NCERT Solutions for Class 12 Accountancy Chapter 8: Analysis of Financial Statements (NCERT 2026–27)

Q: What is Chapter 8 of Class 12 Accountancy about?

Chapter 8, Analysis of Financial Statements, explains the meaning, significance, objectives and limitations of analysing financial statements and introduces the main tools - comparative statements (horizontal analysis), common size statements (vertical analysis) and trend analysis - with ratio and cash flow analysis covered in later chapters.

Q: How is the percentage change calculated in a comparative statement?

Percentage change = (Absolute change / previous-year/base figure) x 100, where absolute change = current-year figure - previous-year figure. A decrease is shown in brackets. For example, a rise from Rs.2,00,000 to Rs.4,00,000 is a 100% increase.

These Class 12 Accountancy Chapter 8 solutions cover Analysis of Financial Statements — the chapter that introduces the main tools of financial analysis: comparative statements, common size statements and trend analysis. Below you get fully worked, step-by-step answers to every Questions for Practice item: all Short Answer and Long Answer theory questions in exam-ready prose, and all six Numerical Questions solved with complete working in clearly formatted tables (comparative balance sheets, comparative statements of profit & loss, and common size statements), updated for the 2026–27 session. Extra practice, MCQs, Assertion–Reason and FAQs follow.

Class: 12 Subject: Accountancy Book: Company Accounts & Analysis of Financial Statements Chapter: 8 Topic: Analysis of Financial Statements Session: 2026–27

On this page

Chapter overview
Key terms, concepts & formats
NCERT Short Answer Questions
NCERT Long Answer Questions
NCERT Numerical Questions (full working)
Extra practice questions
MCQs & Assertion–Reason
Exam tips & common mistakes
FAQs

Class 12 Accountancy Chapter 8 – Overview

Financial statements (the Statement of Profit & Loss and the Balance Sheet) summarise a company’s operating results and financial position, but the raw figures need analysis and interpretation before they reveal a firm’s strengths and weaknesses. Analysis of Financial Statements is the critical evaluation of this information to support decision-making. The chapter explains the significance of analysis for different users (finance managers, top management, trade payables, lenders, investors, labour unions and others), its objectives, and its limitations (it ignores price-level changes, can be distorted by window dressing and changing accounting policies, and considers only monetary information). It then introduces five tools — comparative statements (horizontal analysis), common size statements (vertical analysis), trend analysis, ratio analysis and cash flow analysis — and works the first three in detail, leaving ratio analysis and cash flow analysis for later chapters.

Key Terms, Concepts & Formats

Financial statement analysis: the process of critically evaluating the financial information in the financial statements to understand and make decisions about the operations of the firm. It includes both analysis (simplifying data by methodical classification) and interpretation (explaining its meaning and significance).

Comparative statements (horizontal analysis): statements that show the profitability and financial position of a firm for two or more periods side by side, with the absolute and percentage change between periods, to reveal the trend and direction of performance.

Common size statements (vertical analysis): statements in which each item is expressed as a percentage of a common base — revenue from operations for the statement of profit & loss, and total assets / total liabilities for the balance sheet — so that firms of different sizes can be compared.

Trend analysis: studying operational results and financial position over a series of years by expressing each year’s figure as a percentage of the same item in a chosen base year.

Intra-firm vs inter-firm comparison: intra-firm compares a firm’s own performance over time (time-series); inter-firm compares one firm with another or with the industry (cross-sectional).

Absolute change = Current-year figure − Previous-year (base) figure.

Percentage change = (Absolute change ÷ Base-year figure) × 100.

Common size % = (Item ÷ Common base) × 100, where the base is Revenue from operations (P&L) or Total assets/liabilities (Balance Sheet).

Trend percentage = (Figure of the given year ÷ Figure of the base year) × 100.

NCERT Short Answer Questions — Full Solutions

All questions below are reproduced verbatim from the NCERT textbook’s Questions for Practice. Answers are original, written in exam-ready style.

1. List the techniques of Financial Statement Analysis.

ANSWER The most commonly used techniques (tools) of financial statement analysis are: 1. Comparative Statements (horizontal analysis). 2. Common Size Statements (vertical analysis). 3. Trend Analysis. 4. Ratio Analysis. 5. Cash Flow Analysis.

2. Distinguish between Vertical and Horizontal Analysis of financial data.

ANSWER Horizontal analysis compares the items of financial statements over several periods of time. Each item is examined across years to find the absolute and percentage change; comparative statements and trend analysis are examples. It is also called dynamic analysis. Vertical analysis studies the relationship of the items in a financial statement of one period by expressing each item as a percentage of a common base of the same statement (e.g. each asset as a percentage of total assets). Common size statements and ratio analysis are examples. It is also called static analysis.

3. State the meaning of Analysis and Interpretation.

ANSWER Analysis means the simplification of financial data by methodically classifying and regrouping the figures given in the financial statements, so that meaningful relationships can be established. Interpretation means explaining the meaning and significance of the data so simplified. The two are complementary: analysis is useless without interpretation, and interpretation is difficult without prior analysis.

4. State the importance of Financial Analysis?

ANSWER Financial analysis identifies a firm’s financial strengths and weaknesses by establishing relationships between items of the balance sheet and the statement of profit & loss. Its importance lies in serving different users: Finance manager & management – to judge performance, efficiency and creditworthiness, exercise financial control and take corrective action. Trade payables – to assess the firm’s short-term liquidity and its ability to meet obligations. Lenders – to judge long-term solvency, profitability and the firm’s ability to pay interest and repay principal. Investors – to assess present and future profitability, risk and capital structure before buying, selling or holding shares. Labour unions, government and others – to assess wage-paying capacity, regulate prices and study economic conditions.

5. What are Comparative Financial Statements?

ANSWER Comparative financial statements are statements of profit & loss and balance sheets prepared with columns for the figures of both the current year and the previous year, together with the change during the year in absolute and relative (percentage) terms. They make it possible to see not only the balances on different dates but also the extent of their increase or decrease, helping identify the direction of change and the trends in performance. This is a form of horizontal analysis.

6. What do you mean by Common Size Statements?

ANSWER Common size statements (also called component percentage statements) are statements in which each item is expressed as a percentage of a common base — revenue from operations for the statement of profit & loss and total assets/liabilities for the balance sheet. Because all figures are brought to a common base, the statements of firms of different sizes, or of the same firm over years, can be readily compared. This is a form of vertical analysis.

NCERT Long Answer Questions — Full Solutions

1. Describe the different techniques of financial analysis and explain the limitations of financial analysis.

ANSWER Techniques of financial analysis: 1. Comparative Statements – show profitability and financial position for two or more periods side by side, with absolute and percentage changes, indicating the trend and direction of performance (horizontal analysis). 2. Common Size Statements – express each item as a percentage of a common base, allowing comparison between firms of different sizes (vertical analysis). 3. Trend Analysis – studies results over a series of years by expressing each year’s figure as a percentage of a base-year figure, revealing whether items are rising, falling or steady. 4. Ratio Analysis – measures the relationship between various items of the balance sheet and statement of profit & loss to assess profitability, solvency and efficiency. 5. Cash Flow Analysis – analyses the actual inflow and outflow of cash to explain the change in the cash position between two balance-sheet dates. Limitations of financial analysis: (i) it ignores price-level (inflation) changes; (ii) it can be misleading without knowledge of changes in accounting procedures followed by the firm; (iii) it is only a study of past reports and not a substitute for judgement; (iv) it considers only monetary information and ignores non-monetary (qualitative) factors; and (v) statements are based on accounting concepts and conventions, so they may not reflect the current/true position. It is also affected by window dressing and personal judgement.

2. Explain the usefulness of trend percentages in interpretation of financial performance of a company.

ANSWER Trend percentages express the figures of successive years as a percentage of a chosen base year (taken as 100), so that the long-run movement of each item can be observed at a glance. Their usefulness in interpretation is: • They give a long-run, dynamic view of performance and may point to basic changes in the nature of the business. • By looking at the trend of a particular item or ratio, one can tell whether it is rising, falling or remaining constant. • They help detect problems early and reveal signs of good or poor management. • They simplify the comparison of several years’ data at once and make inter-firm comparison easier as figures are on a common (percentage) base. • They assist in forecasting and budgeting by projecting likely future levels from the established trend.

3. What is the importance of comparative statements? Illustrate your answer with particular reference to comparative income statement.

ANSWER Importance of comparative statements: they present current and previous figures together with the absolute and percentage change, which helps to (i) identify the direction and trend of changes in performance; (ii) assess the increase or decrease in each item between two dates; (iii) judge operational efficiency and financial soundness over time; and (iv) make both intra-firm and inter-firm comparisons. Reference to a comparative income statement (statement of profit & loss): it shows the change in revenue from operations, other incomes, individual expenses, profit before tax, tax and profit after tax. For example, if revenue from operations rises by 25% but expenses rise by only 15%, the comparative income statement immediately reveals that profit before tax has grown faster than sales, signalling improved operating efficiency. (See Illustrations 1 and 2 in the chapter, where BCR Co. Ltd.’s profit after tax rises 35.03% and Madhu Co. Ltd.’s rises 50%.)

4. What do you understand by analysis and interpretation of financial statements? Discuss its importance.

ANSWER Analysis and interpretation of financial statements is the critical evaluation of the information contained in the financial statements — studying the relationship among various financial facts and figures (analysis) and explaining their meaning and significance (interpretation) — to gain insight into the profitability, operational efficiency, financial health and future prospects of the firm. Importance: it helps to (i) assess current profitability and operational efficiency of the firm and its departments; (ii) ascertain the relative importance of the different components of the financial position; (iii) identify the reasons for changes in profitability or financial position; (iv) judge the firm’s ability to repay debt and assess its short-term and long-term liquidity; and (v) support decision-making and forecasting by management, lenders, investors and other users, and provide a basis for governmental actions such as price regulation and taxation.

5. Explain how common size statements are prepared giving an example.

ANSWER Procedure for preparing a common size statement: 1. List the absolute figures (in rupees) for the two points of time. 2. Choose a common base = 100 — revenue from operations for the statement of profit & loss, and total assets (or total liabilities) for the balance sheet. 3. Express every item as a percentage of that base, i.e. (item ÷ base) × 100, and enter the percentage alongside the absolute figure. Example (common size statement of profit & loss): if revenue from operations is ₹25,00,000 (base = 100) and cost of goods sold is ₹12,00,000, then cost of goods sold is (12,00,000 ÷ 25,00,000) × 100 = 48% and gross profit is 52%. Repeating this for every item for successive years shows how each component’s share of sales has changed over time. (See Illustrations 5–7 in the chapter.)

NCERT Numerical Questions — Full Working

Note: In the printed NCERT data a few figures contain obvious typographical slips; the totals in each question have been used to reconcile the figures, and any assumption made is stated under the solution. Percentage change = (Absolute change ÷ previous-year figure) × 100. Figures in brackets ( ) denote a decrease.

1. Following are the balance sheets of Alpha Ltd., as at March 31, 2016 and 2017. You are required to prepare Comparative Balance Sheet.

SOLUTION Comparative Balance Sheet of Alpha Ltd. as at March 31, 2016 and 2017

Particulars	2016 (₹)	2017 (₹)	Absolute change (₹)	% change
I. Equity and Liabilities
1. Shareholders’ Funds – (a) Share Capital	2,00,000	4,00,000	2,00,000	100.00
(b) Reserve & Surplus	1,00,000	1,50,000	50,000	50.00
2. Non-current Liabilities – Long Term Borrowings	2,00,000	3,00,000	1,00,000	50.00
3. Current Liabilities – (a) Short term borrowings	50,000	70,000	20,000	40.00
(b) Trade Payables	30,000	60,000	30,000	100.00
(c) Other Current Liabilities	20,000	10,000	(10,000)	(50.00)
(d) Short Term Provisions	20,000	20,000	—	—
Total	6,20,000	10,20,000	4,00,000	64.52
II. Assets
1. Non-current Assets – (a) Fixed Assets	2,00,000	5,00,000	3,00,000	150.00
(b) Non-Current Investments	1,00,000	1,25,000	25,000	25.00
2. Current Assets – (a) Current Investments	60,000	80,000	20,000	33.33
(b) Inventories	1,35,000	1,55,000	20,000	14.81
(c) Trade Receivables	60,000	90,000	30,000	50.00
(d) Cash and Cash Equivalents	25,000	10,000	(15,000)	(60.00)
(e) Short term Loans & Advances	40,000	60,000	20,000	50.00
Total	6,20,000	10,20,000	4,00,000	64.52

2. Following are the Balance Sheets of Beta Ltd., as at March 31, 2016 and 2017. Prepare comparative Balance Sheet.

SOLUTION Comparative Balance Sheet of Beta Ltd. as at March 31, 2016 and 2017 The total of the Equity & Liabilities side for 2016 is taken as ₹11,00,000 (the printed “1,10,000” is a misprint), so that both sides foot to ₹11,00,000 (2016) and ₹7,00,000 (2017).

Particulars	2016 (₹)	2017 (₹)	Absolute change (₹)	% change
I. Equity and Liabilities
1. Shareholders’ Funds – (a) Share Capital	4,00,000	3,00,000	(1,00,000)	(25.00)
(b) Reserves and Surplus	1,50,000	1,00,000	(50,000)	(33.33)
2. Non-current Liabilities – Long term borrowings (IDBI)	3,00,000	1,00,000	(2,00,000)	(66.67)
3. Current Liabilities – (a) Short term borrowings	70,000	50,000	(20,000)	(28.57)
(b) Trade payables	60,000	30,000	(30,000)	(50.00)
(c) Other current liabilities	1,10,000	1,00,000	(10,000)	(9.09)
(d) Short term provisions	10,000	20,000	10,000	100.00
Total	11,00,000	7,00,000	(4,00,000)	(36.36)
II. Assets
1. Non-current Assets – (a) Fixed Assets	4,00,000	2,20,000	(1,80,000)	(45.00)
(b) Non-current Investments	2,25,000	1,00,000	(1,25,000)	(55.56)
2. Current Assets – (a) Current Investments	80,000	60,000	(20,000)	(25.00)
(b) Inventories	1,05,000	90,000	(15,000)	(14.29)
(c) Trade Receivables	90,000	60,000	(30,000)	(33.33)
(d) Cash and Cash Equivalents	1,00,000	85,000	(15,000)	(15.00)
(e) Short term loans & Advances	1,00,000	85,000	(15,000)	(15.00)
Total	11,00,000	7,00,000	(4,00,000)	(36.36)

3. Prepare Comparative Statement of profit and loss from the following information.

SOLUTION Working notes — Cost of revenue from operations and Revenue from operations: • Net purchases = Cash purchases + Credit purchases. Cost of revenue from operations = Net purchases + Manufacturing expenses ± Stock adjustment. 2015–16: (80,000 + 60,000) + 50,000 − 60,000 (stock increased) = ₹1,30,000. 2016–17: (60,000 + 20,000) + 20,000 + 30,000 (stock decreased) = ₹1,30,000. • Revenue from operations (net) = Cost of revenue from operations + Gross profit. 2015–16: 1,30,000 + (−30,000) = ₹1,00,000. 2016–17: 1,30,000 + 90,000 = ₹2,20,000. • Other income = Profit on sale of furniture. Finance costs = Interest on short-term loans + interest on 10% debentures (10% × 20,000 = 2,000 / 10% × 10,000 = 1,000). Other expenses = Freight outward + Carriage outward + Loss on sale of office car. Employee benefit expenses = Office wages. Machinery is a balance-sheet item; only its depreciation is charged. Since both years show a loss before tax, no income tax is payable, so profit after tax equals profit before tax.

Particulars	2015–16 (₹)	2016–17 (₹)	Absolute change (₹)	% change
I. Revenue from operations	1,00,000	2,20,000	1,20,000	120.00
II. Add: Other income (profit on sale of furniture)	20,000	10,000	(10,000)	(50.00)
III. Total Revenue (I + II)	1,20,000	2,30,000	1,10,000	91.67
IV. Less: Expenses
(a) Cost of revenue from operations	1,30,000	1,30,000	—	—
(b) Employee benefit expenses (office wages)	10,000	5,000	(5,000)	(50.00)
(c) Depreciation on machinery	10,000	5,000	(5,000)	(50.00)
(d) Finance costs (interest on loans + debentures)	22,000	21,000	(1,000)	(4.55)
(e) Other expenses (freight + carriage + loss on car)	1,30,000	80,000	(50,000)	(38.46)
Total Expenses	3,02,000	2,41,000	(61,000)	(20.20)
V. Profit/(Loss) before tax (III − Total Expenses)	(1,82,000)	(11,000)	1,71,000	93.96
VI. Less: Tax (no tax on a loss)	—	—	—	—
VII. Profit/(Loss) after tax	(1,82,000)	(11,000)	1,71,000	93.96

The loss narrowed by ₹1,71,000 (about 94%) chiefly because revenue from operations more than doubled while the heavy loss on sale of the office car fell from ₹90,000 to ₹60,000.

4. Prepare Comparative Statement of Profit and Loss from the following information.

SOLUTION Working notes — Cost of revenue from operations: 2015–16: Opening stock 30,000; Closing stock = 150% × 30,000 = 45,000. Credit purchases 1,50,000; Cash purchases = 80% × 1,50,000 = 1,20,000; Returns outward 4,000 ⇒ Net purchases = 2,66,000. Cost = 30,000 + 2,66,000 + Manufacturing 35,000 − 45,000 = ₹2,86,000. Gross profit = Sales 9,60,000 − 2,86,000 = ₹6,74,000. 2016–17: Closing stock 1,00,000; Opening stock = 60% × 1,00,000 = 60,000. Cash purchases 40,000; Credit purchases = 150% × 40,000 = 60,000; Returns outward 6,000 ⇒ Net purchases = 94,000. Cost = 60,000 + 94,000 + Manufacturing 80,000 − 1,00,000 = ₹1,34,000. Gross profit = Sales 4,50,000 − 1,34,000 = ₹3,16,000. • Other income = Profit on sale of copyright. Other expenses = Carriage outward + Other operating expenses + Depreciation on building (20% × 1,00,000 = 20,000 / 10% × 2,00,000 = 20,000). Finance costs = Interest on bank overdraft + interest on 10% debentures. The debentures are taken as ₹2,00,000 in both years (the printed “20,00,000” for 2016–17 is a misprint), giving debenture interest of ₹20,000 each year. Loss on sale of personal car is a personal item and is ignored.

Particulars	2015–16 (₹)	2016–17 (₹)	Absolute change (₹)	% change
I. Revenue from operations (Sales)	9,60,000	4,50,000	(5,10,000)	(53.13)
II. Add: Other income (profit on sale of copyright)	10,000	20,000	10,000	100.00
III. Total Revenue (I + II)	9,70,000	4,70,000	(5,00,000)	(51.55)
IV. Less: Expenses
(a) Cost of revenue from operations	2,86,000	1,34,000	(1,52,000)	(53.15)
(b) Finance costs (overdraft + debenture interest)	25,000	20,000	(5,000)	(20.00)
(c) Other expenses (carriage + operating + dep. on building)	50,000	60,000	10,000	20.00
Total Expenses	3,61,000	2,14,000	(1,47,000)	(40.72)
V. Profit before tax (III − Total Expenses)	6,09,000	2,56,000	(3,53,000)	(57.96)
VI. Less: Tax (2015–16 @50%, 2016–17 @40%)	3,04,500	1,02,400	(2,02,100)	(66.37)
VII. Profit after tax	3,04,500	1,53,600	(1,50,900)	(49.56)

Other expenses 2015–16 = 10,000 + 20,000 + 20,000 = ₹50,000; 2016–17 = 30,000 + 10,000 + 20,000 = ₹60,000. Finance cost 2015–16 = 5,000 + 20,000 = ₹25,000; 2016–17 = 0 + 20,000 = ₹20,000.

5. Prepare a Common size statement of profit and loss of Shefali Ltd. with the help of following information.

SOLUTION Working notes: Gross profit = Revenue from operations − Cost of revenue from operations. 2015–16: 6,00,000 − 4,28,000 = ₹1,72,000; Indirect expense = 25% × 1,72,000 = ₹43,000. 2016–17: 8,00,000 − 7,28,000 = ₹72,000; Indirect expense = 25% × 72,000 = ₹18,000. (Revenue from operations 2016–17 read as ₹8,00,000.) Profit before tax = Gross profit − Indirect expense + Other incomes. Base for percentages = Revenue from operations.

Particulars	Absolute amount (₹)		% of Revenue from operations
Particulars	2015–16	2016–17	2015–16	2016–17
I. Revenue from operations	6,00,000	8,00,000	100.00	100.00
II. Less: Cost of revenue from operations	4,28,000	7,28,000	71.33	91.00
III. Gross profit (I − II)	1,72,000	72,000	28.67	9.00
IV. Less: Indirect expenses (25% of gross profit)	43,000	18,000	7.17	2.25
V. Add: Other incomes	10,000	12,000	1.67	1.50
VI. Profit before tax (III − IV + V)	1,39,000	66,000	23.17	8.25
VII. Less: Income tax @30%	41,700	19,800	6.95	2.48
VIII. Profit after tax	97,300	46,200	16.22	5.78

6. Prepare a Common Size balance sheet from the following balance sheet of Aditya Ltd., and Anjali Ltd.

SOLUTION Common Size Balance Sheet of Aditya Ltd. and Anjali Ltd. — each item is shown as a percentage of total (Aditya total = ₹10,00,000; Anjali total = ₹12,00,000). The printed Aditya assets total “1,00,0000” is read as ₹10,00,000.

Particulars	Absolute amount (₹)		% of Total
Particulars	Aditya Ltd.	Anjali Ltd.	Aditya Ltd.	Anjali Ltd.
I. Equity and Liabilities
1. Shareholders’ Funds – (a) Equity share capital	6,00,000	8,00,000	60.00	66.67
(b) Reserves and surplus	3,00,000	2,50,000	30.00	20.83
2. Current liabilities	1,00,000	1,50,000	10.00	12.50
Total	10,00,000	12,00,000	100.00	100.00
II. Assets
1. Non-current assets – Fixed assets	4,00,000	7,00,000	40.00	58.33
2. Current assets	6,00,000	5,00,000	60.00	41.67
Total	10,00,000	12,00,000	100.00	100.00

Extra Practice Questions

Short Answer Type Questions

Q1. Why is comparative analysis called ‘horizontal analysis’?

ANSWERIn a comparative statement the same item is read across (horizontally) over two or more periods to find the absolute and percentage change. Because the comparison runs along the rows from one year to the next, it is called horizontal analysis.

Q2. State any two objectives of analysis of financial statements.

ANSWER(i) To assess the current profitability and operational efficiency of the firm so as to judge its financial health; and (ii) to judge the firm’s ability to repay its debts and to assess its short-term and long-term liquidity position.

Q3. What base is used in a common size income statement and in a common size balance sheet?

ANSWERIn a common size statement of profit & loss the base (100) is revenue from operations; in a common size balance sheet the base (100) is total assets (or, equivalently, total of equity and liabilities).

Q4. Give the formula for percentage change used in comparative statements.

ANSWERPercentage change = (Absolute increase or decrease ÷ Previous-year/base figure) × 100. For example, if share capital rises from ₹2,00,000 to ₹4,00,000, the change is ₹2,00,000 and the percentage change is (2,00,000 ÷ 2,00,000) × 100 = 100%.

Q5. Name any two limitations of financial analysis.

ANSWER(i) It ignores price-level (inflation) changes, so figures of different years are not strictly comparable; and (ii) it considers only monetary information and ignores non-monetary (qualitative) factors such as management quality and employee relations.

Long Answer Type Questions

Q1. “Comparative statements and common size statements complement each other.” Explain.

ANSWERA comparative statement is a form of horizontal analysis: it shows how each item has changed in absolute and percentage terms over time, highlighting the direction and trend of performance — for example, that revenue grew 25% while expenses grew only 15%. However, it does not reveal the relative importance of each item within a single year. A common size statement fills this gap through vertical analysis: it expresses every item as a percentage of a common base (revenue or total assets) for each year, showing the internal structure of the statement and allowing comparison between firms of different sizes. Used together, comparative statements tell us how much things changed, while common size statements tell us how the composition changed — so an analyst gets both the movement and the structure of the firm’s finances, leading to a fuller interpretation.

Q2. Explain the significance of financial analysis from the point of view of lenders and investors.

ANSWERLenders (suppliers of long-term debt) are concerned with the firm’s long-term solvency and survival. Through analysis they examine profitability over time, the firm’s ability to generate cash to pay interest and repay principal, and its capital-structure relationships, before deciding whether to lend and on what terms. Investors, who have put money into the firm’s shares, are interested mainly in present and future profitability and in the firm’s capital structure, which affects earnings and risk. They also evaluate the efficiency of management to decide whether a change is needed and, in large companies, simply whether to buy, sell or hold the shares. Thus financial analysis equips both groups to judge return, risk and the safety of their funds, supporting rational investment and lending decisions.

Q3. Describe the steps in preparing a comparative balance sheet, and what an analyst learns from it.

ANSWERSteps: (1) list the absolute figures of each item for the two dates in adjacent columns; (2) find the absolute change by subtracting the earlier-year figure from the later-year figure, marking it as an increase (+) or decrease (−); and (3) compute the percentage change = (absolute change ÷ earlier-year figure) × 100. Totals of equity & liabilities and of assets are reconciled to ensure the sheet still balances. What it reveals: the comparative balance sheet shows the direction and size of changes in share capital, reserves, borrowings, fixed assets, working capital and so on. An analyst can judge whether the firm has grown, how the growth was financed (equity vs debt), whether liquidity (current assets vs current liabilities) has improved or worsened, and whether the asset structure is shifting — all of which indicate the firm’s changing financial soundness and the direction of management’s decisions.

MCQs & Assertion–Reason

1. Comparative statements are also known as:

(a) Vertical analysis (b) Horizontal analysis (c) Ratio analysis (d) External analysis

2. Common size analysis is also known as:

(a) Horizontal analysis (b) Dynamic analysis (c) Vertical analysis (d) Trend analysis

3. In a common size statement of profit & loss, every item is expressed as a percentage of:

(a) Total assets (b) Net profit (c) Revenue from operations (d) Share capital

4. The base used for a common size balance sheet is:

(a) Revenue from operations (b) Total assets (c) Gross profit (d) Net profit

5. Which of the following is not a tool of financial statement analysis?

(a) Comparative statements (b) Common size statements (c) Journal entries (d) Cash flow analysis

6. The technique that expresses each year’s figure as a percentage of a base-year figure is:

(a) Trend analysis (b) Ratio analysis (c) Common size statement (d) Cash flow analysis

7. The percentage change in comparative statements is calculated on the:

(a) Current year’s figure (b) Previous (base) year’s figure (c) Average of the two years (d) Highest figure

8. Which of the following is a limitation of financial analysis?

(a) It establishes relationships (b) It ignores price-level changes (c) It helps decision-making (d) It detects trends

9. The Balance Sheet provides information about the financial position of an enterprise:

(a) Over a period of time (b) For a period of time (c) At a point in time (d) None of these

10. Which technique is most useful for comparing two companies of very different sizes in the same industry?

(a) Comparative statements (b) Common size statements (c) Cash flow statement (d) None of these

Answer key: 1-(b), 2-(c), 3-(c), 4-(b), 5-(c), 6-(a), 7-(b), 8-(b), 9-(c), 10-(b).

For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.

A-R 1. Assertion: Comparative statements are a form of horizontal analysis.

Reason: In comparative statements the same item is compared across two or more periods of time.

A-R 2. Assertion: In a common size balance sheet, total assets are taken as 100.

Reason: A common size statement expresses each item as a percentage of a common base.

A-R 3. Assertion: Financial analysis reflects the current market position of a firm.

Reason: Financial statements are prepared on the basis of accounting concepts and historical cost.

A-R 4. Assertion: Analysis without interpretation is of little use.

Reason: Interpretation explains the meaning and significance of the simplified data.

A-R 5. Assertion: Financial analysis is used only by the creditors of a firm.

Reason: A finance manager uses analysis to study performance and exercise financial control.

Answer key: 1-(A), 2-(A), 3-(D), 4-(A), 5-(D).

Exam Tips & Common Mistakes

How to score full marks in this chapter

Always remember the two anchors: comparative = horizontal (change over time, in ₹ and %), and common size = vertical (each item as a % of a base). In numericals, write the format/heading correctly, show the absolute change and the percentage change on the base (previous) year, and mark decreases in brackets. For common size statements, take revenue from operations = 100 in the P&L and total assets = 100 in the balance sheet, and verify each column totals 100%. State clearly any assumption you make where the data is incomplete. For theory, quote the textbook objectives, the five tools and the five limitations.

Common mistakes to avoid

Calculating the percentage change on the current year instead of the previous (base) year.
Forgetting the (brackets) or minus sign for a decrease, so a fall looks like a rise.
In a common size balance sheet, using revenue from operations as the base instead of total assets.
Not ensuring the two sides of a comparative balance sheet foot to the same total.
Mixing up analysis (simplifying data) with interpretation (explaining its meaning).
Treating trend analysis and common size analysis as the same — trend uses a base year, common size uses a base item.
Including personal/non-business items (e.g. loss on sale of personal car) in the statement of profit & loss.

Frequently Asked Questions

What is Chapter 8 of Class 12 Accountancy about?

Chapter 8, Analysis of Financial Statements, explains the meaning, significance, objectives and limitations of analysing financial statements and introduces the main tools — comparative statements (horizontal analysis), common size statements (vertical analysis) and trend analysis — with ratio and cash flow analysis covered in later chapters.

What is the difference between a comparative statement and a common size statement?

A comparative statement (horizontal analysis) shows the absolute and percentage change in each item over two or more periods, revealing trends over time. A common size statement (vertical analysis) expresses each item as a percentage of a common base — revenue from operations for the P&L and total assets for the balance sheet — revealing the internal structure and allowing comparison of firms of different sizes.

How is the percentage change calculated in a comparative statement?

Percentage change = (Absolute change ÷ previous-year/base figure) × 100, where absolute change = current-year figure − previous-year figure. A decrease is shown in brackets. For example, a rise from ₹2,00,000 to ₹4,00,000 is a 100% increase.

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