Financial Statement Analysis: ISC Class 12 Accounts Notes and Solved Statements

What Financial Statement Analysis is about

Weightage: Financial Statement Analysis carries 4 of the 80 theory marks in Section B (Management Accounting). Candidates answer either Section B or Section C (20 marks each), after the compulsory 60-mark Section A.Source: CISCE ISC Accountancy (Accounts) syllabus, examination year 2027, distribution of marks

Key concepts

Meaning, objectives and tools of financial statement analysis

Financial statement analysis is the process of identifying the financial strengths and weaknesses of a firm by establishing relationships between items of the Balance Sheet and the Statement of Profit and Loss.

Objectives: assess profitability and its trend; judge liquidity (ability to pay short-term debts) and solvency (long-term); compare with past years and with other firms; help in forecasting and planning.

Tools: comparative statements, common size statements, ratio analysis, cash flow statement (the last two are separate chapters).

Users: management, investors, lenders, creditors, employees, government.

Limitations of analysis in general: based on historical figures; ignores price-level changes; affected by accounting policies and window dressing; ignores qualitative factors such as management quality.

Worked example

Suppose a bank is deciding on a five-year loan to a company. Which aspect of financial statement analysis matters most to it, and which tool helps? [2 marks]

Try it first, then show the solutionSolution

1. A long-term lender cares about solvency: whether the company can pay interest and repay the principal over the years.
2. A common size Balance Sheet shows the share of borrowings in total funds; trend analysis via comparative statements shows whether profits cover interest consistently.

Answer: Solvency; common size and comparative Balance Sheets (and ratios such as debt-equity).

Comparative statements: intra-firm and inter-firm

A comparative statement shows, for each item:

| Particulars | Year 1 | Year 2 | Absolute change (Year 2 − Year 1) | % change = Absolute change ÷ Year 1 × 100 |

• Intra-firm: two years of the same firm (trend).
• Inter-firm: two firms in the same year (comparison).

Significance: shows the direction and size of change; highlights trends; helps compare performance.

Limitations: a percentage on a very small base can mislead; differences in accounting policies make inter-firm comparison unreliable; price changes are ignored.

Rules for the ISC paper: show a decrease with a minus sign or brackets; calculate the percentage on the earlier year (or the base firm); round to two decimal places; when figures are missing, present the complete statement, not just the missing numbers.

Worked example

Suppose revenue from operations was ₹10,00,000 in 2024-25 and ₹12,00,000 in 2025-26, and other income fell from ₹50,000 to ₹30,000. Show the absolute and percentage change for both. [2 marks]

Try it first, then show the solutionSolution

1. Revenue: change = +2,00,000; % = 2,00,000 ÷ 10,00,000 × 100 = 20.00%.
2. Other income: change = (20,000); % = (20,000) ÷ 50,000 × 100 = (40.00%).

Answer: Revenue +₹2,00,000 (20.00%); other income (₹20,000) ((40.00%)).

Statement of Profit and Loss: Schedule III Part II format

The syllabus fixes this structure for analysis:

• I. Revenue from operations
• II. Other income
• III. Total revenue (I + II)
• IV. Expenses: cost of materials consumed; purchases of stock-in-trade; changes in inventories of finished goods, work-in-progress and stock-in-trade; employee benefits expense; finance costs; depreciation and amortisation expense; other expenses; total expenses
• V. Profit before tax (III − IV)
• VI. Less tax
• VII. Profit after tax (V − VI)

Operating income is the income from the main business (for a news app, advertisement income is operating); interest or dividends received by a non-financial company, and profit on sale of assets, are other income.

Changes in inventories = opening inventory − closing inventory (a positive figure increases expenses). Adjusted purchases = purchases + opening inventory − closing inventory; so closing inventory = purchases + opening inventory − adjusted purchases.

Worked example

Suppose purchases of stock-in-trade were ₹3,00,000, opening inventory ₹90,000 and adjusted purchases ₹2,20,000. Find the closing inventory. [1 mark]

Try it first, then show the solutionSolution

1. Adjusted purchases = purchases + opening − closing, so closing = 3,00,000 + 90,000 − 2,20,000.

Answer: ₹1,70,000.

Common size statements

In a common size statement each item is expressed as a percentage of a common base:

• Balance Sheet: each item as a % of total assets (assets side) or total equity and liabilities (liabilities side); both totals are 100%.
• Statement of Profit and Loss: each item as a % of revenue from operations.

Significance: shows the structure (composition) of the statements; makes firms of different sizes comparable; shows how each rupee of revenue is used.

Limitations: no standard percentages to compare with; a change in percentage does not show whether the amount itself rose or fell; affected by differences in accounting policies.

A common size statement can also be prepared for two years or two firms side by side.

Worked example

Suppose Mango Ltd's Equity and Liabilities total ₹10,00,000: Share Capital ₹4,50,000; Reserves and Surplus ₹1,50,000; Long-term Borrowings ₹2,50,000; Trade Payables ₹1,00,000; Short-term Provisions ₹50,000. Prepare the common size statement of this side. [3 marks]

Try it first, then show the solutionSolution

1. Common Size Balance Sheet (Equity and Liabilities) of Mango Ltd as at 31st March 2026

   Particulars	₹	% of total
   Share Capital	4,50,000	45.00%
   Reserves and Surplus	1,50,000	15.00%
   Long-term Borrowings	2,50,000	25.00%
   Trade Payables	1,00,000	10.00%
   Short-term Provisions	50,000	5.00%
   Total	10,00,000	100.00%

Answer: Shareholders' funds 60%, long-term borrowings 25%, current liabilities 15%.

Reading the results

Analysis is only useful if you interpret it:

• Revenue rising faster than expenses (in %) means improving profitability.
• In a common size Statement of P&L, a falling cost of materials % with a rising profit % shows better efficiency or pricing.
• A rising share of borrowings in the common size Balance Sheet means higher financial risk.
• An increase in current assets with a larger increase in current liabilities may weaken liquidity.

For a loss, show it as a negative figure; a percentage change in a loss is computed on the absolute values with a note whether the loss has widened or narrowed.

Worked example

Suppose a news app's loss widened from ₹200 crore to ₹270 crore. Calculate the percentage increase in loss. [1 mark]

Try it first, then show the solutionSolution

1. Increase = 270 − 200 = ₹70 crore; % = 70 ÷ 200 × 100.

Answer: 35.00% increase in loss.

Financial Statement Analysis 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

• Common Size Balance Sheet and Statement of Profit and Loss
• Comparative Statements and the Statement of Profit and Loss Format

Financial Statement Analysis: key facts

Absolute change

Current year (or second firm) − previous year (or base firm)

Percentage change

Absolute change ÷ previous year amount × 100

Two decimal places; decreases in brackets or with minus.

Common size (Balance Sheet)

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

Common size (Statement of P&L)

Item ÷ revenue from operations × 100

Closing inventory from adjusted purchases

Purchases + opening inventory − adjusted purchases

How the board asks Financial Statement Analysis

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

Tricks to remember Financial Statement Analysis

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

• Comparative = change; common size = share

  Comparative asks "how much did it change?"; common size asks "what share of the whole is it?"

  Use it when: Choosing the right statement.

• Base rules

  Balance Sheet base: total assets; P&L base: revenue from operations; % change base: earlier year.

  Use it when: Every calculation.

Financial Statement Analysis: 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 A style)

Read the situation, then answer every part. In the board paper this is a 6-mark question split into 2 + 2 + 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 Financial Statement Analysis

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

• ✗Mistake: Writing only the missing figures

  CISCE examiners' comments, 2024: "Wrote only the missing figures instead of full statement".

  ✓Do this: Present the complete statement with headings, then fill the blanks.

  Usually costs: Presentation mark.

• ✗Mistake: Percentages not to two decimals; negatives not shown

  CISCE examiners' comments, 2024: "Did not calculate % change to two decimal places or rounded incorrectly"; "Did not show negative net profit for 2022-23"; CISCE examiners' comments, 2025: "Did not show decrease with negative sign."

  ✓Do this: Round to two decimals; show decreases and losses with a minus sign or brackets.

  Usually costs: ½-1 mark.

• ✗Mistake: Misclassifying operating income

  CISCE examiners' comments, 2025: "Some called advertising income non-operating."

  ✓Do this: Revenue from operations is income from the main business of that particular company.

  Usually costs: 1 mark.

• ✗Mistake: Cannot find closing inventory from adjusted purchases

  CISCE examiners' comments, 2025: "Unable to find closing inventory from adjusted purchases."

  ✓Do this: Adjusted purchases = purchases + opening − closing; rearrange for closing.

  Usually costs: 1 mark.

Practice questions on Financial Statement Analysis

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 Statement of Profit and Loss uses as its base:
   (a) total revenue
   (b) revenue from operations
   (c) profit before tax
   (d) total expenses

   Hint

   Syllabus definition.

   Answer

   (b)

2. Q2 · 1 mark · Very short answerBoard level

   Interest received by a manufacturing company on its fixed deposits: operating income or other income?

   Hint

   Main business?

   Answer

   Other income.

3. Q3 · 1 mark · Very short answerHarder board level

   Trade payables fell from ₹2,40,000 to ₹2,04,000. Show absolute and % change.

   Hint

   Negative change.

   Answer

   (₹36,000); (15.00%).

4. Q4 · 2 marks · Short answerBoard level

   State two limitations of comparative statements.

   Hint

   Policies and price levels.

   Answer

   Differences in accounting policies make comparison unreliable; price-level changes are ignored (also, percentages on small bases mislead).

5. Q5 · 3 marks · Short answerHarder board level

   Revenue from operations ₹8,00,000; cost of materials ₹4,80,000; employee benefits ₹80,000; other expenses ₹40,000; tax 30%. Prepare a common size Statement of P&L.

   Hint

   Base = 8,00,000.

   Answer

   Materials 60.00%; employee 10.00%; other 5.00%; PBT ₹2,00,000 = 25.00%; tax 7.50%; PAT ₹1,40,000 = 17.50%.

6. Q6 · 2 marks · Short answerHarder board level

   In a comparative statement, revenue for 2025-26 is ₹8,250 and absolute change is ₹450. Find 2024-25 revenue and % change.

   Hint

   Work back.

   Answer

   2024-25 = 8,250 − 450 = ₹7,800; % = 450 ÷ 7,800 × 100 = 5.77%.

7. Q7 · 2 marks · Short answerHOTS / competency

   A company's current assets rose by 10% and current liabilities by 30%. Explain what this suggests about liquidity.

   Hint

   Compare growth.

   Answer

   Short-term obligations are growing faster than the assets available to meet them, so liquidity is weakening (the current ratio falls).

8. Q8 · 2 marks · Short answerHOTS / competency

   Why might a common size Balance Sheet show the same percentage for cash in two years even though cash doubled?

   Hint

   Base changed too.

   Answer

   If total assets also doubled, cash remains the same share of the total; a common size statement shows proportions, not amounts.

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.Base for common size Balance Sheet?Show answer

   Total assets (or total equity and liabilities).

2. 2.Base for % change?Show answer

   The earlier year (or base firm).

3. 3.Total revenue in Schedule III Part II?Show answer

   Revenue from operations + other income.

4. 4.Intra-firm comparison means?Show answer

   Comparing the same firm over two periods.

Quick revision checklist

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

• ☐Comparative: absolute change and % change on earlier year.
• ☐Common size: % of total assets or of revenue from operations.
• ☐Two decimals; negatives in brackets.
• ☐Prepared from statements without notes (syllabus limit).

Financial Statement Analysis: frequently asked questions