Class 12 Accountancy Part 2 Chapter 4 Analysis of Financial Statements

Quick reading. A "list" question wants a clean enumeration, not paragraphs, but the marks come from never missing one. The reliable trick is to remember the five tools by what each one compares, because every tool is just a different kind of comparison of the same statement figures.

The five comparisons map one-to-one onto the five tools:

• One item, this year vs last year ⇒ Comparative Statements.
• One item, many years vs a fixed base year ⇒ Trend Analysis.
• One item vs a common base in the same statement ⇒ Common Size Statements.
• One item vs another related item, as a ratio ⇒ Ratio Analysis.
• Cash coming in vs cash going out ⇒ Cash Flow Analysis.

1. Across time, same firm. Comparative Statements compare period with period (absolute and percentage change); Trend Analysis compares many years against one base year fixed at 100.
2. Within one statement, structure. Common Size Statements express each item as a percentage of a common base (revenue for the P&L, total assets for the Balance Sheet).
3. Between two items, relationship. Ratio Analysis relates one figure to another as a ratio to measure profitability, solvency and efficiency.
4. Cash movement. Cash Flow Analysis nets cash inflows against cash outflows to find the change in cash position between two balance-sheet dates.

Why this matters. Examiners often follow "list" with "classify": Comparative and Trend are horizontal analysis; Common Size and Ratio are vertical analysis; Cash Flow stands apart as a movement analysis. Knowing this grouping lets you answer the follow-up without re-reading the chapter.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Comparative Statements, Common Size Statements, Trend Analysis, Ratio Analysis, Cash Flow Analysis.

Structural observation. Picture a financial statement as a grid of figures. Horizontal analysis reads the grid across (the same item over several year-columns). Vertical analysis reads the grid down a single column (each item measured against that column's base). The whole distinction follows from which direction the eye moves, which is why the names "horizontal" and "vertical" were chosen.

A four-line contrast captures everything an exam answer needs:

• Basis: horizontal compares across years; vertical compares within one year against a base.
• Tools: horizontal uses Comparative Statements and Trend Analysis; vertical uses Common Size Statements and Ratio Analysis.
• Output: horizontal yields absolute change and percentage change; vertical yields a component percentage.
• Best use: horizontal tracks one firm's growth over time; vertical compares firms of unequal size on a common 100 base.

1. Direction. Row-wise across year-columns ⇒ horizontal. Column-wise top to bottom within one year ⇒ vertical.
2. Output. Horizontal gives absolute and percentage change of each item over time. Vertical gives each item as a percentage of the period's common base.
3. Best use. Horizontal is for intra-firm growth tracking; vertical is for inter-firm comparison even between firms of very different sizes.
4. Reconcile the pair. Both analyse the very same statement figures; they differ only in the direction of comparison, so a complete analysis usually uses both.

Why this matters. Two firms of unequal size can be laid side by side only after a common size statement scales both to 100; a raw comparative statement of unequal firms cannot be compared directly. That single practical consequence is the point the examiner is testing.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Horizontal = across-time, row-wise (change, via Comparative and Trend). Vertical = within-year, column-wise (proportion, via Common Size and Ratio).

Quick reading. The two words name two stages in a fixed order: first you do the analysis (arrange the numbers), then you say the interpretation (explain what the arrangement means). Answering in that order, and stressing that they are complementary, is the complete answer.

It helps to map each term to a plain question it answers:

• Analysis answers "What do the numbers look like once organised?" It is mechanical: reclassify, regroup, simplify.
• Interpretation answers "So what does that organised picture mean for the firm?" It is judgemental: strength, weakness, trend, prospect.

1. Analysis = the "what". Methodically reclassify and simplify the statement figures (for example into comparative or common size form) so patterns and relationships surface.
2. Interpretation = the "so what". State the significance of those patterns: is profitability rising, is solvency improving, what does it predict.
3. Show the dependence. Analysis without interpretation is useless (numbers alone tell no story); interpretation without analysis is impossible (nothing organised to explain).
4. Conclude they are complementary. Together they form the judgemental process that estimates the past, reads the present and predicts the future.

Why this matters. In a board exam, a comparative statement submitted with no concluding remark loses every interpretation mark, because the "interpretation" half of the term was skipped. Always close a numerical with a one-line "the firm's profitability improved / declined because ..." comment.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Analysis simplifies and classifies the data; interpretation explains its meaning and significance. They are complementary and must be done together.

Strategic angle. The cleanest way to answer "importance" is user by user, because the NCERT explains significance through the needs of each user group.

• Finance manager / top management: operational efficiency, financial control, internal control.
• Trade payables: short-term liquidity.
• Lenders: long-term solvency, interest and principal repayment.
• Investors: profitability and risk for buy / sell / hold.
• Labour unions, economists, government: wage capacity, economic study, regulation and taxation.

1. Name the user. Start with the user group (finance manager, trade payable, lender, investor, labour union, government).
2. State the decision. For each, write the single decision the analysis supports: control and efficiency for management, short-term liquidity for trade payables, long-term solvency and repayment ability for lenders, profitability and risk for investors, wage capacity for labour unions, regulation and taxation for the government.
3. Link to the statements. Note that every user reads the same Balance Sheet and Statement of Profit and Loss; the analysis differs only because the purpose differs.
4. Repeat across all groups. Cover every group so no importance mark is left on the table.

Why this matters. Framing the answer user by user proves to the examiner that you understand why the same statements are analysed differently by different parties: the technique chosen serves the interest of the analyst, so a lender's solvency focus and an investor's profitability focus draw different conclusions from identical figures.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

It supports decisions of every stakeholder: management, trade payables, lenders, investors, labour unions and government.

Picture-first. The fastest way to "define" a comparative statement is to draw its skeleton. It is always a five-column grid: Particulars, Previous Year, Current Year, Absolute Change, Percentage Change. That grid is the comparative statement, and every exam question simply asks you to fill it.

The two derived columns follow one rule each:

• Absolute change = Current Year - Previous Year. Its sign (or a bracket) shows whether the item rose or fell.
• Percentage change = Absolute changePrevious Year× 100. The base is always the earlier year.

1. Columns 2 and 3. Enter the two years' absolute figures for every item of the Statement of Profit and Loss or Balance Sheet.
2. Column 4. Subtract: Column 3 - Column 2, keeping the sign so a decrease shows as negative or in brackets.
3. Column 5. Divide Column 4 by Column 2 and multiply by 100 to get the percentage change.
4. Read the result. The filled grid shows not just the balances but the direction and rate of change, which is the purpose of a comparative statement.

Why this matters. Knowing the five-column layout by heart means you can build any comparative statement in the exam without re-deriving the format, and you will never forget the interpretation column (Column 5) that carries the analysis marks.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

A two-period side-by-side five-column statement with absolute and percentage change for each item (horizontal analysis).

Strategic angle. The single defining feature of a common size statement is the common base set to 100. If you state the correct base for each statement and the conversion formula, the definition is complete and the purpose follows naturally.

Two facts carry the answer, and both are about the base:

• The base is not arbitrary: it is revenue from operations for the Statement of Profit and Loss, and total assets (equal to total of equity and liabilities) for the Balance Sheet.
• Because every figure is divided by the same base and multiplied by 100, two firms of very different sizes are reduced to the same scale and become directly comparable.

1. P&L base. Revenue from operations = 100; every expense and profit line is shown as a percentage of it.
2. Balance Sheet base. Total assets (or total equity and liabilities) = 100; every asset and liability is shown as a percentage of it.
3. Conversion. Each item = itemcommon base× 100.
4. Purpose. The resulting percentages reveal the internal structure of the statement and allow inter-firm and industry comparison regardless of size (vertical analysis).

Why this matters. The base choice is the single most examined point in this topic: revenue for the P&L and total assets for the Balance Sheet, never the other way round. Swapping them is the most common reason marks are lost here.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

A statement expressing every item as a % of a common base (revenue for the P&L; total assets for the Balance Sheet), enabling size-independent comparison (vertical analysis).

Strategic angle. Treat this as two short lists glued together. Each technique gets one defining sentence; each limitation gets one cause-and-effect sentence.

• Techniques (what they do): Comparative (period vs period), Common Size (item vs base), Trend (year vs base year), Ratio (item vs item), Cash Flow (inflow vs outflow).
• Limitations (why they weaken the analysis): inflation ignored, policy changes mislead, only reported data, only monetary data, historical not current.

1. List the five techniques. Comparative Statements (period vs period, with absolute and % change), Common Size Statements (each item as a % of a common base), Trend Analysis (each year vs a fixed base year), Ratio Analysis (one item related to another as a ratio), Cash Flow Analysis (inflows netted against outflows).
2. State the five limitations as cause and effect. Price-level changes ignored, so cross-year figures are not truly comparable; accounting-policy changes can mislead if not disclosed; only reported data is analysed; only monetary information is captured; statements are historical, not current.
3. Connect the halves. Point out that the limitations exist because the techniques operate only on the reported, historical, monetary statements.
4. Close. Conclude that financial analysis is helpful but must always be read with these limitations in mind.

Why this matters. Examiners reward the student who connects the two halves rather than listing them in isolation: the limitations are not a separate topic, they are the direct consequence of the very data the techniques are confined to.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Five techniques (Comparative, Common Size, Trend, Ratio, Cash Flow) and five limitations (price levels, accounting changes, report-only, non-monetary ignored, not current position).

Picture-first. Imagine plotting one item, say sales, for ten years with the first year fixed at 100. The shape of that line, its slope and its turning points, is exactly what trend analysis reads. Everything useful about trend percentages follows from that mental graph.

The graph metaphor unpacks into four concrete benefits:

• A long line shows the long-run direction that a single year's figure cannot reveal.
• The slope tells whether the item is rising, falling or flat.
• A change in slope is an early signal of good or poor management, well before absolute figures react sharply.
• Because every point is scaled to the base 100, comparing ten years is as easy as comparing two.

1. Fix the base year at 100. Choose a representative year as the base; its trend percentage is always 100.
2. Scale every later year. Compute that year's figurebase year figure× 100 for each subsequent year.
3. Read the slope. Rising, falling or flat tells the story of the business over the long run.
4. Use it to forecast. A consistent slope supports a reasonable projection of the next period, which is the planning value of the tool.

Why this matters. A rising sales trend paired with a faster-rising cost trend warns of shrinking margins long before profit actually turns negative. That early-warning property, read straight off the scaled line, is the interpretation value examiners want you to state explicitly.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Trend percentages reveal long-run direction, give early warnings of good or poor management, simplify multi-year comparison and support forecasting.

Strategic angle. The word "illustrate" is the instruction that matters. State the importance in crisp points, then immediately prove each point with a tiny three-line income statement so the examiner sees the concept applied, not merely defined.

The importance reduces to four points, each of which the illustration must visibly demonstrate:

• It shows the exact change between two years in rupees and percentage.
• It reveals the direction and trend of revenue, expenses and profit.
• It supports interpretation by letting you compare the % change in revenue with the % change in expenses.
• It aids decisions of management, investors and lenders.

1. State the importance. Visible change, direction and trend, interpretation support, decision support.
2. Set up the illustration. Take revenue 16,00,000 → 20,00,000 and expenses 10,00,000 → 11,00,000 for two years.
3. Compute the changes. Revenue 4,00,00016,00,000× 100 = +25%; expenses 1,00,00010,00,000× 100 = +10%; profit before tax 3,00,0006,00,000× 100 = +50%.
4. Read the story. Revenue grew faster than expenses, so profit jumped 50%, a structural improvement no single year's statement could show.

Why this matters. A worded definition with no numbers caps your marks on an "illustrate" question; the small worked example that turns the definition into a visible 50% profit jump is exactly what secures full credit.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Importance: visible change, trend, interpretation and decision support, illustrated by profit before tax rising 50% when revenue (+25%) outgrew expenses (+10%).

Quick reading. This is a two-part question hiding in one sentence: first define the analysis-interpretation pair, then discuss its importance. The discussion half carries most of the marks, so keep the definition tight and spend the rest on the objectives.

The importance is best given as the four NCERT objectives plus the user dimension:

• Assess current profitability and operational efficiency to judge financial health.
• Ascertain the relative importance of the components of the financial position.
• Identify the reasons for changes in profitability or position.
• Judge debt-paying ability and short- and long-term liquidity, serving owners, lenders, investors and others.

1. Define the pair. Analysis simplifies and classifies the figures; interpretation explains their significance; they are complementary.
2. List the four objectives. profitability/efficiency, relative importance of components, reasons for change, debt-paying ability.
3. Add the user dimension. Note that owners, lenders, investors, trade payables and government each rely on this analysis for their own decisions.
4. Conclude. The pair together forms the judgemental process that reads the past and present and predicts the future.

Why this matters. The verb "discuss" expects the objectives spelled out, not just the meaning of the two words. Stopping at the definition is the single most common reason marks are lost on this question.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Definition of the complementary pair plus the four NCERT objectives and the multi-user importance.

Strategic angle. A "how to prepare, with an example" question is graded in two halves: the procedure and the worked illustration. State the three preparation steps crisply, then build a two or three line table so each step is visibly applied to real numbers.

The procedure is exactly three steps, and the example must show all three in action:

• List the absolute figures for the period.
• Fix the common base at 100 (revenue for the P&L; total assets for the Balance Sheet).
• Convert every item using itembase× 100.

1. State the three steps. List absolute figures, set the common base to 100, compute each item as item/base× 100.
2. Choose the base. Take revenue from operations = 10,00,000 as the base (= 100%).
3. Apply to cost. 6,00,00010,00,000× 100 = 60%, so cost of revenue is 60% of revenue.
4. Apply to gross profit. 10,00,000 - 6,00,000 = 4,00,000, i.e. 4,00,00010,00,000× 100 = 40%, and present the three lines as a small common size table.

Why this matters. The example is what separates a 4-mark and a 6-mark answer here: a procedure stated without a worked table is treated as incomplete, because the question explicitly asked for an illustration.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Three steps plus a worked table: cost 60%, gross profit 40% on a revenue base of 100%.

Strategic angle. Instead of treating fifteen lines as fifteen unrelated sums, group them into four economic blocks: owners' funds, borrowed funds, fixed-side assets and working-capital assets. Apply the same two formulas to every line, and read each block as a story. The two formulas are, for every line, Abs.=Figure₂₀₁₇-Figure₂₀₁₆ and %=Abs.Figure₂₀₁₆× 100.

1. Owners' funds block. Share capital: 4,00,000 - 2,00,000 = +2,00,000, so 2,00,0002,00,000× 100 = +100%. Reserve & surplus: 1,50,000 - 1,00,000 = +50,000, so 50,0001,00,000× 100 = +50%. Total owners' funds rose from 3,00,000 to 5,50,000: the owners injected fresh money.
2. Borrowed funds block. Long-term borrowings 3,00,000 - 2,00,000 = +1,00,000 (+50%); short-term borrowings 70,000 - 50,000 = +20,000 (+40%); trade payables 60,000 - 30,000 = +30,000 (+100%); other current liabilities 10,000 - 20,000 = -10,000 (-50%); provisions unchanged (0%). Borrowing rose but less than owners' funds.
3. Fixed-side assets block. Fixed assets 5,00,000 - 2,00,000 = +3,00,000 (3,00,0002,00,000× 100 = +150%); non-current investments 1,25,000 - 1,00,000 = +25,000 (+25%). Most of the new money went into fixed assets.
4. Working-capital assets block. Current investments +20,000 (+33.33%); inventories +20,000 (20,0001,35,000× 100 = +14.81%); trade receivables +30,000 (+50%); cash 10,000 - 25,000 = -15,000 (-60%); short-term loans & advances +20,000 (+50%). Cash is the only line that fell sharply.
5. Reconcile the totals. Add the figures: the NCERT-printed totals are 6,20,000 and 10,20,000, giving +4,00,000 and 4,00,0006,20,000× 100 = +64.52% on each side, so the statement balances. (The 2017 liability column's arithmetic slip to 10,10,000 is the known textbook misprint noted above.)

Why this matters. The structure tells the real story: a +150% jump in fixed assets was financed mainly by fresh owners' funds and long-term debt, not by squeezing cash or short-term sources. That is a healthy, well-funded expansion, the one-line interpretation an examiner rewards.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Same Comparative Balance Sheet; both totals 6,20,000 → 10,20,000, +64.52%, expansion led by fixed assets (+150%) funded by capital (+100%) and long-term debt (+50%); cash the only sharp fall (-60%).

Structural observation. This is the mirror image of Alpha Ltd: nearly every line shrinks, so the discipline is to carry the minus sign consistently and always divide by the larger 2016 base. Read it block by block, computing each figure in full so no sign slips.

1. Owners' funds block. Share capital: 3,00,000 - 4,00,000 = -1,00,000, so -1,00,0004,00,000× 100 = -25%. Reserves and surplus: 1,00,000 - 1,50,000 = -50,000, so -50,0001,50,000× 100 = -33.33%. Owners' funds fell from 5,50,000 to 4,00,000.
2. Borrowed funds block. Long-term borrowings 1,00,000 - 3,00,000 = -2,00,000 (-2,00,0003,00,000× 100 = -66.67%); short-term borrowings -20,000 (-28.57%); trade payables -30,000 (-50%); other current liabilities -10,000 (-9.09%). The firm repaid debt aggressively.
3. The lone increase. Short-term provisions 20,000 - 10,000 = +10,000, so 10,00010,000× 100 = +100%: the only line that grew.
4. Fixed-side assets block. Fixed assets 2,20,000 - 4,00,000 = -1,80,000 (-45%); non-current investments 1,00,000 - 2,25,000 = -1,25,000 (-1,25,0002,25,000× 100 = -55.56%): the deepest cuts, meaning assets were sold off.
5. Working-capital assets block. Current investments -20,000 (-25%); inventories -15,000 (-14.29%); trade receivables -30,000 (-33.33%); cash -15,000 (-15%); short-term loans & advances -15,000 (-15%). Every working-capital line also shrank.
6. Reconcile the totals. Both sides move 11,00,000 → 7,00,000, so absolute change = -4,00,000 and -4,00,00011,00,000× 100 = -36.36%. The corrected 2016 figure of 11,00,000 (not the misprinted 1,10,000) makes both sides tie.

Why this matters. A balance sheet that contracts on every front, with long-term borrowings down two-thirds and fixed assets down nearly half, points to a firm winding down or sharply downsizing operations. Stating that single interpretation, backed by the -66.67% debt figure, is what secures the analysis mark.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Same Comparative Balance Sheet; total contracts 11,00,000 → 7,00,000 (-36.36%); owners' funds, debt and all assets fall, only short-term provisions rise (+100%).

Strategic angle. The figures are scattered on purpose to test classification. The safe method is to first derive Revenue from Operations using the trading-account identity, then build the Statement of Profit and Loss in the Schedule III ladder (Revenue → Other income → Total revenue → Expenses by nature → PBT → Tax → PAT), computing each figure fully before attaching the change columns.

1. Derive Revenue from Operations. Net Sales = Purchases + Mfg + Stock Adj + GP - Returns Inward. 2015-16: (80,000 + 60,000) + 50,000 + (-60,000) + (-30,000) - 8,000 = 92,000. 2016-17: (60,000 + 20,000) + 20,000 + 30,000 + 90,000 - 4,000 = 2,16,000. Change = +1,24,000 (+134.78%).
2. Classify the stray items. Wages (office) → Employee Benefit Expenses (10,000 / 5,000). Freight Outward + Carriage Outward + Loss on sale of office car → Other Expenses (1,30,000 / 80,000). Profit on sale of furniture → Other Income (20,000 / 10,000). Interest on short-term loans + 10% debenture interest (2,000 / 1,000) → Finance Costs (22,000 / 21,000). Depreciation given directly (10,000 / 5,000); Machinery is a balance-sheet item, not a P&L line.
3. Total Revenue and Total Expenses. Total revenue: 1,12,000 / 2,26,000. Total expenses = Purchases + Stock-adj inventory change + Wages + Finance + Dep + Other. 2015-16: 1,40,000 + (-60,000) + 10,000 + 22,000 + 10,000 + 1,30,000 = 2,52,000. 2016-17: 80,000 + 30,000 + 5,000 + 21,000 + 5,000 + 80,000 = 2,21,000.
4. Stack to PAT. PBT = Total Revenue - Total Expenses. 2015-16: 1,12,000 - 2,52,000 = -1,40,000 (loss, so tax nil; PAT = -1,40,000). 2016-17: 2,26,000 - 2,21,000 = +5,000; tax = 50% × 5,000 = 2,500; PAT = 5,000 - 2,500 = 2,500. Change in PAT = +1,42,500 (turnaround from loss to profit).
5. Change column rule. Use absolute change everywhere; mark PBT, PAT and the Change-in-Inventories lines "n/a" for percentage because their 2015-16 base is negative or signed (a percentage on a negative or zero base is undefined).
6. Cross-check the turnaround. Revenue more than doubled (92,000 → 2,16,000, +134.78%); other expenses fell sharply ( 1,30,000 →  80,000, -38.46%); together they flipped the bottom line from a  1,40,000 loss to a small profit of  2,500, an exact  1,42,500 swing, confirming the statement is internally consistent.

Why this matters. The two single most common errors are (i) putting the loss on sale of the office car above gross profit when it is a non-operating "Other Expense", and (ii) forgetting to subtract Returns Inward ( 8,000 / 4,000) when deriving Net Sales. Either slip collapses every downstream figure, so the classification step is where the marks are won or lost.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Same comparative statement: Revenue from Operations  92,000 →  2,16,000 (+134.78%); PAT swings from  (1,40,000) to  2,500, a  1,42,500 improvement; tax  2,500 only in 2016-17.

Strategic angle. Every "X% of Y" clue must be converted into a rupee figure before any statement can be built. Resolve the stock and purchase relations first, then feed them into the standard ladder, computing each line in full.

1. Open the stock relations. 2015-16 closing stock = 150% of opening = 1.5 × 30,000 = 45,000. 2016-17 opening stock = 60% of closing = 0.6 × 1,00,000 = 60,000 (closing given as 1,00,000).
2. Open the purchase relations. 2015-16: credit = 1,50,000, cash = 80% of credit = 0.8 × 1,50,000 = 1,20,000. 2016-17: cash = 40,000, credit = 150% of cash = 1.5 × 40,000 = 60,000.
3. Net purchases = (cash + credit) - returns outward. 2015-16: (1,20,000 + 1,50,000) - 4,000 = 2,66,000; 2016-17: (40,000 + 60,000) - 6,000 = 94,000.
4. Cost of revenue = opening + net purchases + manufacturing - closing. 2015-16: 30,000 + 2,66,000 + 35,000 - 45,000 = 2,86,000; 2016-17: 60,000 + 94,000 + 80,000 - 1,00,000 = 1,34,000.
5. Gross profit = sales - cost. 2015-16: 9,60,000 - 2,86,000 = 6,74,000; 2016-17: 4,50,000 - 1,34,000 = 3,16,000.
6. Drop the personal car loss. Loss on sale of a personal car is not a business expense (business entity concept); exclude it entirely before computing PBT.
7. Stack to PAT. Indirect expenses 50,000 / 60,000; other income 10,000 / 20,000; finance cost 25,000 / 2,00,000 (bank overdraft interest plus 10% debenture interest, which is 20,000 / 2,00,000). PBT = 6,09,000 / 76,000; tax at 50% / 40% = 3,04,500 / 30,400; PAT = 3,04,500 / 45,600. Change in PAT = -2,58,900, -2,58,9003,04,500× 100 = -85.02%.
8. Cross-check the collapse. Confirm the figures cohere: sales fell roughly 53%, which alone would cut profit, but profit fell far more steeply (85%). The extra damage is the finance cost rising from  25,000 to  2,00,000, an  1,75,000 jump that almost exactly equals the missing profit. This sanity check confirms the debenture expansion, not just lower sales, drove the result.

Why this matters. The 10% debentures balloon from  2,00,000 to  20,00,000, so debenture interest jumps from  20,000 to  2,00,000. That single finance-cost surge is why profit collapsed even though the firm stayed profitable: stating this is the interpretation mark.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Same statement: sales -53.13%; PAT  3,04,500 →  45,600 (-85.02%), driven by a tenfold rise in debenture interest; personal car loss excluded.

Picture-first. Treat each year's revenue as a fixed bar of length 100. The whole question is: how much of that bar does cost eat, and how much survives as profit? Build every figure first, then scale.

1. Gross profit = revenue - cost of revenue. 2015-16: 6,00,000 - 4,28,000 = 1,72,000; 2016-17: 8,00,000 - 7,28,000 = 72,000.
2. Indirect expense = 25% of gross profit. 2015-16: 0.25 × 1,72,000 = 43,000; 2016-17: 0.25 × 72,000 = 18,000.
3. Profit before tax = gross profit - indirect expense + other incomes. 2015-16: 1,72,000 - 43,000 + 10,000 = 1,39,000; 2016-17: 72,000 - 18,000 + 12,000 = 66,000.
4. Tax and PAT. Tax = 30% of PBT = 41,700 / 19,800; PAT = 1,39,000 - 41,700 = 97,300 and 66,000 - 19,800 = 46,200.
5. Scale every line to revenue. Divide each figure by its year's revenue and multiply by 100. Cost of revenue: 4,28,0006,00,000× 100 = 71.33% and 7,28,0008,00,000× 100 = 91.00%. PAT: 97,3006,00,000× 100 = 16.22% and 46,2008,00,000× 100 = 5.78%.

Why this matters. Revenue grew in rupees, yet the cost-to-revenue ratio leapt from 71.33% to 91%, crushing the profit margin from 16.22% to 5.78%. Common size analysis exposes this structural slide where a comparative statement might hide it behind a rising rupee revenue; stating that contrast is the interpretation mark.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Same common size statement: PAT margin slides 16.22% → 5.78% because cost-to-revenue climbs 71.33% → 91%.

Structural observation. Two firms of unequal size can be compared only after both are scaled to a common 100. The base for each firm is its own balance-sheet total, so divide every line by that firm's total and the two structures line up directly.

1. Fix the bases. Aditya's total = 10,00,000; Anjali's total = 12,00,000. Each firm is scaled against its own total, never the other's.
2. Liabilities side. Equity share capital: 6,00,00010,00,000× 100 = 60% vs 8,00,00012,00,000× 100 = 66.67%. Reserves: 3,00,00010,00,000× 100 = 30% vs 2,50,00012,00,000× 100 = 20.83%. Current liabilities: 1,00,00010,00,000× 100 = 10% vs 1,50,00012,00,000× 100 = 12.50%.
3. Assets side. Fixed assets: 4,00,00010,00,000× 100 = 40% vs 7,00,00012,00,000× 100 = 58.33%. Current assets: 6,00,00010,00,000× 100 = 60% vs 5,00,00012,00,000× 100 = 41.67%.
4. Confirm each column sums to 100%. Aditya liabilities 60 + 30 + 10 = 100; Anjali assets 58.33 + 41.67 = 100, so the scaling is internally consistent.

Why this matters. Once scaled, the contrast is sharp: Aditya is liquidity-rich (current assets 60% of its total) while Anjali is capacity-rich (fixed assets 58.33%) and leans more on equity (66.67% vs 60%). Drawing that structural comparison is exactly what common size analysis is built to deliver, and is the interpretation an examiner rewards.

Common mistakes. Three predictable slips lose marks: (a) computing percentage change on the current-year base rather than the previous-year base in a comparative statement; (b) confusing common-size analysis (each item as a percent of a common base such as Revenue from Operations or Total Assets) with trend analysis (each item as a percent of a chosen base year); (c) discussing limitations in general terms without naming the specific limitation such as ignoring price-level changes or window dressing.

Same common size balance sheet: Aditya is current-asset heavy (60%), Anjali is fixed-asset heavy (58.33%) and more equity-financed (66.67%); bases 10,00,000 and 12,00,000.