal comparison showing absolute increase/decrease and percentage. (T.Y. B.Com., Oct. 2006) 17. From the following information of A Ltd. on , you are required to prepare vertical Income Statement and Balance Sheet. Particulars Amount (` Lakhs) Particulars Amount (` Lakhs) Stock as on Share Capital 198 Raw Material 10 Sales 1760 Work-in-progress 10 Interest 520 Finished Goods 8 28 Creditors 06 Purchases 800 General Reserve 100 Cash in Hand 172 Electricity 35 Salaries 157 Wages 200 Freight Inwards 65 Selling Expenses 50 Preliminary Expenses 50 Rent 157 Debtors 80 Fixed Assets 790 2,584 2,584 Additional Information: (a) Bad Debts of ` 2,00,000, Provision for doubtful debts is to be 10%. (b) Fixed Assets are subject to 15% p.a. (c) Closing stock of Raw Materials was ` 20 lakhs, Work-in-progress was ` 10 lakhs and Finished Goods of ` 10 lakhs.

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