4. CHAPTER 3 : Common Size Statements - Assignment # 3 with Answers

Recapitulation:

 Chapter 1..
* Heads and Contents of Balance Sheet
* Heads and Content of Statement of Profit and Loss

Chapter 2
*Meaning, Objectives, Importance,Limitations and
 Tools of Financial Statement Analysis

Chapter 3
*Tools of Financial Statement Analysis -
1.  Comparative Statements

There are Tasks given to you for the day.

Task 1.
Long term borrowings are concerned about the ability of a firm to discharge its obligations to pay interest and repay the principal amount. True or false? give reason

i) Bank overdraft in the Balance Sheet of a company is shown under _____.
ii) Common size analysis is also known as ______analysis.

Task 2.
Read the notes
The Second Tool of Financial Statement Analysis is:
Common size statements
These are the statements which indicate the relationship of different items of a financial statement with the common item by expressing each item as a percentage of that common items, for example, as percentage of Net Revenue from Operations forSstatement of Profit and Loss and
Total assets/ Total Liabilities for Balance Sheet.
The
following procedure may be adopted for preparing the common size statements:

Step 1: list out absolute figures in rupees at two points of time , say year 1, and year 2 ( column II & III)

Step 2: choose a common base (as 100). Net revenue from operations is taken as base (100) in case of statement of profit and loss and total Assets or liabilities (100) in case of balance sheet .
Step 3: for all items of column II and III, work out the percentage of that total. Column IV and V shows these percentages.

Particulars      year 1      year 2       percentage in year 1     percentage in year 2   

      I                     II             III                        IV                                    V           

This Analysis is also known as 'Vertical analysis'.

Uses of common size statements:
Common size statements are useful both , in intra- firm comparisons over different years and also in making inter -firm comparison for the same year or for several years.

1. if a common size statement is prepared for a single firm for successive periods, it shows the change of the respective percentages over a period of time.
2. inter firm comparison or comparison of company's position with the related industry as a whole is possible with the help of common size statements.

Assignment # 3

Ques. 1

Prepare a common size profit and loss statement
                                                                                  2019 -20       2018 -19
Revenue from operations                                           500000        600000
cost of materials consumed                                        380000        420000
Other expenses                                                           220000       240000
Tax Rate                                                                        40%             40%

Ques.2

Prepare a common size balance sheet.

                                                                      2020                         2019
I. Equity and Liabilities
1. Shareholder's Funds                             1200000                    1000000
Share capital

 Non current liabilities                                  600000                     600000
Current liabilities                                          700000                     400000
Total                                                           2500000                   2000000
II.Assets
Non current assets                                    1300000                    1200000
 Current assets                                          1200000                      800000
Total                                                           2500000                   2000000

Task 3.

Check the Answers to Assignment # 3, make corrections wherever necessary.

Ans 1.

                         Common size statement of profit and loss

                         for the year ended 31st march 2019 and 20

particulars                                             absolute amount         percentage of RFO
                                                          2018-19          2019-20      2018-19       2019-20
I. revenue from operations             600000            500000        100%           100%
II.less expenses 
cost of materials consumed            420000            380000          70%             76%
other expenses                                 240000            220000          40%             44%
total expenses                                  660000            600000          110%           120%
III. profit before tax (I - II)           (60000)           (100000)        (10)%           (20)%
IV. less tax                                            0                       0                 0%               0%
V. profit after tax(III- IV)            (60000)           (100000)        (10)%           (20)%

Ans. 2

                                        Common size Balance Sheet

                                        as at 31st march 2019 & 2020

Particular                          note          Absolute amounts               % of  B/S total

                                             no.       31-3-19    31-3-20            31-3-19     31-3-20

                                

I.                  Equity and Liabilities   

Shareholder's funds        1000000    1200000                50%        48%  

 Non current liabilities     600000       600000                30%        24%

Current liabilities             400000       700000                20%        28%

Total                                 2000000     2500000               100%     100%

II.            Assets

Non current assets         1200000     1300000                60%       52%

Current assets                  800000     1200000                40%       48%

Total                                2000000     2500000               100%     100%