Book-Keeping and Accountancy · Ch 9 — Analysis of Financial Statements
Meaning, Objectives and Parties Interested in Analysis of Financial Statements
Meaning, Objectives and Parties Interested in Analysis of Financial Statements
Every limited company, partnership firm or sole proprietorship prepares two principal financial statements at the close of the accounting year — the Trading and Profit & Loss Account (measuring profitability) and the Balance Sheet (measuring financial position). Taken by themselves, however, these statements are simply a list of figures. Analysis of Financial Statements is the systematic process of breaking these figures down, re-arranging them, comparing them across periods, and establishing meaningful relationships between them (through statements and ratios) so a reader can actually judge the firm's profitability, liquidity, solvency, efficiency and overall financial health — not just read the numbers, but understand what they mean.
This is exactly the chapter Maharashtra HSC (MSBSHSE) places at the end of the Std XII Book-Keeping and Accountancy syllabus, once a student already knows how to PREPARE final accounts (earlier chapters) — this chapter teaches how to READ and INTERPRET them.
Objectives of Analysis of Financial Statements
- To assess the earning capacity or profitability of the business, both overall and in relation to sales and capital invested.
- To judge the short-term financial position (liquidity) — whether the firm can pay its current liabilities as they fall due.
- To judge the long-term financial soundness (solvency) — whether the firm's assets are adequate to meet its outside long-term liabilities.
- To measure the operational and managerial efficiency with which resources (stock, capital) are used.
- To provide a reliable basis for comparison — with the firm's own past performance, or with other firms in the same industry.
- To help various stakeholders make sound economic decisions — whether to lend, invest, extend credit, or continue employment.
Parties Interested in Analysis of Financial Statements
| Party | Why they analyse the statements |
|---|---|
| Owners / Partners / Shareholders | To judge the safety and the return (profitability) on their investment |
| Management | To plan, control costs, and take corrective operating decisions |
| Banks and Financial Institutions | To decide whether to lend, and on what terms/security |
| Creditors and Suppliers | To judge whether the firm can pay for goods/services supplied on credit, on time |
| Prospective Investors | To decide whether investing fresh capital in the business is worthwhile |
| Employees and Trade Unions | To assess job security, and as a basis for wage/bonus negotiation |
| Government and Tax Authorities | For assessing tax liability, and for regulatory/statistical purposes |
This wide circle of interested parties — each reading the SAME two statements for a DIFFERENT purpose — is exactly why financial statement analysis is taught as a distinct skill in the Maharashtra HSC (MSBSHSE) Std XII course, not folded into the final-accounts chapters that merely prepare the statements in the first place.
The systematic process of breaking down, comparing and establishing relationships between the figures of the Trading and Profit & Loss Account and the Balance Sheet, so as to judge a firm's profitability, liquidity, solvency and operating efficiency.