Techniques of Financial Statement Analysis

Techniques of Financial Statement Analysis: Introduction, Objectives of financial statement analysis, various techniques of analysis viz Common Size Statements, Comparative Statements, Trend Analysis, Ratio Analysis, Funds Flow Statement & Cash Flow Statement

1. 201_FinancialManagement
UNIT2:
TechniquesofFinancialStatement
Analysis:Introduction,Objectives
offinancialstatementanalysis,
varioustechniquesofanalysisviz
Common Size Statements,
Comparative Statements,Trend
Analysis,RatioAnalysis,FundsFlow
Statement&CashFlowStatement

2. Financialstatement analysisinvolvesgainingan
understandingofanorganization'sfinancialsituationby
reviewingitsfinancialreports.Theresultscanbeusedto
makeinvestmentandlendingdecisions.Thisreview
involvesidentifyingthefollowingitemsforacompany's
financialstatementsoveraseriesofreportingperiods:
Trends.Createtrendlinesforkeyitemsinthefinancial
statementsovermultipletimeperiods,toseehow
thecompanyisperforming.Typicaltrendlinesare
forrevenue,thegrossmargin,netprofits,cash,
accountsreceivable,anddebt.
Techniques of Financial Statement
Analysis: Introduction

3. Proportionanalysis.Anarrayofratiosareavailablefordiscerning
therelationshipbetweenthesizeofvariousaccountsinthe
financialstatements.Forexample,onecancalculatea
company'squickratiotoestimateitsabilitytopayitsimmediate
liabilities,oritsdebttoequityratiotoseeifithastakenontoo
muchdebt.Theseanalysesarefrequentlybetweentherevenues
andexpenseslistedontheincomestatementandtheassets,
liabilities,andequityaccountslistedonthebalancesheet.
Financialstatementanalysisisanexceptionallypowerfultoolfora
varietyofusersoffinancialstatements,eachhavingdifferent
objectivesinlearningaboutthefinancialcircumstancesofthe
entity.

4. (i)KnowingProfitabilityofBusiness:Financialstatementsarerequiredtoascertain
whethertheenterpriseisearningadequateprofitandtoknowwhethertheprofits
haveincreasedordecreasedascomparedtothepreviousyear(s),sothat
correctivestepscanbetakenwellinadvance.
(ii)KnowingtheSolvencyoftheBusiness:Financialstatementshelptoanalysethe
positionofthebusinessasregardstothecapacityoftheentitytorepayitsshortas
wellaslongtermliabilities.
(iii)JudgingtheGrowthoftheBusiness:Throughcomparisonofdataoftwoormore
yearsofbusinessentity,wecandrawameaningfulconclusionasregardto
growthofthebusiness.Forexample,increaseinsaleswithsimultaneousincreasein
theprofitsofthebusiness,indicatesahealthysignforthegrowthofthebusiness.
(iv)JudgingFinancialStrengthofBusiness:Financialstatementshelptheentityin
determiningsolvencyofthebusinessandhelptoanswervariousaspectsviz.,
whetheritiscapabletopurchaseassetsfromitsownresourcesand/orwhether
theentitycanrepayitsoutsideliabilitiesasandwhentheybecomedue.
Objectives of financial statement analysis

5. (v)MakingComparisonandSelectionofAppropriatePolicy:Tomakea
comparativestudyoftheprofitabilityoftheentitywithotherentities
engaged inthesametrade,financialstatementshelpthe
management toadoptsoundbusinesspolicybymakingintrafirm
comparison.
(vi)ForecastingandPreparingBudgets:Financialstatementprovides
informationregardingtheweak-spotsofthebusinesssothatthe
management cantakecorrectivemeasurestoremovetheseshort
comings.Financialstatementshelpthemanagement tomakeforecast
andpreparebudgets.
(vii)Communicating withDifferentParties:Financialstatementsare
preparedbytheentitiestocommunicatewithdifferentpartiesabout
theirfinancialposition.Hence,itcanbeconcludedthatunderstanding
thebasicfinancialstatementsisanecessarysteptowardsthe
successfulmanagement ofacommercialenterprise.
Objectives of financial statement analysis

6. (i)ManipulationorWindowDressing:Somebusinessenterprisesresorttomanipulate
theinformationcontainedinthefinancialstatementssoastocoveruptheirbad
orweakfinancialposition.Thus,theanalysisbasedonsuchfinancialstatements
maybemisleadingduetowindowdressing.
(ii)UseofDiverseProcedures:Theremaybemorethanonewayoftreatinga
particularitemandwhentwodifferentbusinessenterprisesadoptdifferent
accountingpolicies,itbecomesverydifficulttomakeacomparisonbetween
suchenterprises.Forexample,depreciationcanbechargedunderstraightline
methodorwrittendownvaluemethod.However,resultsprovidedbycomparing
thefinancialstatementsofsuchbusinessenterpriseswouldbemisleading.
(iii)QualitativeAspectIgnored:Thefinancialstatementsincorporatetheinformation
whichcanbeexpressedinmonetaryterms.Thus,theyfailtoassimilatethe
transactionswhichcannotbeconvertedintomonetaryterms.Forexample,a
conflictbetweenthemarketingmanagerandsalesmanagercannotbe
recordedinthebooksofaccountsduetoitsnon-monetarynature,butitwill
certainlyaffectthefunctioningoftheactivitiesadverselyandconsequently,the
profitsmaysuffer.
Limitations of Financial Statements

7. (iv)Historical:Financialstatementsarehistoricalinnatureastheyrecordpastevents
andfacts.Duetocontinuouschangesinthedemandoftheproduct,policiesof
thefirmorgovernmentetc,analysisbasedonpastinformationdoesnotserveany
usefulpurposeandgivesonlypostmortemreport.
(v)PriceLevelChanges:Figurescontainedinfinancialstatementsdonotshowthe
effectsofchangesinthepricelevel,i.e.priceindexinoneyearmaydifferfrom
priceindexinotheryears.Asaresult,misleadingpicturemaybeobtainedby
makingacomparisonoffiguresofpastyearwithcurrentyearfigures.
(vi)Subjectivity&PersonalBias:Conclusionsdrawnfromtheanalysisoffiguresgiven
infinancialstatementsdependuponthepersonalabilityandknowledgeofan
analyst.Forexample,theterm‘Netprofit’maybeinterpretedbyananalystasnet
profitbeforetax,whileanotheranalystmaytakeitasnetprofitaftertax.
(vii)LackofRegularData/Information:Analysisoffinancialstatementsofasingle
yearhaslimiteduses.Theanalysisassumesimportanceonlywhencomparedwith
financialstatements,relatingtodifferentyearsordifferentfirm.
Limitations of Financial Statements

8. Thevariouspartiesinterestedintheanalysisoffinancialstatementsare:
(i)Investors:Shareholdersorproprietorsofthebusinessareinterestedin
thewellbeingofthebusiness.Theyliketoknowtheearningcapacity
ofthebusinessanditsprospectsoffuturegrowth.
(ii)Management:Themanagement isinterestedinthefinancialposition
andperformanceoftheenterpriseasawholeandofitsvarious
divisions.Ithelpstheminpreparingbudgetsandassessing
theperformanceofvariousdepartmentalheads.
(iii)Tradeunions:Theyareinterestedinfinancialstatements
fornegotiatingthewagesorsalariesorbonusagreementwith
themanagement.
(iv)Lenders:Lenderstothebusinesslikedebentureholders,suppliersof
loansandleaseareinterestedtoknowshorttermaswellaslongterm
solvencypositionoftheentity.
Users of Financial Statement Analysis

9. (v)Suppliersandtradecreditors:Thesuppliersandothercreditorsare
interestedtoknowaboutthesolvencyofthebusinessi.e.theabilityofthe
companytomeetthedebtsasandwhentheyfalldue.
(vi)Taxauthorities:Taxauthoritiesareinterestedinfinancialstatementsfor
determiningthetaxliability.
(vii)Researchers:Theyareinterestedinfinancialstatementsinundertaking
researchworkinbusinessaffairsandpractices.
(viii)Employees:Theyareinterestedtoknowthegrowthofprofit.Asresultof
whichtheycandemandbetterremunerationandcongenialworking
environment.
(ix)Governmentandtheiragencies:Theyneedfinancialinformationto
regulatetheactivitiesoftheenterprises/industriesanddeterminetaxation
policy.Theysuggestmeasurestoformulatepoliciesandandregulations.
(x)Stockexchange:Thestockexchangememberstakeinterestinfinancial
statementsforthepurposeofanalysisbecausetheyprovideuseful
financialinformationaboutcompanies.
Users of Financial Statement Analysis

10. a)Comparative Statement or Comparative Financial
and Operating Statements.
b)Common Size Statements.
c)Trend Ratios or Trend Analysis.
d)Average Analysis.
e)Statement of Changes in Working Capital.
f)Fund Flow Analysis.
g)Cash Flow Analysis.
h)Ratio Analysis.
i)Cost Volume Profit Analysis
TECHNIQUES AND TOOLS OF
FINANCIAL STATEMENT ANALYSIS

11. Whilefinancialstatementanalysisisanexcellenttool,there
areseveralissuestobeawareofthatcaninterferewiththe
interpretationoftheanalysisresults.Theseissuesare:
Comparabilitybetweenperiods.Thecompanypreparingthe
financialstatementsmayhavechangedtheaccountsin
whichitstoresfinancialinformation,sothatresultsmay
differfromperiodtoperiod.Forexample,anexpensemay
appearinthecostofgoodssoldinoneperiod,andin
administrativeexpensesinanotherperiod.
Problems with Financial Statement Analysis

12. Comparabilitybetween companies.Ananalystfrequently
comparesthefinancialratiosofdifferentcompaniesinorderto
seehowtheymatchupagainsteachother.However,each
companymayaggregatefinancialinformationdifferently,so
thattheresultsoftheirratiosarenotreallycomparable.Thiscan
leadananalysttodrawincorrectconclusionsabouttheresultsof
acompanyincomparisontoitscompetitors.
Operationalinformation.Financialanalysisonlyreviewsa
company'sfinancialinformation,notitsoperationalinformation,
soyoucannotseeavarietyofkeyindicatorsoffuture
performance,suchasthesizeoftheorderbacklog,orchanges
inwarrantyclaims.Thus,financialanalysisonlypresentspartof
thetotalpicture.
Problems with Financial Statement Analysis

13. Whenfinancialstatementsfiguresfortwoormoreyearsareplaced
side-by-sidetofacilitatecomparison,thesearecalled
'ComparativeFinancialStatements.'
Suchstatementsnotonlyshowtheabsolutefiguresofvariousyears
butalsoprovideforcolumnstoindicatetheincreaseor
decreaseinthesefiguresfromoneyeartoanother.
'Inaddition,thesestatementsmayalsoshowthechangefromone
yeartoanotherinpercentageform.
Becauseoftheutmostusefulnessofthecomparativestatements,
theCompaniesAct,1956hasprovidedthattheProfit&Loss
AccountandBalanceSheetofaCompany mustshowthe
figuresofthepreviousyearalsowiththefiguresofthecurrent
year.
COMPARATIVE STATEMENT

14. ToMaketheDataSimplerandMoreUnderstandable:Whendata
foranumberofyearsareputside-by-sideinacomparative
'formitbecomeseasiertounderstandthemandtheconclusions
regardingtheprofitabilityandfinancialpositionoftheconcern
canbedrawnveryeasily.
ToIndicatetheTrend:Thishelpsinindicatingthetrendofchange
byputtingthefiguresofproduction,sales,expenses,profitsetc.
fornumberofyear’sside-by-side.
ToIndicatetheStrongPointsandWeakPointsoftheConcern:It
mayalsoindicatethestrongpointsandweakpointsofthefirm.
Management cantheninvestigateandfindoutthereasonsfor
theweakareasandcantakecorrectivemeasures.
Purpose or Importance of Comparative
Statements

15. ToComparetheFirm'sPerformancewiththeAveragePerformanceofthe
Industry:Comparativefinancialstatementshelpabusinessunitto
compareits'performancewiththeaverageperformanceofthe
industry.
ToHelpinForecasting:Comparativestudyofthechangesinthekey
figuresoveraperiodhelpsthemanagement inforecastingthe
profitabilityandfinancialsoundnessofthebusiness.
Purpose or Importance of Comparative Statements
LimitationsofComparativeStatements
•Thesestatementsdonotpresentthechangeinvariousitemsin
relationtototalassets,totalliabilitiesornetsales.
•Thesestatementsarenotusefulincomparingfinancialstatements
oftwoormorebusinessbecausethereisnocommonbase

16. Inpracticallifeanyfinancialstatementcanbe
preparedascomparativestatementbutsuch
analysisismorepopularinthecaseofbalancesheet
andincomestatements.Thusmostimportant
comparativestatementsare:
Comparative Balance Sheet
Comparative profit &Loss Account
Constructing Comparative
Statements

17. TheComparativeBalanceSheetasontwoormoredifferentdates
canbepreparedtoincreaseordecreaseinvariousassets,
liabilitiesandcapital.SuchaComparativeSheetisveryusefulin
studyingthetrendsinabusinessenterprise.
MethodofPreparingComparativeBalanceSheet:Theformof
comparativebalancesheetconsistsoffourcolumns.Inthefirst
columnthedataforpreviousyearisshownandinthesecond
columnthedataforcurrentyearisshown.Inthethirdcolumn
theincreasesordecreasesinabsolutedataisshownintermsof
rupeeamounts.Fourthcolumnshowsthepercentageof
increaseordecreaseinabsolutedata.
Thepreparationofcomparativebalancesheethasbeen
explainedinthefollowingexample:•
Comparative Balance Sheet:

18. Liabilities2017 2018 Assets 2017 2018
Current 2,00,0004,00,000Fixed Assets 12,00,00018,00,000
Liabilities Less: Accumulated
Reserves 3,00,0002,00,000Depreciation 2,00,0003,00,000
12% Loan 5,00,0008,00,000Current Assets10,00,00015,00,000
Share capital5,00,00010,00,000 5,00,0009,00,000
15,00,00024,00,000 15,00,00024,00,000
Illustration1:From,thefollowingBalanceSheetsofBhatiChemicalsLtd.as
on31stDecember,2017and31stDecember,2018prepareaComparative
BalanceSheetandcommentuponthechanges:
BALANCE SHEETS
As on 31st December, 2017 and 2018

19. Particulars 2017 2018 Increase or decrease
over2017
% Increase or decrease
over2017
Fixed Assets 12,00,000 18,00,000 +6,00,000 + 50
Less: Accumulated
Depreciation
2,00,000 3,00,000 +1,00,000 +50
Net Fixed assets (A) 10,00,000 15,00,000 +5,00,000 +50
Working capital :-
Current assets (1) 5,00,000 9,00,000 +4,00,000 +80
Current Liabilities (2) 2,00,000 4,00,000 +2,00,000 +100
Working capital ((B) (1-2) 3,00,000 5,00,000 +2,00,000 +66.67
Capital Employed (A+B) 13,00,000 20,00,000 +7,00,000 +53.85
Less:-12% Loan 5,00,000 8,00,000 +3,00,000 +60
Shareholder’s fund 8,00,000 12,00,000 +4,00,000 +50
Represented By:
Share capital 5,00,000 10,00,000 +5,00,000 +100
+ Reserves 10,00,000 2,00,000 -1,00,000 -33.33
Shareholder’s Fund 8,00,000 12,00,000 +4,00,000 +50

20. Comments: The analysis of the above Comparative Balance Sheets
gives the followingconclusions:
TotalfixedassetshaveincreasedbyRs.6,00,000,i.e.50%increase.
PurchaseoffixedassetswasfinancedpartlybytheissueofsharesforRs.5,
00,000andpartlybyincreaseinloan.
ShareCapitalhasincreasedbyRs.5,00,000,i.e.100%increase.Ithas
strengthenedthefinancialpositionofthecompany.
ReserveshavedecreasedbyRs.1,00,000i.e.33.33%decrease,whichreflects
lossinthebusinessduringthecurrentyear.
CurrentliabilitieshaveincreasedbyRs.2,00,000,i.e.100%increase,butcurrent
assetshavealsoincreasedbyRs.4,00,000,i.e.,80%increase.Ithasresultedin
increaseintheworkingcapitalofthefirmbyRs.2,00,000whichhasbeen
financedbyincreaseinloan.
12%loanhasincreasedbyRs.3,00,000(60%).OutofitRs.1,00,000hasbeen
usedforpurchaseoffixedassetsandthebalanceRs.2,00,000hasbeenusedas
workingcapital.

21. MethodofPreparingComparativeProfit&Lossaccount:The
formofcomparativeprofitandlossaccount(income
statement)alsoconsistsoffourcolumns.Inthefirstcolumn
thedataforpreviousyearisshownandinthesecond
columnthedataforcurrentyearisshown.Inthethird
columntheincreaseordecreaseinabsolutedatais
shownintermsofrupeeamounts.Fourthcolumnshows
theincreaseordecreaseinvariousitemsintheformof
percentages.ThepreparationofComparativeIncome
Statementhasbeenexplainedinthefollowingillustrations:
Method of Preparing Comparative Profit
&Loss account

22. Illustration2:FromthefollowingProfit&LossAccountof
HindustanTradingCo.fortheyearending31stDec.,2015and
2016youarerequiredtoprepareacomparativeProfit&Loss
Accountandgiveyourcomments.
Particulars 2015 2016 Particulars2015 2016
To Cost of goods sold 420,0005,60,000By sales 6,0 0,000 7,20,000
To administrative50,000 66,000 By Dividend30,000 90,000
expenses Received
To selling and25,000 23,000
Distribution expenses
To Intereston12,000 12,000
Debentures
To loss on sale of plant6,000 4,000
To provision for income 40,000 48,000
tax
To net Profit 77,000 97,000
6,30,0008,10,000 6,30,000 8,10,000

23. Solution: Comparative Profit & Loss account
For the year ended 31st Dec 2015 and 2016
Particulars 2015(Rs.) 2016 (Rs.)
Absolute
Increase/
Decrease(Rs.)
Percentage
Increase/
Decrease (%)
Sales 6,00,000 7,20,000 +120,000 +20
Less: Cost of Goods Sold4,20,000 5,60,000 +140,000 +33.33
Gross Profit(A) 1,80,000 1,60,000 -20,000 -11.11
Less :Operating expenses
Administrative expenses50,000 66,000 +16,000 +32
Selling & distribution expenses25,000 23,000 -2,000 -8
Total Operating expenses (B)75,000 89,000 +14,000 +18.67
Operating profit (A-B) 105,000 71,000 -34,000 -32.38

24. Add: Dividend Received 30,000 90,000 +60,000 +200
Total Income (C) 135,000 161,000 +26,000 +19.26
Less: other expenses:
Interest on debentures 12,000 12,000 - -
Loss on sale of plant 6,000 4,000 -2,000 -33.33
Total other expenses (D) 18,000 16,000 -2,000 -11.11
Income before tax (C -D) 117,000 145,000 +28,000 +23.93
Less Provision for Tax 40,000 48,000 +8,000 +12
Income After tax 77,000 97,000 +20,000 +25.97

25. Comments:TheanalysisoftheabovecomparativeProfit&LossAccount
givesthefollowinginformation:
In2016,saleshaveincreasedbyRs.1,20,000(20%),butcostofgoodssold
hasalsospurtedbyRs.1,40,000(33.33%),asaresultofwhichthegross
profithasdeclinedbyRs.20,000(11.11%).Thismeansthatthereisa
largerincreaseincostofsalesascomparedtosales.Thisshouldbea
causeofconcernandthemanagement shouldthoroughlyinvestigate
thecausesofincreaseincostofsales.
OperatingexpenseshaveincreasedbyRs.14,000(18.67%).Administrative
expenses,includedinoperatingexpenseshavealoneincreased
'heavilyandthismustbeacauseofconcern.Sellingexpenseshave
tomedownby8%inspiteofincreaseinsales.Thisisafavorablesign.
Increaseincostofsalesandadministrativeexpenseshaveledtoafallin
operatingprofitsbyRs.34,000(32.38%).
Despitedecreaseinoperatingprofits,thetotalincomehasincreasedby
Rs.26,000(19.26%).ThisisduetoRs.60,000(200%)increaseinnon-
operatingincome(dividend).

26. Common sizestatementthatgivesonlythevertical
percentagesorratiosforfinancingdatawithout
givingrupeevalueareknownascommon size
statements.Acomparisonoftwoyearsfiguresofa
concerniseasilymadeunderthecompaniesAct.
Companiesmustshowintheirprofitandlossaccount
andbalancesheetthecorrespondingfiguresforthe
previousyear.Sometimeshoweverthefiguresdonot
signifyanythingastheheadofitemsareregrouped
andareincomparable.Foravalidcomparison,the
previousheadsshouldbestrictlycompared.
COMMON SIZE STATEMENT

27. AdvantagesofCommonSizeStatement
1.Common sizeanalysisrevealsthesourcesofcapitalandallother
sourcesoffundsandthedistributionorapplicationofthetotalfundsin
theassetofabusinessenterprise.
2.Comparisonofcommonsizestatementoveranumberofyearswill
clearlyindicatethechangingproportionofthevariouscomponents
ofasset,liabilities,costs,netsalesandprofits.
3.Comparison of common size statement of two or more enterprises in
the same industry or that of an enterprise with the industry as a whole
will assist corporate evaluation and ranking.
Limitations of Common Size Statement
1.These statements show percentage of each item to total sum but do
not show variations in the individual items from period to period.
2.Common size statement is regarded by many as useless as there is no
established standard proportion of each item to total.

28. Incommon sizestatementsindividualfigureare
convertedintopercentagetosomecommon
base.
Inbalancesheet,thetotalofassetsorliabilitiesis
assumedtobeequalto100andallthefiguresare
expressedaspercentageofthistotal.
Inprofitandlossaccount,salesfigureistakenas100
andallotherfigureareexpressedaspercentageof
sales.
Constructing Common Size Statement

29. Liabilities 2017(Rs.)2018(Rs.)Assets 2017(Rs.)2018(Rs.)
Equity share6,00,0006,00,000Land & Building8,00,0007,50,000
capital
General reserve6,80,00010,00,000Plant &3,00,0005,00,000
Machinery
10% Debenture 3,00,0003,00,000Furniture 1,00,0001,06,250
Bills Payable 84,000 1,40,000Stock 4,50,0006,25,000
Creditors 3,28,0004,50,000Sundry Debtors2,55,0004,10,000
Outstanding 8,000 10,000 Cash 95,000 1,08,750
Expenses
20,00,00025,00,000 2000,0002500,000
Illustration 3: Prepare a common size balance sheet from the following Balance
sheet ofAroma Industries and interpret the same.
Balance Sheet
As on 31
st
December 2017 and 2018

30. Particulars 31
st
December 2007 31
st
December 2008
Amount (Rs) % Amount (Rs) %
Fixed Assets:
Land & Building 8,00,000 40 7,50,000 30
Plant & Machinery 3,00,000 15 5,00,000 20
Furniture 1,00,000 5 1,06,250 4.25
Total Fixed Assets (A) 12,00,000 60 13,56,250 54.25
Current Assets
Stock 4,50,000 22.50 6,25,000 25
Sundry Debtors 2,55,000 12.75 4,10,000 16.40
Cash 95,000 4.75 1,08,750 4.35
Total Current Assets (B) 8,00,000 40 11,43,750 45.75
Total Assets (A+B) 20,00,000 100 25,00,000 100
Liabilities and Capital
Owner’s Equity
Equity share capital 6,00,000 30 6,00,000 24
General reserve 6,80,000 34 10,00,000 40
Total Owners Equity( C) 12,80,000 64 16,00,000 64
Long Term Borrowings
10% Debenture 3,00,000 15 3,00,000 12
Current Liabilities
Bills payable 84,000 4.20 1,40,000 5.60
Creditors 3,28,000 16.40 4,50,000 18
Outstanding expenses 8,000 .40 10,000 .40
Total Current Liabilities(E) 4,20,000 21 6,00,000 24
Total liabilities and Capital(C+D+E) 20,00,000 100 25,00,000 100

31. Working Notes: All the % will be calculated on basis of total of
Balance sheet. Hence in 2017% will be based on Rs. 20,
00,000 and in 2018 % will be based on 25, 00,000
Interpretation:
in 2017, current assets were 40% of Total assets. In 2018, these
have increasedto 45.75%.
Current liabilities have also increased from 21% to 24%. Because
of greater increase in current assets than in current liabilities,
the position of working capital has improved.
The percentage of fixed assets has come down from 60% to
54.25% .owners equity has remained constant.

32. Illustration 4: Prepare a common size Income Statement
from the following Income statementof M/S Bhati Traders
and interpret the same.
Particulars 31
st
Dec 2017 31
st
Dec 2018
Gross Sales 10,30,000 12,42,000
Less: Sales returns 30,000 42,000
Net Sales 10,00,000 12,00,000
Less: Cost of goods sold 6,00,000 6,60,000
Gross profit 4,00,000 5,40,000
Less: Operating expenses
Administrative expenses 85,000 1,14,000
Selling expenses 2,00,000 1,93,200
Total operating expenses 2,85,000 3,07,200
Income from operations 1,15,000 2,32,800
Add: Non-operating Income 24,000 34,200
Total Income 1,39,000 2,67,000
Less: Non-operating expenses 36,000 53,280
Net Profit 1,03,000 2,13,720

33. COMMON SIZE INCOME STATEMENT
Particulars 31
st
December 2017 31
st
December2018
Amount (Rs) % Amount (Rs) %
Gross Sales 10,30,000 103 12,42,000 103.50
Less: Sales returns 30,000 3 42,000 3.50
Net Sales 10,00,000 100 12,00,000 100
Less: Cost of goods sold6,00,000 60 ,60,000 55
Gross profit 4,00,000 40 5,40,000 45
Less: Operating expenses
Administrative expenses85,000 8.50 1,14,000 9.50
Selling expenses 2,00,000 20 1,93,200 16.10
Total operating Expenses2,85,000 28.50 3,07,200 25.60
Income from operations1,15,000 11.50 2,32,800 19.40
Add: Non-operating Income24,000 2.40 34,200 2.85
Total Income 1,39,000 13.90 2,67,000 22.25
Less: Non-operating expenses36,000 3.60 53,280 4.44
Net Profit 1,03,000 10.30 2,13,720 17.81
Working Notes: All the %
will be calculated on the
basis of net sales
Interpretation:
i) Cost of goods sold has
reduced by 5% in 2018. This
is due to reduction in cost
of raw material. As a result
of reduction the gross
profit has increased from
40% to 45%.
•Operating expenses have
been decreased by 2.9%
due to this reduction and
reduction in cost if goods
sold; income from
operation has increased
from 11.50% to 19.40%

34. FIVE MARKS QUESTIONS
1)Define Financial management and its objectives?
2)Financial management means maximization of economic welfare of its
shareholders.
3)Compare and contrast profit maximizationand wealth maximization?
4)Critically examined wealth maximization is superior to profit maximisation.
5)What is financial management?
6)Define financial management. Explain its significance.
7)Explain the various areas of financial management.
8)Analyse the nature of financial management.
9)Describe the evolution of financial management.
10)Financial management –is it a science or an art.
11)What are key areas of financial management.
12)Explain the role of financial manager in the current scenario.