Analysis of Financial Statements Chapter Notes | Accountancy Class 12 - Commerce PDF Download

Tools for financial statement analysis

The various tools used for analysis of financial statements are :

Comparative Statement : Financial Statements of two years are compared and changes in absolute terms and in percentage terms are calculated. It is a form of Horizontal Analysis.

Common Size statement : Figures of Financial statements are converted it to percentage with respect to some common base.

In Common size Income Statement Sales/Revenue from Operations is taken is common base where as in Common size Balance Sheet Total assets or Total Equity and Liabilities are taken as common base.

Ratio Analysis : It is a technique of Study of relationship between various items in the Financial Statements.There are mainly four types of ratios-

1) liquidity ratio

2) solvency ratio

3) activity ratio

4) profitability ratio

Cash Flow Statement : It is a statement that shows the inflow and outflow of cash and cash equivalents during a particular period which helps in finding out the causes of changes in cash position between the two balance sheet dates.It is prepared under accounting standard 3

Comparative Statements

It is a statement that shows changes in each item of the financial statement in absolute amount and in percentage, taking the amounts of the preceding as counting period as the base.

Types of Comparative Statements :

1. Comparative Balance Sheet; and

2. Comparative Statement of Profit and Loss.

Comparative Balance Sheet: It shows the increases and decreases in various items of assets, equity and liabilities in absolute term and in percentage term by taking the corresponding figures in the previous year’s balance sheet as a base.

Format for a Comparative Balance Sheet

Comparative Balance Sheet of............ Ltd.

As at 31st March 2014 and 2015

*Percentage change = absolute change/ previous year *100 

for example -

COMPARATIVE STATEMENT OF PROFIT AND LOSS/COMPARATIVE INCOME STATEMENT

Comparative Income Statement: It shows the increases and decreases in various items of income Statement in absolute amount and in percentage amount by taking the  corresponding figures in the previous year’s Income Statement as a base.

Format for a Comparative Statement of Profit and Loss Comparative Statement of Profit and Loss

For the years ended on 31st March, 2014 and 2015

percentage = absolutechange/ previous year*100

Importance of Comparative Statement

To make the data simple and more understandable.

To indicate the trend with respect to the previous year.

To compare the firm performance with the performance of other firm in the same business.

Common Size Statement

Common Size Financial Statements are the statements in which amounts of the various items of financial statements are converted into percentages to a common base.

Types of Common Size statements :

1. Common Size Balance sheet; and

2. Common Size Statement of Profit and Loss.

Common Size Balance sheet : It is a statement in which every item of assets, equity and liabilities is expressed as a percentage to the total of all assets or to the total of Equity and Liabilities.

Format for a Common Size Balance Sheet :

Common Size Balance Sheet of................. Ltd.

As at 31st March, 2014 and 2015

Common Size Income Statement or Statement of Profit and Loss: It is a statement in which every item of Statement of Profit and Loss is expressed as a percentage to the amount of Revenue from Operations.

Format for a Common Size Statement of Profit and Loss: Common Size Statement of Profit and Loss

For the years ended on 31st March, 2014 and 2015

III. Total Revenue (I+II)

IV. Expenses :

a. Cost of Material consumed

b. Purchases of Stock-in-Trade

c. Changes in Inventories of Finished Goods, Work-in-progress and Stock-in­trade

d. Employees Benefit Expenses

e. Finance Cost

f.  Depreciation

g. Other Expenses Total Expenses

V.  Profit before Tax (III-IV)

Less : Income Tax

VII. Profit after Tax

note- all the items are divided by revenue from operations of that year to calculate the percentages.