Basic Assignment

1. Name-Mitesh Singh Suryavanshi
Roll No-BBA019283 Subject-Management Accounting
Semester-III Assignment No.2
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Question 1:
Distinguish between Comparative Statement and Common-Size Statement?
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Answer:
Financial Statement, i.e., Balance Sheet and Statement of profit and loss are prepared at the end of the accounting
process along with Cash Flow Statement. But the financial statements have only absolute amounts for assets,
liabilities, incomes, expenses and profit earned or loss incurred. Financial statements in this form do not convey
information on earning capacity, capital, utilization, trend, etc. Thus, financial statements are analyzed by using
tools of analysis.
Tools for Analysis of Financial Statements:
Financial statements when analyzed in isolation are not of much meaning and use. They are thus
analyzed by comparing with the financial statement of previous years or with that of other enterprises
of similar business environment or with the industry standards. The tools used for carrying out the
analysis are:
1. Comparative Statement or Comparative Financial and Operating Statements.
2. Common Size Statements.
3. Trend Ratios or Trend Analysis.
4. Average Analysis.
5. Statement of Changes in Working Capital.
6. Fund Flow Analysis.
7. Cash Flow Analysis.
8. Ratio Analysis.
9. Cost Volume Profit Analysis
A brief explanation of the tools or techniques of financial statement analysis presented below.
1. Comparative Statement
Comparative statements deal with the comparison of different items of the Profit and Loss Account and
Balance Sheets of two or more periods. Separate comparative statements are prepared for Profit and
Loss Account as Comparative Income Statement and for Balance Sheets.
Commented [MS1]: Follow Up: Statements

2. As a rule, any financial statement can be presented in the form of comparative statement such as
comparative balance sheet, comparative profit and loss account, comparative cost of production
statement, comparative statement of working capital and the like.
2. Comparative Income Statement
Three important information are obtained from the Comparative Income Statement. They are Gross
Profit, Operating Profit and Net Profit. The changes or the improvement in the profitability of the
business concern is find out over a period of time. If the changes or improvement is not satisfactory, the
management can find out the reasons for it and some corrective action can be taken.
3. Comparative Balance Sheet
The financial condition of the business concern can be finding out by preparing comparative balance
sheet. The various items of Balance sheet for two different periods are used. The assets are classified as
current assets and fixed assets for comparison. Likewise, the liabilities are classified as current liabilities,
long term liabilities and shareholders’ net worth. The term shareholders’ net worth includes Equity
Share Capital, Preference Share Capital, Reserves and Surplus and the like.
4. Common Size Statements
A vertical presentation of financial information is followed for preparing common-size statements.
Besides, the rupee value of financial statement contents is not taken into consideration. But only
percentage is considered for preparing common size statement.
The total assets or total liabilities or sales is taken as 100 and the balance items are compared to the
total assets, total liabilities or sales in terms of percentage. Thus, a common size statement shows the
relation of each component to the whole. Separate common size statement is prepared for profit and
loss account as Common Size Income Statement and for balance sheet as Common Size Balance Sheet.
5. Trend Analysis
The ratios of different items for various periods are find out and then compared under this analysis. The
analysis of the ratios over a period of years gives an idea of whether the business concern is trending
upward or downward. This analysis is otherwise called as Pyramid Method.
6. Average Analysis
Whenever, the trend ratios are calculated for a business concern, such ratios are compared with
industry average. These both trends can be presented on the graph paper also in the shape of curves.
This presentation of facts in the shape of pictures makes the analysis and comparison more
comprehensive and impressive.
7. Statement of Changes in Working Capital
The extent of increase or decrease of working capital is identified by preparing the statement of changes
in working capital. The amount of net working capital is calculated by subtracting the sum of current
liabilities from the sum of current assets. It does not detail the reasons for changes in working capital.
8. Fund Flow Analysis

3. Fund flow analysis deals with detailed sources and application of funds of the business concern for a
specific period. It indicates where funds come from and how they are used during the period under
review. It highlights the changes in the financial structure of the company.
9. Cash Flow Analysis
Cash flow analysis is based on the movement of cash and bank balances. In other words, the movement
of cash instead of movement of working capital would be considered in the cash flow analysis. There are
two types of cash flows. They are actual cash flows and notional cash flows.
10. Ratio Analysis
Ratio analysis is an attempt of developing meaningful relationship between individual items (or group of
items) in the balance sheet or profit and loss account. Ratio analysis is not only useful to internal parties
of business concern but also useful to external parties. Ratio analysis highlights the liquidity, solvency,
profitability and capital gearing.
11. Cost Volume Profit Analysis
This analysis discloses the prevailing relationship among sales, cost and profit. The cost is divided into
two. They are fixed cost and variable cost. There is a constant relationship between sales and variable
cost. Cost analysis enables the management for better profit planning.
Detail Study of Comparative Statements:
The comparative financial statements are statements of the financial position at different periods; of
time. The elements of financial position are shown in a comparative form so as to give an idea of
financial position at two or more periods. Any statement prepared in a comparative form will be
covered in comparative statements.
From practical point of view, generally, two financial statements (balance sheet and income statement)
are prepared in comparative form for financial analysis purposes. Not only the comparison of the figures
of two periods but also be relationship between balance sheet and income statement enables an in-
depth study of financial position and operative results.
The comparative statement may show:
(i) Absolute figures (rupee amounts).
(ii) Changes in absolute figures i.e., increase or decrease in absolute figures.
(iii) Absolute data in terms of percentages.
(iv) Increase or decrease in terms of percentages.
The analyst is able to draw useful conclusions when figures are given in a comparative position. The
figures of sales for a quarter, half -year or one year may tell only the present position of sales efforts.
When sales figures of previous periods are given along with the figures of current periods then the
analyst will be able to study the trends of sales over different periods of time. Similarly, comparative
figures will indicate the trend and direction of financial position and operating results.

4. The financial data will be comparative only when same accounting principles are used in preparing these
statements. In case of any deviation in the use of accounting principles this fact must be mentioned at
the foot of financial statements and the analyst should be careful in using these statements.
Types of Comparative Statements:
The two comparative statements are
(i) Balance sheet, and
(ii) Income statement.
(i) Comparative Balance Sheet:
The comparative balance sheet analysis is the study of the trend of the same items, group of items and
computed items in two or more balance sheets of the same business enterprise on different dates.’ The
changes in periodic balance sheet items reflect the conduct of a business.
The changes can be observed by comparison of the balance sheet at the beginning and at the end of a
period and these changes can help in forming an opinion about the progress of an enterprise. The
comparative balance sheet has two columns for the data of original balance sheets. A third column is
used to show increases in figures. The fourth column may be added for giving percentages of increases
or decreases.
Guidelines for Interpretation of Comparative Balance Sheet:
While interpreting Comparative Balance Sheet the interpreter is expected to study the following
aspects:
(1) Current financial position and liquidity position.
(2) Long -term financial position.
(3) Profitability of the concern.
(1) For studying current financial position or short -term financial position of a concern, one should see
the working capital in both the years. The excess of current assets over current liabilities will give the
figures of working capital. The increase in working capital will mean improvement in the current
financial position of the business.
An increase in current assets is accompanied by the increase in current liabilities of the same amount
will not show any improvement in the short-term financial position. A student should study the increase
or decrease in current assets and current liabilities and this will enable him to analyze the current
financial position.
The second aspect which should be studied in current financial position is the liquidity position of the
concern. If liquid assets like cash in hand, cash at bank, bills receivables, debtors, etc. show an increase
in the second year over the first year, this will improve the liquidity position of the concern.

5. The increase in inventory can be on account of accumulation of stocks for want of customers, decrease
in demand or inadequate sales promotion efforts. An increase in inventory may increase working capital
of the business but it will not be good for the business.
(2) The long -term financial position of the concern can be analyzed by studying the changes in fixed
assets, long-term liabilities and capital. The proper financial policy of concern will be to finance fixed
assets by the issue of either long-term securities such as debentures, bonds, loans from financial
institutions or issue of fresh share capital.
An increase in fixed assets should be compared to the increase in long-term loans and capital. If the
increase in fixed assets is more than the increase in long term securities then part of fixed assets has
been financed from the working capital. On the other hand, if the increase in long-term securities is
more than the increase in fixed assets then fixed assets have not only been financed from long-term
sources but part of working capital has also been financed from long-term sources. A wise policy will be
to finance fixed assets by raising long-term funds.
The nature of assets which have increased or decreased should also be studied to form an opinion about
the future production possibilities. The increase in plant and machinery will increase production capacity
of the concern. On the liabilities side, the increase in loaned funds will mean an increase in interest
liability whereas an increase in share capital will not increase any liability for paying interest. An opinion
about the long-term financial position should be formed after taking into consideration above-
mentioned aspects.
(3) The next aspect to be studied in a comparative balance sheet question is the profitability of the
concern. The study of increase or decrease in retained earnings, various resources and surpluses, etc.
will enable the interpreter to see whether the profitability has improved or not. An increase in the
balance of Profit and Loss Account and other resources created from profits will mean an increase in
profitability to the concern. The decrease in such accounts may mean issue of dividend, issue of bonus
shares or deterioration in profitability of the concern.
(4) After studying various assets and liabilities an opinion should be formed about the financial position
of the concern. One cannot say if short-term financial position is good then long-term financial position
will also be good or vice-versa. A concluding word about the overall financial position must be given at
the end.
Comparative Financial Statements:
Comparative financial statements are the complete set of financial statements that an entity issues,
revealing information for more than one reporting period. The financial statements that may be
included in this package are:
• The income statement (showing results for multiple periods)
• The balance sheet (showing the financial position of the entity as of more than one balance
sheet date)
• The statement of cash flows (showing the cash flows for more than one period)
Another variation on the comparative concept is to report information for each of the 12 preceding
months on a rolling basis. Comparative financial statements are quite useful for the following reasons:

6. • Provides a comparison of an entity's financial performance over multiple periods, so that you
can determine trends. The statements may also reveal unusual spikes in the reported
information that can indicate the presence of accounting errors.
• Provides a comparison of expenses to revenues and the proportions of various items on the
balance sheet over multiple periods. This information can be useful for cost management
purposes.
• May be useful for predicting future performance, though you should rely more on operational
indicators and leading indicators than on historical performance for this type of analysis.
It is customary to issue comparative financial statements with additional columns containing the
variance between periods, as well as the percentage change between periods.
The Securities and Exchange Commission requires that a publicly held company use comparative
financial statements when reporting to the public on the Form 10-K and Form 10-Q.
Comparative Financial Statements Example
The following is an example of a balance sheet that is presented on a comparative basis.
ABC International
Balance Sheet
as of
12/31/20X3
as of
12/31/20X2
as of
12/31/20X1
Current assets
Cash $1,200 $900 $750
Accounts receivable 4,800 3,600 3,000
Inventory 3,600 2,700 2,300
Total current assets $9,600 $7,200 $6,050
Total fixed assets 6,200 5,500 5,000
Total Assets $15,800 $12,700 $11,050
Current liabilities
Accounts payable $2,400 $1,800 $1,500
Accrued expenses 480 360 300
Short-term debt 800 600 400
Total current liabilities $3,680 $2,760 $2,200
Long-term debt 9,020 7,740 7,350
Total liabilities 12,700 10,500 9,550
Shareholders’ equity 3,100 2,200 1,500
Total liabilities and equity $15,800 $12,700 $11,050
Detail Study of Common Size Statements:
Meaning of Common-Size Statement:
The common-size statements, balance sheet and income statement are shown in analytical percentages.
The figures are shown as percentages of total assets, total liabilities and total sales. The total assets are

7. taken as 100 and different assets are expressed as a percentage of the total. Similarly, various liabilities
are taken as a part of total liabilities.
These statements are also known as component percentage or 100 per cent statements because every
individual item is stated as a percentage of the total 100. The short-comings in comparative statements
and trend percentages where changes in items could not be compared with the totals have been
covered up. The analyst is able to assess the figures in relation to total values.
The common-size statements may be prepared in the following way:
(1) The totals of assets or liabilities are taken as 100.
(2) The individual assets are expressed as a percentage of total assets, i.e., 100 and different liabilities
are calculated in relation to total liabilities. For example, if total assets are Rs 5 lakhs and inventory value
is Rs 50,000, then it will be 10% of total assets (50,000×100/5,00,000)
Types of Common-Size Statements:
(i) Common-Size Balance Sheet:
A statement in which balance sheet items are expressed as the ratio of each asset to total assets and the
ratio of each liability is expressed as a ratio of total liabilities is called common-size balance sheet.
For example, following assets are shown in a common-size balance sheet:
The total figure of assets Rs 2,00,000, is taken as 100 and all other assets are expressed as a percentage
of total assets. The relation of each asset to total assets is expressed in the statement. The relation of
each liability to total liabilities is similarly expressed.
The common-size balance sheet can be used to compare companies of differing size. The comparison of
figures in different periods is not useful because total figures may be affected by a number of factors. It
is not possible to establish standard norms for various assets. The trends of figures from year to year
may not be studied and even they may not give proper results.
The Balance Sheets of S & Co. and K& Co. are given as follows:
Comments:
(1) An analysis of pattern of financing of both the companies shows that K &Co. is more traditionally
financed as compared to S&Co. The former company has depended more on its own funds as is shown
by balance sheet. Out of total investments, 71.53% of the funds are proprietor’s funds and outsiders’
funds account only for 28.47%.
In S & Co. proprietors’ funds are 64.83% while outsiders’ share is 35.17% which shows that this company
has depended more upon outsiders' funds. In the present-day economic world, generally, companies
depend more on outsiders’ funds. In this context both the companies have good financial planning but
K& Co. is more financed on traditional lines.
(2) Both the companies are suffering from inadequacy of working capital. The percentage of current
liabilities is more than the percentage of current assets in both the companies. The first company is

8. suffering more from working capital position than the second company because current liabilities are
more than current assets by 3.44% and this percentage is 1.86% in the case of second company.
(3) A close look at the balance sheets shows that investments in fixed assets have been financed from
working capital in both the companies. In S & Co. fixed assets account for 94.52% of total assets while
long- term funds account for 91.08% of total funds. In K& Co. fixed assets account for 89.48% whereas
long term funds account for 87.62% of total funds Instead of using long-term funds for working capital
purposes the companies have used working capital for purchasing fixed assets.
(4) Both the companies face working capital problem and immediate steps should be taken to issue
more capital or raise long-term loans to raise working capital position.
(ii) Common Size Income Statement:
The items in income statement can be shown as percentages of sales to show the relation of each item
to sales. A significant relationship can be established between items of income statement and volume of
sales. The increase in sales will certainly increase selling expenses and not administrative or financial
expenses.
In case the volume of sales increases to a considerable extent, administrative and financial expenses
may go up. In case the sales are declining, the selling expenses should be reduced at once. So, a
relationship is established between sales and other items in income statement and this relationship is
helpful in evaluating operational activities of the enterprise.
Financial Statements of Common Size
Financial statements are prepared for organizations or businesses to know about the state of the business at
that time or period. For an organization or a business owner, the importance of financial statements is
defined by its interpretation and analysis.
Importance of financial statements is different for different individuals in an organization. For a manager, it
would be the efficiency of the operations, and for a stockholder, it will be related to the earnings and profits
of the company.
What is Common Size Statement
Common size statement is a form of analysis and interpretation of the financial statement. It is also known as
vertical analysis. This method analyses financial statements by taking into consideration each of the line
items as a percentage of the base amount for that particular accounting period.
Common size statements are not any kind of financial ratios but are a rather easy way to express financial
statements, which makes it easier to analyze those statements.
Common size statements are always expressed in the form of percentages. Therefore, such statements are
also called 100 per cent statements or component percentage statements as all the individual items are
taken as a percentage of 100.
Types of Common Size Statements
There are two types of common size statements:
10. Common size income statement
11. Common size balance statement

9. 1. Common Size Income Statement
This is one type of common size statement where the sales is taken as the base for all calculations. Therefore,
the calculation of each line item will take into account the sales as a base, and each item will be expressed as
a percentage of the sales.
Use of Common Size Statement
It helps the business owner in understanding the following points
12. Whether profits are showing an increase or decrease in relation to the sales obtained.
13. Percentage change in cost of goods that were sold during the accounting period.
14. Variation that might have occurred in expense
15. If the increase in retained earnings is in proportion to the increase in profit of the business.
16. Helps to compare income statements of two or more periods
17. Recognizes the changes happening in the financial statements of the organization, which will help
investors in making decisions about investing in the business.
2. Common-Size Balance Sheet:
A common size balance sheet is a statement in which balance sheet items are being calculated as the ratio of
each asset in relation to the total assets. For the liabilities, each liability is being calculated as a ratio of the
total liabilities.
Common-size balance sheets can be used for comparing companies that differ in size. The comparison of
such figures for the different periods is not found to be that useful because the total figures seem to be
affected by a number of factors.
Standard values for various assets cannot be established by this method as the trends of the figures cannot
be studied and may not give proper results.

10. Common Size Statement Format
The common size statement format is as follows:
Preparing Common Size Statements
(1) Take the total of assets or liabilities as 100
(2) Each individual asset is expressed as a percentage of the total assets, i.e., 100 and different liabilities are
also calculated as per total liabilities. For example, suppose total assets are around Rs 4 lakhs, and inventory
value is Rs 1 lakh. In that case, it will be counted as 25% of the total assets.
Limitations of Common Size Statement
Following are the limitations discussed
18. It is not helpful in the decision-making process as it does not have any approved benchmark.
19. For a business that is impacted by fluctuations due to seasonality, it can be misleading.
This concludes the topic of the Common size statement, which will be helpful for the students in getting a
better understanding of the concept.
Difference Between Common Size and Comparative Statement:
The major differences between comparative analysis and common size analysis are as follows −
Comparative analysis
• It shows previous financial results side by side along with its change in amount/percentage.
• It compares current year results with its base year.
• It’s a horizontal analysis.
• The results are expressed in both percentages and pictorial form.

11. • Both inter and intra firm can be compared.
• It helps in internal decision making.
• It is useful to compare results with its previous financial years.
• Relative importance of individual figures can’t be shown in statement with comparative analysis.
Common Size analysis
• It shows results regarding same year in the form of percentages.
• It compares figures of same year.
• It’s a vertical analysis.
• The results are expressed in percentages only.
• Only inter firm are compared.
• It prepares as references to stakeholders.
• It is used to compare companies results with its competitors.
• Shows relative importance of individual figures in statement.
Comparative vs Common Size Statement
Comparative financial statements present
financial information for several years side by
side in the form of absolute values, percentages
or both.
Common size financial statements present all
items in percentage terms where balance sheet
items are presented as percentages of assets and
income statement items are presented as
percentages of sales.
Purpose
Comparative statements are prepared for
internal decision making purpose.
Common size statements prepared for reference
purpose for stakeholders.
Usefulness
Comparative statements become more useful
when comparing company results with previous
financial years.
Common size statements can be used to compare
company results with similar companies.
Comparative & Common Size Statements
(1) It shows figures for successive years side by side, along with the amount of change and percentage of
change.
(1) It shows figures for the same year in the form of percentages of some base figure.
(2) Comparison is made between the figures of the current year or successive years with those of a base
year.
(2) Comparison is made between the figures of the same year.
(3) It is a horizontal analysis because the comparisons made are on a horizontal plane from left to right.
(3) It is a vertical analysis because the comparisons are made vertically from top to bottom for an
analysis of the component changes that occur from year to year with certain base figure within those
years.
(4) Comparison is made both in absolute figures & percentages.
(4) Comparison is always made in percentage form.

12. (5) It is used for both inter-firm and intra-firm comparison.
(5) It is mainly used for inter-firm comparison.
(6) It fails to show the relative importance of individual figures in a statement.
(6) It shows the relative importance of each individual figure in a statement.
Summary- Comparative vs Common Size Statement
The difference between comparative and common size statement depends on the way financial
information in statements are presented. Since comparative financial statements present financial
information for a number of years side by side, this kind statement is convenient to calculate ratios and
to directly compare results. On the other hand, common size financial statements present all items in
percentage terms making it useful for analyzing current period results. Both these methods are equally
important to make decisions that affect the company on an informed basis and sufficient time should be
dedicated to the proper analysis of financial information for effective decision-making.