P2 C4 ANALISIS OF FINANCIAL STATEMENT — Elements of Account STD 12 Commerce — Question
Gujarat BoardEnglish MediumSTD 12 CommerceElements of AccountP2 C4 ANALISIS OF FINANCIAL STATEMENT3 Marks
Question
Discuss any three objectives of financial analysis.
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Answer
Important objectives of financial analysis are as follows:
$(1)$ Evaluation of earning capacity
$(2)$ Efficiency evaluation
$(3)$ Solvency evaluation
$(4)$ Evaluation of managerial efficiency
$(5)$ Planning for budget
$(6)$ Comparative study
$(7)$ Simplicity to understand accounts.
Discussion of three objectives:
$(a)$ Efficiency evaluation:
Business entity acquires different assets as per the nature of business with the help of this assets production and sales are done and services are provided.
The use of these assets should be at maximum level.
Maximum use of assets generates more earning.
Through financial analysis, the evaluation of the efficient use of assets can be done.
$(b)$ Evaluation of earning capacity:
Generally, financial statements are prepared for the duration of $12$ months.
This analysis is made with the help of different accounting ratios and future earning capacity of the entity can also be forecasted.
Mostly all stakeholders, gather information of present and future earning through this analysis for their investment decision.
$(c)$ Solvency evaluation:
Solvency evaluation has two types: Short term and long term solvency.
The goods and service providers to the business measure the short term solvency and banks and financial institutions measure the long term solvency of business entities for their loan amount.
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