UNIT-2

UNDERSTANDING CORPORATE FINANCIAL REPORTS AND STATEMENTS

Corporate reports
Corporate governance reports
Horizontal statement analysis
Vertical statement analysis

FORMATS OF FINANCIAL STATEMENTS

The two main financial statements, viz the Income Statement and the Balance sheet, can
either be presented in the horizontal form or the vertical form where statutory provisions are
applicable, the statement has to be prepared in accordance with such provisions.
Income Statement:
There is no legal format for the profit and loss A/C. Therefore, it can be presented in the
traditional T form, or vertically, in statement form. An example of the two formats is given as
under.
(i) Horizontal, or T form:
Manufacturing, Trading and profit and loss A/C
ending ...............

of .. for the year

Dr

Cr
Particulars

Rs.

To opening stock

Particulars
By cost of finished Goods c/d

Raw materials

xxx By closing stock

Work in progress

xxx

To purchases of raw materials

xxx

To manufacturing wages

xxx

To carriage inwards

xxx

To other Factory Expenses

xxx

Rs.
Xxxx

Raw materials

xxx

Work in progress

xxx

xxx

xxx
By sales

To opening stock of finished

xxx

xxx By closing stock of finished

goods

xxx

goods

To cost of Finished goods b/d

xxx By Gross Loss c/d

To Gross Profit c/d

xxx

xxx

xxx

xxx

To Gross Loss b/d

xxx By Gross profit b/d

xxx

To office and Admn. Expense

xxx By Miscellaneous Receipts

xxx

To Interest and financial expenses

xxx By Net Loss c/d

xxx

To provision for Income-tax

xxx

To Net Profit c/d

xxx
xxx

xxx

To net loss b/d

xxx By Balance b/d

xxx

To general reserve

xxx (from previous year)

To Dividend

xxx By Net profit b/d

To Balance c/f

xxx

xxx

xxx

xxx

(ii) Vertical Form

Income statement of for the year ending ...
Particulars

Rs.

Rs.

Sales

xxxx

Less: Sales Returns

xxx

Sales Tax/ Exise Duty

Net sales

xxx
(1)

xxxx
xxxx

Cost of Goods Sold

Materials Consumed

xxxx

Direct Labour

xxxx

Manufacturing Expenses

xxxx

Add / less Adjustment for change in stock

(2)

xxxx
xxxx

Gross Profit

(1) (2)

xxx

Less: Operating Expenses

Office and Administration Expenses
Selling and Distribution Expenses

xxx
xxx

Operating Profit

xxx
Xxxx

Add: Non-operating Income

Xxx

Less: Non-oprating Expenses (including Interest)

xxxx

Profit before Tax

xxx
xxxx

Less : Tax
Profit After Tax

xxx
xxxx

Appropriations
Transfer to reserves
Dividend declared /paid
Surplus carried to Balance sheet

xxxx
xxx
xxx
xxxx

Balance Sheet

The Companies Activities, 1956 stipulates that the Balance sheet of a joint stock
company should be prepared as per part I of schedule VI of the Activities. However, the
statement form has been emphasized upon by accountants for the purpose of analysis and
Interpretation. The permission of the Central Government is necessary for adoption of the
'statement* form.
(i) Horizontal Form
Balance sheet of .................... as on ....................
Liabilities
Share Capital
(with all paticulars of Authorized,
Issued, Subscribed capital) Called
up capital

Rs.

Assets

Rs.

xxx Fixed Assets:

1. Goodwill

xxx

2. Land & Building

xxx

xxx 3. Leasehold property

xxx

4. Plant and Machinery

xxx

5. Furniture and Fittings

xxx

Less: Calls in Arrears

xxx 6. Patents and Trademarks

xxx

Add: Forfeited Shares

xxx 7. Vehicles

xxx

Reserves and Surplus :

1. Capital Reserve
2. Capital Redemption

Investments
xxx Current Assets, loans and
Advances

reserve

xxx (A) Current Assets

3. Share premium

xxx 1. Interest accured on

4. Other premium

xxx Investments

xxx

Less: debit balance of Profit

xxx 2. Loose tools

xxx

and loss A/C (if any)

5. Profit and Loss
Appropriation A/C
6. Sinking Fund

3. Stock in trade
xxx 4. Sundry Debtors

xxx
xxx

Less: Provision for doubtful

xxx debts
5. cash in hand

xxx

6. cash in Bank
Secured Loans
Debentures

xxx

(B) Loans and Advances

xxx 7. Advances to subsidiaries

xxx

Add: Outstanding Interest

xxx 8. Bills Receivable

xxx

Loans from Banks

xxx 9. Prepaid Expenses

xxx

Unsecured Loans
Fixed Deposits
Short-term loans and advances

Miscellaneous Expenditure (to the

extent not written off or
xxx adjusted)

xxx

xxx

Current Liabilities and Provisions

1. Preliminary expenses

xxx

2. Discount on Issue of shares

xxx

and debentures
A. Current Liabilites

3. Underwriting Commssion

1. Bills Payable

xxx

2. Sudnry Creditors

xxx Profit and Loss account (Loss),

3. Income received in advance

xxx if any

4. unclaimed Dividends

xxx

5. Other Liabilities

xxx

xxx

B. Provisions
6. Provisions for Taxation

xxx

7. Proposed Dividends

xxx

8. Proposed funds & pension

xxx

fund contingent liabilities not

Provided for
xxx

xxx

(ii) Vertical Form:

Balance sheet of . as on
Particulars

Schedule No.

Current year

Previous
Year

I. Source of funds
1. Share holders funds
a. capital

xxxx

xxxx

b. Reserves and surplus

xxxx

xxxx

a. Secured Loans

xxxx

xxxx

b. Unsecured Loans

xxxx

xxxx

a. Gross Block

xxxx

xxxx

b. less Deprciation

xxxx

xxxx

c. Net block

xxxx

xxxx

d. Capital work in progress

xxxx

xxxx

xxxx

xxxx

a. Inventions

xxxx

xxxx

b. Sundry Debtors

xxxx

xxxx

c. Cash and Bank balance

xxxx

xxxx

d. other current assets

xxxx

xxxx

e. Loans and Advances

xxxx

xxxx

2. Loans funds

Total
II. Application of funds
1. Fixed Assets

2. Investments

3. Current Assets, Loans and Advances

Less : current Liabilities and Provisions

a. Current Laibilities

xxxx

xxxx

b. Provisions

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

Net Current Assets

4.

a. Miscellaneuos Expenditure to

the extent not written off or adjusted

b. Profit and Loss Account (debit)
Total

Illustration: 1 From the following information, prepare a vertical Income Statement.

Sales

2,00,000

Opening stock

10,000

Closing stock

15,000

Purchases

40,000

Operating Expenses

12,000

Rate of Tax 50%

Solution:
Income Statement
Particulars

Rs.

Sales

Rs.
2,00,000

Less : cost of goods sold:

Opening stock
Add: Pruchases

10,000
40,000

50,000
Less: closing Stock

15,000
35,000

Gross Profit

1,65,000

Less: operating expenses

12,000

Operating profit

1,53,000

Less: non-operating expenses

4,000

Profit before tax

1,49,000

Less: Income tax (50%)

74,500

Net profit after tax

74,500

Illustration: 2 From the following information Prepare P& L Accounts And Balance sheet
For the year ended March 31, 2015
Particulars
Purchase and sales
Carriage on Purchase
Wages and Salary
office expence
Rent
Insurance
Audit Fees
Accounts Receivable/ payable
Printing and Advertising
Commission
Opening Stock
Cash in hand
Cash at bank
Bank Loan
Interest On Loan
Share Capital
Reserves
Fixed Assets

Debit

Credit

600000

1200000

25000
120000
44000
24000
40000
24000
280000
33000

125000
20000

72000
36000
55000
240000
24000
500000
132000
888000

2241000
Adjustments:
1.
2.
3.
4.

Stock at the end of the year 120 000

Depreciate Fixed Assets by 10%
Unpaid salary at the end of the year are 20 000
Tax rate is 30%

2241000

Illustration: 3
particular
Purchase and sales
Carriage on Purchase
Wages and Salary
office expense

debit

credit
180000
900000
0
37500
180000
66000

dividend received
Insurance
Audit Fees
Accounts Receivable/ payable
Printing and Advertising
Interest received
Opening Stock
Investment
Cash at bank
Bank Loan
Interest On Loan
Share Capital
Reserves
Fixed Assets

36000
60000
36000
420000
49500

187500
30000

108000
54000
82500
360000
36000
750000
198000
1332000
3361500

336150
0

Financial statement, Boards report

(1) The financial statement, including consolidated financial statement, if any, shall be approved
by the Board of Directors before they are signed on behalf of the Board at least by the
chairperson of the company where he is authorized by the Board or by two directors out of which
one shall be managing director and the Chief Executive Officer, if he is
a director in the company, the Chief Financial Officer and the company secretary of the
company, wherever they are appointed, or in the case of a One Person Company, only by one
director, for submission to the auditor for his report thereon.
(2) The auditors report shall be attached to every financial statement.
(3) There shall be attached to statements laid before a company in general meeting, a report by
its Board of Directors, which shall include
(a) The extract of the annual return as provided under sub-section (3) of section 92;
(b) Number of meetings of the Board;
(c) Directors Responsibility Statement;
(d) A statement on declaration given by independent directors under sub-section of section 149;

(e) in case of a company covered under sub-section (1) of section 178, companys policy on
directors appointment and remuneration including criteria for determining qualifications,
positive attributes, independence of a director and other matters provided under sub-section (3)
of section 178;
(f) Explanations or comments by the Board on every qualification, reservation or adverse remark
or disclaimer made
(i) By the auditor in his report; and
(ii) By the company secretary in practice in his secretarial audit report;
(g) Particulars of loans, guarantees or investments under section 186;
(h) particulars of contracts or arrangements with related parties referred to in sub-section (1) of
section 188 in the prescribed form; (i) the state of the companys affairs;
(j) The amounts, if any, which it proposes to carry to any reserves;
(k) The amount, if any, which it recommends should be paid by way of dividend;
(l) Material changes and commitments, if any, affecting the financial position of the company
which have occurred between the end of the financial year of the company to which the financial
statements relate and the date of the report;
(m) The conservation of energy, technology absorption, foreign exchange earnings and outgo, in
such manner as may be prescribed;
(n) a statement indicating development and implementation of a risk management policy for the
company including identification therein of elements of risk, if any, which in the opinion of the
Board may threaten the existence of the company;
(o) The details about the policy developed and implemented by the company on corporate social
responsibility initiatives taken during the year;
(p) in case of a listed company and every other public company having such paid-up share
capital as may be prescribed, a statement indicating the manner in which formal annual
evaluation has been made by the Board of its own performance and that of its committees and
individual directors;
(q) such other matters as may be prescribed.
(4) The report of the Board of Directors to be attached to the financial statement under this
section shall, in case of a One Person Company, mean a report containing explanations or
comments by the Board on every qualification, reservation or adverse remark or disclaimer made
by the auditor in his report.

(5) The Directors Responsibility Statement referred to in clause (c) of sub-section (3) shall
state that
(a) in the preparation of the annual accounts, the applicable accounting standards had been
followed along with proper explanation relating to material departures;
(b) the directors had selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair view of the
state of affairs of the company at the end of the financial year and of the profit and loss of the
company for that period;
(c) the directors had taken proper and sufficient care for the maintenance of adequate accounting
records in accordance with the provisions of this Act for safeguarding the assets of the company
and for preventing and detecting fraud and other irregularities;
(d) the directors had prepared the annual accounts on a going concern basis; and
(e) the directors, in the case of a listed company, had laid down internal financial controls to be
followed by the company and that such internal financial controls are adequate and were
operating effectively.
Explanation.For the purposes of this clause, the term internal financial controls means the
policies and procedures adopted by the company for ensuring the orderly and efficient conduct of
its business, including adherence to companys policies, the safeguarding of its assets, the
prevention and detection of frauds and errors, the accuracy and completeness of the accounting
records, and the timely preparation of reliable financial information;
(f) the directors had devised proper systems to ensure compliance with the provisions of all
applicable laws and that such systems were adequate and operating effectively.
(6) The Boards report and any annexures thereto under sub-section (3) shall be signed by its
chairperson of the company if he is authorized by the Board and where he is not so authorised,
shall be signed by at least two directors, one of whom shall be a managing director, or by the
director where there is one director.
(7) A signed copy of every financial statement, including consolidated financial statement, if any,
shall be issued, circulated or published along with a copy each of
(a) any notes annexed to or forming part of such financial statement;
(b) the auditors report; and
(c) the Boards report referred to in sub-section (3).

(8) If a company contravenes the provisions of this section, the company shall be punishable
with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five
lakh rupees and every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to three years or with fine which shall not be less
than fifty thousand rupees but which may extend to five lakh rupees, or with both.

Auditors report

Managements discussion and analysis

Corporate Governance Report

UNIT-3
FINANCIALSTATEMENTSANALYSIS
AN INTRODUCTION
You have already learnt about the preparation of financial statements i.e. Balance Sheet and
Trading and Profit and Loss Account. After preparation of the financial statements, one may be
interested in analyzing the financial statements with the help of different tools such as
comparative statement, common size statement, ratio analysis, trend analysis, fund flow analysis,
cash flow analysis, etc. In this process a meaningful relationship is established between two or
more accounting figures for comparison. In this lesson you will learn about analyzing the
financial statements by using comparative statement, common size statement, trend analysis and
ratio Analysis.
OBJECTIVES
After studying this lesson, you will be able to:
explain the meaning, need and purpose of financial statement analysis;
identify the parties interested in analysis of financial statements;
Explain the various techniques and tools of analysis of financial statements.
TECHNIQUES AND TOOLS OF FINANCIAL STATEMENT ANALYSIS
Financial statements give complete information about assets, liabilities, equity, reserves,
expenses and profit and loss of an enterprise. They are not readily understandable to interested
parties like creditors, shareholders, investors etc. Thus, various techniques are employed for
analysing and interpreting the financial statements. Techniques of analysis of financial
statements are mainly classified into three categories :
Cross-sectional analysis
It is also known as inter firm comparison. This analysis helps in analysing financial
characteristics of an enterprise with financial characteristics of another similar enterprise in that
accounting period.
For example, if company A has earned 15% profit on capital invested. This does not say whether
it is adequate or not. If we analyse further and find that a similar company has earned 16%
during the same period, then only we can make a conclusion that company B is better.
Thus, it turns into a meaningful analysis.
Time series analysis
It is also called as intra-firm comparison. According to this method, the relationship between
different items of financial statement is established, comparisons are made and results obtained.
The basis of comparison may be :
Comparison of the financial statements of different years of the same business unit.
Comparison of financial statement of a particular year of different business units.

(iii) Cross-sectional cum time series analysis

This analysis is intended to compare the financial characteristics of two or more enterprises for a
defined accounting period. It is possible to extend such a comparison over the year. This
approach is most effective in analysing of financial statements.
The analysis and interpretation of financial statements is used to determine the financial position.
A number of tools or methods or devices are used to study the relationship between financial
statements. However, the following are the important tools which are commonly used for
analyzing and interpreting financial statements :

Comparative financial statements

Common size statements
Trend analysis
Ratio analysis
Funds flow analysis
Cash flow analysis

Comparative financial statements

In brief, comparative study of financial statements is the comparison of the financial statements
of the business with the previous years financial statements. It enables identification of
weakpoints and applying corrective measures. Practically, two financial statements (balance
sheet and income statement) are prepared in comparative form for analysis purposes.
1. Comparative Balance Sheet
The comparative balance sheet shows the different assets and liabilities of the firm on different
dates to make comparison of balances from one date to another. The comparative balance sheet
has two columns for the data of original balance sheets. A third column is used to show change
(increase/decrease) in figures. The fourth column may be added for giving percentages of
increase or decrease. While interpreting comparative Balance sheet the interpreter is expected to
study the following aspects :
(i) Current financial position and Liquidity position
(ii) Long-term financial position
(iii) Profitability of the concern
(i) For studying current financial position or liquidity position of a concern one should examine
the working capital in both the years. Working capital is the excess of current assets over current
liabilities.
(ii) For studying the long-term financial position of the concern, one should examine the changes
in fixed assets, long-term liabilities and capital.
(iii) The next aspect to be studied in a comparative balance sheet is the profitability of the
concern. The study of increase or decrease in profit will help the interpreter to observe whether
the profitability has improved or not.
After studying various assets and liabilities, an opinion should be formed about the financial
position of the concern.

The following is the Balance Sheets of MS Gupta for the years 2014 and 2015.Prepare the
comparative Balance Sheet and study the financial position of the concern.

Balance Sheet as on 31stDecember

Liabilities

2014
Rs

2015
Rs

Equity share capital

500,000

700,000

Reserve and surplus

330,000

Debentures
Long term loan

Assets

2014
Rs

2015
Rs

Land and Building

270,000

1,70,000

222,000

Plant and Machinery

400,000

600,000

200,000

300,000

Furniture

20,000

25,000

100,000

150,000

Other fixed assets

25,000

30,000

50,000

45,000

Cash in hand

20,000

40,000

100,000

120,000

Bill Receivables

100,000

80,000

5000

10,000

Sundry debtors

200,000

250,000

Stock

250,000

350,000

2000

1285000

1547000

mortgage
Bill Payables
Sundry creditors
Other current liabilities

Prepaid Expenses
1285000

1547000

Solution:
Comparative Balance Sheet of MS Gupta for the year ending December 2014 and 2015
Year ending 31st Dec

Assets

Increase/
Decrease

Increase
Decrease
(Percentage)

2014

2015

(Amount)
(Rs)

20,000

40,000

+20,000

+100

Receivables Sundry

100,000

80,000

20,000

20

Debtors

200,000

250,000

+50,000

+25

Current Assets Cash

in hand Bill

Stock

250,000

350,000

+100000

+40

Pre paid expenses

2000

+2000

+100

Total current assets

570,000

722,000

+152,000

26.67

Plant and Machinery

400,000

600,000

+200,000

+50.00

Furniture

20,000

25,000

+5000

+25.00

Other fixed assets

25000

30,000

+5000

+20.00

Total Fixed Assets

715000

825000

+110000

+13.49

Total Assets

1285000

1547000

+262000

20.39

Sundry creditors

100,000

120,000

+20,000

+20

Other current liabilities

5,000

10,000

+5,000

+100

Total current liabilities

155,000

175,000

+20,000

+12.9

Long term loan on mortgage

100,000

150,000

+50000

+50

Total long term liabilities

300,000

450,000

+150,000

+50

Total liabilities

455000

625000

+170,000

+37.36

Reserve & surplus

330,000

2,22,000

108,000

32.73

Total owned equities

8,30,000

9,22,000

+82,000

+50

Total capital & liabilities

1285000

1547000

+262,000

+20.39

II.

Fixed Assets

Land and Building

Liabilities & Capital:

Current liabilities
Bill Payables

II.
Debentures

III.
Equity share capital

Interpretation

(i) The comparative balance sheet of the company reveals that during 2015 there has been an
increase in fixed assets of 110,000 i.e. 13.49%. Long term liabilities to outsiders have relatively
increased by Rs 150,000 and equity share capital has increased by Rs 200000. This fact indicates
that the policy of the company is to purchase fixed assets from the long term sources of finance.
(ii) The current assets have increased by Rs 152000 i.e. 26.67% and cash has increased by Rs
20,000. The current liabilities have increased only by Rs 20000 i.e. 12.9%. This further confirms
that the company has used long-term finances even for the current assets resulting into an
improvement in the liquidity position of the company.
(iii) Reserves and surplus have decreased from Rs 330,000 to Rs 222,000 i.e. 32.73% which
shows that the company has utilized reserves and surplus for the payment of dividends to
shareholders either in cash or by way of bonus.
(iv) The overall financial position of the company is satisfactory.

Comparative Income statement

The income statement provides the results of the operations of a business. This statement
traditionally is known as trading and profit and loss A/c. Important components of income
statement are net sales, cost of goods sold, selling expenses, office expenses etc. The figures of
the above components are matched with their corresponding figures of previous years
individually and changes are noted. The comparative income statement gives an idea of the
progress of a business over a period of time. The changes in money value and percentage can be
determined to analyze the profitability of the business. Like comparative balance sheet, income
statement also has four columns. The first two columns are shown figures of various items for
two years. Third and fourth columns are used to show increase or decrease in figures in absolute
amount and percentages respectively.

Illustration: 2
From the following particulars, pertaining to Mohan Ltd., you are required to prepare a
comparative Income Statement and interpret the changes.

Particulars

Rs.

Rs.

Sales

58,000

65,200

Cost of goods sold

47,600

49,200

1,016

1,000

Administration expenses

Selling expenses

1,840

1,920

Non -operating expenses

140

155

Non-operating expenses

96

644

2000

1,200

43.75%

43.75%

Sales returns
Tax rate

Solution:
Comparative Income Statement of Mohan Ltd., for the years 2000 and 2001.

Particulars

Sales

2000

2001

Rs.

Rs.
58,000

65,200

2,000

1,200

Net sales

56,000

64,000

Less: Cost of Goods sold

47,600

49,200

8,400

14,800

Administration expenses

1,016

1,000

Selling expenses

1,840

1,920

2,856

2,920

5,544

11,880

Add: non - operating incomes

96

644

Less: non- operating expenses

5,640

12,524

140

155

Net profit before tax

5,500

12,369

Less: Tax

2,406

5,411

3094

6,958

Less Returns

Gross Profit

(A)

Less: Operating expenses

Total operating expenses

(B)

Operating profit

Net profit after Tax

(A)-(B)

Techniques of Financial Statement Analysis:

The following techniques are adopted in analysis of financial statements of a
business organization:

Comparative Statements
Common size Statements
Trend Analysis
Funds flow Analysis
Cash flow Analysis
Ration Analysis
Value Added Analysis.

The first three topics are covered in this chapter and the rest are discussed in the
subsequent chapters in detail.
Comparative Financial Statements
Comparative financial statements are statements pf financial position of a business
designed to provide time perspective to the consideration of various elements of financial
position embodied in such statements. Comparative Statements reveal the following: .
Absolute data (money values or rupee amounts)
Increase or reduction in absolute data (in terms of moiwy values)
Increase or reduction in absolute data (in terms of percentages)
Comparison (in terms of ratios)
Percentage of totals.
a. Comparative Income Statement or Profit and Loss Account:

A comparative income statement shows the absolute figures for two or more periods and
the absolute change from one period to another. Since the figures are shown side by side, the user
can quickly understand the operational performance of the firm in different periods and draw
conclusions.

b. Comparative Balance Sheet

Balance sheet as on two or more different dates are used for comparing the assets,
liabilities and the net worth of the company Comparative balance sheet is useful for studying the
trends of analysis undertaking.
Financial Statements of two or more firms can also be compared for drawing inferences.
This is called interfirm Comparison.
Illustration 3:
The following is the profit and loss account of Ashok Ltd., for the years 2000 and 2001.
Prepare comparative Income Statement and comment on the profitability of the undertaking.

Particulars

To Cost of
goods sold

2000

2001

Rs.

Rs.

2,31,625

Particulars

2,41,950 By Sales

To Office
expenses

23,266

27,068 Less Returns

To Interest
expenses

45,912

57,816

To Loss on
sale of fixed

627

2000

2001

Rs.

Rs.

3,60,728

4,17,125

5,794

6,952

3,54,934

4,10,173

1,896

1,750 By Other
incomes :

To Income
Tax

21,519

40,195 By Discount
on purchase

2,125

To Net Profit

35,371

44,425 By Profit on
sale of land

1,500

3,60,457

4,13,379

3,60,457

4,13
,379

Solution:
ASHOK LTD.
Comparative Income Statement for the years ending 2000 and 2001

Particulars

Sales

2000 Rs.

2001 Rs.

Increase (+)

Increase (+)

Decrease (-)

Decrease (-)

Amount (Rs.)

Percentages

3,60,728

4,17,125

+56,397

+15.63

5,794

6,952

+1.158

+19.98

3,54,934

4,10,173

+55,239

+15.56

Less: Cost of goods sold

2,31,625

2,41,950

+ 10,325

+4.46

Gross Profit

1,23,309

1,68,223

+44.914

+36.42

Office expenses

23,266

27,068

+3,802

+ 16.34

Selling expenses

45,912

57,816

+11,904

+25.93

Total operating expenses

69,178

84,884

+15,706

+22.70

Operating profit

54,131

83,339

+29,208

+53.96

5,523

3,206

-2,317

-41.95

59,654

86,545

+26.891

+45.08

2,764

1,925

-839

-30.35

Profit before tax

56,890

84,620

+27,730

+48.74

Less: Income tax

21,519

40,195

+18,676

+86.79

Net Profit after tax

35,371

44,425

+9,054

+25.60

Less: Sales returns

Operating Expenses:

Add: Other incomes

Less: Other expenses

The comparative Income statement reveals that while the net sales has been increased by
15.5%, the cost of goods sold increased by 4.46%. So gross profit is increased by 36.4%. The
total operating expenses has been increased by 22.7% and the gross profit is sufficient to

compensate increase in operating expenses. Net profit after tax is 9,054 (i.e., 25.6%) increased.
The overall profitability of the undertaking is satisfactory.

Illustration: 4
The following are the Balance Sheets of Gokul Ltd., for the years ending 31 s1 December,
2000,2001.

Particulars

2000

2001
Rs.

Rs.

2,00,000

3,30,000

1,00,000

1,50,000

20,000

30,000

15,000

20,000

50,000

50,000

40,000

50,000

20,000

25,000

15,000

25,000

4,60,000

6,80,000

2,40,000

3,50,000

40,000

50,000

1,00,000

1,25,000

20,000

60,000

10,000

12,000

40,000

53,000

10,000

30,000

4,60,000

6,80,000

Liabilities
Equity share capital
Preference share capital
Reserves
Profit and Loss a/c
Bank overdraft
Creditors
Provision for taxation
Proposed Dividend
Total
Fixed Assets

Less: Depreciation
Stock
Debtors
Bills Receivable
Prepaid expenses
Cash in hand
Cash at Bank
Total

Solution:
Comparative Balance Sheet
Particulars

31st Dec.

31st Dec.

2000

2001

Rs.

Rs.

Inerease(+)
Decrease(-)
Amount(Rs.)

Increase(+)
Decrease(-)
Percentages

ASSETS
Current Assets:
Cash at bank and in hand
Bills receivable

50,000
20,000

83,000
60,000

+33,000
+40,000

1,00,000

1,25,000

+25,000

+25

Stock

40,000

50,000

+10,000

+25

Prepaid expenses

10,000

12,000

+2,000

+20

Total Current Assets

2,20,00

3,30,000

+1,10,000

+50

Fixed Assets

2,40,000

3,50,000

+1,10,000

+45.83

Total Assets

4,60,000

6,80,000

2,20,000

47.83

Bank overdraft

50,000

50,000

Creditors

40,000

50,000

+10,000

+25

Proposed dividend

15,000

25,000

+10,000

+66.67

Provision for taxation

20,000

25,000

+5,000

+25

1,25,000

1,50,000

+25,000

+20

Equity share capital

2,00,000

3,30,000

+1,30,000

+65

Preference share capital

1,00,000

1,50,000

+50,000

+50

20,000

30,000

+10,000

+50

Debtors

+66
+200

LIABILITIES
Current Liabilities:

Total Current Liabilities

Capital and Reserve:

Reserves

Profit and Loss a/c

Total Liabilities

15,000

20,000

+5,000

+33.33

3,35,000

5,30,000

+1,95,000

+58.21

4,60,000

6,80,000

+2,20,000

+47.83

Interpretation:
1.

The above comparative Balance sheet reveaJs the current assets has been increased to
50%, while current liabilities increase to 20% only. Cash increased to Rs.33,000 (i.e.
66%), There is an improvement in liquidity position.

2.

The fixed assets purchased was for Rs, 1,10,000. As there are no long-term funds, it
should have been purchased partly from Share Capital.

3.

Reserves and Profit and Loss a/c increased by 50% and 33.33% respectively. The
company may issue bonus shares in near future.

4.

Current financial position of the company is satisfactory. It should issue more long-term
funds.

COMMON SIZE STATEMENTS

The figures shown in financial statements viz. Frofit and Loss Account and Balance sheet
are converted to percentages so as to establish each element to the total figure of the statement
and these statement are called Common Size Statements. These statements are useful in analysis
of the performance of the company by analyzing each individual element to the total figure of the
statement. These statements will also assist in analyzing the performance over years and also
with the figures of the competitive firm in the industry for making analysis of relative efficiency.
The following statements show the method of presentation of the data.

Illustration: 5
Common Size Income Statement of XYZ Ltd., for the year ended 31st March, 2001.

Particulars
Sales
Raw materials

Amount (Rs.)
(A)

% to Sales

14,00,000

100

5,40,000

16.4

Direct wages

2,30,000

16.4

Faciory expenses

1,60,000

11.4

9,30,000

66.4

4,70,000

33.6

1,10,000

7.9

80,000

5.7

2,80,000

20.0

40,000

2.9

3,20,000

22.9

60,000

43

2,60,000

18.6

80,000

5.7

1,80,000

12.9

(B)
GrossProfit

(A) - (B)

Less: Administrative expenses

Selling and distribution expenses
Operating Profit
Add: Non-operative income

Less: Non-operating expenses

Profit before tax
Less: Income tax
Profit after tax

Common Size Balance Sheet of XYZ

Particulars

Amount (Rs.)

% to Total

ASSETS
Fixed Assets
Land

50,000

5.3

Buildings

1,10,000

11.7

Plant and Machinery

2,50,000

26.6

Raw materials

80,000

8.5

Work-in-progress

50,000

5.3

1,60,000

17.0

Current Assets :
Inventory

Finished goods

Sundry debtors

2,10,000

22.4

30,000

3.2

9,40,000

100.0

Euqity Share capital

2,50,000

26.6

Preference Share Capital

1,00,000

10.6

General reserve

1,60,000

17.0

80,000

8.5

2,20,000

23.4

Creditors for expenses

40,000

4.3

Bills payable

90,000

9.6

9,40,000

100.0

Cash at Bank
Total
Capital and Liabiltiies

Debentures
Current Liabilities
Sundry Creditors

Analysis of performance and position can be made from the above Common Size
Statements.

llustration: 6
From the following P&L A/c prepare a Common Size Income StatementParticulars

To Cost of goods

2000

2001

Rs.

Rs.

12,000

1 5,000 By Net Sales

sold
To Administrative

400

400

600

800

3,000

3,800

expenses
To Selling expenses
To Net Profit

Particulars

2000

2001

Rs.

Rs.

16,000

20,000

16,000

20,000

16,000

20,000

Common Size Income Statement

Particulars

2000

2001

Rs.

Rs.

Net sales

16,000

100.00

20,000

100.00

Less: Cost of goods sold

12,000

75.00

15,000

7500

4,000

25.00

5,000

25.00

400

2.50

400

2.00

Gross Profit
Less: Operating expenses
Administration expenses
Selling expenses

600

3.75

800

4.00

Total Operating expenses

1,000

6.25

1,200

6.00

Net Profit

3,000

18.75

3,800

19.00

Illustration: 7
Following are Balance sheet of Vinay Ltd. for the year ended 31 st December 2000 and
2001.

Liabilities

Equity capital

2000

2001

Rs.

Rs.

1,00,000

Assets

1 ,65,000 Fixed Assets (Net)

2000
Rs.

2001
Rs.

1 ,20,000

1,75,000

Pref. Capital

50,000

75,000 Stock

20,000

25,000

Reserves

10,000

15,000 Debtors

50,000

62,500

P&L A/c

7,500

10,000 Bills receivable

10,000

30,000

Creditors

20,000

25,000 Cash at Bank

20,000

26,500

Provision
for taxation

10,000

12,500 Cash in hand

5,000

15,000

2,30,000

3,40,000

Proposed dividends

7,500

12,500

2,30,000

3,40,000

Prepare a common size balance sheet and interpret the same.

Solution;

Common Size Balance Sheet of Vinay Ltd.

for the year ended 31.12.2001 & 2002

Particulars

2000
Rs.

2001

Rs.

Capital & Reserves:

Equity Capital

1,00,000

43,48

1 ,65,000

48.53

Pref. Capital

50,000

21,74

75,000

22.05

Reserves

10,000

4.34

15,000

4.41

P&L A/c

7,500

3.26

10,000

2.95

1,67,500

72.82

2,65,000

77.94

Bank overdraft

25,000

10.87

25,000

7.35

Creditors

20,000

8.70

25,000

7.35

Provisions for taxation

10,000

4.35

12,500

3.68

7,500

3.26

12,500

3.68

62,500

27.18

75,000

22.06

(i)
Current Liabilities:

Proposed dividends
(ii)

Total Liabilities (ij + (ii)

2,30,000

100.00

3,40,000

100.00

1,20,000

52.17

1,75,000

51.47

Stock

20,000

8.70

25,000

7.35

Debtors

50,000

21.74

62,500

18.38

Bills receivable

10,000

4.34

30,000

8.82

Cash al bank

20,000

8.70

26,500

7.79

Cash in hand

5,000

2.18

15,000

4.41

1,10,000

47.83

1,65,000

48.53

Fixed Assets (Net)

(a)

Current Assets:

(b)

Total Asses (a + b) 2,30,000

100.00

3,40,000

100.00

Interpretation :
(1)

In 2001 Current Assets were increased from 47.83% to 48.53%. Cash balance increased
by Rs. 16,500.

(2)

Current Liabilities were decreased from 27.18% to 22.06%. So, the company can pay off
the Current Liabilities from Current Assets. The liquidity position is reasonably good.

(3)

Fixed Assets were increased from Rs. 3,20,000 in 2000 to Rs. 1,75,000 in 2001. These
were purchased from the additional share capital issued.

(4)

So, the ove.all financial position is satisfactory.

TREND ANALYSIS

In trend analysis ratios of different items are calculated for various periods for
comparison purpose.
Trend analysis can be .done by trend percentage, trend ratios and
graphic and diagrammatic representation.
The trend analysis is a simple technique and does
not involve tedious calculations.

Illustration: 8
From the following data, calculate trend percentage taking 1999 as base.

Particulars

1999

2000

2001

Rs.

Rs.

Rs.

Sales

50,000

75,000

1,00,000

Purchases

40,000

60,000

72,000

Expenses

5,000

8,000

15,000

Profit

5,000

7,000

13,000

Solution:
Particulars

1999 Rs.

2000 Rs.

2001 Rs.

Rs.

Rs.

Rs.

Trend Percentage Base 1999

1999

2000

2001

Purchases

40,000

60,000

72,000

100

150

180

Expenses

5,000

8,000

15,000

100

160

300

Profit

5,000

7,000

13,000

100

140

260

Sales

50,000

75,000

1,00,000

100

150

200

Illustration: 9
From the following data, calculate trend percentages (1999 as base)

Particulars

1999

2000

2001

Rs.

Rs.

Rs.

Cash

200

240

160

Debtors

400

500

650

Stock

600

800

700

Other Current Assets

450

600

750

Land

800

1,000

1,000

Buildings

1,600

2,000

2,400

Plant

2,000

2,000

2,400

Solution:

Particulars
Rs.

2000

2001

Rs.

Rs.

(Base Year 1999)

1999

2000

2001

Cash

200

240

160

100

120

80

Debtors

400

500

650

100

125

163

Other Current Assets

450

600

750

100

133

167

Total Current Assets

1,650

2,140

2,260

100

130

137

800

1,000

1,000

100

125

125

Buildings

1,600

2,000

2,400

100

125

150

Plant

2,000

2,000

2,400

100

100

120

Total Fixed Assets

4,400

5,000

5,800

100

114

132

Fixed Assets:
Land

The verdict is finally out on Indias biggest corporate fraud.

A special court under Indias Central Bureau of Investigation (CBI) on April 10 held the
founders and former officials of outsourcing firm, Satyam Computer Services, guilty in an
accounting scam worth Rs7,000 crore ($1.1 billion). B Ramalinga Raju, the companys former
chairman, has been sentenced to seven years in jail.
The case, which is also called the Enron of India, dates back to 2009. Six years ago, Raju wrote a
letter to the Securities and Exchange Board of India (SEBI) and his companys shareholders,
admitting that he had manipulated the companys earnings, and fooled investors. Nearly $1
billionor 94% of the cashon the books was fictitious.
In an immediate reaction to the confession, investors lost as much as Rs14,000 crore ($2.2
billion) as Satyams shares tanked.
Raju explained his reasons for inflating earning in the letter thus: As the promoters held a small
percentage of equity, the concern was that poor performance would result in a takeover, thereby
exposing the gap.
What started as a marginal gap between actual operating profit and the one reflected in the
books of accounts continued to grow over the years, Raju said in the letter. It has attained
unmanageable proportions as the size of the company operations grew significantly.
Raju was once the poster boy of Indias IT revolutionrubbing shoulders with top CEOs and
politicians across the world, including Bill Clinton.
Heres a timeline of what went wrong at Satyam.
1987: Thirty three-year-old Raju establishes Satyam Computer with his brother and a brother-inlaw in Hyderabad.
1991: The company is listed on the Bombay Stock Exchange, where its initial public offering is
oversubscribed by as much as 17 times.
1993: Satyam Computer signs a deal with US-based Dun & Bradstreet to set up Dun &
Bradstreet Satyam Software. Satyam holds 24% stake in the venture, while Dun & Bradstreet
holds the remaining. In 1996, Satyam sells its stake to Dun & Bradstreet, ahead of a
restructuring, and the new company is called Cognizant Technologies.

1999: Satyam Infoway, a subsidiary of Satyam Computer, becomes the first Indian information
and communication technology company to be listed on Nasdaq, and Satyam expands footprint
to 30 countries.
2006: Satyams revenues cross $1 billion. Raju becomes the chairman of industry body, The
National Association of Software and Services Companies.
2007: Raju is named Ernst & Young Entrepreneur of the Year. Thecompany bags contract to be
the official IT services provider of the FIFA World Cups in 2010 and 2014.
2008: Satyams revenues cross $2 billion. In December, the company decides to buy out Maytas
Infraowned by Rajus sonsfor $1.6 billion. The deal falls through after investors and board
members object, and in a span of four days, four directors of the company quit. (Maytas is
Satyam spelt backwards.)
January 2009: Satyam is barred from doing business with the World Bank for eight years. The
World Bank alleges that Satyam was involved in data thefts and staff bribery. Shares fall to
record low in four years. Satyam employees receive a letter from Raju admitting to the fraud,
following which he resigns as chairman.
Raju and his younger brother B Rama Raju are arrested by police, while the Indian government
steps in and disbands Satyam board.
June 2009: Tech Mahindra, owned by the Mahindra Group, and Satyam merge to form Indias
fifth largest IT exports company. The merged entity is called Mahindra Satyam.
November 2011: Raju gets bail from Indias supreme court after the CBI fails to file chargesheet.
October 2013: Indias enforcement directorate files a charge-sheet against Raju and 212
others under money-laundering charges.
July 2014: Indias market regulator SEBI bars Raju from the capital markets for 14 years, and
also seeks Rs1,849 crore as fine.
April 2015: The special CBI court holds Raju and nine other officials guilty of cheating. Among
those held guilty are two former partners at PwC. We are disappointed with this verdict given
by the court of the Additional Chief Metropolitan Magistrate at Hyderabad, accounting
firm PwC said in a statement.
Raju, who also has to pay a fine of about $800,000 (Rs5 crore), has served 32 months in prison
so far

B Ramalinga Raju, one of the pioneers in the industry and Satyam's founder and then chairman,
allegedly confessed to manipulating his company's account books and inflating profits over
many years to the tune of crores of rupees. The confession sent shockwaves across the industry.
He was arrested by Andhra Pradesh Police's Crime Investigation Department along with his
brother Rama Raju and others on January 11. All the 10 accused in the case are currently out on
bail. Around 3,000 documents were marked and 226 witnesses examined during the trial that
began nearly six years ago.
Satyam scam untangled:
- 2003-2008: False clients, projects and invoices created to boost companies profile
- 2009: Satyam reports Rs 5200 cr sales vs real sales of Rs 4100 cr
- 2009: Satyam reports 24% profits vs real profits of 3%
- Damages calculated at Rs 7900 cr
Satyam scam probe:
- Concurrent probe by CBI, ED, SEBI
- 53,000 employees, millions of investors impacted
- Accused charged with cheating, forgery, faking accounts and IT violations
- 3000 documents, 223 witnesses examined
- Verdict postponed twice
The timeline:
January 7, 2009: Ramalinga Raju resigns, discloses a Rs 7000-crore accounting fraud in balance
sheets about cash which never existed in the company.
January 8, 2009: Satyam's bank Citibank freezes its 30 accounts. Interim CEO Ram Mynampati
says company in severe cash crunch and may not be able to pay salaries. Satyam's auditor PwC
faces ire.
January 9, 2009: Ramalinga Raju and his younger brother B Rama Raju arrested by Police.
Central Govt disbands Satyam board, to appoint its own 10 directors.
Jan 9, 2009: Satyam removed from Sensex, Nifty; NSE excludes F&O
contracts on expiry of Jan contract.

Jan 10, 2009: Satyam former CFO Srinivas Vadlamani arrested.

Jan 11, 2009: Government appoints Deepak Parekh, Kiran Karnik and C
Achuthan to Satyam board.
February 2009: CBI takes over investigation, goes on to file 3 chargesheets
Mar 6, 2009: Gets SEBI nod for bidding process to select investor
April 22, 2009: Tech Mahindra makes open offer to Satyam
shareholders at Rs 58/share, offer to close Jun 9.
June 22, 2009: Mahindra unveils new brand identity for Satyam,
Mahindra Satyam.
2010: Raju retracts confession statement, says charges levelled by CBI are false
November 2, 2011: Supreme Court grants bail to Raju since CBI failed to file chargesheet on
time.
October 28, 2013: Enforcement Directorate filed a chargesheet against Raju and 212 others. The
filed report states that "it transpires that the accused resorted to inter-connected transactions, so
as to ensure that crime proceeds were distanced from its initial beneficiaries, and laundered the
said proceeds under the cover of the corporate veil, with an ulterior motive to project the
properties so acquired as untainted ones
December 8, 2014: Ramalinga Raju and 3 others given 6 months jail term by SFIO
December 23, 2014: Judge adjourns verdict citing voluminous documents
March 9, 2015: Special court adjourns verdict till April 9
April 9, 2015: All 10 accused found guilty