Maharashtra Board Class 12 Book Keeping and Accountancy Chapter 9 Analysis of Financial Statements PDF Download

Analysis of Financial Statements

Content

9.1 Meaning, Objectives and Limitations of Financial Statement Analysis.

9.2 Tools for Financial Statement Analysis

9.2.1 (A) Comparative Statement

9.2.2 (B) Common Sized Statement

9.2.3 (C) Cash Flow Statement

9.3 Meaning, Objectives and Classification of Accounting Ratios.

Competency Statements

The students will be able to:

Understand the meaning, objectives and limitation of financial statement analysis

Learn various tools for Financial statements analysis

Understand objectives and classification of Accounting Ratios and Ratio analysis

Introduction to Ratios

(A) Balance Sheet Ratio: (1) Current Ratio

(2) Liquid Ratio

(B) Income Statement Ratio: (1) Gross Profit Ratio

(2) Operating Profit Ratio

(3) Net Profit Ratio

(4) Operating Ratio

(C) Combined/Mixed Ratio: (1) Return On Capital Employed (ROCE)

(2) Return on Investment (ROI)

9.1 Meaning

The Financial Statements are those which are prepared periodically. Generally at the end of financial year all the information recorded in the Books of Accounts of business is summarized in Financial Statements.

"The Statements which are prepared by the business to find out profitability, efficiency, solvency, growth of business to judge the financial strength and status are called as Financial Statements." These statements give complete picture of financial positions and managerial performance. Financial Statements are prepared for the purpose of presenting Annual Report.

The Financial Statements are prepared by the profit concern as well as Non Profit concern organisations.

There are two important Financial Statements.

(1) Balance Sheet / A Position Statement

(2) Profit and Loss A/c / An Income Statement

Financial Statement analysis includes two aspects

(a) Analysis of Data: It provides methodical classification of financial statement

(b) Interpretation of Data: It means explanation of meaning and significance of data.

Objectives of Financial Statement Analysis

The Financial Statements are the source of information to various users e.g. Share holders, Investors, Suppliers, Govt, etc. The main objectives of Financial Statement are as follows:

(1) To help in planning

(2) To assist in estimating the earnings of business.

(3) To assist in investment making decision

(4) To help management in assessing the efficiency of the organisation.

(5) To provide financial information about economic resources.

(6) To provide information about changes in net resources arising out of business activities.

(7) To disclose other information that is relevant to the need of the users of the Financial Statement.

Thus the objectives of Financial Statement is to provide information about the financial position, performance and changes in financial position of an enterprises that is useful to wide range of users in making economic decisions.

Limitations of Financial Statement Analysis

Financial Statement is a powerful mechanism which helps in ascertaining the strength and weakness in the operations and financial position of an enterprise. Analysis of financial statements depends upon the data and information supplied by the Financial Statement about the economic result and financial position of the business.

The main limitations of the analysis of Financial Statement are:

(1) Qualitative informations are ignored: Only the information which can be represented in monetary terms are shown in financial statement. Other important feature relating to quality which cannot be expressed in monetary terms are ignored. Such as goodwill, harmony, efficiency of management, competitions etc.

(2) Historical cost: Financial statements are prepared on historical cost and book values of Assets. They do not present the effect of change in prices.

(3) Based on accounting concepts and conventions: Financial Statements are prepared on the basis of certain accounting concepts and conventions. This means that these statements are far away from reality and there analysis cannot be of much use.

(4) Influenced by personal judgment: Financial Statements and conclusions are affected by personal decisions. There are so many items which are decided by accountant themselves. For example: Depreciations method, valuation of stock, writing off of deferred expenses etc.

(5) Being Uncomparable: Differences in date of preparation, nature of business, method of Accounting etc. make the financial statement uncomparable.

Teacher's Note

Financial Statements help us understand how a business is doing. Just like a report card shows your progress in school, a financial statement shows how a company is doing in making money.

Exam Trick

Remember: Financial Statement = health report of business. It shows assets, liabilities and profit or loss. Think of it like checking your bank balance to know your money status.

Points to Remember

Financial Statements are prepared at the end of the year.
They show profitability, efficiency and solvency of business.
Balance Sheet shows assets and liabilities.
Income Statement shows profit and loss.
Analysis means studying these statements to understand business health.

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