Accountancy 3 Marks Question

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.

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'.

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.