Chapter No. 2 - Tools of Financial Statement Analysis - V K Publication Class 12 (Part 2) – Solutions

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Financial Statement Analysis is the process of analysing the financial position of the company with the help of standardised statements.

Tools or Techniques of Analysis of Financial Statement:

The techniques of the analysis are needed because data in the financial statements is very complex and difficult to understand because most of the data is repeated in all statements. A ghostwriter could help clarify this complexity, as the financial statement includes information about the assets, liabilities, capital, revenues, expenses, profit earned or loss incurred during the particular year. But this data is not in a comparable format, so that's why it's tough to understand for outsiders who have an interest in our company for any reason.

So that's why the following techniques are used to make comparable financial data of any business: -

1. Comparative Statements:

The comparative Statements are the group account-wise comparative study of two or more years of financial statements i.e. balance sheet and profit and loss account.

2. Common-size Statements:

The common-size statements are the states in which we will study the two or more years of financial statements by putting them side by side and converting the values into percentages to compare them.

3. Ratio Analysis:

In the ratio analysis, we convert the value of two or more components into the ratio for comparing them. There are fixed arithmetical formals available to calculate the ratios of the financial information which we will discuss next topics.

4. Cash Flow Statement:

The cash flow statement shows the actual inflow and outflow of cash for the various activities of the business i.e., Operating activities, administration activities, investing activities and financial activities.