MANAGERIAL ACCOUNTING

UNILT 5: FINANCIAL STATEMENTS – ANALYSIS AND INTERPRETATION

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Course Instructor: Mr. N. Ramesh Babu

Name of the student: Roll No:

Coverage:

1. Introduction

2. Objectives and Limitations of Financial Statements.

3. Income statement equations and Balance Sheet equations

4. Types of analysis and interpretation. Horizontal analysis & Vertical analysis

5. Comparative Financial Statements

6. Common Size Financial Statements

7. Trend Analysis

8. Basic problems.

9. Comprehensive problems.

10. Assignment

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Income statement equations:

1. Net sales = Cost of Sales + Operating Expenses + Non – operating Expenses

2. Gross Profit = Net sales – Cost of goods sold
3. Operating expenses = Office + selling & distribution expenses
4. Operating expenses = Gross Profit – operating profit
5. Sales – Net operating profit = Cost of sales + Operating expenses
6. Net operating profit = Gross profit – operating expenses
7. Net profit before interest and tax = Net operating profit – Non operating expenses
8. Sales = cost of sales + operating expenses + Non operating expenses
9. Net profit = Net sales – (cost of sales + operating expenses + Non operating expenses)

Balance sheet Equations:

1. Liquid Assets = Current Assets – stock and Prepaid expenses

2. Net working capital = Current Assets – current liabilities
3. Current assets = Net working capital – Current liabilities
4. Capital employed = Net working capital + Fixed assets
(Or) Total assets – Current liabilities
5. Shareholders’ net worth = companies net assets – external liabilities

Comparative financial Statements:

1. From the following Profit and Loss a/c of Avs Ltd. You are required to prepare a Comparative
Income statement and give your interpretation on the profitability of the firm.

Particulars 2002 2003

Net sales 4,000 5,000

Less: Cost of goods sold (3000) (3750)

Gross profit 1,000 1250

Less: operating expenses:

Offing and admn. Expenses (200) (250)

Selling and distribution exp. (225) (300)

Net Profit 575 700

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2. From the following Profit and Loss a/c you are required to prepare a Comparative Income
statement and give your interpretation on the profitability of the firm.
Particulars 2003 2004

Net sales 2, 00,000 2, 25,000

Less: Cost of goods sold (1, 18,000) (1, 47,000)

Gross profit 82,000 78,000

Less: operating expenses:

General and administrative Exp. (5,000) (6,000)

Selling and distribution exp. (7,000) (8,000)

Add: Non - operating income 10,000 15,000

Less: Non - operating expenses (5,000) (7,000)
Net profit 75,000 72,000
3. From the following Balance Sheet of ABC ltd. You are required to prepare Comparative Balance
Sheet.
Liabilities 2004 2005 Assets 2004 2005
Share capital 1, 35,000 1, 45,000 Cash 5,000 5,500
Long term loans 45,000 42,000 Bank 3,500 5,000
Short term loans 32,000 35,000 Debtors 45,000 40,000
B/P 13,000 13,000 Stock 35,000 40,000
Creditors 27,000 35,000 B/R 11,000 11,500
Pre paid exp. 2,500 3,000
Fixed assets 1, 50,000 1, 65,000

----------------------------- --------------------------------
2, 52,000 2, 70,000 2, 52,000 2, 70,000

4. From the following Balance Sheet of XYZ ltd. You are required to prepare Comparative Balance
Sheet.
Liabilities 2003 2004 Assets 2003 2004
Share capital 1, 25,000 1, 60,000 Cash 3,000 5,000
Long term loans 2, 00,000 2, 50000 Bank 10,000 20,000
Current liabilities 37,000 50,000 Debtors 10,000 15,000
Debentures 50,000 60,000 Stock 20,000 25,000
General reserve 28,000 30,000 B/R 7,000 10,000
Pref. share capital 1, 00,000 1, 50,000 Fixed assets 4, 90,000 6, 25,000

----------------------------- --------------------------------

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 5, 40,000 7, 00,000 5, 40,000 7, 00,000

Common Size Statements:

5. From the following Profit and Loss a/c of A Ltd. You are required to prepare a Common Size
Income statement and give your interpretation on the profitability of the firm.

Particulars 2002 2003

Net sales 5,000 5,000

Less: Cost of goods sold (3500) (3750)

Gross profit 1,500 1250

Less: operating expenses:

Offing and admn. Expenses (200) (250)

Selling and distribution exp. (250) (100)

Net Profit 1050 900

6. From the following Balance Sheet of ABC ltd. You are required to prepare Common Size Balance
Sheet.
Liabilities 2004 2005 Assets 2004 2005
Share capital 1, 35,000 1, 45,000 Cash 5,000 5,500
Long term loans 45,000 42,000 Bank 3,500 5,000
Short term loans 32,000 35,000 Debtors 45,000 40,000
B/P 13,000 13,000 Stock 35,000 40,000
Creditors 27,000 35,000 B/R 11,000 11,500
Pre paid exp. 2,500 3,000
Fixed assets 1, 50,000 1, 65,000

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2, 52,000 2, 70,000 2, 52,000 2, 70,000

Trend Analysis:

7. Calculate the Trend percentages from the following taking 1999 as the base year.
Year Sales cost of goods sold GP
1999 2000 1400 600
2000 2500 1800 700
2001 3000 2200 800

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2002 3500 2600 900
2003 4000 3000 1000