Q.Which of the following tools of 'Analysis of Financial Statements' indicate the trend and direction of financial position and operating results ? (A) Comparative statements (B) Common size statements (C) Cash flow analysis (D) Ratio analysis
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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? …
Part (b)Concept understanding — Ratio Analysis
Let’s start with something you already know. Suppose you and a friend both run small shops. You each put in ₹1,00,000. At the end of the year, your shop made a profit of ₹20,000; your friend’s shop made ₹30,000. Which shop is doing better? The obvious answer is your friend’s — more profit. But what if your friend had to borrow ₹2,00,000 to earn that ₹30,000, while you used only your own ₹1,00,000? Suddenly, your shop looks more efficient. You are now thinking in ratios: profit relative to the money used.
That is the core of Ratio Analysis. It is not about raw numbers; it is about relationships between numbers. A ratio is simply one figure divided by another. In accounting, we use ratios to judge a business’s performance, financial health, and efficiency — without being misled by size.
What the NCERT textbook says
The NCERT Class 12 Accountancy textbook (Part II, Chapter 5) defines Ratio Analysis as:
“Ratio Analysis is a technique of analysis of financial statements to assess the profitability, liquidity, solvency and efficiency of a business enterprise.”
It is a tool, not a separate account. You do not “debit” or “credit” a ratio. Ratios are calculated from the figures already recorded in the Trading and Profit & Loss Account and the Balance Sheet.
Why does it matter?
Three big reasons:
- Comparison – You can compare a small firm with a large one, or the same firm over different years, because ratios cancel out size.
- Decision-making – A bank deciding whether to give a loan looks at liquidity ratios. An investor looks at profitability ratios.
- Early warning – A falling current ratio may signal trouble paying bills, even if profits look fine.
Accounting treatment: No debit/credit
This is a common confusion. Ratio Analysis is not a journal entry. You never write:
“Debit Ratio Analysis, Credit Profit & Loss Account”
That would be wrong. Ratios are computed after the final accounts are prepared. They are presented in a separate statement called a Comparative Statement or Common Size Statement, or simply listed in a report.
Where a format/proforma is given
The NCERT textbook gives a format for Comparative Balance Sheet and Comparative Statement of Profit & Loss. These are the main vehicles for ratio analysis. Here is the proforma for a Comparative Balance Sheet as per NCERT:
| Particulars | Note No. | Previous Year (₹) | Current Year (₹) | Absolute Change (₹) | Percentage Change (%) |
|---|---|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||||
| 1. Shareholders’ Funds | |||||
| (a) Share Capital | |||||
| (b) Reserves and Surplus | |||||
| 2. Non-Current Liabilities | |||||
| (a) Long-term Borrowings | |||||
| 3. Current Liabilities | |||||
| (a) Trade Payables | |||||
| (b) Short-term Provisions | |||||
| Total | |||||
| II. ASSETS | |||||
| 1. Non-Current Assets | |||||
| (a) Fixed Assets | |||||
| (b) Non-Current Investments | |||||
| 2. Current Assets | |||||
| (a) Inventories | |||||
| (b) Trade Receivables | |||||
| (c) Cash and Cash Equivalents | |||||
| Total |
Part (a)
The tool that shows the trend and direction of financial position and operating results over time is the Comparative Statement, which places two or more years side by side with absolute and percentage changes. …
Part (a): (A) Comparative statements. Part (b): (B) Turnover ratios.
Part (a)
Comparative statements present Balance Sheet / Statement of Profit & Loss data for two or more periods side by side, computing the absolute change and the percentage change for every item — which is exactly what reveals the trend (rising/falling) and direction (increase/decrease). Common-size statements show composition at a point in time, cash-flow analysis explains cash movement, and a single ratio is only a snapshot — none captures trend and direction as comparative statements do. …
Showing the 12 most recent of 88 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 - CBSE 2026Set MARCH1 markMCQQ.For which of the following items the ratio is computed in days?(a) For total purchase(b) For credit sales(c) For credit purchase(d) Both (B) and (C)
›Reveal solutionSolution
Ratios computed in days apply to both credit sales and credit purchases, so the answer is (d).
Certain activity ratios are stated as a number of days:
Ratio Based on Expressed in Debtors / Receivables collection period Credit sales Days Creditors / Payables payment period Credit purchases Days … - CBSE 2026Set MARCH1 markMCQQ.Which of the following is correct for accounting ratios?(a) Comparison with ratios developed by the firm(b) Comparison with ratios of industry(c) Comparison with ratios of competitors(d) All of the above
›Reveal solutionSolution
Accounting ratios can be compared with the firm's own, industry and competitors' ratios, so the answer is (d).
Ratio analysis is a comparative tool. A ratio is judged good or bad only against a benchmark, which may be:
- the firm's own ratios of earlier years (intra-firm/trend comparison),
- the average ratios of the industry, and …
- 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:
…
- 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.
…
- CBSE 2026Set MARCH1 markQ.Expand R.O.I.
›Reveal solutionSolution
R.O.I. stands for Return on Investment.
Return on Investment (also called Return on Capital Employed) is a profitability ratio that shows how efficiently the capital employed in the business has been used to generate profit.
…
- CBSE 2026Set ANNUAL1 markMCQQ.If the market price of a company is ₹ 16 per share and earning per share is ₹ 3.2, then the price earning ratio will be A) ₹ 0.20 B) ₹ 5 C) ₹ 16 D) Cannot be determined
›Reveal solutionSolution
The price-earning ratio is 5 - option (B).
Price-Earning (P/E) Ratio = Market Price per Share / Earnings per Share (EPS)
= 16 / 3.2
= 5 times.
…
- CBSE 2026Set ANNUAL1 markMCQQ.Assertion(A) : Accounting ratio is a mathematical expression of relationship between different items of the group of items in the Financial Statements for two consecutive years. Reason (R) : Accounting ratio is a mathematical expression of relation between two items of the group of items in the Financial Statement. In the context of the above statements, which of the following is correct?(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)(b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A)(c) Assertion (A) is true but Reason (R) is false(d) Assertion (A) is false but Reason (R) is true(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)(b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A)(c) Assertion (A) is true but Reason (R) is false(d) Assertion (A) is false but Reason (R) is true
›Reveal solutionSolution
Assertion (A) is false but Reason (R) is true (Option D).
An accounting ratio is simply a mathematical expression of the relationship between two related items (or groups of items) taken from the financial statements of the SAME accounting period — for example, Current Assets to Current Liabilities, or Net Profit to Revenue from Operations, both for the same year. It does not require, and is not defined using, figures 'for two consecutive years' as stated in Assertion (A); ratios for two different years are only needed when doing trend/comparative analysis of the SAME ratio across years, which is a separate exercise from the basic defini …
- CBSE 2026Set ANNUAL1 markMCQQ.Or. When a firm's total asset turnover ratio increases, it indicates(a) assets are being used more efficiently to generate sales(b) assets are being underutilized(c) sales have decreased(d) fixed assets have increased
›Reveal solutionSolution
A rising Total Asset Turnover Ratio shows the firm is generating more sales per rupee of assets employed — a sign of improving efficiency, not a decline.
Total Asset Turnover Ratio = Net Sales (Revenue from Operations) ÷ Total Assets
This ratio is an efficiency/activity ratio that reveals how effectively a company is using its entire base of assets (both fixed and current) to generate sales revenue. A higher (or increasing) ratio means the company is generating more sales for every rupee tied up in its assets — i.e., its asset base is being put to more productive, efficient use. This could result from growing sales without a proportionate rise in assets, or from the company trimming down unproductive/idle assets while maintaining its sales level.
Conversely, a falling ratio would suggest assets are becoming underutilized relative to the sales they generate — the opposite of what this question describes.
The other options are incorrect because: …
- CBSE 2025Set 67/6/11 markMCQQ.The Current Ratio of Magnum Ltd. is 2·5 : 1. Which of the following transactions will result in decrease in this ratio ? (A) Purchased goods for cash ₹ 73,000 (B) Cash collected from debtors ₹ 41,000 (C) Outstanding salaries paid ₹ 62,000 (D) Repayment of long term loan ₹ 8,00,000
›Reveal solutionSolution
The Current Ratio will decrease only in transaction (D) Repayment of long-term loan ₹8,00,000. Transactions (A), (B), and (C) either keep the ratio unchanged or increase it.
The Current Ratio is Current Assets divided by Current Liabilities. A ratio of 2.5:1 means for every ₹1 of current liability, the firm has ₹2.5 of current assets. To see whether a transaction decreases this ratio, you must check what happens to both the numerator (current assets) and the denominator (current liabilities). The ratio falls when current assets decrease more than current liabilities, or when current liabilities increase more than current assets.
Let's examine each option one by one.
(A) Purchased goods for cash ₹73,000
Cash (a current asset) goes down by ₹73,000. Goods purchased become inventory (also a current asset), which goes up by ₹73,000. One current asset replaces another — total current assets remain unchanged. Current liabilities are not affected. So the ratio stays exactly the same.
(B) Cash collected from debtors ₹41,000
Cash (current asset) increases by ₹41,000. Debtors (current asset) decrease by ₹41,000. Again, one current asset replaces another. Total current assets are unchanged. Current liabilities are untouched. The ratio does not change.
(C) Outstanding salaries paid ₹62,000
Outstanding salaries are a current liability. When you pay them, cash (current asset) decreases by ₹62,000, and the liability (outstanding salaries) also decreases by ₹62,000. Both numerator and denominator fall by the same amount. For a ratio greater than 1 (here 2.5), reducing both by the same rupee amount actually increases the ratio. Let's test with assumed numbers: suppose current assets were ₹2,50,000 and current liabilities ₹1,00,000 (ratio 2.5). After paying ₹62,000, current assets become ₹1,88,000 and current liabilities become ₹38,000. New ratio = 1,88,000 ÷ 38,000 = 4.95 (approx). So the ratio increases, not decreases.
(D) Repayment of long-term loan ₹8,00,000 …
- 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). …
- CBSE 2025Set MARCH1 markQ.What is ratio?
›Reveal solutionSolution
A ratio is the mathematical relationship between two related accounting figures, expressed as a pure number (times), a proportion, or a percentage, used to analyse and interpret financial statements.
In GSEB Class-12 Commerce Accountancy (Accounting Ratios):
- A ratio shows how one figure relates to another (e.g., current assets to current liabilities).
- It can be expressed as a pure ratio (2 : 1), a quotient/times (2 times), or a percentage (25%). …
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