Accountancy 6 Marks Question

Interpretation:

1. Cost of Materials Consumed has increased to 48% in 2018 from 44% in 2017. This is due to reduction in cost of raw materials.
2. Total expenses have decreased to 61% in 2018 from 63% as that in the year 2017 which indicates efficiency on the part of the company. As a result of company's better efficiency, the net profit shows a rise of 3% in the year 2018 (i.e., 43% - 40%).

Comments: The following differences may be observed in the financial position of both the companies on the basis of above common size balance sheet of X Ltd. and Y Ltd:

1. The short-term financial position of X Ltd. is definitely better than Y Ltd. The current liabilities of X Ltd. are 13.33% of total funds invested whereas a proportion of current assets in these funds is 33.33%. Thus, the working capital of X Ltd. is positive. On the other hand, current liabilities of Y Ltd. are 13.89% and current assets only 11.11% of these funds. Thus, the working capital of Y Ltd. is negative.
2. Y Ltd. has invested more (i.e., 88.89%) in non-current assets as compared to 66.67% by X Ltd.

Thus, the overall financial position of X Ltd. is better from all aspects.

Comments: The following differences may be observed in the financial position of A Ltd. and B Ltd. on the basis of above common size balance sheet :

1. The short-term financial position of A Ltd. is better as compared to B Ltd. The current liabilities of A Ltd. are 10% of total funds invested whereas a proportion of current assets in these funds is 60%. On the other hand, current liabilities of B Ltd. are 12.5% and current assets 41.67% of these funds. Thus, trade payables are more secured in A Ltd.
2. The long-term financial position is better in B Ltd. because Shareholder's Funds are 60% in case of A Ltd. while it is 66.67% in B Ltd.
3. B Ltd. has invested more (58.33%) in non-current assets as compared to 40% by A Ltd.

Common-Size Financial Statement is a statement in which figures are converted into percentage to a common base, i.e., Revenue from Operations for Common-size Statement of Profit and Loss and Total of Assets or Total of Equity and Liabilities for Common-size Balance Sheet.

1. To present the change in various items in relation to revenue from operations, total assets or total liabilities: One of the major drawbacks of comparative financial statements is that they do not present the change in various items in relation to revenue from operations, total assets or total equity & liabilities. This drawback is removed through the preparation of common size statements.
2. To establish a relationship: Over a period, a relationship is established between various items of the statement of profit & loss to revenue from operations and various items of balance sheet to total assets or total equity & liabilities. Significant conclusions can be drawn by studying the change in-Such a relationship. For example, if over the years it is established that cost of materials consumed constitute 40% of revenue from operations, an increase in this percentage will need immediate attention.

Interpretation: In 2016, Current Assets were 42% of total assets. In 2017, these have increased to 46%. Current liabilities on the other hand have decreased to 20% in 2017 as compared to 22% in 2016. Because of increase in the current assets and decrease in the current liabilities, the working capital position of the company has improved. The percentage of Non-Current assets has come down from 58% in 2016 to 54% in 2017. Owner's equity (Equity Share Capital Plus Reserves) has increased a little i.e., from 61.33% in 2016 to 63.33% in 2017. Non-Current Liabilities have remained constant at 16.67% in both the years.