Analysis of Financial Statements Class 12: Comparative and Common-size Statements

What Analysis of Financial Statements is about

Weightage: This chapter is in Part B Option I: Financial Statement Analysis, which a student takes instead of Option II (Computerised Accounting). The syllabus unit Analysis of Financial Statements carries 12 of the 80 theory marks and covers this chapter together with the chapters Financial Statements of a Company and Accounting Ratios.Source: CBSE Accountancy (055) syllabus 2026-27, Part B Option I: Financial Statement Analysis

In real board papers: asked in 2 of the 2 board papers we hold (2026 to 2026), on average 4 marks per paper. See the questions

Key concepts

Meaning and significance of financial analysis

NCERT section 4.1, 4.2

Analysis of financial statements is the process of identifying the financial strengths and weaknesses of a firm by properly establishing relationships between items of the Balance Sheet and the Statement of Profit and Loss.

Its significance lies in serving each user:

• Management: measures the success of operations and the efficiency of the use of resources.
• Trade payables: judge short-term liquidity.
• Lenders: judge long-term solvency, ability to pay interest and repay principal, and capital structure.
• Investors: judge present and future profitability and risk.
• Labour unions: judge whether a wage increase can be afforded.
• Government, economists and researchers: study business conditions, taxation and regulation.

Worked example

Suppose a raw-material supplier is deciding whether to sell goods on 60 days' credit to a company. What would its analysis focus on? [1 mark]

Try it first, then show the solutionSolution

1. The supplier is a trade payable of the company.
2. It cares about payment within a short period.

Answer: Short-term liquidity: the company's ability to meet current obligations.

Objectives of financial analysis

NCERT section 4.3

The broad aim is to understand the information in financial statements in order to know the strengths and weaknesses of the firm and forecast its future prospects. Specifically:

• to assess current profitability and operational efficiency of the firm and its departments;
• to find the relative importance of the components of financial position;
• to identify the reasons for change in profitability or financial position;
• to judge the firm's ability to repay debt and its short- and long-term liquidity.

Worked example

Suppose a company's profit fell this year although sales rose. Which objective of analysis would a comparative statement serve here? [1 mark]

Try it first, then show the solutionSolution

1. A comparative statement shows each expense's change beside the change in sales.

Answer: Identifying the reasons for the change in profitability.

Tools of financial analysis

NCERT section 4.4

• Comparative statements (horizontal analysis): figures of two or more periods side by side, with absolute and percentage changes. Meaningful only if the same accounting principles are used in all years.
• Common-size statements (vertical analysis): every item as a percentage of a common base (revenue from operations for the Statement of Profit and Loss; total assets or total equity and liabilities for the Balance Sheet). Useful for comparing years and firms of different sizes.
• Trend analysis: each year's figure as a percentage of a base year, showing the direction over several years.
• Ratio analysis: relationships between items to judge liquidity, solvency, activity and profitability.
• Cash flow analysis: actual inflows and outflows of cash classified into operating, investing and financing activities.

Worked example

Suppose sales were ₹4,00,000, ₹4,60,000 and ₹5,20,000 in three years, with the first year as base. Calculate trend percentages. [1 mark]

Try it first, then show the solutionSolution

1. Year 2: 4,60,000 ÷ 4,00,000 × 100 = 115%.
2. Year 3: 5,20,000 ÷ 4,00,000 × 100 = 130%.

Answer: 100%, 115%, 130%.

Comparative statements: how to prepare

NCERT section 4.5

Columns: particulars, previous year, current year, absolute change (current − previous), percentage change (absolute change ÷ previous year × 100). The previous year is always the base for the percentage.

Work down the Statement of Profit and Loss line by line: total income, total expenses, profit before tax, tax and profit after tax all need their own rows. A decrease is shown in brackets or with a minus sign. Do not compute percentage change on a percentage; compute it on the rupee figures.

In the Balance Sheet version, compare each head (shareholders' funds, non-current and current liabilities, non-current and current assets) and the totals.

Worked example

Suppose revenue rose from ₹20,00,000 to ₹25,00,000. Find the absolute and percentage change. [1 mark]

Try it first, then show the solutionSolution

1. Absolute change = 25,00,000 − 20,00,000 = ₹5,00,000.
2. Percentage change = 5,00,000 ÷ 20,00,000 × 100 = 25%.

Answer: ₹5,00,000; 25%.

Common-size statements: how to prepare

NCERT section 4.6

Choose the base: revenue from operations = 100 for the Statement of Profit and Loss; total of the Balance Sheet = 100 for the Balance Sheet. Each item ÷ base × 100. Columns: particulars, rupee figures for each year, percentages for each year.

Common-size statements show structure: what share of revenue goes on materials, wages or tax; what share of funds comes from owners versus lenders; how much of the assets are fixed versus current. Because everything is a percentage, two firms of very different sizes can be compared directly.

Worked example

Suppose profit after tax is ₹4,20,000 on revenue of ₹20,00,000. What is it as a common-size percentage? [1 mark]

Try it first, then show the solutionSolution

1. 4,20,000 ÷ 20,00,000 × 100.

Answer: 21% of revenue from operations.

Limitations of financial analysis

NCERT section 4.7

• Ignores price-level changes: figures of different years are in rupees of different purchasing power.
• Affected by window dressing: statements may be made to look better than they are.
• Ignores qualitative aspects: reputation, staff quality, relations with customers.
• Suffers from the limitations of financial statements: historical cost, estimates.
• Not free from bias: the analyst's judgement affects interpretation.
• Variation in accounting practices: different firms (or years) using different methods make comparison misleading.
• Forecasting: past data may not predict the future.

Worked example

Suppose one company uses the straight-line method of depreciation and its rival uses the written-down value method. Which limitation affects a comparison of their profits? [1 mark]

Try it first, then show the solutionSolution

1. Different methods give different depreciation and therefore different profits for the same assets.

Answer: Variation in accounting practices makes inter-firm comparison less reliable.

Analysis of Financial Statements in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Comparative Statements
• Common-size Statements
• Objectives and Limitations of Financial Statement Analysis

Analysis of Financial Statements: key facts

Absolute change

Current year figure − previous year figure

Percentage change

Absolute change ÷ previous year figure × 100

Common-size % (Statement of Profit and Loss)

Item ÷ revenue from operations × 100

Common-size % (Balance Sheet)

Item ÷ total assets (or total equity and liabilities) × 100

Trend percentage

Year's figure ÷ base year's figure × 100

How the board asks Analysis of Financial Statements

The question patterns to expect, and the method that works for each.

Tricks to remember Analysis of Financial Statements

Short memory aids. Say each one aloud once, then use it on a question the same day.

• H for How it changed, V for Vertical slice

  Horizontal = across years; Vertical = slice of one year against a base.

  Use it when: Naming the tools.

• Previous year is the yardstick

  Change ÷ previous year × 100.

  Use it when: Percentage change.

• Revenue = 100, Total = 100

  Revenue from operations for P&L; balance-sheet total for the Balance Sheet.

  Use it when: Common-size base.

• PWQ-BVF

  Price changes, Window dressing, Qualitative ignored, Bias, Variation in practices, Forecasting limits.

  Use it when: Limitations.

Analysis of Financial Statements: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In the board paper this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Analysis of Financial Statements

The slips examiners see most often, and what to write instead.

• ✗Mistake: Using the current year as base for percentage change

  Dividing by the bigger number.

  Wrong working

  5,00,000 ÷ 25,00,000 = 20%

  Right working

  5,00,000 ÷ 20,00,000 = 25%

  ✓Do this: Percentage change is always on the previous year.

  Usually costs: 1-2 marks.

• ✗Mistake: Using total income as the common-size base

  It looks like the "total".

  ✓Do this: Revenue from operations = 100 for the Statement of Profit and Loss.

  Usually costs: 1-2 marks.

• ✗Mistake: Adding percentages of different items to get a percentage change

  Mixing common-size and comparative ideas.

  ✓Do this: Compute each percentage from the rupee figures.

  Usually costs: 1 mark.

• ✗Mistake: Leaving out total and profit rows

  Copying only the given items.

  ✓Do this: Show total income, total expenses, profit before tax, tax and profit after tax.

  Usually costs: 1-2 marks.

• ✗Mistake: Calling common-size analysis horizontal

  Mixing the names.

  ✓Do this: Horizontal = across years (comparative); vertical = within a year (common-size).

  Usually costs: 1 mark.

NCERT exercise guide: Analysis of Financial Statements

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Analysis of Financial Statements: previous year questions

• Asked in 2 of the 2 board papers we hold (2026 to 2026), on average 4 marks per paper; 4 questions in all, counting OR alternatives. In 4 of 4 sample papers.

Counted from the real papers on our previous year papers page, not estimated. Average marks are over every board paper we hold, with an OR pair counted once. Chapter tags are ours.

Solved board questions from Analysis of Financial Statements

Real questions from recent papers. Try each one first, then open our step-by-step solution with marks per step.

Every Analysis of Financial Statements question, by year

Practice questions on Analysis of Financial Statements

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   Common-size statements are also known as:
   (a) horizontal analysis
   (b) vertical analysis
   (c) trend analysis
   (d) cash flow analysis

   Hint

   Within one year.

   Answer

   (b) vertical analysis

2. Q2 · 1 mark · MCQBoard level

   In a common-size Statement of Profit and Loss, the base is:
   (a) total expenses
   (b) profit before tax
   (c) revenue from operations
   (d) total income

   Hint

   100%.

   Answer

   (c) revenue from operations

3. Q3 · 3 marks · Short answerBoard level

   State any three objectives of analysis of financial statements.

   Hint

   Profitability, components, reasons, repayment.

   Answer

   To assess profitability and efficiency; to find the relative importance of components of financial position; to identify reasons for change; to judge the ability to repay debt (any three).

4. Q4 · 3 marks · Short answerBoard level

   Explain any three limitations of financial analysis.

   Hint

   Price changes, window dressing, qualitative aspects.

   Answer

   Ignores price-level changes; affected by window dressing; ignores qualitative aspects (also bias, variation in practices).

5. Q5 · 4 marks · Short answerHarder board level

   Suppose revenue from operations is ₹8,00,000 and ₹10,00,000, cost of materials ₹4,80,000 and ₹5,50,000, and other expenses ₹1,20,000 and ₹1,50,000, with tax at 25%. Prepare a comparative Statement of Profit and Loss.

   Hint

   Profit before tax is ₹2,00,000 and ₹3,00,000.

   Answer

   Revenue +2,00,000 (25%); materials +70,000 (14.58%); other expenses +30,000 (25%); total expenses 6,00,000 → 7,00,000, +1,00,000 (16.67%); PBT 2,00,000 → 3,00,000, +1,00,000 (50%); tax 50,000 → 75,000 (50%); PAT 1,50,000 → 2,25,000, +75,000 (50%).

6. Q6 · 3 marks · Short answerHarder board level

   Suppose total assets are ₹30,00,000, of which current assets are ₹9,00,000, and shareholders' funds are ₹18,00,000. Calculate common-size percentages for current assets, non-current assets and shareholders' funds.

   Hint

   Base = ₹30,00,000.

   Answer

   Current assets 30%; non-current assets 70%; shareholders' funds 60%.

7. Q7 · 3 marks · Short answerHOTS / competency

   Suppose profit after tax rose by 30% while revenue rose by 25%. What does a comparative statement suggest, and which line items would you check first?

   Hint

   Costs grew slower than revenue.

   Answer

   Costs grew more slowly than revenue (operating leverage or better cost control). Check the main cost lines first (cost of materials, employee benefits, other expenses) to see which grew by less than 25%, and whether other income or tax changed.

8. Q8 · 1 mark · Assertion-reasonHOTS / competency

   Assertion (A): Comparative statements are meaningful only when the same accounting principles are followed in all the years compared.
   Reason (R): A change in method can change figures without any real change in performance.
   (a) Both true and R explains A (b) Both true, R does not explain A (c) A true, R false (d) A false, R true

   Hint

   Like with like.

   Answer

   (a)

9. Q9 · 3 marks · Short answerHarder board level

   Suppose sales for 2023-24, 2024-25 and 2025-26 are ₹5,00,000, ₹6,00,000 and ₹5,50,000. Calculate trend percentages with 2023-24 as base and interpret.

   Hint

   Base = 100.

   Answer

   100%, 120%, 110%: sales grew 20% and then fell back by 10 points; the trend is upward but uneven.

10. Q10 · 1 mark · MCQHarder board level

    Current liabilities of a company were ₹4,00,000 in 2025 and ₹6,00,000 in 2026. The percentage change is:
    (a) 33.33%
    (b) 50%
    (c) 66.67%
    (d) 150%

    Hint

    Previous year is the base.

    Answer

    (b) 50%

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.What is the base for a common-size Balance Sheet?Show answer

   Total assets (or total equity and liabilities) = 100.

2. 2.What does a comparative statement show?Show answer

   Figures of two or more periods with absolute and percentage changes.

3. 3.What is trend analysis?Show answer

   Each year's figure as a percentage of a base year, over several years.

4. 4.Which users are most interested in short-term liquidity?Show answer

   Trade payables.

5. 5.Name the five tools of analysis.Show answer

   Comparative statements, common-size statements, trend analysis, ratio analysis and cash flow analysis.

6. 6.Why must accounting principles be consistent for comparative statements?Show answer

   Otherwise changes may come from a change in method, not performance.

7. 7.Name three limitations of financial analysis.Show answer

   Ignores price changes, window dressing, ignores qualitative aspects.

8. 8.What is the base for percentage change?Show answer

   The previous year's figure.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you define analysis of financial statements?
• ☐Can you say what each user looks for?
• ☐Can you state four objectives?
• ☐Can you name and explain the tools?
• ☐Can you compute absolute and percentage changes correctly?
• ☐Can you choose the common-size base for each statement?
• ☐Can you prepare a comparative Balance Sheet?
• ☐Can you interpret a common-size Balance Sheet?
• ☐Can you compute trend percentages?
• ☐Can you list six limitations?

Analysis of Financial Statements: frequently asked questions