Q.The most commonly used tools for financial analysis are:
Concept understanding — Financial Statement Analysis
Financial Statement Analysis – A First Look
Think of a doctor checking your health. They don't just look at your height or weight alone — they compare your current weight with last year's, check your pulse rate against normal ranges, and see if your fever is rising or falling. That's analysis: taking raw numbers and asking "what does this mean?"
Financial Statement Analysis is exactly that — but for a business. You already know the two main financial statements from Class 11: the Balance Sheet (a snapshot of what the business owns and owes on a particular date) and the Statement of Profit and Loss (the earnings story for the year). Analysis is what you do after those statements are prepared. You don't just read the numbers; you interpret them, compare them, and draw conclusions.
The Precise Meaning
As the NCERT Class 12 Accountancy textbook puts it:
Financial Statement Analysis is the process of reviewing, evaluating, and interpreting a business's financial statements to assess its performance, financial position, and future prospects.
In simpler words: you take the raw data from the Profit & Loss Account and Balance Sheet, and you turn it into useful insights — Is the company making enough profit? Can it pay its debts? Is it growing or shrinking?
Why Does It Matter?
Three big reasons:
- For owners and investors — to decide whether to invest more money or take some out.
- For lenders (banks) — to check if the business can repay loans.
- For managers — to spot problems early (e.g., rising costs, falling sales) and fix them.
Without analysis, a Balance Sheet is just a list of numbers. With analysis, it becomes a story.
The Tools of Analysis (What You Actually Do)
NCERT focuses on three main techniques:
1. Comparative Statements
You take the same statement (say, the Profit & Loss Account) for two consecutive years and put them side by side. Then you calculate the absolute change (increase or decrease in rupees) and the percentage change.
Format for a Comparative Statement of Profit & Loss:
| Particulars | Note No. | 2022–23 (₹) | 2023–24 (₹) | Absolute Change (₹) | Percentage Change (%) |
|---|---|---|---|---|---|
| Revenue from Operations | 5,00,000 | 6,00,000 | 1,00,000 | 20% | |
| Cost of Materials Consumed | 2,00,000 | 2,50,000 | 50,000 | 25% | |
| Gross Profit | 3,00,000 | 3,50,000 | 50,000 | 16.67% |
The percentage change is calculated as: (Absolute Change ÷ Previous Year Figure) × 100. Always use the earlier year as the base.
2. Common Size Statements
Here, you express every item as a percentage of a common base. For the Profit & Loss Account, the base is Revenue from Operations (100%). For the Balance Sheet, the base is Total Assets (or Total Liabilities).
Format for a Common Size Balance Sheet (partial):
| Particulars | Note No. | Amount (₹) | Percentage of Total |
|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||
| Shareholders' Funds | 4,00,000 | 40% | |
| Non-Current Liabilities | 3,00,000 | 30% | |
| Current Liabilities | 3,00,000 | 30% | |
| Total | 10,00,000 | 100% |
This instantly tells you: 40% of the company's funding comes from owners, 60% from outsiders.
3. Ratio Analysis
This is the most powerful tool. A ratio is simply one number divided by another. NCERT classifies ratios into three groups:
- Liquidity Ratios — Can the business pay its short-term bills? (e.g., Current Ratio = Current Assets ÷ Current Liabilities)
- Solvency Ratios — Can it pay its long-term debts? (e.g., Debt-Equity Ratio = Long-term Debt ÷ Shareholders' Funds)
- Profitability Ratios — How much profit is it earning? (e.g., Gross Profit Ratio = Gross Profit ÷ Revenue from Operations × 100)
A ratio by itself means nothing. You must compare it — with the industry average, with the company's past ratios, or with a standard norm. For example, a Current Ratio of 2:1 is generally considered healthy, but a ratio of 1:1 might signal trouble.
Accounting Treatment — What Gets Debited and Credited?
Here's a point that often confuses students: Financial Statement Analysis is not a journal entry. You do not debit or credit anything when you perform analysis. The analysis is done after the books are closed. It is an interpretation exercise, not a recording exercise.
The only "account" involved is the Trading and Profit & Loss Account and the Balance Sheet — but those are already prepared. Analysis uses them as source documents.
Do not write "Debit Financial Statement Analysis A/c" or any such nonsense. Analysis is a tool, not a transaction. No entry is passed.
Where Formulas Apply (And How to State Them)
NCERT gives several formulas for ratio analysis. Here are the key ones, stated in plain text (no LaTeX):
- Current Ratio = Current Assets divided by Current Liabilities
- Liquid Ratio = Liquid Assets divided by Current Liabilities (Liquid Assets = Current Assets − Inventories − Prepaid Expenses)
- Debt-Equity Ratio = Long-term Debt divided by Shareholders' Funds
- Gross Profit Ratio = (Gross Profit divided by Revenue from Operations) × 100
- Net Profit Ratio = (Net Profit divided by Revenue from Operations) × 100
- Return on Investment (ROI) = (Net Profit before Interest and Tax divided by Capital Employed) × 100
For the Interest Coverage Ratio, the formula is: Net Profit before Interest and Tax divided by Interest on Long-term Debt. A ratio of less than 1.5 is usually a red flag for lenders.
A Final Word
Financial Statement Analysis is where accounting stops being about "recording" and starts being about "thinking." The numbers don't change — but your understanding of the business changes completely. When you see that Gross Profit Ratio has fallen from 40% to 30%, you don't just note the drop — you ask: Why? Higher material costs? Lower selling prices? Theft? That question is the whole point of analysis.
Start with comparative statements to see the trend. Then use common size to see the structure. Finally, use ratios to dig deeper. That's the NCERT approach, and it works.
The correct answer is (d) All the above. Horizontal analysis (comparing figures across periods), vertical analysis (expressing items as a percentage of a common base), and ratio analysis are all standard, widely used tools of financial statement analysis, so all three are correct.
Horizontal analysis, vertical analysis and ratio analysis are all commonly used tools for financial analysis, so the correct option is (d) All the above.
Horizontal analysis, vertical analysis and ratio analysis are all commonly used tools for financial analysis, so the correct option is (d) All the above.
Financial analysis uses several tools to interpret the information in financial statements. Horizontal analysis (also called dynamic or time-series analysis) compares figures of the same item across two or more periods to study trends and growth. Vertical analysis (static analysis) expresses each item as a percentage of a common base within the same statement — for example, each asset as a percentage of total assets. Ratio analysis studies the relationship between two related figures to assess liquidity, solvency, profitability and efficiency. Each tool serves a different analytical purpose, and analysts routinely use them together.
Options (a), (b) and (c) each name only one genuine tool, so they are individually true but incomplete. Since all three are commonly used, (d) All the above is the correct answer.
Horizontal analysis, vertical analysis and ratio analysis are all commonly used tools for financial analysis, so the correct option is (d) All the above.
Showing the 12 most recent of 41 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.Which of the following analyses shows duration-based classification?(a) External analysis(b) Horizontal analysis(c) Short-term analysis(d) Vertical analysis
›Reveal solutionSolution
Duration-based classification of analysis is represented by short-term (and long-term) analysis, so the answer is (c).
Financial statement analysis is classified on different bases:
Basis of classification Types Material used Internal and external analysis Modus operandi / method Horizontal and vertical analysis Duration / time span Short-term and long-term analysis Since the question asks which analysis reflects a duration-based classification, the correct choice among the options is short-term analysis.
✓Final answer(c) Short-term analysis.
- CBSE 2026Set MARCH1 markQ.Match the following :
A B a) Valuation of goodwill i) Acknowledgement of debt b) Debentures ii) Earnings per share c) Revenue from operations iii) Inflows and Outflows of cash d) Profitability Ratio iv) Average profit method e) Cash flow statement v) Sales vi) Financial position ›Reveal solutionSolution
Correct pairings: a-iv, b-i, c-v, d-ii, e-iii (option vi is a distractor).
Each term is matched to its meaning from the Karnataka 2nd PUC Accountancy syllabus:
✓Final answerColumn A Match Column B a) Valuation of goodwill iv Average profit method b) Debentures i Acknowledgement of debt c) Revenue from operations v Sales d) Profitability Ratio ii Earnings per share e) Cash flow statement iii Inflows and Outflows of cash Reasoning: goodwill is commonly valued using the average profit method; a debenture is a written acknowledgement of a debt owed by the company; revenue from operations for a trading concern is its sales; earnings per share is a profitability ratio; and a cash flow statement reports cash inflows and outflows. Option (vi) Financial position is left unmatched.
- CBSE 2026Set MARCH1 markQ.State any one user of Financial Statement Analysis.
›Reveal solutionSolution
One user of financial statement analysis is the investor/shareholder (others include management, creditors, banks, employees and government).
Financial statement analysis serves several interested parties who need information to make economic decisions.
✓Final answerInvestors / Shareholders are a key user. They analyse the financial statements to evaluate the earning capacity, profitability and financial soundness of the company before buying, holding or selling shares and to judge the safety of their investment and expected returns.
- CBSE 2025Set MARCH1 markMCQQ.Which of the following analyses shows stakeholders-based classification?(a) External analysis(b) Horizontal analysis(c) Short term analysis(d) Vertical analysis
›Reveal solutionSolution
Based on the party doing the analysis (stakeholders), analysis is internal or external; the option here is external analysis. Correct option: (a).
In GSEB Class-12 Commerce Accountancy (Analysis of Financial Statements):
-
On the basis of the person/party (stakeholders) analysing: Internal analysis (by management) and External analysis (by outsiders such as investors, banks, creditors).
-
Horizontal and vertical analysis are classified by method/direction; short-term is by time horizon.
-
Hence the stakeholder-based option is External analysis.
✓Final answer(a) External analysis.
-
- CBSE 2025Set ANNUAL1 markMCQQ.Parties interested in financial statements are (A) Managers (B) Financial institutions (C) Creditors (D) All of these
›Reveal solutionSolution
Financial statements serve a wide range of users — internal (management) and external (financial institutions, creditors, investors) — each needing the information for their own decisions. Hence the answer is (D) All of these.
For the BSEB Inter / Bihar Class-12 Accountancy syllabus, the parties interested in financial statements include:
- Managers: to plan, control and take operating decisions.
- Financial institutions / banks: to assess creditworthiness before lending.
- Creditors and suppliers: to judge whether the firm can pay its dues.
- Investors/shareholders, employees, government and researchers also rely on them.
Since managers, financial institutions and creditors are all genuine users, every option is correct. Hence option (D).
✓Final answer(D) All of these.
- CBSE 2025Set ANNUAL1 markMCQQ.When financial statements of two or more organisations are analysed, it is called (A) Intra-firm analysis (B) Inter-firm analysis (C) Vertical analysis (D) None of these
›Reveal solutionSolution
Comparing the financial statements of two or more separate organisations is a comparison between firms, called inter-firm analysis. Hence the answer is (B) Inter-firm analysis.
For Bihar Class-12 (BSEB Inter) commerce candidates, financial analysis can be classified by the basis of comparison:
- Intra-firm analysis: comparing the figures of the same firm over different years (within one firm).
- Inter-firm analysis: comparing the figures of two or more different firms for the same period.
- Vertical analysis: studying relationships within a single period's statement (as in common-size statements).
- Horizontal analysis: comparing figures across several periods.
Since the question refers to analysing the statements of two or more organisations, it is inter-firm analysis. Hence option (B).
✓Final answer(B) Inter-firm analysis.
- CBSE 2025Set ANNUAL1 markMCQQ.Financial analysis is useful for (A) Investors (B) Shareholders (C) Debenture holders (D) All of them
›Reveal solutionSolution
Financial analysis helps all stakeholders assess profitability, solvency and safety of their funds — investors, shareholders and debenture holders each use it. Hence the answer is (D) All of them.
For the BSEB Inter / Bihar Class-12 Accountancy syllabus, financial statement analysis serves many users:
- Investors: to decide whether to invest, judging earning capacity and growth.
- Shareholders: to evaluate profitability, dividend prospects and the safety of their investment.
- Debenture holders / lenders: to check the firm's ability to pay interest and repay principal (solvency).
Since investors, shareholders and debenture holders all benefit, every option is correct. Hence option (D).
✓Final answer(D) All of them.
- CBSE 2025Set ANNUAL1 markMCQQ.Which of the following is not the method of financial statement analysis ? (A) Ratio Analysis (B) Comparative Analysis (C) Trend Analysis (D) Capitalisation Method
›Reveal solutionSolution
Ratio analysis, comparative statements and trend analysis are standard tools of financial statement analysis, whereas the capitalisation method is used to value goodwill or a business. Hence the answer is (D) Capitalisation Method.
For Bihar Class-12 (BSEB Inter) commerce candidates, the common methods/tools of financial statement analysis are:
- Comparative statements
- Common-size statements
- Trend analysis (trend percentages)
- Ratio analysis
- Cash flow statement
The capitalisation method, by contrast, is a method of valuing goodwill (capitalisation of average profit or of super profit) or valuing a business, not a tool for analysing financial statements. Hence the one that does not belong is (D) Capitalisation Method.
✓Final answer(D) Capitalisation Method.
- CBSE 2025Set ANNUAL1 markMCQQ.Which of the following is a tool of financial statement analysis? (A) Cash Book (B) Trial Balance (C) Trend Analysis (D) All of these.
›Reveal solutionSolution
Trend Analysis is the tool of financial statement analysis — option (C).
Tools of financial statement analysis are techniques used to study, compare and interpret financial data. The common tools are comparative statements, common-size statements, trend analysis, ratio analysis and cash flow statements. A Cash Book and a Trial Balance are part of the basic book-keeping/recording process, not analytical tools. Therefore, among the options, Trend Analysis is the recognised tool of financial statement analysis.
✓Final answerThe correct answer is (C) Trend Analysis.
- CBSE 2025Set ANNUAL1 markMCQQ.Which of the following is not an example of spreadsheet software? (A) Word Pro (B) MS-Excel (C) Lotus 1-2-3 (D) None of these.
›Reveal solutionSolution
Word Pro is not a spreadsheet package — option (A).
Spreadsheet software organises data in a grid of rows and columns and is used for calculations, charts and analysis. MS-Excel and Lotus 1-2-3 are well-known spreadsheet programs. Word Pro, however, is a word-processing application (part of the Lotus SmartSuite) used to create text documents, not spreadsheets. Hence Word Pro is not an example of spreadsheet software.
✓Final answerThe correct answer is (A) Word Pro.
- CBSE 2025Set ANNUAL1 markMCQQ.The next column to Z column in MS-Excel is (A) AA (B) AZ (C) AB (D) AC.
›Reveal solutionSolution
The column after Z in MS-Excel is AA — option (A).
In MS-Excel, columns are named alphabetically: A, B, C, ... up to Z (26 single-letter columns). After column Z, the labels continue with two letters starting from AA, then AB, AC, and so on up to AZ, then BA, BB, etc. Therefore the column immediately next to Z is AA.
✓Final answerThe correct answer is (A) AA.
- CBSE 2025Set ANNUAL1 markMCQQ.The financial function used in calculation of payment of any loan is (A) SLN (B) PMT (C) COUNTIF (D) SUMIF
›Reveal solutionSolution
PMT is used to calculate loan payments — option (B).
MS-Excel's financial functions include several for different purposes:
- PMT calculates the periodic payment (instalment) for a loan based on constant payments and a constant interest rate.
- SLN calculates straight-line depreciation of an asset.
- COUNTIF counts cells meeting a condition, and SUMIF adds cells meeting a condition (both are statistical/maths functions, not loan functions).
Hence the function used to compute the payment on a loan is PMT.
✓Final answerThe correct answer is (B) PMT.
🎓Unlock everything free for 14 days
- ✓Full step-by-step solutions
- ✓Concept-first explanations
- ✓Methods, shortcuts & mistakes
- ✓PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.