CBSE Class 12 Accountancy: Tools for Analysis of Financial Statements
For companies, investors, and stakeholders as well as for financial decisions, financial statements form the backbone. Raw financial data, meantime, is not always clear-cut. Analyzers employ several tools for financial statement analysis in order to get important information. Covering important tools, their relevance, and their application—as discussed in the CBSE Class 12 Accountancy Notes on Tools for Financial Statement Analysis—this blog investigates
Knowledge of Financial Statement Analysis
Analyzing financial data helps one to evaluate the financial situation and performance of a company. It guides decisions by pointing up patterns, areas of strength and weakness.
The main instruments applied in financial statement analysis consist on:
1. Comparative Financial Notes
2. Common Size References
3. Ratio Study
Four: Cash Flow Statements
Let us closely explore every one of these instruments.
1. Comparative Financial Reports
Comparative financial accounts show financial data for several periods, which facilitates the identification of patterns and evaluation of development. Their numbers indicate changes in both absolute and percent terms.
Styles of Comparative Financial Statements. Comparative Balance Sheets
aids in the analysis of over time changes in assets, liabilities, and shareholder equity.
Percentage change follows this formula:
Percentage Change = \frac{\text{ Current Year Figure – Previous Year Figure}{text{Previous Year Figure}} \times 100
2. Statement of Comparative Profit and Loss
shows variations over several years in income, expenses, and profits.
helps evaluate trends in profitability.
Illustration of a Comparative Balance Sheet
The Value of Comparative Financial Statements
helps to simplify difficult financial information.
Notes developments and trends in important financial spheres.
Helps with intra- and inter-firm comparability.
2. Common Size Statements
Common size statements translate every item in financial statements as a proportion of a common base. One name for this method is vertical analysis.
Different Common Size Statement Forms
1. Standard Size Balance Sheet
Every item is displayed as a percentage of overall liabilities or assets.
Helps evaluate financial structure and asset composition.
2. Profit & Loss Common Size Statement: Common Size
Every thing is stated as a proportion of operational income.
Applied in analysis of profitability and cost effectiveness.
Typical Common Size Balance Sheets
Common Size Statements: Significance
promotes, regardless of size, comparison between businesses.
Emphasizes throughout time changes in financial structure.
aids in industry standard benchmarking.
3. Ratio Examination
By means of correlations between several financial statement elements, ratio analysis is a method applied to assess financial performance.
Ratios of Different Types
Ratios of liquidity help to assess short-term financial situation.
Current Ratio = Current Assets / Current Liabilities
Current Assets less Inventory / Current Liabilities: Quick Ratio
2. Solventness Ratios: Evaluate long-term financial stability.
Ratio of Debt to Equity: Total Debt / Equity of Shareholders
EBIT divided by Interest Expenses is Interest Coverage Ratio.
Review operational efficiency using activity ratios.
Cost of Goods Sold / Average Inventory = Inventory Turnover Ratio
Net Credit Sales / Average Trade Receivables = Debtors Turnover Ratio
4. Profitfulness Ratios: Indicate efficiency and profitability.
Gross Profit Ratio = (Gross Profit / Operation Revenue) × 100
Net Profit Ratio = (Net Profit / Operation Revenue) × 100
Example of Ratio Analysis
Value of Ratios Analysis
highlights financial strengths and shortcomings.
lays a foundation for performance comparison.
Aids in guiding loan and investment decisions.
4. Statements of Cash Flow
A cash flow statement displays throughout a given period financial inflows and outflows. It arranges financial flows into:
1. Core company operations constitute operating activities.
2. Investing Activities: Acquiring assets and investments either bought or sold.
3. Financing Activities: Debt and equity transaction issuing and repayment.
Significance of Statements of Cash Flow
Shows operational and investment cash available.
facilitates liquid management.
offers understanding of the financial consistency of a company.
Important Variations Between Approaches of Financial Analysis
Final Thought
Making wise judgments and knowing the financial situation of a firm depend on an awareness of it through financial statement analysis. For stakeholders, comparative comments, common size statements, ratio analysis, and cash flow statements offer insightful information that will enable them to assess stability, profitability, and efficiency.
Mastery of these techniques will enable CBSE Class 12 students to lay a strong basis in financial analysis, therefore preparing them for advanced study in business management, finance, and commerce.
