DK Goel Solutions Class 12 Accountancy Volume 2 Chapter 4

Students will be able to comprehend the meaning of common size statements, as well as their applications and where they are used in this chapter. Students will be able to clarify their fundamental principles in relation to these assertions. They should fully comprehend the topic presented here, as this will aid them in solving the chapter's more difficult questions.

The chapter provides a number of questions that will be beneficial to Accountancy students in Class 12 and will also assist in the development of strong concepts that will be beneficial in your career. These solutions are completely free and will assist you in preparing for your Class 12 Accounting exam.

Financial statements are generated to provide information on the state of a company or organisation at a given time or period. The significance of financial statements for an organisation or a business owner is determined by their interpretation and analysis.

The importance of financial statements varies depending on who you are in an organisation. It will be tied to the company's earnings and profits for a manager, and it will be related to the company's earnings and profits for a stockholder.

What Exactly is a "Common Size Statement?"

• A type of financial statement analysis and interpretation is a common size statement. Another term for it is vertical analysis.

• This approach analyses financial statements by calculating each line item as a percentage of the base amount for the accounting period under consideration.

• Common size statements are not financial ratios, but they are a straightforward way of articulating financial statements that makes them easier to understand.

• In general, size assertions are always expressed as percentages.

• As a result, such statements are sometimes referred to as 100 percent statements or component percentage statements, because each individual item is expressed as a percentage of 100.

Types of Common Size Statements:

• Income Statement.

• Balance statement.

What Are Common Size Income Statements?

Common Size Income Statement is the type of statement where the financial calculations are done by taking the overall income or sale as the base. So, each item in the calculation table is expressed as the percentage of the sale or income. This is a standard size statement in which the sales are used as the starting point for all calculations. As a result, each line item's computation will use sales as a starting point, and each item will be expressed as a percentage of sales.

Common Size Income statements are used extensively by the business owners to understand the relationship between sales and profit, to compare the sales figures in different periods, to understand the relationship between sales and expense, etc.

What Are Common Size Balance Statements?

Common Size Balance sheet Statement is the type of statement where the financial calculations are done for the items in a balance sheet. Each asset in a balance sheet is calculated with respect to total assets and each liability in the balance sheet is calculated against total liability. Common Size Balance Sheet statements are used to compare the balance sheet between two or more companies in a specific time period.

A common size balance sheet is a financial statement in which the balance sheet items are determined as the ratio of each asset to the total assets. Each liability is determined as a percentage of the total liabilities for the liabilities.

When comparing companies of different sizes, common size balance sheets can be employed. The comparison of such data over time is not found to be particularly relevant because the overall values appear to be influenced by a variety of factors. This method cannot develop standard values for varied assets because the patterns of the statistics cannot be investigated and the conclusions may not be accurate.

What Are Balance Sheets?

The balance sheet is a financial statement that illustrates the company's financial situation. It details the business's assets and liabilities at the end of the accounting period after producing trade and profit and loss accounts.

‘Not-for-Profit’ Balance Sheets are created by organisations to determine the financial position of the company. The balance sheet is prepared in the same way as the trade companies are. It shows obligations and assets at the end of the fiscal year. On the right-hand side, assets are shown, while liabilities are shown on the left-hand side.

However, in place of the Capital, there will be a General Fund or Capital Fund, and the surplus or deficit as per Income and Expenditure A/c will be removed from or added to the Capital Fund, depending on the scenario. It is usual practice to include some subsidised things, such as admission fees, legacies, and life membership costs, in the capital fund.

Balance Sheet Characteristics

A balance sheet has the following characteristics:

• It is regarded as the final step in the preparation of final accounts.

• It is not an account, but rather a statement.

• It is made up of transactions documented on both sides, namely assets and liabilities. The assets are placed on the left, while the liabilities are positioned on the right.

• The sum of both sides should always be the same.

• The balance sheet reveals the company's financial situation.

• It is created following the completion of trading and the creation of a profit and loss account.

Uses of Common Size Statements:

1. Common Size Statement helps to compare between companies in terms of their performance on the basis of numerical figures but it fails to compare the quality of work or customer relation. 

2. With the help of Common Size Statements, it is easier to understand the key factors behind the profit or loss of a company.

3. Common Size Percentages also helps to identify how a component is affecting a company’s financial position.

4. Plotting a company’s financial result over a specific period of time, the change in the financial trend becomes apparent and easier to discern. Below is the solution to Question no.1, which we will discuss in detail.

Though Common Size Statements are very useful in understanding the financial position of a company, there are some limitations as well.

The Drawbacks or the Limitations of the Common Size Statements are as Follows:

1. The Common Size Statements does not have a proper framework or proper benchmark. The calculation depends on the analyst. For this reason, it is not acceptable practice to use it in the decision making process.

2. Secondly, seasonal fluctuation in a business gives wrong results in Common Size Statements.

In DK Goel solutions Class 12 Accountancy solutions Chapter 4, the solutions of the questions are given in a well-defined table for ease of understanding.