Analysis of Financial Statements
Class 12 Accountancy · Accountancy Part II · Chapter 4
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हिंदी (आधार)
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Physics
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हिंदी (ऐच्छिक)
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Physics
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Chemistry
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Biotechnology
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Business Studies
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Business Studies
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Economics
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Economics
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History
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History
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History
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Geography
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Geography
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Geography
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Political Science
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Sociology
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Sociology
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Home Science
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Home Science
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Summary
Analysis of financial statements is the process of critically evaluating the information in the financial statements to understand the operations of a firm and to make decisions about it. It studies the relationship among various financial facts and interprets them to gain insight into the firm's profitability and operational efficiency. The term includes both analysis, the methodical classification and simplification of data, and interpretation, the explanation of its meaning and significance; the two are complementary. Financial analysis is useful to finance managers, top management, trade payables, lenders, investors, labour unions and others, each with a different purpose. The main tools are comparative statements, common-size statements, trend analysis, ratio analysis and cash-flow analysis. Comparative statements, a form of horizontal analysis, show the figures for two or more periods together with the absolute and percentage changes between them. Common-size statements, a form of vertical analysis, express each item as a percentage of a common base—revenue from operations for the statement of profit and loss and total assets for the balance sheet—so that firms of different sizes can be compared. Trend analysis studies the percentage change in items over several years relative to a base year. Financial analysis is limited because it ignores price-level changes and qualitative factors, and depends on the reliability of the underlying statements.
Meaning and significance of financial analysisTools of financial analysisComparative statements (horizontal analysis)Common-size statements (vertical analysis)Trend analysis and limitations
Key terms
Financial Statement Analysis
The critical evaluation of financial information to understand a firm's operations and make decisions about it.
Comparative Statements
Statements showing the figures of two or more periods side by side with the absolute and percentage changes; a form of horizontal analysis.
Common-size Statements
Statements expressing each item as a percentage of a common base; a form of vertical analysis.
Trend Analysis
A technique that studies the percentage change in items over several years in relation to a base year.
Horizontal Analysis
Analysis comparing financial data across two or more periods, as in comparative statements.
Vertical Analysis
Analysis expressing items as a proportion of a common base within a single period, as in common-size statements.
Extra questions & answers
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Analysis of financial statements means: