Accountancy 3 Marks Question

Any of the following appropriate point.

1. To study the ability of the business to meet its short term obligations.
2. To study short term solvency of the business.

Importance of Financial Statement Analysis:

1. Assessing the Profitability.
2. Judging the efficiency.
3. Judging the liquidity.

Government can judge on the basis of analysis of financial statements, which industry is progressing on the desired lines and which industry needs the financial help. Government can take a decision to reduce the GST in those industries where the profit margins are low in comparison to the cost of production. On the contrary, if the profit margins are too high in comparison to the cost of production, Government can increase the GST or can enforce the price regulations.

The following are the commonly used techniques of Financial Statement analysis:

1. Comparative Financial Statements.
2. Common Size Financial Statements.
3. Trend Analysis.
4. Ratio Analysis.
5. Cash Flow Statement.
6. Fund Flow Statement.
7. The above listed techniques can be classified on the following basis:

A On the basis of Comparison.
Inter-firm Comparison.

• Comparative Statement (Balance Sheet, Profit and Loss Account)
• Common size Statement (of the same period)
• Ratio of two or more Competitive Firms (of the same period)
• Cash Flow Statement of two or more Competitive firms.
• Polygon, Bar Diagram.

Intra-firm Comparison.

• Comparative Statement (Balance Sheet, Profit and Loss Account)
• Common size Statement (of the same period)
• Ratio of two or more Competitive Firms (of the same period)
• Cash Flow Statement of two or more Competitive firms
• Polygon, Bar Diagram

Horizontal Comparison.

Vertical Comparison.

2. On the basis of Time

Inter-period Comparison.

• Comparative statement (two or more periods)
• Cash Flow statement (two or more period) etc.

Cross Sectional (Intra-period) Comparison.

• Common size statement
• Ratio Analysis

3. Horizontal Analysis.

• Time series
• Bar Diagram
• Polygon
• Comparative statement
• Ratio Analysis

4. Vertical Analysis.

• Common size statement
• Pie Diagram

In the Common size Statement of Profit and Loss, Revenue from Operations (Net Sales) is taken as 100 and expenses are expressed as percentage of Revenue from Operations (Net Sales). Common-size Statement of Profit and Loss may be prepared for different periods of the firm or for same period of two firms. It shows the relative efficiency i.n operating the business.Objectives of Common size Statement of Profit and Loss (Income Statement):

1. To analyse change in individual items of Income Statement.
2. To study the trend in different items of Incomes and Expenses.
3. To assess the efficiency.

Trend percentages are very useful in making comparative study of the financial statements for a number of years. These indicate the direction of movement over a long time and help an analyst of financial statements to form an opinion as to whether favourable or unfavourable tendencies have developed. This helps in future forecasts of various items.

A common size balance sheet is a statement in which total of assets or equity & liabilities is assumed to be equal to 100 and all the figures are expressed as percentage of the total.Objectives of Common-size Balance Sheet:

1. To analyse the changes in individual items of Balance Sheet.
2. To see the trend of different items of assets, equity and liabilities.
3. To assess the financial soundness and understand financial strategy.

The Trend Analysis presents each financial item in percentage terms for each year. These Trend Analyses not only help the accounting users to assess the financial performance of the business but also assist them to form an opinion about various tendencies and predict the future trend of the business.Usefulness and Importance of Trend Analysis:

1. Assists in forecasting: The trends provided by Trend Analysis help the accounting users to forecast the future trend of the business.
2. Percentage Terms: The trends are expressed in percentage terms. Analysing the percentage figures is easy and also less time consuming.
3. User Friendly: As the trends are expressed in percentage figures, so it is the most popular financial analysis to analyse the financial performance and operational efficiency of the company. In other words, one need not to have an in-depth and sophisticated knowledge of accounting in order to analyse these percentage trends.
4. Presents a Broader Picture: The trend analysis presents a broader picture about the financial performance, viability and operational efficiency of a business. Generally, companies prefer to present their financial data for a period of 5 or 10 years in forms of percentage trends, whereas the other techniques of Financial Analysis lack this popularity.

1. Percentage(%) Change in:

2. Values involved:

1. Fulfilment of Social Responsibility.
2. Concern for economically weaker section of the society.

Vertical Analysis: In such type of analysis, financial statements for a single year or on a particular date are reviewed and analysed with the help of proper devices like ratios It involes a study quantitative amongs various items of Balance Sheet or Statement of Profit & Loss of a single period. The items in the financial statement are expressed as a percentage to total and the total is taken as equivalent to 100. Statements containing such analysis are termed as 'Common Size Statements'.

Comparative Balance Sheet analysis is the study of the trend of same items, group of items and computed items in two or more Balance Sheets of the same business enterprise on different dates. The fonn of comparative balance sheet consists of five columns.
In the first column the items of Balance Sheet are entered. ln the second column the data for previous year is shown and in the third column the data for current year is shown. In the fourth column the increases or decreases in absolute data is shown in terms of rupee amounts. Fifth column shows the percentage of increase or decrease in absolute data.

Objectives of 'Financial Statements Analysis':

• Assessing the earning capacity or profitability of the firm as a whole as well as its different departments so as to judge the financial health of the firm.
• Assessing the managerial efficiency by using financial ratios.
• Assessing the short-term and the long-term solvency of the enterprise.
• Assessing their own perf onnance in comparison to other firms in the same business.

Hint: First of all, figure of Revenue from Operations will be calculated on the basis of 'Other Expenses'.