Problems on Financial Statement Analysis

Question 1 Prepare Comparative Balance sheet of Magnesium Ltd. form the

following two Balance Sheets of the year 2018 and 2019 receptively and
interpret the financial Position of the firm.
Balance Sheets of Magnesium Ltd. as at 31.03 …..
[Rs. In 00,000]
Particulars 2018 2019
Sources of Funds
A) Shareholder’s Fund:
Share Capital 800 800
Reserves and Surplus 1100 1200
1900 2000
B) Loan Funds
Secured Loan 150 130
Unsecured Loan 90 70
240 200
Total (A+B) 2140 2200
Application of Funds
C) Fixed Assets
Property, Plant and Equipment 600 690
Intangible Assets 240 228
840 918
D) Current Assets:
Inventories 500 450
Accounts Receivables 1100 1350
Cash and Bank 300 700
1,900 2,500
Less Current Liabilities
Account Payables (450) (800)
Accrued Liabilities (250) (480)
Net Current Assets 1200 1220
E) Deferred Expenditure 100 62
Total (C+D+E) 2140 2200

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 Problems on Financial Statement Analysis

Question 1: Given the following Income Statements of Garments Ltd. for the
years 2018 and 2019. Prepare comparative Income Statement’s and analyse
the performance of the firm.
Income Statements of Garments Ltd for the year ended 31.03… (` in 000)
Particulars 2018 2019
Net Sales 466 659
Less Cost of Goods Sold -205 -275
Gross Profit 261 384
Less Operating Expenses
General and Administrative Expenses -23 -35
Sales and Marketing Expenses -58 -81
Research and Development -60 -87
Write-off Patents 0 -52
-141 -255
Income from Operations 120 129
Add Interest Income 7 12
Less Interest Expenses -1 -0.8
Income before Taxes 126 140
Less Provision for Taxes -31 -34.20
Net Income 95 106

Comparative Income Statements of Garments Ltd. Shall comprise 4 columns –

two columns with 2018 and 2019 values of each item respectively, third column
for increase/decrease in rupee value of each item and the fourth column for
percentage increase/decrease in each item.

Rupee change in each item is calculated as (2018 Value - 2019 Value) and
percentage change is calculated as: -

(2018 Value - 2019 Value)

------------------------------------------------ x 100
2018 Value

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 Problems on Financial Statement Analysis

Comparative Income Statements of Garments Ltd.

For the period 2018-2019
Income Statements of Garments Ltd for the year
ended 31.03… (` in 000)
Change in Percent
(` age
Increase/De Change
Particulars 2018 2019 crease) %
Net Sales 466.00 659.00 193.00 41.42%
Less Cost of Goods Sold -205.00 -275.00 -70.00 34.15%
Gross Profit 261.00 384.00 123.00 47.13%
Less Operating Expenses
General and Administrative Expenses -23.00 -35.00 -12.00 52.17%
Sales and Marketing Expenses -58.00 -81.00 -23.00 39.66%
Research and Development -60.00 -87.00 -27.00 45.00%
Write-off Patents - -52.00 -52.00 0.00%
-141.00 -255.00 -114.00 80.85%
Income from Operations 120.00 129.00 9.00 7.50%
Add Interest Income 7.00 12.00 5.00 71.43%
Less Interest Expenses -1.00 -0.80 0.20 -20.00%
Income before Taxes 126.00 140.20 14.20 11.27%
Less Provision for Taxes -31.00 -34.20 -3.20 10.32%
Net Income 95.00 106.00 11.00 11.58%
It is clear from the above comparative income statement that net sales in 2019
have increased by 41.42% over 2018 while cost of goods sold has increased by
34.15%. As a result, there has been 47.13% boost in gross profit in 2019. Despite
this increase in gross profit, income from operations has increased only by
7.50%. The reason for such relatively small income increase could be the large
amount of write-off of patents associated with the acquisition of new
technology. However, for the sake of comparison, it has been assumed that
accounting principles have not changed in between the two years.

Q2. ABC Limited has provided the following information about its two accounting
periods, i.e., 2016 and 2017. Prepare a Comparative Income Statement and
interpret the basic findings.
2016 (Amount in 2017 (Amount in
Particulars
Rs.) Rs.)
Net Sales 2,00,000 2,50,000
Cost of Goods Sold 1,50,000 1,80,000
Selling, General and Administrative
25,000 30,000
Expenses
Other Income 12,000 18,000
Taxes 8,000 16,000

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 Problems on Financial Statement Analysis

2016 (Amount in 2017 (Amount in

Particulars
Rs.) Rs.)
Interest 17,000 18,000

Solution: -
2016 2017
Absolute Percentage
Particulars (Amount (Amount in
Change Change
in `) `)
Net Sales 2,00,000 2,50,000 50,000 25%
Less: Cost of Goods Sold 1,50,000 1,80,000 30,000 20%
Gross Profit 50,000 70,000 20,000 40%
Less: Selling, General and
25,000 30,000 5,000 20%
Administrative Expenses
Net Operating Profit 25,000 40,000 15,000 60%
Add: Other Income 12,000 18,000 6,000 50%
Earnings before Interest and
37,000 58,000 21,000 56.76%
Taxes
Less: Interest 17,000 18,000 1,000 5.88%
Earnings before Taxes 20,000 40,000 20,000 100%
Less: Taxes 8,000 16,000 8,000 100%
Net Profit 12,000 24,000 12,000 100%
Based on the above Comparative Income Statement of ABC Limited, it can be
analysed how an increase in sales (25% over the previous year) has impacted the
Net profit (increased by 100% in absolute terms over the previous year) and how
various line items have contributed. Basic Analysis includes the following:
1. Net Sales increased by 25% over the period.
2. Gross Profit Ratio increased from 25% to 28% over the period.
3. Net Profit Ratio increased from 6% to 9% over the period.
4. Income Tax Expenses doubled from 100 to 100 and Interest expense
increased by 5.88%.

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 Problems on Financial Statement Analysis

Trend Analysis (Index Number):

1. Prepare comparative Income statement of Zodiac Ltd. from the statement
for the period 2000 to 2004, also interpret the comparative statement

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Problems on Financial Statement Analysis

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 Problems on Financial Statement Analysis

2. Given below are the Income statements of Sun Ltd. and Moon Ltd. for the
year ended 31.03.2004. Prepare Comparative Income Statement of two
firms and compare their financial performance over the same period.

Solution: Comparative Income Statement of two firms for the same

period essentially involve the preparation of common size income
statement as shown below:

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Problems on Financial Statement Analysis

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 Problems on Financial Statement Analysis

3. Prepare Comparative Balance Sheets of Star Ltd. and Saturn Ltd from their
Balance Sheet as at 31.03.2004 as given below. Also compare their
financial position on the said date.

Comparative Balance Sheets of two firms at a particular date in effect

involve the preparation of common size Balance Sheets as shown below.

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Problems on Financial Statement Analysis

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Problems on Financial Statement Analysis

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