Accountancy · Class 12 Commerce
Ch 8Analysis of Financial Statements — Class 12 Accountancy, concept-first.
The previous chapter covered a company's financial statements — the Statement of Profit and Loss and the Balance Sheet. These are, at their core, summarised financial reports that show a company's operating results and financial position.
Key concepts
Hover a concept to preview it and jump to its most relevant Q&A.
Financial Statement Analysis
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 risin…
Most relevant Q&A
- Fill in the blanks with the appropriate word(s): (a) Analysis simply means ______ data. (b) Interpretation means ______ data. (c) Comparativ…Preview
- The financial statements of a business enterprise include: (a) Balance sheet (b) Statement of Profit and loss account (c) Cash flow statemen…Free
- The most commonly used tools for financial analysis are: (a) Horizontal analysis (b) Vertical analysis (c) Ratio analysis (d) All the aboveFree
- An Annual Report is issued by a company to its: (a) Directors (b) Auditors (c) Shareholders (d) ManagementPreview
- Balance Sheet provides information about financial position of the enterprise: (a) At a point in time (b) Over a period of time (c) For a pe…Preview
Chapter contents
The NCERT structure, section by section. Open a section to see its questions, then read the concept-first solution.
Introduction
The previous chapter covered a company's financial statements — the Statement of Profit and Loss and the Balance Sheet.
Meaning of Analysis of Financial Statements
The process of critically evaluating the financial information contained in the financial statements to understand and make decisions about a firm’s operations is called Financial Statement Analysis.
Significance of Analysis of Financial Statements
Financial analysis is the process of identifying a firm’s financial strengths and weaknesses by establishing relationships between items in the balance sheet and the statement of profit and loss.
Objectives of Analysis of Financial Statements
The purpose of analysing financial statements is not merely to read the numbers, but to understand the story behind them.
Tools of Analysis of Financial Statements
The purpose of financial statement analysis is to turn raw accounting data into meaningful insights. To do this, analysts use a set of standard tools.
Comparative Statements
6 QComparative statements are a tool for side-by-side comparison of financial data across two periods. They present the Statement of Profit and Loss and the Balance Sheet with columns for the current yea…
+−Illustrationsi4 questions
- Illustration 1Convert the following statement of profit and loss of BCR Co. Ltd. into the comparative statement of profit and loss of BCR Co. Ltd.: | Part…Free
- Illustration 2From the following statement of profit and loss of Madhu Co. Ltd., prepare comparative statement of profit and loss for the year ended March…Free
- Illustration 3The following are the Balance Sheets of J. Ltd. as at March 31, 2016 and 2017. Prepare a Comparative balance sheet. | Particulars | Note No.…Preview
- Illustration 4From the following Balance Sheets of Amrit Limited as at March 31, 2016 and 2017, prepare a comparative balance sheet: | Particulars | Note…Preview
+−Do It Yourselfi2 questions
Common Size Statement
9 QA common size statement — also called a component percentage statement — is a financial tool that helps you study key changes and trends in a company's financial position and operating results.
+−Illustrationsi3 questions
- Illustration 5From the following information, prepare a Common size Income Statement for the year ended March 31, 2016 and March 31, 2017: | Particulars |…Free
- Illustration 6From the following information, prepare Common size statement of profit and loss for the year ended March 31, 2016 and March 31, 2017: | Par…Preview
- Illustration 7Prepare common size Balance Sheet of XRI Ltd. from the following information: | Particulars | Note No. | March 31, 2016 (₹) | March 31, 2017…Preview
+−Do It Yourselfi1 question
+−Test Your Understandingi5 questions
- Q1The financial statements of a business enterprise include: (a) Balance sheet (b) Statement of Profit and loss account (c) Cash flow statemen…Free
- Q2The most commonly used tools for financial analysis are: (a) Horizontal analysis (b) Vertical analysis (c) Ratio analysis (d) All the aboveFree
- Q3An Annual Report is issued by a company to its: (a) Directors (b) Auditors (c) Shareholders (d) ManagementPreview
- Q4Balance Sheet provides information about financial position of the enterprise: (a) At a point in time (b) Over a period of time (c) For a pe…Preview
- Q5Comparative statements are also known as: (a) Dynamic analysis (b) Horizontal analysis (c) Vertical analysis (d) External analysisPreview
Limitations of Financial Analysis
Financial analysis is a powerful tool, but it is not perfect. Every conclusion drawn from it is only as reliable as the data it is based on.
Terms Introduced in the Chapter
The key terms introduced in this chapter, with a short meaning for each.
Summary
An annual report contains the basic financial statements, namely the Balance Sheet, the Statement of Profit and Loss and the Cash Flow Statement.
Questions for Practice
17 Q+−Short Answer Questions6 questions
- Q1List the techniques of Financial Statement Analysis.Free
- Q2Distinguish between Vertical and Horizontal Analysis of financial data.Free
- Q3State the meaning of Analysis and Interpretation.Preview
- Q4State the importance of Financial Analysis?Preview
- Q5What are Comparative Financial Statements?Preview
- Q6What do you mean by Common Size Statements?Preview
+−Long Answer Questions5 questions
- Q1Describe the different techniques of financial analysis and explain the limitations of financial analysis.Free
- Q2Explain the usefulness of trend percentages in interpretation of financial performance of a company.Free
- Q3What is the importance of comparative statements? Illustrate your answer with particular reference to comparative income statement.Preview
- Q4What do you understand by analysis and interpretation of financial statements? Discuss its importance.Preview
- Q5Explain how common size statements are prepared giving an example.Preview
+−Numerical Questions6 questions
- Q1Following are the balance sheets of Alpha Ltd. as at March 31, 2016 and 2017. You are required to prepare a Comparative Balance Sheet. | Par…Free
- Q2Following are the Balance Sheets of Beta Ltd. as at March 31, 2016 and 2017. Prepare a comparative Balance Sheet. | Particulars | Note No. |…Free
- Q3Prepare Comparative Statement of profit and loss from the following information: | Particulars | 2015-16 (₹) | 2016-17 (₹) | |---|---:|---:|…Preview
- Q4Prepare Comparative Statement of Profit and Loss from the following information: | Particulars | 2015-16 | 2016-17 | |---|---|---| | Manufac…Preview
- Q5Prepare a Common size statement of profit and loss of Shefali Ltd. with the help of following information: | Particulars | 2015-16 (₹) | 201…Preview
- Q6Prepare a Common Size balance sheet from the following balance sheet of Aditya Ltd. and Anjali Ltd.: | Particulars | Aditya Ltd. (₹) | Anjal…Preview