TS Grewal Solution Class 12 Chapter 2 Financial Statement Analysis

Question 14. One of the objectives of Financial Statement Analysis is to identify the reason for change in the financial position of the enterprise states two more objectives of this analysis.

Question 15. One of the objectives of Financial Statement Analysis is to Judge the ability of the firm to repay its debts and assessing the short term as well long term liquidity position of the firm state two more objectives of this analysis.

Question 16. What is meant by Solvency of Business?

Question 17. How the Solvency of Business is assessed by Financial Statement Analysis?

Question 18. How the earning capacity of a business is assessed by Financial Statement Analysis?

Question 19. State any two limitations of Financial Statement Analysis?

(a) Historical Analysis

(b) Ignores Price Level Changes

Question 20. How Window dressing become a limitation of Financial Statement Analysing?

Question 21. How does subjectivity become a limitation of Financial Statement Analysis?

Question 22. Name any two parties interest in Financial Statement Analysis?

(a) Suppliers or Creditors

(b) Bankers and Lenders

Question 23. State why Shareholders are intrusted in Financial Statement Analysis?

Question 24. State why creditors are intrusted in Financial Statement Analysis?

Question 25. State the intrust of trade unions in Financial Statement Analysis?

Question 26. State the Management of trade unions in Financial Statement Analysis?

Question 27. How Qualitative aspects are ignored in Financial Statement Analysis?

Question 28. How the Financial Statement Analysis is useful to Financial Manager?

In order to determine the rate of division and to identify the primary profit drivers and business risk in order to evaluate the profit potential of the company, financial managers find financial statement analysis to be helpful.

Question 29. State the significance of Analysis of Financial Statements to the lenders?

The importance of financial statement analysis to lenders or bankers is in servicing loans given to businesses, which involves timely principal and interest repayment.

Question 30. State the significance of Analysis of Financial Statements to the Creditors?

The importance of the analysis of financial statements to "Creditors" is that they are concerned with the firm's capacity to satisfy its immediate obligations and its short-term solvency situation.

Question 31. State one advantage of Financial Statement Analysis?

Finding the main profit generators is one benefit of financial statement analysis.

Question 32. State any one limitations of Financial Statement Analysis?

One drawback of "Analysis of Financial Statements" is the analysis's lack of consideration for quality factors including management, personnel, and public relations.

Short Answer Type Questions:-

Question 1. What is meant by analysis of financial statements? State any two objectives of financial analysis.

Financial statement analysis is the systematic analysis of the financial data in the financial statements for the purpose of understanding and making decisions about the business operations.

The lists of two objectives of analyzing the Financial Statements are:

(a) lnter-firm Comparison:- With the use of financial analysis, becomes simple. If mergers and acquisitions are to be taken into consideration, it assists in evaluating their own performance as well as that of others.

(b) Forecasting and Preparing Budgets:- Analysis of previous financial statements aids in forecasting future changes, particularly for the coming year.

Question 2. What is meant by analysis of financial statements? State any two limitations of financial analysis.

Financial statement analysis is the systematic process of analyzing the financial data contained in the financial statements in order to comprehend and decide on the operations of the business.
The following are three disadvantages of Analysis of Financial Statements:

(a) Variation in Accounting Practices: It is essential that the accounting practices used by the firms do not significantly differ in order to conduct an inter-firm comparison. It is impossible to compare the financial statements of different firms meaningfully since different firms may use different accounting techniques.

(b) Window Dressing refers to the practice of altering the books of accounts to reflect a better financial state than what it truly is. Due to this circumstance, consumers of financial analysis may receive inaccurate information.

Question 3. Briefly explain the various financial statement analysis techniques.

The various Financial Statement Analysis techniques are explained below: 

Comparative Statement Financial statements' specific elements or components are compared in comparative statements. In order to make comparisons easier, the balance sheet and the statement of profit and loss from two or more years are shown side by side, together with changes in the amounts in absolute and percentage terms.

Common-Size Statements are those that compare the individual components of financial statements from two or more years side by side before converting them into percentages using a common base. In the case of a common-size balance sheet or statement of equity and liabilities, the base typically used is total assets, while in the case of a common-size statement of profit and loss, the base typically used is revenue from operations. Assuming a total of 100 for assets, equity, and liabilities, the balance sheet's figures are always expressed as a percentage of this sum. Similar to this, in the Statement of Profit and Loss, Net Sales, or Revenue from Operations, is assumed to be 100 and all amounts are expressed as a percentage of Net Sales.

Ratio Analysis: Ratio analysis is a crucial approach for analyzing financial statements, namely the balance sheet and the statement of profit and loss. A ratio is an arithmetic description of the relationship between two linked or interdependent components of financial statements of an accounting period.

Cash Flow The flow of cash and cash equivalents during the accounting period is shown in the statement, which is broken down into operating, investing, and financing activities. It displayed the sources from which money is received or produced as well as the uses to which it is put. Additionally, it displays the evolution of the cash position over time.

Question 4. State any three advantages and three limitations of Analysis of Financial Statements.

The following are three advantages of Analysis of Financial Statements:

(a) Assessing the Earning Capacity or Profitability: Financial analysis can be used to determine an enterprise's earning potential. Additionally, an estimate of the company's profit potential for the upcoming years is possible. Earning capacity and forecasts are of interest to all external consumers of financial statements, particularly investors and potential investors.

(b) Inter-firm Comparison using the use of financial analysis is simple. If mergers and acquisitions are to be taken into consideration, it assists in evaluating both their own performance and that of others. 

(c) Explainable and Understandable: Users of financial statements can better grasp complex topics by using financial analysis to break them down. Charts and diagrams, which are simple to explain and comprehend, can be used to increase the comprehensiveness of financial data.

The following are three disadvantages of Analysis of Financial Statements:

(a) Variation in Accounting Practices: It is essential that the accounting practices used by the firms do not considerably differ in order to conduct an inter-firm comparison. A meaningful comparison of their financial statements is impossible since various firms may use different accounting processes.

(b) Window Dressing refers to the practice of altering the books of accounts to reflect a better financial state than what it truly is. Due to this circumstance, consumers of financial analysis may receive inaccurate information. 

(c) Identifies Symptoms: Financial analysis can spot the signs of issues but cannot diagnose them. The management needs to find a solution to the issues.

Question 5. List any three objectives of analysing the Financial Statements.

The list of three objectives of analysing the Financial Statements is:

(a) lnter-firm Comparison using the use of financial analysis is simple. If mergers and acquisitions are to be taken into consideration, it assists in evaluating both their own performance and that of others. 

(b) Forecasting and Preparing Budgets: Analysis of previous financial statements aids in forecasting future changes, particularly for the coming year.

(c) Explainable and Understandable: Users of financial statements can better grasp complex topics by using financial analysis to break them down. Charts and diagrams, which are simple to explain and comprehend, can be used to increase the comprehensiveness of financial data.

Question 6. What is meant by analysis of financial statements? How is useful for Creditors, Management, Investors, Employees, Government and Customers.

Financial statement analysis refers to a methodical process of analyzing the financial data in the financial statements to comprehend and make judgments about the business operations. It is beneficial for 

(a) Creditors: The ability of a company to satisfy its short-term solvency obligations may be ascertained with the use of financial statements, which is why creditors or suppliers of goods are interested in financial statement analysis. They determine whether or not to grant credit to the firm based on their findings.

(b) Management: In order to determine the general as well as segment-specific effectiveness of the firm, management is interested in the analysis of financial statements. Additionally, it aids management in self-evaluation, control, and decision-making. 

(c) Investors: Investors, owners, or shareholders put their own money into the business. They are therefore concerned with the success and security of their investments. They want to know if the company is profitable, has room to develop, and is making the expected progress. The ability of a business to grow aids in the investment's appreciation. 

(d) Employees: Employees or Trade Unions are interested in the analysis of financial statements since it will result in higher compensation, job security, and working conditions. 

(e) Government: The legality of the business and the advancement of society are matters of importance to the government. It is concerned with making sure that the enterprise's tax liabilities are properly assessed in accordance with the rules that are now in effect.

(f) Customers: Customers are interested in learning about an enterprise's future, especially if they depend on it or have a long-term relationship with it.

Question 7. What is meant by analysis of financial statements? What is importance of Shareholders and Employees?

Financial Statement Analysis means a systematic process of analysing the financial information in the financial statements to understand and make decisions regarding the operations of the enterprise.

The importance of Analysis of Financial Statements to shareholders and employees are given below: 

(a) Shareholders: Shareholders  or  Owners  or  Investors  invest  their  savings  in  the  enterprise. Therefore, they are interested in profitability and safety of their investments. They would like to know whether the business is profitable, has growth potential and its progress is on expected lines. Growth potential of business helps in appreciation of their investment.

(b) Employees: Trade Unions or Employees are interested in the Analysis of Financial Statements in their better working conditions, security of their jobs and better wage payments.

Question 8. Briefly explain of the limitations of financial statement analysis?

The following are the brief explanation of the limitations of Financial Statement Analysis:

(a) Variation in Accounting Practices: For inter-firm comparison. it is necessary that accounting practices followed by the firms do not vary significantly. As there may be variations in accounting practices followed by different firms, a meaningful comparison of their financial statements is not possible.

(b) Window Dressing refers to the presentation of a better financial position than what it actually is by manipulating the books of account. On account of such a situation, financial analysis may give false information to the users.

(c) Identifies Symptoms: Financial analysis identifies symptoms of the problems but does not offer its diagnosis. The management has to look for the remedy to rectify the problems.

(d) Historical Analysis: Financial statement analysis is a historical analysis. It analyses what has happened till date. It does not reflect the future. Persons like shareholders, investors, etc., are more interested in knowing the likely position in future.

(e) Ignores Price Level Changes: Price level changes and purchasing power of money are inversely related. A change in the price level makes analysis of financial statements of different accounting years invalid because accounting records ignore change in value of money.

(f) Quality Aspect Ignored: Since the financial statements are confined to monetary matters alone. The qualitative aspects like quality of management, quality of staff, public relations are ignored, while carrying out the analysis of financial statements.

(g) Suffers from the Limitations of Financial Statements: Financial statement analysis is based on the data provided in the financial statements. As a result, this analysis has all the same flaws as the financial statements. Therefore, the conclusions drawn from the examination of the basic data in the financial accounts cannot be reliable if this data is not reliable.

(h) Not Free from Bias: The choice of the method of depreciation or the method of inventory value is one that the accountant frequently has to make. As a result, the financial statements are not objective because subjective judgment is a component of it.

Question 9. Difference between Intra-firm and Inter-firm analysis.

The following are the difference between Intra-firm and Inter-firm Analysis:

(a) lntra-firm Analysis: Intra-firm Comparison is the process of comparing an enterprise's financial characteristics over time. It is also known as trend analysis or time series analysis. It examines a company's performance over a period of years and displays the trends in financial variables. 

(b) lnter-firm Analysis: Inter-firm analysis is the comparison of two or more businesses or corporations. It examines and contrasts the financial metrics of two or more businesses or corporations to assess their competitiveness. Cross-sectional analysis refers to the process of comparing one set of financial statements from two different firms.

Question 10. Discuss the advantages of Financial statement analysis.

The advantages of Financial Statement Analysis are:

(a) Assessing the Earning Capacity or Profitability: Financial analysis can be used to determine an enterprise's earning potential. Additionally, an estimate of the company's profit potential for the upcoming years is possible. Earning capacity and forecasts are of interest to all external consumers of financial statements, particularly investors and potential investors. 

(b) Inter-firm Comparison: using the use of financial analysis is simple. If mergers and acquisitions are to be taken into consideration, it assists in evaluating both their own performance and that of others. 

(c) Explainable and Understandable: Users of financial statements can better grasp complex topics by using financial analysis to break them down. Charts and diagrams, which are simple to explain and comprehend, can be used to increase the comprehensiveness of financial data. 

(d) Assessing Managerial Efficiency: The study of the financial statements aids in determining the managers' areas of effectiveness and ineffectiveness. Any favorable or unfavorable variation can be found, and the causes can be determined to determine whether a manager is being efficient or inefficient. 

(e) Assessing the Short-term and Long-term Solvency of the Enterprise: Financial statement analysis can be used to evaluate an enterprise's long- and short-term solvency. The enterprise's short-term solvency or liquidity is of interest to creditors or suppliers. Debenture holders and lenders are curious to know the business's long-term viability in order to judge its capacity to pay back the principle and interest accrued. 

(f) Forecasting and Preparing Budgets: Analysis of previous financial statements aids in forecasting future changes, particularly for the coming year. Thus, an analysis aids in budget planning and forecasting.

Question 11. What is meant by financial statement analysis? How is important from the point of view of creditors and management?

Financial Statement Analysis means a systematic process of analysing the financial information in the financial statements to understand and make decisions regarding the operations of the enterprise.

It is important from the viewpoint of creditors and management as given below:

(a) Creditors: Creditors or Suppliers for goods are interested in Financial Statement Analysis to know the short-term solvency position of a firm, which is the ability to meet its short-term solvency of a firm can be determined with the help of financial statements. On the basis of analysis, they decide whether they should allow credit to the enterprise or not.

(b) Management: Management is interested in the Analysis of Financial Statements to ascertain overall as well as segment-wise efficiency of the business. It also helps the management in decision-making, controlling and self-evaluation.

Question 12. Explain the importance of financial analysis?

The importances of Financial Analysis are:

(a) Assessing the Earning capacity or Profitability: On the basis of financial analysis, the earning capacity of an enterprise can be assessed. In addition, the earning capacity of the enterprise.in coming years may also be forecast. All the external users of financial statements, especially investors and potential investors, are interested in earning capacity and forecast.

(b) lnter-firm Comparison becomes easy with the help of financial analysis. It helps in assessing their own performance as well as that of others, if mergers and acquisitions are to be considered.

(c) Explainable and Understandable: Financial analysis helps the users of the financial statements to understand the complicated matter in a simplified manner. Financial data can be made more comprehensive by charts and diagrams, which can be easily explained and understood.

(d) Assessing Managerial Efficiency: The financial statement analysis helps to identify the area where the managers have been efficient and the area where they have been inefficient. Any favorable or unfavorable variation can be identified and reasons thereof can be ascertained to pinpoint managerial efficiency or inefficiency.

(e) Assessing the Short-term and Long-term Solvency of the Enterprise: long-term and short-term solvency of an enterprise can be assessed on the basis of financial statement analysis. Creditors or suppliers are interested to know the short-term solvency or liquidity of the enterprise. Debenture holders and lenders are interested to know the long-term solvency of the enterprise to assess the ability of the company to repay the principal amount and interest thereon.

(f) Forecasting and Preparing Budgets: Past financial statement analysis helps in assessing developments in future, especially in the next year. An analysis thus helps in forecasting and preparing the budget.

Question 13. What is meant by financial statement analysis and what is the interest of Management and shareholders in such analysis.   

Financial statement analysis refers to a methodical process of analyzing the financial data in the financial statements to comprehend and make judgments about the business operations.

It is important from the viewpoint of creditors and management as given below:

Shareholders:- Investors, owners, or shareholders put their own money into the business. They are therefore concerned with the success and security of their investments. They want to know if the company is profitable, has room to develop, and is making the expected progress. The ability of a business to grow aids in the investment's appreciation.

Management:- In order to determine the general as well as segment-specific effectiveness of the firm, management is interested in the analysis of financial statements. Additionally, it aids management in decision-making, self-evaluation, and control.

Question 14. What is meant by financial statement analysis? How it is useful to investors and employees.

Financial Statement Analysis means a systematic process of analysing the financial information in the financial statements to understand and make decisions regarding the operations of the enterprise.

It is useful to investors and employees as given below:

(a) Investors: Shareholders or Owners or Investors invest their savings in the enterprise. Therefore, they are interested in profitability and safety of their investments. They would like to know whether the business is profitable, has growth potential and its progress is on expected lines. Growth potential of business helps in appreciation of their investment.

(b) Employees: Employees or Trade Unions are interested in the analysis of financial statements since it will result in higher compensation, job security, and working conditions.

Question 15. How financial statement analysis is useful to Potential investors and Tax Authorities.

Analysis of Financial Statements is useful to potential investors and Tax Authorities as given below:

(a) Potential Investors:- Investors, owners, or shareholders put their own money into the business. They are therefore concerned with the success and security of their investments. They want to know if the company is profitable, has room to develop, and is making the expected progress. The ability of a business to grow aids in the investment's appreciation.

(b)Tax Authorities:- The appropriate assessment of the enterprise's tax liabilities in accordance with the regulations that are currently in effect is important to tax authorities.

Question 16. How financial statement analysis is important to Government Authorities.

The legality of the business and the advancement of society are of importance to the government. It is concerned with making sure that the enterprise's tax obligations are properly assessed in accordance with the applicable rules. The government makes sure that taxes are paid on time.

Question 17. Why is financial statement analysis important to Creditors?

The ability of a company to satisfy its short-term solvency obligations may be ascertained with the use of financial statements, which is why creditors or suppliers of goods are interested in financial statement analysis. They determine whether or not to grant credit to the firm based on their findings.