This GSEB Class 12 Commerce Accounts Notes Part 2 Chapter 4 Analysis of Financial Statements covers all the important topics and concepts as mentioned in the chapter.
Analysis of Financial Statements Class 12 GSEB Notes
The last stage of financial accounting system is to prepare financial statements. In this stage, income statement and balance sheet are included. Financial statements provides the information about results of different aspects of financial condition of an unit. The information shown in the financial statements are useful to parties which are connected in present and likely to join in future with the business units, i.e. directors, present and future investors, money lender, short term creditors, employees, customers, government and analysis. Analysis of financial statement is necessary types, to make information more clear and explanable. In this chapter we will study about meaning, objectives, advantages, limitations and stages of financial analysis and two important tools (comparative and common size) of analysis of financial statements.
Financial Analysis:
The interpretation of information or results given in financial statements is known as financial analysis.
Tools of Analysis of Financial Statement:
For the analysis of financial statement, different tools are developed in accounting and analysis process in done with the use of them where common size, financial statements, comparative statements and ratio analysis are included.
Comparative Statements:
Through financial statements of different times, method showing the trends of changes in economic situation and profitability is known as comparative statements method.
In this method of financial statement analysis, following matters are included.
- Here, comparison of income statements and balance sheets of two years or more than two years are done.
- In the comparison of previous year we can know about percentage and rupees increase/decrease in a respectives data of current year.
- We can know about the trend of development of a business unit.
- This comparison is done in horizontal form. Thus it is known as horizontal analysis to financial statements.
- By following formulas, we can finding out the necessary missing data.
(a) On the basis of previous year and current year data :
- Amount of change (increase/decrease) = Amount of current year – Amount of previous year
- Percentage of change (increase/decrease) = \(\frac{\text { Amount of Change(increase/ decrease) }}{\text { Amount of Previous year }}\) × 100
(b) To find out amount and change in amount of current year on the basis of amount and precentage of previous year :
Amount of current year = Amount of previous year × \(\frac{(100+\text { Change in Percentage })}{100}\)
OR
Change in amount = Amount ol previous year × \(\frac{\text { Change in Percentage }}{100}\)
(c) To find out amount and change in amount of previous year on the basis of amount and percentage change of current year :
Amount of previous year = Amount of current year × \(\frac{100}{(100+\text { Change in Percentage })}\)
OR
Change in amount = Amount of current year × \(\frac{\text { Change in Percentage }}{(100+\text { Change in Percentage })}\)
Common Size Statements:
This method is used to know the change of trend in the data of different accouns shown in balance sheet and in income statements in proportion of assets and in proportation of total sales of a business unit.
In this method, the following points are included :
- Comparison of balance sheet and income statement are done for two years or more than two years.
- Net sales is taken as base for income statement and total of balance sheet is taken as base for balance sheet. It is considered as 100%.
- In income statement, precentage found for revenue, expenses and taxes for both previous and current year.
- Difference of both year percentage is used for analysis and interpretation.
- In balance sheet, precentage of both year (previous and current) for each liabilities and for each assets are found out.
- This statement is also known as 100 percentage statement.
- This analysis is done in the vertical form. Thus, it is known as vertical analysis of financial statements.
- By following formulas missing data are found out.
Common Size Statement of Profit and Loss Statement :
- Proportion of Revenue/expenses to Sales = \(\frac{\text { Amount of revenue/expenses }}{\text { Amount of total sales in rupees }}\) × 100
- Revenue/expenses amount in rupees = \(\frac{\text { Total amount of sales } \times \text { Percentage of revenue/expenses }}{100}\)
Common Size Statement of Balance Sheet:
- Proportion of Assets/Liabilities to total of Balance Sheet = \(\frac{\text { Amount of Liabilities / Assets in Rupees }}{\text { Amount of total of Balance Sheet of respective year }}\) × 100
- Amount of Liabilities/Assets of respective year = \(\frac{\text { Total of Balance Sheet of percentage of respective year} \times \text { Precentage of respective Liabilities Assets }}{100}\)
While preparing comparative financial statements. The following points are taken into consideration :
- If any changes (increase/decrease) obtain negative in any data of financial statement then that amount shown in bracket ( ).
- In income (Profit and Loss) statement, if the for rate for both the year is same then percantage chage in profit before tax, tax and profit after tax will be same.
- In balance sheet statement total amount of change on equity side will be sameas total amount of change on assets side. So percentage change will also be same.
Following points to be considered while preparing income (profit and loss) statement.
- If only sales amount is given in income statement then total of percentage of total expense and percentage of profit before tax will be 100%.
- If other incomes are given in income statement except sales then these incomes are included in profit before tax so proportion of profit increases. But to find out precentage of profit before tax, sales is taken as base. So, total of percentage of total expenses and percentage of profit before tax is never comes to 100%.