Let us begin with something honest. For two whole years you have been taught how to make financial statements — how to post a journal entry, how to draw up a Balance Sheet, how to present a Statement of Profit and Loss in the format Schedule III asks for. And now, quite suddenly, the syllabus turns around and asks a completely different question: so what? The statements are ready. What do they actually tell you?
That is this chapter. Analysis of Financial Statements is where accounting stops being a recording job and starts being a thinking job. If preparing the statements is like buying and chopping the ingredients, analysis is the tasting — the moment you dip the spoon in and say, honestly, this needs more salt, or this has gone bitter, or actually this is rather good. The numbers do not change. Your relationship with them does.
And here is the reassuring part, which I want you to hear before we go any further: this chapter is arithmetically easy. There is no complicated adjustment, no revaluation account, no ratio of profit sharing to worry about. You will subtract one number from another, divide by the first number, and multiply by a hundred. That is genuinely most of it. The marks in this unit are lost not to hard sums but to careless formats, missing totals, wrong bases and — most of all — to students who compute beautifully and then write no interpretation at all. We are going to fix every one of those habits, slowly, with worked examples you can copy the discipline from.
Take it gently. Read a section, do its examples with a pen in your hand, and only then move on. Nothing here needs to be rushed.
What You’ll Learn
- What Financial Statement Analysis Really Means
- Why Analysis Matters: The Objectives
- Who Uses The Analysis (Internal And External Parties)
- Significance And Importance
- Limitations Of Financial Statement Analysis
- Types Of Analysis: Horizontal vs Vertical
- Intra-Firm vs Inter-Firm Comparison
- The Four Tools At A Glance
- Comparative Statements: The Idea
- Preparing A Comparative Statement Of Profit And Loss
- Preparing A Comparative Balance Sheet
- Reading And Interpreting A Comparative Statement
- Common Size Statements: The Idea
- Preparing A Common Size Statement Of Profit And Loss
- Preparing A Common Size Balance Sheet
- Comparative vs Common Size: Choosing The Right Tool
- Ratio Analysis And Cash Flow Analysis As Tools (Overview)
- Percentage Change: The Arithmetic Students Get Wrong
- Writing The Interpretation Sentence That Earns The Mark
- Common Mistakes Students Make
- How Marks Are Awarded In The Board Exam
Your Game Plan
- Get the vocabulary straight first. Meaning, objectives, users, significance, limitations. These are the 1-mark and 3-mark theory carriers and they cost you nothing but a careful read.
- Fix the two directions in your head. Horizontal means across years. Vertical means inside one year. Everything else in this chapter hangs off that single distinction.
- Learn one format perfectly, then the second is free. Master the Comparative Statement of Profit and Loss column-by-column; the Comparative Balance Sheet uses the identical five columns.
- Drill the percentage arithmetic until it is boring. Absolute change divided by the previous year figure. Say it out loud. This one habit protects half the marks in the unit.
- Practise writing the interpretation sentence. One line per observation, with a number in it. Most students skip this and quietly donate two marks per question.
- Finish with the worksheet at the bottom under timed conditions, then check every total and every percentage yourself before opening the answers.
Study Notes
What Financial Statement Analysis Really Means
Financial statement analysis is the process of breaking a set of financial statements into their parts, re-expressing those parts in a comparable form, and drawing meaningful conclusions about the profitability, financial position and operating efficiency of a business.
Notice the three verbs hidden in that sentence, because CBSE examiners love them: break down, re-express, conclude. A student who only breaks down and re-expresses has done bookkeeping. A student who concludes has done analysis.
Think about what a raw Statement of Profit and Loss actually gives you. It tells you that a company earned ₹25,00,000 of revenue and made ₹3,90,000 of profit after tax. That is a fact, and it is a lonely one. Is ₹3,90,000 good? You cannot possibly say. Good compared to what? Compared to last year? Compared to the company down the road? Compared to the revenue that produced it? The single number floats in space with nothing to lean against.
Analysis gives it something to lean against. The instant you place last year’s ₹3,00,000 beside it, you have a story: profit rose by ₹90,000, or 30 per cent. The instant you express it as a percentage of revenue, you have another story: the company kept 15.6 paise of every rupee of sales this year against 15 paise last year. Same raw number. Suddenly, meaning.
There is a second word you must be able to separate from analysis, and CBSE has asked about it: interpretation. Analysis is the mechanical part — the regrouping, the computing, the percentages. Interpretation is the judgement part — explaining what the computed figure signifies. In practice the two are so tightly joined that the syllabus treats them as one process, but in a 3-mark theory answer it is worth showing the examiner you know they are different stages of the same job.
A firm reports Employee benefit expenses of ₹3,60,000 for the year ended 31st March 2026. Comment.
Working. Standing alone, no comment is possible. Now suppose we are told two more things: last year the figure was ₹3,00,000, and revenue from operations was ₹20,00,000 last year and ₹25,00,000 this year.
- Absolute change = ₹3,60,000 – ₹3,00,000 = ₹60,000 increase.
- Percentage change = 60,000 ÷ 3,00,000 × 100 = 20%.
- As a percentage of revenue: last year 3,00,000 ÷ 20,00,000 × 100 = 15%; this year 3,60,000 ÷ 25,00,000 × 100 = 14.4%.
Interpretation. The wage bill rose by 20%, but revenue rose faster, by 25%. So although the firm is paying more in absolute terms, each rupee of sales now carries a slightly lighter wage load (14.4 paise against 15 paise). That is an improvement in operating efficiency.
Why it works. One raw figure produced nothing. The same figure, compared two different ways, produced two genuine business conclusions — which is exactly what "analysis" means.
Why Analysis Matters: The Objectives
Every analysis is done for somebody, and that somebody has a question in mind. The objectives of financial statement analysis are simply the standard list of those questions, tidied up into exam language. Learn them as a list of five, and give one sentence of explanation to each — that is exactly how a 3 or 4-mark answer is built.
| Objective | The question it answers | Tool that usually answers it |
|---|---|---|
| To assess earning capacity / profitability | Is the business making money, and is it making more money than before? | Comparative Statement of Profit and Loss; profitability ratios |
| To assess the financial position and solvency | Can the business pay what it owes, in the short run and the long run? | Comparative Balance Sheet; liquidity and solvency ratios |
| To assess managerial and operating efficiency | Are resources being used well, or is money leaking into costs? | Common Size Statement of Profit and Loss; turnover ratios |
| To make inter-firm and inter-period comparison possible | How does this firm compare with its own past, and with rivals of a different size? | Common size statements above all |
| To help forecasting, budgeting and decision-making | What is likely to happen next, and what should we do about it? | Trend analysis; cash flow analysis |
A sixth objective is worth carrying in your back pocket for longer answers: to measure the short-term and long-term solvency separately. Short-term solvency is about whether the firm can meet bills falling due within twelve months; long-term solvency is about whether it can service its borrowings over years. Mixing the two is a classic mark-loser.
State which objective of financial statement analysis is being served in each case:
- A bank studies whether a firm can repay a five-year term loan.
- A production head checks whether the cost of materials as a share of sales has crept upward.
- An investor compares a small firm with revenue of ₹20,00,000 against a large one with revenue of ₹2,00,00,000.
Answers. (1) Assessing long-term solvency and financial position. (2) Assessing operating efficiency. (3) Making inter-firm comparison possible — and note that only a common size statement can do this fairly, because the two firms differ so much in size.
Why it works. Each objective has a signature clue word: "repay" points to solvency, "cost as a share of sales" points to efficiency, "different sizes" points to comparability.
Who Uses The Analysis (Internal And External Parties)
Financial statements are read by a surprisingly wide crowd, and each reader wants something different from the same set of pages. CBSE regularly asks you to name the parties interested in analysis and state their interest, so learn them in two neat buckets.
Internal users are people inside the business who can also see the books, the budgets and the internal reports.
- Management — wants to measure its own performance, control costs, plan the next year and decide on expansion. Management is the heaviest user of analysis because it must act on the findings.
- Employees and their unions — want to know whether the firm can afford better wages, bonus and job security. A rising profit trend strengthens a wage claim.
- Owners in a closely held firm — want to know the return their capital is earning and whether to put in more.
External users stand outside and can see only the published statements, which is precisely why analysis matters so much to them.
- Shareholders and prospective investors — want earning capacity, dividend prospects and the safety of their investment.
- Lenders, banks and financial institutions — want to know whether interest and instalments will be paid on time; they concentrate on solvency and on cash flows.
- Creditors and suppliers — want short-term liquidity, because they will be paid within weeks or months, not years.
- Government and tax authorities — want correct income determination, tax compliance and data for policy and national accounts.
- Customers — especially industrial customers, want assurance that a supplier they depend on will still exist next year.
- Researchers, analysts and stock exchanges — want comparable data for studies, ratings and listing requirements.
A company’s Balance Sheet shows Long-term borrowings rising from ₹5,00,000 to ₹6,00,000 while Reserves and surplus rise from ₹4,00,000 to ₹6,00,000. How will (a) a debenture holder, (b) a supplier, and (c) an equity shareholder each read this?
Working. Borrowings up by ₹1,00,000, i.e. 1,00,000 ÷ 5,00,000 × 100 = 20%. Reserves up by ₹2,00,000, i.e. 2,00,000 ÷ 4,00,000 × 100 = 50%.
Interpretation. (a) The debenture holder notes that although debt rose 20%, the owners’ cushion grew faster at 50%, so the safety margin behind the debt has improved. (b) The supplier barely reacts — neither item is a short-term due, so this tells him little about whether his bill will be paid next month. (c) The shareholder is pleased: reserves growing at 50% indicate profits being ploughed back, which builds future earning capacity.
Why it works. The figures are identical for all three readers. What differs is the question each brings to the table — which is the whole point of learning the user list.
Significance And Importance
"Significance" and "importance" questions want the benefits of doing the analysis. There is a temptation to repeat the objectives here; resist it, because the examiner wants outcomes, not aims. Frame each point as something the analysis enables.
- It makes raw data usable. A published Balance Sheet is a wall of figures. Analysis converts it into percentages, changes and ratios that a non-accountant can act upon.
- It reveals trends that single-year statements hide. A firm may be profitable in every one of three years and yet be sliding, because the margin is shrinking each year. Only comparison exposes that.
- It permits fair comparison between unequal firms. Two companies of wildly different sizes become directly comparable once every item is stated as a percentage of a common base.
- It supports credit and investment decisions. Banks sanction loans, and investors buy shares, largely on the strength of analysed figures rather than raw ones.
- It measures managerial efficiency. Rising sales with falling margins is a management story, and analysis is what tells it.
- It aids planning, budgeting and forecasting. Past patterns, once quantified, become the base for next year’s targets.
- It helps detect weaknesses early. A creeping rise in inventories or receivables shows up in a comparative statement long before it becomes a cash crisis.
Limitations Of Financial Statement Analysis
This is one of the most reliably examined parts of the unit, and it is also where students write the vaguest answers. The trick is to remember why the limitations exist: analysis is only as good as the statements it feeds on, and financial statements themselves carry built-in imperfections. So the limitations are really inherited.
- It ignores qualitative factors. The quality of management, employee morale, brand reputation, customer loyalty and the state of industrial relations never appear in the statements — yet they often decide a firm’s future. Analysis is blind to all of them.
- It is affected by the price level (inflation). Financial statements are prepared at historical cost. When prices rise, a 25% increase in revenue may simply mean the same quantity sold at higher prices. The growth is nominal, not real.
- Different accounting policies destroy comparability. One firm charges depreciation on the straight line method and values inventory at weighted average; another uses the written down value method and FIFO. Their statements are not truly comparable even after analysis.
- Window dressing. Management may deliberately present a rosier picture — delaying purchases, pushing sales into the current year, postponing repairs — so the analysed figures look better than reality.
- It is historical. Every figure analysed describes a period that has already ended. Past performance is a guide to the future, never a guarantee.
- Personal bias and judgement. Two analysts looking at the same comparative statement may weight the same facts differently and reach different conclusions.
- It is only a means, not an end. Analysis narrows the questions; it does not by itself take the decision. Interpretation and business judgement must still be applied.
- Interim and non-recurring items distort the picture. A one-off sale of a plot of land can lift "Other income" dramatically and make the year look exceptional when normal operations did not improve at all.
Revenue from operations of a firm rose from ₹20,00,000 to ₹25,00,000. On enquiry it is found that selling prices were raised by 25% during the year and the quantity sold was unchanged. Compute the percentage growth and state the limitation this illustrates.
Working. Absolute change = 25,00,000 – 20,00,000 = ₹5,00,000. Percentage change = 5,00,000 ÷ 20,00,000 × 100 = 25%.
Interpretation. The statement shows 25% growth, but since prices rose 25% and volume was flat, the real growth in business activity is nil. The entire increase is a price effect.
Limitation illustrated: the effect of the price level (inflation) — historical cost statements do not distinguish real growth from price-driven growth. Why it works. The arithmetic is undisputed; it is the meaning of the 25% that the limitation attacks. That is the distinction the examiner is testing.
Types Of Analysis: Horizontal vs Vertical
Analysis is classified in more than one way, and the pair that matters most is horizontal versus vertical. Get this straight and half the chapter falls into place.
Horizontal analysis — also called dynamic analysis or time series analysis — compares the same item over two or more accounting periods. You put 2024-25 next to 2025-26 and ask: what happened to Revenue? What happened to Inventories? The direction of travel is sideways, across columns of years. Comparative statements and trend analysis are horizontal by nature.
Vertical analysis — also called static analysis or structural analysis — studies the relationship between different items within a single period’s statement. You take one year, choose a base figure inside it, and express everything else as a percentage of that base. The direction of travel is downwards, through one column. Common size statements and most ratios are vertical by nature.
Classify each statement as horizontal or vertical analysis, and support it with the arithmetic where possible. Revenue from operations: 2024-25 ₹20,00,000; 2025-26 ₹25,00,000. Cost of materials consumed: 2024-25 ₹12,00,000; 2025-26 ₹15,00,000.
- "Cost of materials rose by ₹3,00,000 over the year."
- "Cost of materials is 60% of revenue in 2025-26."
- "Revenue grew 25% while material cost also grew 25%."
Working. (1) 15,00,000 – 12,00,000 = ₹3,00,000 — two years compared, so horizontal. (2) 15,00,000 ÷ 25,00,000 × 100 = 60% — both figures come from 2025-26 alone, so vertical. (3) Revenue: 5,00,000 ÷ 20,00,000 × 100 = 25%; materials: 3,00,000 ÷ 12,00,000 × 100 = 25% — both are year-on-year growth rates, so horizontal.
Why it works. Look only at where the two numbers in each calculation came from. If they sit in different year columns, the analysis is horizontal. If they sit in the same year column, it is vertical. The label follows the source of the figures, never the wording of the sentence.
Intra-Firm vs Inter-Firm Comparison
The second classification is about whose figures you are placing side by side. The two words look almost identical on the page, and every year a batch of students loses a mark by swapping them. Learn the prefixes and you will never confuse them again: intra- means within, inter- means between.
| Basis | Intra-firm comparison | Inter-firm comparison |
|---|---|---|
| Meaning | One enterprise compared with its own figures of earlier years | One enterprise compared with another enterprise, or with the industry average |
| Also called | Intra-period / time series comparison | Cross-sectional comparison |
| Question answered | Am I doing better than I was? | Am I doing better than they are? |
| Main problem | Price level changes over time distort the comparison | Different accounting policies and different sizes distort the comparison |
| Best served by | Comparative statements and trend analysis | Common size statements and ratios |
Firm P has revenue from operations of ₹20,00,000 and cost of materials consumed of ₹12,00,000. Firm Q has revenue from operations of ₹50,00,000 and cost of materials consumed of ₹32,50,000. Which firm controls its material cost better?
Working. In absolute terms Firm P looks cheaper (₹12,00,000 against ₹32,50,000), but that is only because it is a smaller firm. Convert both to a percentage of revenue:
- Firm P: 12,00,000 ÷ 20,00,000 × 100 = 60%
- Firm Q: 32,50,000 ÷ 50,00,000 × 100 = 65%
Interpretation. Firm P spends 60 paise of every sales rupee on materials against Firm Q’s 65 paise, so Firm P controls material cost better by 5 percentage points of revenue.
Why it works. Absolute figures answer "how much"; percentages answer "how efficiently". For inter-firm comparison between unequal firms, only the percentage question can be answered honestly. This is the single strongest argument for common size statements.
The Four Tools At A Glance
The syllabus names four tools of financial statement analysis. Two of them are studied in full inside this chapter; the other two have chapters of their own, and here we only need to know what they are and when they are used.
| Tool | What it does | Type | Studied where |
|---|---|---|---|
| Comparative statements | Puts two years side by side and shows the absolute and percentage change in every item | Horizontal | This chapter |
| Common size statements | Restates every item as a percentage of one common base within each year | Vertical | This chapter |
| Ratio analysis | Expresses the arithmetical relationship between two related figures as a ratio, rate or percentage | Mainly vertical | Accounting Ratios chapter |
| Cash flow analysis | Traces the inflows and outflows of cash and cash equivalents under operating, investing and financing activities | Flow-based | Cash Flow Statement chapter |
You may also meet trend analysis. It is horizontal analysis stretched over several years: one year is fixed as the base and given the index 100, and every later year is expressed as an index relative to it. Think of it as a comparative statement with more than two columns.
Name the most suitable tool of financial statement analysis in each situation, with a one-line reason:
- The board wants to know by what percentage each expense head grew over last year.
- An analyst compares the cost structure of a firm earning ₹20,00,000 with one earning ₹50,00,000.
- A bank wants to know whether the firm generated enough cash from operations to service its debt.
- An investor wants a single figure showing how much profit the firm earns on every rupee of shareholders’ funds.
Answers. (1) Comparative statement — it shows absolute and percentage change item by item. (2) Common size statement — it removes the size difference by expressing everything on a base of 100. (3) Cash flow analysis — profit is not cash, and only the cash flow statement isolates operating cash. (4) Ratio analysis — a return ratio condenses the relationship into one number.
Why it works. Each tool has a signature output: change (comparative), structure (common size), cash (cash flow), relationship (ratio). Match the output the question wants and the tool names itself.
Comparative Statements: The Idea
A comparative statement is nothing more mysterious than the same financial statement of two years printed side by side, with two extra columns added: how much each item changed, and by what percentage.
Imagine you have your school report card for Class 11 and Class 12 lying on the table. Separately, each is a list of marks. Place them side by side, add a column called "change" and another called "change %", and something new appears: you can see instantly that Physics went up 12 marks while Mathematics slipped by 4. Nobody added information. The layout created insight. A comparative statement does exactly that for a business.
Because it looks across years, a comparative statement is a horizontal, dynamic, intra-firm tool. Two comparative statements are prescribed for Class 12:
- Comparative Statement of Profit and Loss — shows how revenue, each expense head and profit moved between the two years.
- Comparative Balance Sheet — shows how each asset, each liability and shareholders’ funds moved between the two dates.
Both use an identical five-column skeleton after Particulars, and if you can build one you can build the other. That skeleton is worth memorising as a single line:
Particulars → Note No. → Previous Year → Current Year → Absolute Change → Percentage Change
Previous year always comes before current year. Absolute change = Current – Previous. Percentage change = Absolute change ÷ Previous year figure × 100. Never divide by the current year, and never divide by the total.
Trade receivables were ₹2,40,000 on 31st March 2025 and ₹3,00,000 on 31st March 2026. Complete the comparative columns.
Working. Absolute change = 3,00,000 – 2,40,000 = ₹60,000 (increase). Percentage change = 60,000 ÷ 2,40,000 × 100 = 25.00%.
Interpretation. Receivables grew a quarter in one year. That is only comfortable if revenue grew at least as fast; if revenue grew more slowly, credit is being extended too freely.
Why it works. The base of the percentage is 2,40,000 — the earlier figure — because we are asking "by how much has the old level grown?" Dividing by 3,00,000 would give 20%, which answers a question nobody asked.
Preparing A Comparative Statement Of Profit And Loss
Let us build one completely, slowly, with every figure shown. Work through it with a pen. The format below is the one CBSE expects, and the discipline is: copy the Particulars in Schedule III order, fill the two year columns, then compute across.
The five-step routine:
- Rule the six columns and write the heading — Comparative Statement of Profit and Loss for the years ended 31st March 2025 and 31st March 2026.
- Enter Revenue from operations, then Other income, then strike Total Revenue.
- List every expense head, then strike Total Expenses.
- Compute Profit before tax, deduct tax, arrive at Profit after tax. Every subtotal gets its own row.
- Fill the Absolute Change column (Current – Previous) and the Percentage Change column (Absolute ÷ Previous × 100) for every single row, subtotals included.
Revenue from operations rose 25% and Other income rose 50%. Does Total Revenue therefore rise by 37.5% (the average)?
Working. No. Take Revenue from operations ₹20,00,000 → ₹25,00,000 and Other income ₹1,00,000 → ₹1,50,000. Total Revenue = ₹21,00,000 → ₹26,50,000. Absolute change = ₹5,50,000. Percentage change = 5,50,000 ÷ 21,00,000 × 100 = 26.19%.
Why it works. Percentages cannot be averaged, because the two items have very different sizes. The subtotal’s percentage must always be computed from the subtotal’s own two figures. This is the single most common arithmetic slip in the whole unit.
From the following information of Meera Textiles Ltd, prepare a Comparative Statement of Profit and Loss for the years ended 31st March 2025 and 31st March 2026, and comment on the profitability. (Amounts in ₹)
| Particulars | 2024-25 | 2025-26 |
|---|---|---|
| Revenue from operations | 20,00,000 | 25,00,000 |
| Other income | 1,00,000 | 1,50,000 |
| Cost of materials consumed | 12,00,000 | 15,00,000 |
| Employee benefit expenses | 3,00,000 | 3,60,000 |
| Other expenses | 1,00,000 | 1,40,000 |
| Rate of tax | 40% | 40% |
Solution
Comparative Statement of Profit and Loss of Meera Textiles Ltd for the years ended 31st March 2025 and 31st March 2026
| Particulars | Note No. | 2024-25 (₹) | 2025-26 (₹) | Absolute Change (₹) | Percentage Change (%) |
|---|---|---|---|---|---|
| I. Revenue from operations | — | 20,00,000 | 25,00,000 | 5,00,000 | 25.00 |
| II. Other income | — | 1,00,000 | 1,50,000 | 50,000 | 50.00 |
| III. Total Revenue (I + II) | 21,00,000 | 26,50,000 | 5,50,000 | 26.19 | |
| IV. Expenses: | |||||
| (a) Cost of materials consumed | — | 12,00,000 | 15,00,000 | 3,00,000 | 25.00 |
| (b) Employee benefit expenses | — | 3,00,000 | 3,60,000 | 60,000 | 20.00 |
| (c) Other expenses | — | 1,00,000 | 1,40,000 | 40,000 | 40.00 |
| Total Expenses | 16,00,000 | 20,00,000 | 4,00,000 | 25.00 | |
| V. Profit before tax (III – IV) | 5,00,000 | 6,50,000 | 1,50,000 | 30.00 | |
| VI. Less: Tax @ 40% | — | 2,00,000 | 2,60,000 | 60,000 | 30.00 |
| VII. Profit after tax (V – VI) | 3,00,000 | 3,90,000 | 90,000 | 30.00 |
Full workings, line by line
- Revenue from operations: 25,00,000 – 20,00,000 = 5,00,000; 5,00,000 ÷ 20,00,000 × 100 = 25.00%
- Other income: 1,50,000 – 1,00,000 = 50,000; 50,000 ÷ 1,00,000 × 100 = 50.00%
- Total Revenue: 20,00,000 + 1,00,000 = 21,00,000 and 25,00,000 + 1,50,000 = 26,50,000; change 5,50,000; 5,50,000 ÷ 21,00,000 × 100 = 26.19%
- Cost of materials: 15,00,000 – 12,00,000 = 3,00,000; 3,00,000 ÷ 12,00,000 × 100 = 25.00%
- Employee benefits: 3,60,000 – 3,00,000 = 60,000; 60,000 ÷ 3,00,000 × 100 = 20.00%
- Other expenses: 1,40,000 – 1,00,000 = 40,000; 40,000 ÷ 1,00,000 × 100 = 40.00%
- Total Expenses: 12,00,000 + 3,00,000 + 1,00,000 = 16,00,000 and 15,00,000 + 3,60,000 + 1,40,000 = 20,00,000; change 4,00,000; 4,00,000 ÷ 16,00,000 × 100 = 25.00%
- Profit before tax: 21,00,000 – 16,00,000 = 5,00,000 and 26,50,000 – 20,00,000 = 6,50,000; change 1,50,000; 1,50,000 ÷ 5,00,000 × 100 = 30.00%
- Tax: 40% of 5,00,000 = 2,00,000 and 40% of 6,50,000 = 2,60,000; change 60,000; 60,000 ÷ 2,00,000 × 100 = 30.00%
- Profit after tax: 5,00,000 – 2,00,000 = 3,00,000 and 6,50,000 – 2,60,000 = 3,90,000; change 90,000; 90,000 ÷ 3,00,000 × 100 = 30.00%
Comment (the marks-earning part). Revenue from operations grew 25% while total expenses grew at exactly the same 25%, so the operating cost structure was held steady. Profit before tax nevertheless rose faster, at 30%, because Other income grew 50% and because the wage bill grew only 20% — more slowly than sales. Since the tax rate was unchanged, profit after tax also rose 30%, from ₹3,00,000 to ₹3,90,000. Overall, profitability improved.
Why it works. Notice that the answer never says only "profit increased". It compares growth rates against each other — 25% revenue against 25% expenses against 30% profit — because a comparative statement earns its keep exactly when two growth rates differ.
Preparing A Comparative Balance Sheet
Good news: the columns are identical to the ones you have just learnt. The only new thing is the Schedule III order of the Balance Sheet itself, which you already know from the previous unit. Write the Equity and Liabilities side first, strike its total, then the Assets side, then strike its total — and the two totals must agree in both years.
Trade payables were ₹1,00,000 on both 31st March 2025 and 31st March 2026. What goes in the last two columns?
Working. Absolute change = 1,00,000 – 1,00,000 = Nil. Percentage change = 0 ÷ 1,00,000 × 100 = 0.00%.
Interpretation. An unchanged figure is itself a finding. If total liabilities rose 25% while trade payables stayed flat, then the firm did not fund its growth from suppliers — it funded it some other way.
Why it works. Write "Nil" and "0.00", never a dash and never a blank. A blank cell reads as an omission; a zero reads as a computed answer, and only one of the two earns a mark.
From the following Balance Sheets of Sunrise Ceramics Ltd, prepare a Comparative Balance Sheet as at 31st March 2025 and 31st March 2026, and comment. (Amounts in ₹)
Comparative Balance Sheet of Sunrise Ceramics Ltd as at 31st March 2025 and 31st March 2026
| Particulars | Note No. | 31.3.2025 (₹) | 31.3.2026 (₹) | Absolute Change (₹) | Percentage Change (%) |
|---|---|---|---|---|---|
| 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 | — | 4,00,000 | 6,00,000 | 2,00,000 | 50.00 |
| 2. Non-current Liabilities | |||||
| Long-term borrowings | — | 5,00,000 | 6,00,000 | 1,00,000 | 20.00 |
| 3. Current Liabilities | |||||
| Trade payables | — | 1,00,000 | 1,00,000 | Nil | 0.00 |
| Total Equity and Liabilities | 20,00,000 | 25,00,000 | 5,00,000 | 25.00 | |
| II. ASSETS | |||||
| 1. Non-current Assets | |||||
| (a) Property, Plant and Equipment | — | 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 | |||||
| (a) Inventories | — | 3,00,000 | 4,00,000 | 1,00,000 | 33.33 |
| (b) Trade receivables | — | 2,00,000 | 2,00,000 | Nil | 0.00 |
| (c) Cash and cash equivalents | — | 1,00,000 | 1,00,000 | Nil | 0.00 |
| Total Assets | 20,00,000 | 25,00,000 | 5,00,000 | 25.00 | |
Full workings
- Share capital: 12,00,000 – 10,00,000 = 2,00,000; 2,00,000 ÷ 10,00,000 × 100 = 20.00%
- Reserves and surplus: 6,00,000 – 4,00,000 = 2,00,000; 2,00,000 ÷ 4,00,000 × 100 = 50.00%
- Long-term borrowings: 6,00,000 – 5,00,000 = 1,00,000; 1,00,000 ÷ 5,00,000 × 100 = 20.00%
- Trade payables: no change; 0 ÷ 1,00,000 × 100 = 0.00%
- Total Equity and Liabilities: 10,00,000 + 4,00,000 + 5,00,000 + 1,00,000 = 20,00,000; and 12,00,000 + 6,00,000 + 6,00,000 + 1,00,000 = 25,00,000; change 5,00,000; 5,00,000 ÷ 20,00,000 × 100 = 25.00%
- Property, Plant and Equipment: 15,00,000 – 12,00,000 = 3,00,000; 3,00,000 ÷ 12,00,000 × 100 = 25.00%
- Non-current investments: 3,00,000 – 2,00,000 = 1,00,000; 1,00,000 ÷ 2,00,000 × 100 = 50.00%
- Inventories: 4,00,000 – 3,00,000 = 1,00,000; 1,00,000 ÷ 3,00,000 × 100 = 33.33%
- Total Assets: 12,00,000 + 2,00,000 + 3,00,000 + 2,00,000 + 1,00,000 = 20,00,000; and 15,00,000 + 3,00,000 + 4,00,000 + 2,00,000 + 1,00,000 = 25,00,000 — both totals agree with the Equity and Liabilities side, so the statement balances in both years.
Comment. The Balance Sheet total expanded 25%, from ₹20,00,000 to ₹25,00,000. The expansion was financed mainly by owners rather than by outsiders: shareholders’ funds rose from ₹14,00,000 to ₹18,00,000 (share capital up 20%, reserves up 50%), while long-term borrowings rose only ₹1,00,000. The money went chiefly into Property, Plant and Equipment, up 25%, indicating capacity building. On the current side, inventories rose 33.33% while trade receivables and cash were unchanged — inventories growing faster than the overall 25% is the one item worth watching, since it can signal slow-moving stock.
Why it works. The comment follows the money: first how much the firm grew, then where the funds came from, then where they went, then the one item behaving differently from the rest. That four-move structure works for almost every Comparative Balance Sheet you will ever be set.
Reading And Interpreting A Comparative Statement
Computing is half the question. The other half — and often two of the six marks — is saying what the numbers mean. Most students write "there is an increase in profit, so the company is doing well" and collect nothing, because that sentence would be true of almost any statement.
Here is a reliable reading routine. Apply it in this order and your comment will always have something specific to say.
- Find the headline growth rate. For a Statement of Profit and Loss, that is Revenue from operations. For a Balance Sheet, it is the Balance Sheet total. Every other item is now judged against this one number.
- Sort every other item into faster, slower or flat. An expense growing slower than revenue is good news. An expense growing faster than revenue is bad news. It really is that simple.
- Say what happened to margin. If profit grew faster than revenue, margin improved. If profit grew slower, margin fell even though profit rose.
- Name the odd one out. There is nearly always one item behaving differently from the rest. Point at it.
- Close with a judgement on profitability (for the Statement of Profit and Loss) or on financial position (for the Balance Sheet).
Using the Meera Textiles figures — revenue +25%, cost of materials +25%, employee benefits +20%, other expenses +40%, total expenses +25%, profit before tax +30%, profit after tax +30% — write a comment worth three marks.
Step 1, headline: revenue from operations grew 25%.
Step 2, sort: slower than revenue → employee benefit expenses (20%). Same as revenue → cost of materials (25%). Faster than revenue → other expenses (40%).
Step 3, margin: profit after tax grew 30% against revenue’s 25%, so margin improved — from 15% to 15.6% of revenue (3,00,000 ÷ 20,00,000 × 100 = 15%; 3,90,000 ÷ 25,00,000 × 100 = 15.6%).
Step 4, odd one out: Other expenses at 40% is the only head clearly outrunning sales; in rupees the amount is small (₹40,000) but the rate deserves management attention.
Step 5, judgement: operating performance improved — sales up a quarter, wage cost contained, and net margin up by 0.6 percentage points.
Why it works. Every sentence contains a number, and every number is compared with another number. An examiner can tick a mark against each of those, which is exactly what he cannot do for "the company is doing well".
Common Size Statements: The Idea
A common size statement takes one year’s statement and re-expresses every item as a percentage of a single chosen base figure inside that same year. The base is given the value 100, and everything else is measured against it. Because it works down a single year’s column, it is a vertical, static, structural tool — and it is the natural tool for inter-firm comparison.
The everyday analogy is the nutrition label on a food packet. It does not tell you how many grams of the packet you bought; it tells you what share of it is protein, what share is fat, what share is sugar. Two packets of different sizes become instantly comparable, because both are described out of 100. A common size statement is a nutrition label for a business.
For a Common Size Statement of Profit and Loss, the base is Revenue from operations = 100. Not total revenue — revenue from operations.
For a Common Size Balance Sheet, the base is Total Assets = 100, which of course equals Total Equity and Liabilities = 100. Each year uses its own base: the 2024-25 column is divided by the 2024-25 base, and the 2025-26 column by the 2025-26 base.
One consequence of choosing revenue from operations as the base is that Total Revenue will normally exceed 100%, because other income is added on top of it. That is not an error. Students often panic and try to force the column to add to exactly 100; do not. Only the Balance Sheet column is required to total 100%.
Revenue from operations ₹25,00,000; Other income ₹1,50,000; Cost of materials consumed ₹15,00,000. Express cost of materials in a common size statement.
Correct working. 15,00,000 ÷ 25,00,000 × 100 = 60.00%.
The tempting wrong working. 15,00,000 ÷ 26,50,000 × 100 = 56.60% — this uses Total Revenue as the base and is not what the format asks for.
Why it works. The purpose is to see what share of trading activity each cost consumes. Other income — interest received, profit on sale of an asset — is not trading activity, so including it in the base would flatter every cost ratio. Base equals revenue from operations, always.
Preparing A Common Size Statement Of Profit And Loss
The routine is short. Rule six columns: Particulars, Note No., the two amount columns, and then the two percentage columns. Head the percentage columns clearly as Percentage of Revenue from Operations. Then divide, year by year, always by that year’s own revenue from operations.
Employee benefit expenses: ₹3,00,000 in 2024-25 and ₹3,60,000 in 2025-26. Revenue from operations: ₹20,00,000 and ₹25,00,000. Show the common size percentages and comment.
Working. 2024-25: 3,00,000 ÷ 20,00,000 × 100 = 15.00%. 2025-26: 3,60,000 ÷ 25,00,000 × 100 = 14.40%.
Interpretation. The wage burden per rupee of sales fell by 0.6 percentage points. The firm is getting more revenue out of each rupee spent on people — a genuine efficiency gain, even though the absolute wage bill went up.
Why it works. The comparative statement said "wages rose 20%". The common size statement says "wages became relatively cheaper". Both are true; they answer different questions, which is exactly why the syllabus teaches both tools.
From the same data of Meera Textiles Ltd used in Example 10, prepare a Common Size Statement of Profit and Loss for the years ended 31st March 2025 and 31st March 2026.
Common Size Statement of Profit and Loss of Meera Textiles Ltd for the years ended 31st March 2025 and 31st March 2026
| Particulars | Note No. | 2024-25 (₹) | 2025-26 (₹) | 2024-25 (% of Revenue from Operations) | 2025-26 (% of Revenue from Operations) |
|---|---|---|---|---|---|
| I. Revenue from operations | — | 20,00,000 | 25,00,000 | 100.00 | 100.00 |
| II. Other income | — | 1,00,000 | 1,50,000 | 5.00 | 6.00 |
| III. Total Revenue (I + II) | 21,00,000 | 26,50,000 | 105.00 | 106.00 | |
| IV. Expenses: | |||||
| (a) Cost of materials consumed | — | 12,00,000 | 15,00,000 | 60.00 | 60.00 |
| (b) Employee benefit expenses | — | 3,00,000 | 3,60,000 | 15.00 | 14.40 |
| (c) Other expenses | — | 1,00,000 | 1,40,000 | 5.00 | 5.60 |
| Total Expenses | 16,00,000 | 20,00,000 | 80.00 | 80.00 | |
| V. Profit before tax (III – IV) | 5,00,000 | 6,50,000 | 25.00 | 26.00 | |
| VI. Less: Tax @ 40% | — | 2,00,000 | 2,60,000 | 10.00 | 10.40 |
| VII. Profit after tax (V – VI) | 3,00,000 | 3,90,000 | 15.00 | 15.60 |
Full workings — 2024-25, base ₹20,00,000
- Other income: 1,00,000 ÷ 20,00,000 × 100 = 5.00
- Total revenue: 21,00,000 ÷ 20,00,000 × 100 = 105.00
- Cost of materials: 12,00,000 ÷ 20,00,000 × 100 = 60.00
- Employee benefits: 3,00,000 ÷ 20,00,000 × 100 = 15.00
- Other expenses: 1,00,000 ÷ 20,00,000 × 100 = 5.00
- Total expenses: 16,00,000 ÷ 20,00,000 × 100 = 80.00 — and check: 60.00 + 15.00 + 5.00 = 80.00
- Profit before tax: 5,00,000 ÷ 20,00,000 × 100 = 25.00 — and check: 105.00 – 80.00 = 25.00
- Tax: 2,00,000 ÷ 20,00,000 × 100 = 10.00; Profit after tax: 3,00,000 ÷ 20,00,000 × 100 = 15.00 — and check: 25.00 – 10.00 = 15.00
Full workings — 2025-26, base ₹25,00,000
- Other income: 1,50,000 ÷ 25,00,000 × 100 = 6.00
- Total revenue: 26,50,000 ÷ 25,00,000 × 100 = 106.00
- Cost of materials: 15,00,000 ÷ 25,00,000 × 100 = 60.00
- Employee benefits: 3,60,000 ÷ 25,00,000 × 100 = 14.40
- Other expenses: 1,40,000 ÷ 25,00,000 × 100 = 5.60
- Total expenses: 20,00,000 ÷ 25,00,000 × 100 = 80.00 — and check: 60.00 + 14.40 + 5.60 = 80.00
- Profit before tax: 6,50,000 ÷ 25,00,000 × 100 = 26.00 — and check: 106.00 – 80.00 = 26.00
- Tax: 2,60,000 ÷ 25,00,000 × 100 = 10.40; Profit after tax: 3,90,000 ÷ 25,00,000 × 100 = 15.60 — and check: 26.00 – 10.40 = 15.60
Interpretation. The cost structure is remarkably stable: total expenses held at exactly 80% of revenue from operations in both years, with materials steady at 60%. Within that total, the mix shifted slightly — employee benefits eased from 15% to 14.4% while other expenses rose from 5% to 5.6%, a straight swap of 0.6 percentage points. Profit before tax improved from 25% to 26% of revenue, driven almost entirely by other income rising from 5% to 6%. After tax at an unchanged 40%, the firm retained 15.6 paise of every sales rupee against 15 paise last year.
Why it works. Because both years are stated out of 100, you can compare them directly without doing any subtraction of rupee amounts — and the internal checks (components adding to the subtotal, 105 – 80 = 25) catch arithmetic slips before the examiner does.
Preparing A Common Size Balance Sheet
Here the base is Total Assets = 100, which is the same figure as Total Equity and Liabilities. Divide every item in a year by that year’s total, and multiply by 100. Because both sides of the Balance Sheet share the same total, each side’s percentages must add up to exactly 100.00 — a self-check the Statement of Profit and Loss cannot give you.
Long-term borrowings were ₹5,00,000 out of a Balance Sheet total of ₹20,00,000 in 2024-25, and ₹6,00,000 out of ₹25,00,000 in 2025-26. Comment using common size percentages.
Working. 2024-25: 5,00,000 ÷ 20,00,000 × 100 = 25.00%. 2025-26: 6,00,000 ÷ 25,00,000 × 100 = 24.00%.
Interpretation. In absolute rupees the borrowing went up by ₹1,00,000, but as a share of total funds it went down from 25% to 24%. The firm is now marginally less dependent on outside long-term debt, so long-term solvency has improved slightly.
Why it works. This is the classic case where the two tools give opposite-sounding answers, and neither is wrong. A comparative statement measures the size of the change; a common size statement measures the share. Say which one you are using and you can never be marked down.
From the Balance Sheets of Sunrise Ceramics Ltd used in Example 12, prepare a Common Size Balance Sheet as at 31st March 2025 and 31st March 2026 and comment on the structure.
Common Size Balance Sheet of Sunrise Ceramics Ltd as at 31st March 2025 and 31st March 2026
| Particulars | Note No. | 31.3.2025 (₹) | 31.3.2026 (₹) | 31.3.2025 (% of Total) | 31.3.2026 (% of Total) |
|---|---|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||||
| Share capital | — | 10,00,000 | 12,00,000 | 50.00 | 48.00 |
| Reserves and surplus | — | 4,00,000 | 6,00,000 | 20.00 | 24.00 |
| Long-term borrowings | — | 5,00,000 | 6,00,000 | 25.00 | 24.00 |
| Trade payables | — | 1,00,000 | 1,00,000 | 5.00 | 4.00 |
| Total Equity and Liabilities | 20,00,000 | 25,00,000 | 100.00 | 100.00 | |
| II. ASSETS | |||||
| Property, Plant and Equipment | — | 12,00,000 | 15,00,000 | 60.00 | 60.00 |
| Non-current investments | — | 2,00,000 | 3,00,000 | 10.00 | 12.00 |
| Inventories | — | 3,00,000 | 4,00,000 | 15.00 | 16.00 |
| Trade receivables | — | 2,00,000 | 2,00,000 | 10.00 | 8.00 |
| Cash and cash equivalents | — | 1,00,000 | 1,00,000 | 5.00 | 4.00 |
| Total Assets | 20,00,000 | 25,00,000 | 100.00 | 100.00 | |
Full workings — 31.3.2025, base ₹20,00,000
- Share capital 10,00,000 ÷ 20,00,000 × 100 = 50.00; Reserves 4,00,000 ÷ 20,00,000 × 100 = 20.00; Long-term borrowings 5,00,000 ÷ 20,00,000 × 100 = 25.00; Trade payables 1,00,000 ÷ 20,00,000 × 100 = 5.00. Check: 50.00 + 20.00 + 25.00 + 5.00 = 100.00
- PPE 12,00,000 ÷ 20,00,000 × 100 = 60.00; Investments 2,00,000 ÷ 20,00,000 × 100 = 10.00; Inventories 3,00,000 ÷ 20,00,000 × 100 = 15.00; Receivables 2,00,000 ÷ 20,00,000 × 100 = 10.00; Cash 1,00,000 ÷ 20,00,000 × 100 = 5.00. Check: 60.00 + 10.00 + 15.00 + 10.00 + 5.00 = 100.00
Full workings — 31.3.2026, base ₹25,00,000
- Share capital 12,00,000 ÷ 25,00,000 × 100 = 48.00; Reserves 6,00,000 ÷ 25,00,000 × 100 = 24.00; Long-term borrowings 6,00,000 ÷ 25,00,000 × 100 = 24.00; Trade payables 1,00,000 ÷ 25,00,000 × 100 = 4.00. Check: 48.00 + 24.00 + 24.00 + 4.00 = 100.00
- PPE 15,00,000 ÷ 25,00,000 × 100 = 60.00; Investments 3,00,000 ÷ 25,00,000 × 100 = 12.00; Inventories 4,00,000 ÷ 25,00,000 × 100 = 16.00; Receivables 2,00,000 ÷ 25,00,000 × 100 = 8.00; Cash 1,00,000 ÷ 25,00,000 × 100 = 4.00. Check: 60.00 + 12.00 + 16.00 + 8.00 + 4.00 = 100.00
Interpretation. On the funding side, shareholders’ funds strengthened from 70% to 72% of total funds (share capital 50% to 48%, but reserves 20% to 24%), while outside funds — long-term borrowings plus trade payables — eased from 30% to 28%. That is a modest improvement in long-term solvency. On the asset side, the firm remained a fixed-asset-heavy business, with PPE steady at 60% and non-current investments rising from 10% to 12%. Inventories crept up from 15% to 16% while trade receivables fell from 10% to 8% and cash from 5% to 4%, so the firm is holding a slightly larger share of its assets in the least liquid current asset. Liquidity is therefore marginally weaker even though solvency improved.
Why it works. Note that the reserves percentage rose even though share capital’s percentage fell — both were growing in rupees, but reserves grew faster than the Balance Sheet total while share capital grew slower. Common size percentages always answer the question "did this item grow faster or slower than the whole?"
Comparative vs Common Size: Choosing The Right Tool
Students often ask which tool is "better". Neither is. They answer different questions, and a question in the exam will tell you which one it wants — sometimes by naming it, sometimes only by the kind of conclusion it asks for. Learn the contrast table and you will always pick correctly.
| Basis | Comparative Statement | Common Size Statement |
|---|---|---|
| Type of analysis | Horizontal (dynamic) | Vertical (static) |
| What it shows | Absolute change and percentage change between two periods | Each item as a percentage of a common base within a period |
| Base of the percentage | The previous year’s figure of the same item | The same year’s revenue from operations or total assets |
| Main purpose | Measures growth or decline over time | Reveals the internal structure or composition |
| Best used for | Intra-firm comparison across years | Inter-firm comparison between firms of different sizes |
| Number of years needed | At least two | Can be prepared for a single year |
| Typical answer sentence | "Revenue grew 25% while expenses grew 25%." | "Materials consumed 60 paise of every sales rupee in both years." |
Inventories rose from ₹3,00,000 to ₹4,00,000 while the Balance Sheet total rose from ₹20,00,000 to ₹25,00,000. Describe this in comparative terms and in common size terms, then reconcile.
Comparative view. Change = ₹1,00,000; 1,00,000 ÷ 3,00,000 × 100 = 33.33% increase.
Common size view. 3,00,000 ÷ 20,00,000 × 100 = 15.00% of total assets, rising to 4,00,000 ÷ 25,00,000 × 100 = 16.00%.
Reconciliation. Inventories grew 33.33% while the Balance Sheet as a whole grew only 25%. Because the item outgrew the whole, its share had to rise — and it did, from 15% to 16%. The two statements agree perfectly; they simply say the same thing in different units.
Why it works. Use this as a permanent test. If an item’s growth rate exceeds the total’s growth rate, its common size percentage must rise. If it is lower, the percentage must fall. If you ever compute a rise in growth rate and a fall in share, you have made an arithmetic error somewhere.
Ratio Analysis And Cash Flow Analysis As Tools (Overview)
These are the other two tools the syllabus names. Both have their own full chapters, so here we only need to place them correctly in the family of tools — enough to answer a theory question, not enough to compute anything. Resist the urge to start solving ratio problems in this chapter; the marks for that live elsewhere.
Ratio analysis expresses the arithmetical relationship between two related figures. The relationship can be shown as a pure ratio (2 : 1), as a rate or number of times (4 times a year), or as a percentage (15%). Ratios are grouped into four families:
- Liquidity ratios — short-term ability to pay, such as the current ratio and the quick ratio.
- Solvency ratios — long-term financial strength, such as the debt to equity ratio and the interest coverage ratio.
- Activity or turnover ratios — how efficiently assets are used, such as inventory turnover and trade receivables turnover.
- Profitability ratios — earning power, such as the gross profit ratio, net profit ratio and return on investment.
Its great advantage is condensation: a single figure summarises a relationship that would otherwise take a paragraph. Its great weakness is that a ratio out of context means nothing — a current ratio of 2 : 1 is comfortable for a manufacturer and possibly excessive for a supermarket. The computation and interpretation of individual ratios belongs to the separate Accounting Ratios chapter; study it there.
Cash flow analysis studies the movement of cash and cash equivalents during the year, classified into operating, investing and financing activities. It exists because profit is not cash. A firm can show a healthy profit and still be unable to pay its wages, because the profit is locked up in inventories and receivables. Only a cash flow statement isolates the cash actually generated by day-to-day operations.
A firm’s profit after tax rose from ₹3,00,000 to ₹3,90,000, yet its cash and cash equivalents stayed at ₹1,00,000 while inventories rose from ₹3,00,000 to ₹4,00,000 and PPE from ₹12,00,000 to ₹15,00,000. Which tool explains the puzzle, and what is the likely explanation?
Working. Profit after tax up ₹90,000, i.e. 90,000 ÷ 3,00,000 × 100 = 30%. Inventories up ₹1,00,000; PPE up ₹3,00,000. Cash unchanged.
Interpretation. Profits were earned but not left lying as cash: ₹1,00,000 went into building up stock and ₹3,00,000 into fixed assets. The tool that traces this properly is cash flow analysis, which would show cash generated from operating activities being consumed by investing activities.
Why it works. Comparative and common size statements can point at the puzzle — they show profit up and cash flat — but only the cash flow statement follows the rupees from operations into investment. Knowing the boundary between the tools is itself an examinable idea.
Percentage Change: The Arithmetic Students Get Wrong
This whole unit rests on one small formula, and it is worth spending ten minutes making it unbreakable.
Absolute change = Current year figure – Previous year figure
Percentage change = (Absolute change ÷ Previous year figure) × 100
The denominator is always the previous year figure of that same item. Not the current year. Not the total. Not the average of the two. Say it to yourself as: divide by where you started from.
Four situations trip students up, and each has a correct treatment.
- A fall. Show the absolute change as negative or in brackets, and the percentage as negative. Do not write a bare positive number and hope the examiner infers a decrease.
- A previous year figure of zero. Division by zero is undefined, so the percentage change cannot be computed. Write "N.A." or "Not computable" and show the absolute change in rupees.
- A previous year figure that is negative (for instance a loss turning into a profit). The percentage is arithmetically computable but meaningless, because a negative base flips the sign. Show the absolute change and state that the percentage is not meaningful.
- Rounding. Two decimal places is the safe convention. Write 26.19, not 26.190476 and not 26. If you round, round consistently down the whole column.
| Item | Previous (₹) | Current (₹) | Absolute change (₹) | Working | % change |
|---|---|---|---|---|---|
| Revenue from operations | 8,00,000 | 10,00,000 | 2,00,000 | 2,00,000 ÷ 8,00,000 × 100 | 25.00 (↑) |
| Operating expenses | 5,00,000 | 4,00,000 | (1,00,000) | (1,00,000) ÷ 5,00,000 × 100 | (20.00) (↓) |
| Trade receivables | 2,40,000 | 3,00,000 | 60,000 | 60,000 ÷ 2,40,000 × 100 | 25.00 (↑) |
| Inventories | 4,50,000 | 4,05,000 | (45,000) | (45,000) ÷ 4,50,000 × 100 | (10.00) (↓) |
| Finance costs | 60,000 | 84,000 | 24,000 | 24,000 ÷ 60,000 × 100 | 40.00 (↑) |
| Cash and cash equivalents | 1,25,000 | 1,00,000 | (25,000) | (25,000) ÷ 1,25,000 × 100 | (20.00) (↓) |
Why it works. Look at rows two and six. Both are decreases of exactly 20%, but one is a fall of ₹1,00,000 and the other of ₹25,000 — because the bases differ. The percentage tells you the proportion; the rupee figure tells you the weight. Report both.
(a) Other income was Nil in 2024-25 and ₹40,000 in 2025-26. (b) A firm had a loss before tax of ₹50,000 in 2024-25 and a profit before tax of ₹1,50,000 in 2025-26. Complete the comparative columns.
(a) Working. Absolute change = 40,000 – 0 = ₹40,000 increase. Percentage change = 40,000 ÷ 0 × 100 — division by zero, so not computable. Write "N.A." in the percentage column.
(b) Working. Absolute change = 1,50,000 – (–50,000) = ₹2,00,000 improvement. Mechanically, 2,00,000 ÷ (–50,000) × 100 = –400%, which would absurdly suggest a decline. The base is negative, so the percentage is not meaningful; state that and rely on the absolute figure.
Why it works. Percentage change assumes you are measuring growth from a positive starting level. When the starting level is zero or negative, that assumption collapses. Examiners award marks for recognising this, and deduct for a confidently written nonsense figure.
Writing The Interpretation Sentence That Earns The Mark
Let me be very direct with you. The single biggest avoidable loss of marks in this unit is not arithmetic. It is a beautifully prepared statement followed by a comment that says nothing. Examiners cannot award a mark for "the position is satisfactory", because that sentence would be equally true, and equally empty, for any company on earth.
A mark-earning interpretation sentence has three parts. Build every one of your sentences this way until it becomes automatic.
1. The fact — name the item and its number. "Employee benefit expenses rose 20% …"
2. The comparison — set it against a benchmark. "… while revenue from operations rose 25% …"
3. The consequence — say what it means for the business. "… so the wage cost per rupee of sales fell, improving operating efficiency."
Some vocabulary that helps. For rising figures: rose, grew, expanded, increased, outpaced. For falling figures: fell, declined, contracted, eased, lagged behind. For a good outcome: improved, strengthened, is favourable. For a bad outcome: weakened, deteriorated, is a matter of concern, deserves management attention. And for the honest middle ground, which examiners respect: broadly stable, largely unchanged, requires watching.
Rewrite each weak sentence using fact, comparison, consequence. Data: revenue from operations up 25%; other expenses up 40% (from ₹1,00,000 to ₹1,40,000); inventories up 33.33% while Balance Sheet total up 25%; profit after tax up 30%.
| Weak (earns nothing) | Strong (earns the mark) |
|---|---|
| Expenses have increased. | Other expenses grew 40%, well ahead of the 25% growth in revenue, so this head is consuming a rising share of sales — though at ₹40,000 the rupee impact remains small. |
| Inventory is high. | Inventories grew 33.33% against a 25% growth in total assets, so stock now occupies a larger share of the Balance Sheet, which may indicate slower movement of goods. |
| Profit is good. | Profit after tax rose 30% against revenue growth of 25%, so the net profit margin improved from 15% to 15.6% of revenue from operations. |
| The company is doing well overall. | Overall profitability improved: sales grew a quarter, total expenses grew at the same rate, and the net margin widened by 0.6 percentage points. |
Why it works. Every strong sentence contains at least two numbers and one comparison word. Read your own comment back and count the numbers — if the count is zero, you have written nothing an examiner can reward.
Common Mistakes Students Make
Every one of these has cost real students real marks. Read the list once now, and again the night before the exam.
And a further set worth internalising:
- Omitting the heading. The statement needs a full title naming the company, the statement and the two periods. It carries a mark in many marking schemes.
- Leaving the Note No. column out. The prescribed format has it. Draw it even if you fill it with dashes.
- Missing subtotal rows. Total Revenue, Total Expenses, Profit before tax, Profit after tax — each is a separate row with all four numeric columns filled.
- Failing to show the sign of a decrease. Use brackets or a minus sign in both the absolute and the percentage columns.
- Not labelling the currency or the year. Head your amount columns "2024-25 (₹)" and "2025-26 (₹)".
- Percentages that do not total 100 in a Common Size Balance Sheet. Always add your column before moving on.
- Writing no comment at all. If the question says "and comment", silence costs marks that the arithmetic has already earned you.
- Mixing up intra- and inter-firm. Intra is within one firm; inter is between firms.
- Dragging ratio formulas into this chapter. Unless asked, do not compute ratios in a comparative statement question — there are no marks for it and it eats your time.
How Marks Are Awarded In The Board Exam
Unit 3 carries 12 marks in the Part B, Option I paper, shared with the Cash Flow Statement and, in most patterns, sitting alongside the separately weighted Accounting Ratios unit. Questions from this chapter typically appear as a 3-mark theory question and a 4 to 6-mark practical.
Here is how a typical 6-mark practical is broken up. Knowing this changes how you allocate your time.
| What you do | Indicative marks | Why students lose it |
|---|---|---|
| Correct heading and correct column format | 1 | Rushing straight to the figures without ruling the columns |
| Correct amounts in both year columns, in Schedule III order | 1 to 2 | Copying errors and wrong sequence of heads |
| All subtotals struck correctly | 1 | Missing Total Expenses or Profit before tax rows |
| Absolute and percentage change columns complete and correct | 1 to 2 | Wrong base; blank cells where the change is nil |
| Interpretation or comment, when asked | 1 to 2 | Vague sentences with no numbers in them |
A student prepares the Meera Textiles comparative statement perfectly but stops at Profit before tax, and ends with the single sentence "The company is performing well." The question was worth 6 marks and said "prepare and comment". Estimate the loss.
Assessment. Heading and format: earned. Amounts and subtotals up to Profit before tax: earned. But the tax row and Profit after tax row are missing (the question gave a 40% rate), costing roughly 1 mark, and the comment carries no numbers and no comparison, costing the interpretation marks — roughly another 2. A near-perfect statement scores about 3 out of 6.
Why it works as a warning. The arithmetic was flawless. Half the marks still vanished, to an unfinished format and an empty sentence. Both are fixable in under three minutes of exam time, which makes them the cheapest marks in the whole paper.
Practice Worksheet
Ten original questions. Do each one on paper first — write the format, rule the columns, compute — and only then open the answer. If a numerical answer does not match, find your own error before reading the solution line by line; that search is where the learning actually happens.
Q1. State the meaning of Analysis of Financial Statements and give any three objectives. (3 marks)
Show Answer
Meaning. Analysis of financial statements is the process of breaking the figures in the Statement of Profit and Loss and the Balance Sheet into their components, re-expressing them in a comparable form (as changes, percentages or ratios), and drawing meaningful conclusions about the profitability, financial position and operating efficiency of the enterprise.
Any three objectives.
- To assess earning capacity. It shows whether profits are growing and whether the growth is faster or slower than the growth in sales.
- To assess solvency and financial position. It shows whether the firm can meet its short-term dues and service its long-term borrowings.
- To assess operating efficiency. It shows whether costs per rupee of sales are rising or falling.
- (Alternatives accepted: to enable inter-firm and inter-period comparison; to help forecasting, budgeting and decision-making.)
Marking note. Meaning carries about 1 mark and the three objectives about 2. Each objective needs a name plus one explaining line — a bare list of names usually scores half.
Q2. Classify each of the following as horizontal or vertical analysis, and as intra-firm or inter-firm comparison. (4 marks)
(a) A firm’s Revenue from operations of 2025-26 is compared with that of 2024-25. (b) Cost of materials consumed is expressed as 65% of this year’s revenue from operations. (c) Firm A’s net profit percentage is compared with Firm B’s for the same year. (d) A five-year series of sales figures is indexed with 2021-22 as 100.
Show Answer
| Case | Horizontal or vertical | Intra-firm or inter-firm | Reason |
|---|---|---|---|
| (a) | Horizontal | Intra-firm | Same item, two different years, one firm |
| (b) | Vertical | Intra-firm | Two items from within the same year of one firm |
| (c) | Vertical | Inter-firm | Each percentage is computed within one year, then compared across two firms |
| (d) | Horizontal (trend analysis) | Intra-firm | Several years of one firm indexed to a base year |
Marking note. One mark per case, and the reason is what protects the mark if the label is arguable.
Q3. Numerical. Compute the absolute change and the percentage change for each item. (5 marks)
(a) Revenue from operations ₹8,00,000 → ₹10,00,000. (b) Finance costs ₹60,000 → ₹84,000. (c) Inventories ₹4,50,000 → ₹4,05,000. (d) Other income Nil → ₹40,000. (e) Loss before tax ₹50,000 → Profit before tax ₹1,50,000.
Show Answer
| Item | Absolute change (₹) | Working | % change |
|---|---|---|---|
| (a) Revenue from operations | 2,00,000 | 2,00,000 ÷ 8,00,000 × 100 | 25.00 |
| (b) Finance costs | 24,000 | 24,000 ÷ 60,000 × 100 | 40.00 |
| (c) Inventories | (45,000) | (45,000) ÷ 4,50,000 × 100 | (10.00) |
| (d) Other income | 40,000 | Base is Nil — division by zero | N.A. |
| (e) Profit before tax | 2,00,000 | Base is negative (–50,000) | Not meaningful |
Note on (e). 1,50,000 – (–50,000) = ₹2,00,000, a genuine improvement. The mechanical calculation 2,00,000 ÷ (–50,000) × 100 = –400% would wrongly suggest deterioration, so state that the percentage is not meaningful and rely on the absolute figure.
Why it works. Parts (d) and (e) are the discrimination questions — they separate students who apply the formula blindly from those who understand what it assumes.
Q4. Numerical. Prepare a Comparative Statement of Profit and Loss of Kabir Foods Ltd and comment. (6 marks)
Revenue from operations: 2024-25 ₹15,00,000, 2025-26 ₹18,00,000. Other income: ₹50,000 and ₹90,000. Purchases of stock-in-trade: ₹9,00,000 and ₹10,80,000. Changes in inventories of finished goods: ₹50,000 and ₹20,000. Employee benefit expenses: ₹2,00,000 and ₹2,50,000. Other expenses: ₹1,00,000 and ₹1,30,000. Tax rate 30% in both years.
Show Answer
Comparative Statement of Profit and Loss of Kabir Foods Ltd for the years ended 31st March 2025 and 31st March 2026
| Particulars | Note No. | 2024-25 (₹) | 2025-26 (₹) | Absolute Change (₹) | Percentage Change (%) |
|---|---|---|---|---|---|
| I. Revenue from operations | — | 15,00,000 | 18,00,000 | 3,00,000 | 20.00 |
| II. Other income | — | 50,000 | 90,000 | 40,000 | 80.00 |
| III. Total Revenue | 15,50,000 | 18,90,000 | 3,40,000 | 21.94 | |
| IV. Expenses: | |||||
| (a) Purchases of stock-in-trade | — | 9,00,000 | 10,80,000 | 1,80,000 | 20.00 |
| (b) Changes in inventories | — | 50,000 | 20,000 | (30,000) | (60.00) |
| (c) Employee benefit expenses | — | 2,00,000 | 2,50,000 | 50,000 | 25.00 |
| (d) Other expenses | — | 1,00,000 | 1,30,000 | 30,000 | 30.00 |
| Total Expenses | 12,50,000 | 14,80,000 | 2,30,000 | 18.40 | |
| V. Profit before tax | 3,00,000 | 4,10,000 | 1,10,000 | 36.67 | |
| VI. Less: Tax @ 30% | — | 90,000 | 1,23,000 | 33,000 | 36.67 |
| VII. Profit after tax | 2,10,000 | 2,87,000 | 77,000 | 36.67 |
Key workings. Total Revenue 15,00,000 + 50,000 = 15,50,000 and 18,00,000 + 90,000 = 18,90,000; change 3,40,000; 3,40,000 ÷ 15,50,000 × 100 = 21.94%. Total Expenses 9,00,000 + 50,000 + 2,00,000 + 1,00,000 = 12,50,000 and 10,80,000 + 20,000 + 2,50,000 + 1,30,000 = 14,80,000; change 2,30,000; 2,30,000 ÷ 12,50,000 × 100 = 18.40%. PBT 15,50,000 – 12,50,000 = 3,00,000 and 18,90,000 – 14,80,000 = 4,10,000; change 1,10,000; 1,10,000 ÷ 3,00,000 × 100 = 36.67%. Tax 30% of 3,00,000 = 90,000 and 30% of 4,10,000 = 1,23,000. PAT 2,10,000 and 2,87,000; change 77,000; 77,000 ÷ 2,10,000 × 100 = 36.67%.
Comment. Revenue from operations grew 20% while total expenses grew only 18.40%, so costs were contained below the pace of sales. The gap widened profit before tax by 36.67%, helped further by other income rising 80% (though on a small base of ₹50,000). Since the tax rate was unchanged, profit after tax also rose 36.67%, from ₹2,10,000 to ₹2,87,000. Profitability improved clearly. The one head to watch is other expenses at 30% growth, the only item outrunning sales.
Q5. Numerical. Prepare a Comparative Balance Sheet of Trident Papers Ltd and comment. (6 marks)
As at 31.3.2025 and 31.3.2026 respectively — Share capital ₹8,00,000 and ₹10,00,000; Reserves and surplus ₹2,00,000 and ₹3,00,000; Long-term borrowings ₹4,00,000 and ₹3,00,000; Trade payables ₹2,00,000 and ₹2,50,000; Short-term provisions ₹1,00,000 and ₹1,50,000; Property, Plant and Equipment ₹10,00,000 and ₹12,00,000; Intangible assets ₹1,00,000 and ₹80,000; Inventories ₹3,00,000 and ₹4,20,000; Trade receivables ₹2,00,000 and ₹2,00,000; Cash and cash equivalents ₹1,00,000 and ₹1,00,000.
Show Answer
| Particulars | 31.3.2025 (₹) | 31.3.2026 (₹) | Absolute Change (₹) | Percentage Change (%) |
|---|---|---|---|---|
| I. EQUITY AND LIABILITIES | ||||
| Share capital | 8,00,000 | 10,00,000 | 2,00,000 | 25.00 |
| Reserves and surplus | 2,00,000 | 3,00,000 | 1,00,000 | 50.00 |
| Long-term borrowings | 4,00,000 | 3,00,000 | (1,00,000) | (25.00) |
| Trade payables | 2,00,000 | 2,50,000 | 50,000 | 25.00 |
| Short-term provisions | 1,00,000 | 1,50,000 | 50,000 | 50.00 |
| Total Equity and Liabilities | 17,00,000 | 20,00,000 | 3,00,000 | 17.65 |
| II. ASSETS | ||||
| Property, Plant and Equipment | 10,00,000 | 12,00,000 | 2,00,000 | 20.00 |
| Intangible assets | 1,00,000 | 80,000 | (20,000) | (20.00) |
| Inventories | 3,00,000 | 4,20,000 | 1,20,000 | 40.00 |
| Trade receivables | 2,00,000 | 2,00,000 | Nil | 0.00 |
| Cash and cash equivalents | 1,00,000 | 1,00,000 | Nil | 0.00 |
| Total Assets | 17,00,000 | 20,00,000 | 3,00,000 | 17.65 |
Key workings. Totals: 8,00,000 + 2,00,000 + 4,00,000 + 2,00,000 + 1,00,000 = 17,00,000; 10,00,000 + 3,00,000 + 3,00,000 + 2,50,000 + 1,50,000 = 20,00,000. Assets: 10,00,000 + 1,00,000 + 3,00,000 + 2,00,000 + 1,00,000 = 17,00,000; 12,00,000 + 80,000 + 4,20,000 + 2,00,000 + 1,00,000 = 20,00,000. Both sides agree in both years. Total percentage change 3,00,000 ÷ 17,00,000 × 100 = 17.65%.
Comment. The Balance Sheet grew 17.65%. The growth was financed entirely by owners — share capital up 25% and reserves up 50% — while long-term borrowings were actually repaid down 25%, so long-term solvency has strengthened materially. Funds went into Property, Plant and Equipment (up 20%) and, more sharply, into inventories (up 40%, far ahead of the 17.65% overall growth) while trade receivables and cash were unchanged. Rising inventories alongside flat cash is the one point of concern and merits attention to stock movement.
Q6. Numerical. Prepare a Common Size Statement of Profit and Loss of Neelkanth Ltd and interpret. (6 marks)
For 2024-25 and 2025-26 respectively — Revenue from operations ₹40,00,000 and ₹50,00,000; Other income ₹2,00,000 and ₹2,00,000; Cost of materials consumed ₹24,00,000 and ₹32,50,000; Employee benefit expenses ₹6,00,000 and ₹6,50,000; Other expenses ₹2,00,000 and ₹3,00,000. Tax rate 50% in both years.
Show Answer
Common Size Statement of Profit and Loss of Neelkanth Ltd for the years ended 31st March 2025 and 31st March 2026
| Particulars | 2024-25 (₹) | 2025-26 (₹) | 2024-25 (%) | 2025-26 (%) |
|---|---|---|---|---|
| I. Revenue from operations | 40,00,000 | 50,00,000 | 100.00 | 100.00 |
| II. Other income | 2,00,000 | 2,00,000 | 5.00 | 4.00 |
| III. Total Revenue | 42,00,000 | 52,00,000 | 105.00 | 104.00 |
| (a) Cost of materials consumed | 24,00,000 | 32,50,000 | 60.00 | 65.00 |
| (b) Employee benefit expenses | 6,00,000 | 6,50,000 | 15.00 | 13.00 |
| (c) Other expenses | 2,00,000 | 3,00,000 | 5.00 | 6.00 |
| IV. Total Expenses | 32,00,000 | 42,00,000 | 80.00 | 84.00 |
| V. Profit before tax | 10,00,000 | 10,00,000 | 25.00 | 20.00 |
| VI. Less: Tax @ 50% | 5,00,000 | 5,00,000 | 12.50 | 10.00 |
| VII. Profit after tax | 5,00,000 | 5,00,000 | 12.50 | 10.00 |
Key workings. 2024-25 base ₹40,00,000: 2,00,000 ÷ 40,00,000 × 100 = 5.00; 24,00,000 ÷ 40,00,000 × 100 = 60.00; 6,00,000 ÷ 40,00,000 × 100 = 15.00; 2,00,000 ÷ 40,00,000 × 100 = 5.00; check 60.00 + 15.00 + 5.00 = 80.00 and 105.00 – 80.00 = 25.00. 2025-26 base ₹50,00,000: 2,00,000 ÷ 50,00,000 × 100 = 4.00; 32,50,000 ÷ 50,00,000 × 100 = 65.00; 6,50,000 ÷ 50,00,000 × 100 = 13.00; 3,00,000 ÷ 50,00,000 × 100 = 6.00; check 65.00 + 13.00 + 6.00 = 84.00 and 104.00 – 84.00 = 20.00.
Interpretation. This is the trap question. Profit after tax is exactly ₹5,00,000 in both years, so a careless reader would call performance unchanged. The common size statement says otherwise: total expenses rose from 80% to 84% of revenue from operations, driven almost entirely by cost of materials climbing from 60% to 65%. Employee benefit expenses eased from 15% to 13%, which softened the blow but did not offset it. As a result the net margin fell sharply, from 12.5 paise to 10 paise per rupee of sales. The firm sold more but earned less on each rupee — a clear deterioration in operating efficiency that the absolute profit figure completely conceals.
Q7. Numerical. Prepare a Common Size Balance Sheet of Alpine Tools Ltd and comment. (6 marks)
As at 31.3.2025 and 31.3.2026 respectively — Share capital ₹25,00,000 and ₹36,00,000; Reserves and surplus ₹10,00,000 and ₹20,00,000; Long-term borrowings ₹10,00,000 and ₹16,00,000; Trade payables ₹5,00,000 and ₹8,00,000; Property, Plant and Equipment ₹30,00,000 and ₹52,00,000; Inventories ₹10,00,000 and ₹14,00,000; Trade receivables ₹6,00,000 and ₹8,00,000; Cash and cash equivalents ₹4,00,000 and ₹6,00,000.
Show Answer
| Particulars | 31.3.2025 (₹) | 31.3.2026 (₹) | 31.3.2025 (%) | 31.3.2026 (%) |
|---|---|---|---|---|
| I. EQUITY AND LIABILITIES | ||||
| Share capital | 25,00,000 | 36,00,000 | 50.00 | 45.00 |
| Reserves and surplus | 10,00,000 | 20,00,000 | 20.00 | 25.00 |
| Long-term borrowings | 10,00,000 | 16,00,000 | 20.00 | 20.00 |
| Trade payables | 5,00,000 | 8,00,000 | 10.00 | 10.00 |
| Total Equity and Liabilities | 50,00,000 | 80,00,000 | 100.00 | 100.00 |
| II. ASSETS | ||||
| Property, Plant and Equipment | 30,00,000 | 52,00,000 | 60.00 | 65.00 |
| Inventories | 10,00,000 | 14,00,000 | 20.00 | 17.50 |
| Trade receivables | 6,00,000 | 8,00,000 | 12.00 | 10.00 |
| Cash and cash equivalents | 4,00,000 | 6,00,000 | 8.00 | 7.50 |
| Total Assets | 50,00,000 | 80,00,000 | 100.00 | 100.00 |
Key workings. 31.3.2025 base ₹50,00,000: 25,00,000 ÷ 50,00,000 × 100 = 50.00; 10,00,000 ÷ 50,00,000 × 100 = 20.00; 10,00,000 ÷ 50,00,000 × 100 = 20.00; 5,00,000 ÷ 50,00,000 × 100 = 10.00 — check 50 + 20 + 20 + 10 = 100.00. Assets: 60.00 + 20.00 + 12.00 + 8.00 = 100.00. 31.3.2026 base ₹80,00,000: 36,00,000 ÷ 80,00,000 × 100 = 45.00; 20,00,000 ÷ 80,00,000 × 100 = 25.00; 16,00,000 ÷ 80,00,000 × 100 = 20.00; 8,00,000 ÷ 80,00,000 × 100 = 10.00 — check 45 + 25 + 20 + 10 = 100.00. Assets: 52,00,000 ÷ 80,00,000 × 100 = 65.00; 14,00,000 ÷ 80,00,000 × 100 = 17.50; 8,00,000 ÷ 80,00,000 × 100 = 10.00; 6,00,000 ÷ 80,00,000 × 100 = 7.50 — check 65 + 17.5 + 10 + 7.5 = 100.00.
Comment. The funding structure barely moved: shareholders’ funds held at 70% of total funds in both years (share capital 50% to 45%, offset by reserves 20% to 25%), with long-term borrowings steady at 20% and trade payables at 10%. Long-term solvency is therefore unchanged. The asset structure, however, shifted decisively towards fixed assets: Property, Plant and Equipment rose from 60% to 65% of total assets, while every current asset lost share — inventories 20% to 17.5%, receivables 12% to 10%, cash 8% to 7.5%. Total current assets fell from 40% to 35% of the Balance Sheet. The firm has invested heavily in capacity, which should support future revenue, but it is now carrying proportionately less working capital and its short-term liquidity has weakened.
Q8. State any four limitations of financial statement analysis. (4 marks)
Show Answer (any four, each with an explaining line)
- Ignores qualitative factors. Quality of management, employee morale, brand strength and customer loyalty never appear in the statements, yet they shape future performance.
- Affected by price level changes. Because statements use historical cost, a rise in revenue may reflect inflation rather than any real growth in business activity.
- Differing accounting policies. Two firms using different depreciation methods or inventory valuation methods are not truly comparable even after analysis.
- Window dressing. Management may present a deliberately favourable picture, so the analysed figures may not reflect the true state of affairs.
- Historical in nature. Every figure relates to a period already over, so conclusions about the future are inferences, not certainties.
- Personal bias. Different analysts may weigh the same facts differently and reach different conclusions.
Marking note. One mark per limitation with its explanation. A bare list of four headings typically scores two.
Q9. Interpretation. A firm reports revenue growth of 20%, total expense growth of 30%, and profit after tax growth of 5%. Write a comment of about four sentences. (3 marks)
Show Answer
Revenue from operations grew 20%, but total expenses grew faster at 30%, so costs consumed a rising share of every rupee of sales. Because expenses outpaced revenue, profit after tax rose only 5% — far behind the growth in sales — which means the net profit margin fell even though profit in rupees increased. In other words, the firm sold considerably more but converted much less of each additional rupee into profit. Operating efficiency has therefore deteriorated, and management should examine which expense heads grew fastest before expanding sales further.
Why this scores. It states facts with numbers, compares three growth rates against one another, names the consequence (margin fell) and closes with an actionable judgement. Contrast it with "profit increased so the firm is doing well", which is true, useless and worth nothing.
Q10. Application. Name the tool of analysis you would use, and say whether the comparison is intra-firm or inter-firm. (4 marks)
(a) A supplier wants to know whether a customer’s cash generated from operations covers its short-term dues. (b) An investor compares the expense structure of two garment companies of very different sizes for 2025-26. (c) A board reviews how each expense head of its own company moved between 2024-25 and 2025-26. (d) A lender wants a single figure for the relationship between outside funds and owners’ funds.
Show Answer
| Case | Tool | Comparison | Reason |
|---|---|---|---|
| (a) | Cash flow analysis | Intra-firm | Only the cash flow statement isolates cash generated from operating activities; profit is not cash |
| (b) | Common size statement | Inter-firm | Stating every item out of a base of 100 removes the distortion caused by the size difference |
| (c) | Comparative statement | Intra-firm | It reports absolute and percentage change head by head between two years of one firm |
| (d) | Ratio analysis | Either | A solvency ratio condenses the relationship into one figure, usable across years or across firms |
Marking note. The tool alone usually carries half a mark and the reason the other half. Always give the reason — it is quicker to write than you think and it is where the mark actually sits.
One Question Better Than Yesterday
This chapter is unusual in a good way: nothing in it is hard. There is no adjustment to remember, no exception to a rule, no formula that hides a trap. What it asks for instead is habit — ruling six columns the same way every time, dividing by the previous year every time, adding your common size column to check it makes 100 every time, and writing a comment with a number in it every time.
Habits are not built by long sittings. They are built by short, honest, repeated attempts. So here is the only study plan I would give you for this unit: tomorrow, prepare one comparative statement from start to finish, with the heading, the Note No. column, every subtotal and a four-line comment. Then check it against your own totals before you check it against any answer key. The day after, do one common size statement the same way. On the third day, do one of each and time yourself.
By the end of a week you will have prepared perhaps eight statements. That is not many. But eight statements done with full discipline will beat forty done carelessly, because the exam does not test whether you have seen the format — it tests whether your hand reaches for the right column without being told.
One question better than yesterday. Then close the book, and come back tomorrow.