Analysis of Financial Statements + Important Questions 2026-27
Welcome, future finance wizards! This guide unlocks the secrets of NCERT Class 12 Accountancy Chapter 4, "Analysis of Financial Statements." A crucial chapter for your CBSE 2026-27 board exams and competitive exams like CUET, mastering it will help you read and understand a company's financial health like a pro.
Chapter NameAnalysis of Financial Statements
SubjectAccountancy (Book 2: Company Accounts and Analysis of Financial Statements)
Class12
BoardCBSE
Important TopicsMeaning, Objectives & Limitations of Financial Analysis, Tools of Analysis, Comparative & Common-Size Statements
Difficulty LevelModerate (Conceptual clarity and calculation practice are key)
Exam Weightage4-6 Marks in Board Exams
Learning Objectives
After completing this chapter from the updated NCERT Solutions, you will be able to:
- Define financial statement analysis and its significance.
- Explain the objectives and limitations of analyzing financial statements.
- Identify and describe the various tools of financial analysis like Comparative Statements and Common-Size Statements.
- Prepare Comparative Balance Sheets to analyze changes over time.
- Construct Comparative Statements of Profit and Loss to assess operational performance.
- Develop Common-Size Balance Sheets and Statements of Profit and Loss for cross-sectional analysis.
- Interpret the results from these analytical tools to make informed judgments about a company's financial position and performance.
Key Concepts and Definitions
Understanding these terms is the first step to mastering the chapter.
- Financial Statement Analysis: It is the process of reviewing a company's financial statements (Balance Sheet, Statement of P&L) to make better economic decisions. It involves using various techniques to evaluate the financial performance and position of a firm.
- Horizontal Analysis (Dynamic Analysis): This involves comparing financial data of a company for two or more consecutive years. The changes are shown in both absolute and percentage terms. Comparative Statements are a prime example of horizontal analysis.
- Vertical Analysis (Static Analysis): This involves analyzing the financial statements of one particular year. Each item on the statement is expressed as a percentage of a common base figure. Common-Size Statements are an example of vertical analysis.
- Tools of Financial Analysis: These are the techniques used to analyze financial statements. The main tools for Class 12 are:
- Comparative Statements (Balance Sheet and Statement of P&L)
- Common-Size Statements (Balance Sheet and Statement of P&L)
- Ratio Analysis (covered in the next chapter)
- Cash Flow Statement (covered in a subsequent chapter)
- Comparative Statement: A statement that shows the financial data for two or more periods side-by-side to highlight changes in individual items in both absolute (Rupees) and relative (percentage) terms.
- Common-Size Statement: A statement where figures are converted into percentages based on a common figure.
- In a Common-Size Balance Sheet, total assets or total equity and liabilities are taken as 100.
- In a Common-Size Statement of P&L, Revenue from Operations is taken as 100.
Full NCERT Solutions for Class 12 Accountancy Chapter 4
Here are the step-by-step solutions to all the questions from your NCERT textbook for Chapter 4: Analysis of Financial Statements. (Note: The NCERT textbook primarily contains practical problems in this chapter. The solutions below are representative of the type and format expected in exams.)
Question 1: What is meant by Analysis of Financial Statements?
Analysis of Financial Statements refers to the systematic process of establishing and interpreting relationships between various items of the financial statements (i.e., Balance Sheet and Statement of Profit and Loss) to get a deeper understanding of a company's financial performance and position.
The key aspects of this process are:
Step 1: Simplification. It breaks down complex financial data into simpler, more understandable information.Step 2: Evaluation. It helps in assessing the firm's profitability, solvency, liquidity, and efficiency.
Step 3: Decision-Making. It provides crucial information to various stakeholders like management, investors, creditors, and government agencies to make informed economic decisions.
Question 2: State any three objectives of Analysis of Financial Statements.
The three main objectives of Analysis of Financial Statements are:
Step 1: Assessing Profitability. To measure the ability of the business to earn profits. This is done by analyzing the Statement of Profit and Loss to understand the relationship between revenues, expenses, and net profit.Step 2: Evaluating Financial Position (Solvency). To assess the firm's ability to meet its long-term and short-term obligations. This analysis helps determine if the company is financially sound and can survive in the long run.
Step 3: Judging Managerial Efficiency. To evaluate how efficiently the management has utilized the company's resources. For example, a higher return on investment indicates efficient use of capital by the management.
Question 3: From the following information, prepare a Comparative Statement of Profit & Loss:
| Particulars | 31.3.2023 (₹) | 31.3.2024 (₹) |
|---|---|---|
| Revenue from Operations | 20,00,000 | 25,00,000 |
| Other Income | 4,00,000 | 3,00,000 |
| Expenses | 12,00,000 | 15,00,000 |
| Tax Rate | 30% | 30% |
Solution:
Comparative Statement of Profit and Loss
for the years ended 31st March, 2023 and 31st March, 2024
| Particulars | 2022-23 (₹) (A) | 2023-24 (₹) (B) | Absolute Change (₹) (C = B - A) | Percentage Change (%) (D = C/A * 100) |
|---|---|---|---|---|
| I. Revenue | ||||
| Revenue from Operations | 20,00,000 | 25,00,000 | 5,00,000 | 25.00% |
| Other Income | 4,00,000 | 3,00,000 | (1,00,000) | (25.00%) |
| II. Total Revenue | 24,00,000 | 28,00,000 | 4,00,000 | 16.67% |
| III. Expenses | 12,00,000 | 15,00,000 | 3,00,000 | 25.00% |
| IV. Profit before Tax (II - III) | 12,00,000 | 13,00,000 | 1,00,000 | 8.33% |
| V. Tax (30%) | 3,60,000 | 3,90,000 | 30,000 | 8.33% |
| VI. Profit after Tax (IV - V) | 8,40,000 | 9,10,000 | 70,000 | 8.33% |
Working Notes:
- % Change in Revenue from Operations: (5,00,000 / 20,00,000) * 100 = 25%
- % Change in Total Revenue: (4,00,000 / 24,00,000) * 100 = 16.67%
- % Change in Profit After Tax: (70,000 / 8,40,000) * 100 = 8.33%
Question 4: Prepare a Comparative Balance Sheet from the following:
| Particulars | 31.3.2023 (₹) | 31.3.2024 (₹) |
|---|---|---|
| Equity and Liabilities | ||
| Share Capital | 10,00,000 | 12,00,000 |
| Reserves and Surplus | 3,00,000 | 4,00,000 |
| Long-term Borrowings | 5,00,000 | 6,00,000 |
| Trade Payables | 2,00,000 | 2,50,000 |
| Total | 20,00,000 | 24,50,000 |
| Assets | ||
| Non-Current Assets (Fixed) | 12,00,000 | 15,00,000 |
| Non-Current Investments | 2,00,000 | 3,00,000 |
| Current Assets | 6,00,000 | 6,50,000 |
| Total | 20,00,000 | 24,50,000 |
Solution:
Comparative Balance Sheet
as at 31st March, 2023 and 31st March, 2024
| Particulars | 31.3.2023 (₹) (A) | 31.3.2024 (₹) (B) | Absolute Change (₹) (C = B - A) | Percentage Change (%) (D = C/A * 100) |
|---|---|---|---|---|
| I. EQUITY AND LIABILITIES | ||||
| 1. Shareholders' Funds | ||||
| (a) Share Capital | 10,00,000 | 12,00,000 | 2,00,000 | 20.00% |
| (b) Reserves and Surplus | 3,00,000 | 4,00,000 | 1,00,000 | 33.33% |
| 2. Non-Current Liabilities | ||||
| (a) Long-term Borrowings | 5,00,000 | 6,00,000 | 1,00,000 | 20.00% |
| 3. Current Liabilities | ||||
| (a) Trade Payables | 2,00,000 | 2,50,000 | 50,000 | 25.00% |
| TOTAL | 20,00,000 | 24,50,000 | 4,50,000 | 22.50% |
| II. ASSETS | ||||
| 1. Non-Current Assets | ||||
| (a) Fixed Assets | 12,00,000 | 15,00,000 | 3,00,000 | 25.00% |
| (b) Non-Current Investments | 2,00,000 | 3,00,000 | 1,00,000 | 50.00% |
| 2. Current Assets | 6,00,000 | 6,50,000 | 50,000 | 8.33% |
| TOTAL | 20,00,000 | 24,50,000 | 4,50,000 | 22.50% |
Question 5: Prepare a Common-Size Balance Sheet from the information given in Question 4 for the year 31.3.2024.
A Common-Size Balance Sheet expresses each item as a percentage of Total Assets (or Total Equity and Liabilities). The base amount for 31.3.2024 is ₹24,50,000.
Solution:Common-Size Balance Sheet
as at 31st March, 2024
| Particulars | Absolute Amount (₹) | % of Total (Amount / 24,50,000 * 100) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders' Funds | ||
| (a) Share Capital | 12,00,000 | 48.98% |
| (b) Reserves and Surplus | 4,00,000 | 16.33% |
| 2. Non-Current Liabilities | ||
| (a) Long-term Borrowings | 6,00,000 | 24.49% |
| 3. Current Liabilities | ||
| (a) Trade Payables | 2,50,000 | 10.20% |
| TOTAL | 24,50,000 | 100.00% |
| II. ASSETS | ||
| 1. Non-Current Assets | ||
| (a) Fixed Assets | 15,00,000 | 61.22% |
| (b) Non-Current Investments | 3,00,000 | 12.24% |
| 2. Current Assets | 6,50,000 | 26.53% |
| TOTAL | 24,50,000 | 100.00% |
Working Notes:
- % for Share Capital: (12,00,000 / 24,50,000) * 100 = 48.98%
- % for Fixed Assets: (15,00,000 / 24,50,000) * 100 = 61.22%
- (Similar calculations are done for all other items)
Extra Important Questions (CBSE Board Style 2026-27)
Practice these questions to score full marks in your CBSE Class 12 Accountancy board exam.
Multiple Choice Questions (MCQs)
Q1. Horizontal analysis is also known as:
(a) Static Analysis
(b) Dynamic Analysis
(c) Structural Analysis
(d) Liquidity Analysis
Correct Answer: (b) Dynamic Analysis
Q2. In a Common-Size Statement of Profit & Loss, the base for comparison is:
(a) Total Expenses
(b) Net Profit
(c) Revenue from Operations
(d) Total Assets
Correct Answer: (c) Revenue from Operations
Q3. Which of the following is a limitation of financial analysis?
(a) It helps in decision making
(b) It judges the efficiency of management
(c) It is affected by window dressing
(d) It helps in forecasting
Correct Answer: (c) It is affected by window dressing
Q4. A company’s Revenue from Operations is ₹40,00,000, its Cost of Revenue from Operations is ₹22,00,000 and Operating Expenses are ₹4,00,000. What is its Operating Ratio?
(a) 65%
(b) 55%
(c) 75%
(d) 80%
Correct Answer: (a) 65%.
Explanation: Operating Ratio = (Cost of Revenue from Operations + Operating Expenses) / Revenue from Operations * 100 = (22,00,000 + 4,00,000) / 40,00,000 * 100 = 65%
Explanation: Operating Ratio = (Cost of Revenue from Operations + Operating Expenses) / Revenue from Operations * 100 = (22,00,000 + 4,00,000) / 40,00,000 * 100 = 65%
Q5. An increase in Trade Receivables results in:
(a) Inflow of Cash
(b) Outflow of Cash
(c) No flow of Cash
(d) Application of funds
Correct Answer: (d) Application of funds (as cash is blocked in receivables). This concept links to the Cash Flow Statement chapter.
Short Answer Questions
Q6. What is 'Window Dressing' in the context of financial statements?
Answer: Window dressing refers to the manipulation of financial statements to present a more favorable or better-than-actual financial position of the company. It is a major limitation of financial analysis as the analysis is based on these potentially misleading statements.
Q7. State any two parties interested in the financial analysis of a company.
Answer: Two parties interested in financial analysis are:
1. Investors: To decide whether to buy, hold, or sell the shares of the company.
2. Lenders/Creditors: To assess the company's ability to repay its debts.
1. Investors: To decide whether to buy, hold, or sell the shares of the company.
2. Lenders/Creditors: To assess the company's ability to repay its debts.
Q8. Give the formula to calculate 'Percentage Change' in a Comparative Statement.
Answer: Percentage Change =
(Absolute Change / Amount of Previous Year) x 100. Where, Absolute Change = Current Year's Amount - Previous Year's Amount.Q9. What is the common base for a Common-Size Balance Sheet?
Answer: The common base for a Common-Size Balance Sheet is Total Assets or Total Equity and Liabilities, which is taken as 100%.
Q10. Why is analysis of a single year's financial statement not very useful?
Answer: Analysis of a single year's statement is not very useful because it doesn't provide a basis for comparison. Financial analysis gains significance only when data is compared over time (trend analysis) or with other firms (cross-sectional analysis). A single year's data doesn't show whether the company is improving or declining.
Long Answer Questions
Q11. Explain the limitations of Financial Statement Analysis in detail.
Answer: The limitations of Financial Statement Analysis are:
Step 1: Historical Analysis. Financial statements report past data. This historical information may not be an accurate predictor of the future.
Step 2: Ignores Price Level Changes. The statements are prepared at historical costs and do not consider changes in the purchasing power of money (inflation), which can distort the results.
Step 3: Affected by Personal Judgment. The preparation of statements involves personal judgments and estimates (e.g., method of depreciation, provision for doubtful debts), which can affect the reliability of the data.
Step 4: Window Dressing. Companies may manipulate financial data to show a better position than what it actually is, misleading the analysts.
Step 5: Lack of Qualitative Information. Financial statements only record monetary transactions. They ignore qualitative aspects like the quality of management, brand reputation, and employee morale, which are crucial for a company's success.
Step 6: Difficulty in Comparison. Different firms may follow different accounting policies (e.g., LIFO vs. FIFO for inventory), making direct comparison difficult and sometimes misleading.
Step 1: Historical Analysis. Financial statements report past data. This historical information may not be an accurate predictor of the future.
Step 2: Ignores Price Level Changes. The statements are prepared at historical costs and do not consider changes in the purchasing power of money (inflation), which can distort the results.
Step 3: Affected by Personal Judgment. The preparation of statements involves personal judgments and estimates (e.g., method of depreciation, provision for doubtful debts), which can affect the reliability of the data.
Step 4: Window Dressing. Companies may manipulate financial data to show a better position than what it actually is, misleading the analysts.
Step 5: Lack of Qualitative Information. Financial statements only record monetary transactions. They ignore qualitative aspects like the quality of management, brand reputation, and employee morale, which are crucial for a company's success.
Step 6: Difficulty in Comparison. Different firms may follow different accounting policies (e.g., LIFO vs. FIFO for inventory), making direct comparison difficult and sometimes misleading.
Q12. From the following Balance Sheet of Sunstar Ltd., prepare a Common-Size Balance Sheet.
| Particulars | Amount (₹) |
|---|---|
| Equity and Liabilities | |
| Share Capital | 25,00,000 |
| Reserves and Surplus | 5,00,000 |
| Long-term Borrowings | 10,00,000 |
| Short-term Borrowings | 10,00,000 |
| Total | 50,00,000 |
| Assets | |
| Tangible Assets | 30,00,000 |
| Inventories | 12,00,000 |
| Trade Receivables | 5,00,000 |
| Cash and Cash Equivalents | 3,00,000 |
| Total | 50,00,000 |
Answer:
Common-Size Balance Sheet of Sunstar Ltd.
as at...
| Particulars | Absolute Amount (₹) | % of Total |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders' Funds | ||
| (a) Share Capital | 25,00,000 | 50% |
| (b) Reserves and Surplus | 5,00,000 | 10% |
| 2. Non-Current Liabilities | ||
| (a) Long-term Borrowings | 10,00,000 | 20% |
| 3. Current Liabilities | ||
| (a) Short-term Borrowings | 10,00,000 | 20% |
| TOTAL | 50,00,000 | 100% |
| II. ASSETS | ||
| 1. Non-Current Assets | ||
| (a) Tangible Assets | 30,00,000 | 60% |
| 2. Current Assets | ||
| (a) Inventories | 12,00,000 | 24% |
| (b) Trade Receivables | 5,00,000 | 10% |
| (c) Cash and Cash Equivalents | 3,00,000 | 6% |
| TOTAL | 50,00,000 | 100% |
Q13. Differentiate between Horizontal and Vertical Analysis.
| Basis of Difference | Horizontal Analysis (Dynamic) | Vertical Analysis (Static) |
|---|---|---|
| Meaning | Compares financial data of two or more years to find changes. | Compares items of a single financial year with a common base. |
| Time Period | Involves multiple accounting periods. | Involves a single accounting period. |
| Objective | To analyze the trend and direction of movement. | To analyze the proportion of each item to the total. |
| Tool Used | Comparative Statements. | Common-Size Statements. |
| Information | Shows change in absolute and percentage terms. | Shows each item as a percentage of a common base. |
| Also Known As | Trend Analysis, Dynamic Analysis. | Structural Analysis, Static Analysis. |
Case-Based Question (CBQ)
Q14. Read the following information about TechNova Solutions Ltd. and answer the questions that follow.
TechNova Solutions Ltd., a software company, presented the following extracts from its Statement of Profit and Loss for the years ended 31st March 2023 and 2024.
| Particulars | 2023 (₹) | 2024 (₹) |
|---|---|---|
| Revenue from Operations | 50,00,000 | 60,00,000 |
| Employee Benefit Exp. | 20,00,000 | 27,00,000 |
| Other Expenses | 5,00,000 | 6,00,000 |
The management is concerned about rising costs. You are hired as a junior analyst to help them understand the situation.
[Image: Bar graph showing Revenue, Employee Benefit Expenses, and Other Expenses for both years to visually represent the data]
Questions:
(i) Calculate the absolute and percentage change in Revenue from Operations.
(ii) Calculate the absolute and percentage change in Employee Benefit Expenses.
(iii) For the year 2024, calculate Employee Benefit Expenses as a percentage of Revenue from Operations.
(iv) Based on your analysis, give one observation about the company's performance.
(i) Change in Revenue from Operations:
- Absolute Change: ₹60,00,000 - ₹50,00,000 = ₹10,00,000 (Increase)
- Percentage Change: (10,00,000 / 50,00,000) * 100 = 20% (Increase)
- Absolute Change: ₹27,00,000 - ₹20,00,000 = ₹7,00,000 (Increase)
- Percentage Change: (7,00,000 / 20,00,000) * 100 = 35% (Increase)
- (27,00,000 / 60,00,000) * 100 = 45%
Q15. What are the tools of financial statement analysis? Explain any one.
Answer:
The main tools of financial statement analysis are:
1. Comparative Statements
2. Common-Size Statements
3. Ratio Analysis
4. Cash Flow Statement
Explanation of Comparative Statements:
Step 1: Definition. Comparative Statements are a tool of horizontal analysis. They present financial information for two or more accounting periods in a side-by-side format.
Step 2: Components. This allows for easy comparison and identification of trends. The statement shows the data for the previous year, the data for the current year, the absolute change between the two years (in ₹), and the percentage change between the two years.
Step 3: Utility. This tool is extremely useful for understanding the magnitude and direction of changes in a company's financial performance and position over time.
The main tools of financial statement analysis are:
1. Comparative Statements
2. Common-Size Statements
3. Ratio Analysis
4. Cash Flow Statement
Explanation of Comparative Statements:
Step 1: Definition. Comparative Statements are a tool of horizontal analysis. They present financial information for two or more accounting periods in a side-by-side format.
Step 2: Components. This allows for easy comparison and identification of trends. The statement shows the data for the previous year, the data for the current year, the absolute change between the two years (in ₹), and the percentage change between the two years.
Step 3: Utility. This tool is extremely useful for understanding the magnitude and direction of changes in a company's financial performance and position over time.
Common Mistakes Students Make
- Calculation Errors: Simple mistakes while calculating percentages or absolute change can cost you marks. Double-check your calculations.
- Format Confusion: Mixing up the format of a Comparative Statement with a Common-Size Statement. Remember: Comparative = Side-by-side years, Common-Size = % of a base.
- Incorrect Base: Using the wrong base for calculation. In Comparative statements, the base is always the previous year's amount. In Common-Size statements, it's Total Assets or Revenue from Operations.
- Forgetting Brackets: Not using brackets `()` to denote negative figures or decreases. This is a crucial presentation standard.
- Ignoring Theory: This chapter has important theoretical concepts like objectives and limitations, which are often asked as 1 or 3-mark questions. Don't skip them.
Exam Preparation Tips for 2026-27
- Master the Formats: Practice drawing the formats for Comparative and Common-Size statements until you can do it from memory. This saves time in the exam.
- One Question a Day: The calculation part is easy but needs practice. Solve one question on Comparative/Common-Size statements daily to build speed and accuracy.
- Understand, Don't Just Memorize: Understand *why* you are doing the analysis. What does an increase in expenses mean? What does a decrease in liabilities imply? This helps in answering case-based questions.
- Time Management: A 4-6 mark question on this topic should not take more than 10-12 minutes. Time yourself while practicing.
- Focus on Presentation: Use proper headings, columns, and working notes. A neat and clean answer script always fetches better marks.
Frequently Asked Questions (FAQs)
Q1. What is the main difference between Comparative and Common-Size Statements?
A Comparative Statement compares financial data across different years to show trends, using the previous year as the base for percentages. A Common-Size Statement analyzes data of a single year by showing each item as a percentage of a common base (like total assets or revenue).
Q2. Is Chapter 4 Analysis of Financial Statements important for CUET?
Yes, absolutely. Questions on the tools of financial analysis, including Comparative and Common-Size Statements, are frequently asked in the Accountancy section of the CUET exam.
Q3. How to calculate percentage change when the previous year's figure is zero or negative?
If the previous year's figure is zero and the current year has a value, the percentage change is considered infinite or not meaningful to calculate. If the base year is negative, percentage change calculation becomes complex and is generally not asked in CBSE exams.
Q4. What are the main tools of financial analysis for CBSE Class 12?
For CBSE Class 12, the primary tools of financial analysis you need to master are Comparative Statements, Common-Size Statements, Ratio Analysis, and the Cash Flow Statement.
Q5. Can I use a calculator in the board exam for this chapter?
As per CBSE guidelines, calculators are not allowed in the Class 12 Accountancy board exam. All calculations, including percentages, must be done manually. Therefore, practicing manual calculations is very important.
Conclusion: Congratulations on making it through this detailed guide for Class 12 Accountancy Chapter 4: Analysis of Financial Statements. This chapter is a stepping stone to more advanced financial topics and is a scoring one if you get the concepts right. The key is consistent practice. Keep revising the formats, solve plenty of problems from your NCERT book and past year question papers (PYQs), and you'll be well on your way to acing your board exams. Happy learning!
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