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Class 12 Accounts Notes Chapter 2 Studyguide360 - 2

This document summarizes financial statement analysis. It discusses the meaning, objectives, types (horizontal and vertical), and significance of financial statement analysis. The key points are: 1) Financial statement analysis involves systematically studying relationships between financial factors in statements to understand a business's financial position. 2) Objectives include measuring profitability, financial strength, efficiency, and ability to pay obligations. 3) There are two types of analysis: horizontal compares figures over years, and vertical analyzes a single year's statements. 4) Financial statement analysis is significant for management, investors, creditors, government, employees, and customers to evaluate performance, risks, and prospects.

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78 views2 pages

Class 12 Accounts Notes Chapter 2 Studyguide360 - 2

This document summarizes financial statement analysis. It discusses the meaning, objectives, types (horizontal and vertical), and significance of financial statement analysis. The key points are: 1) Financial statement analysis involves systematically studying relationships between financial factors in statements to understand a business's financial position. 2) Objectives include measuring profitability, financial strength, efficiency, and ability to pay obligations. 3) There are two types of analysis: horizontal compares figures over years, and vertical analyzes a single year's statements. 4) Financial statement analysis is significant for management, investors, creditors, government, employees, and customers to evaluate performance, risks, and prospects.

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CHAPTER 2

FINANCIAL STATEMENT ANALYSIS

Meaning : Financial statement analysis is a systematic process of studying the


relationship among the various financial factors contained in the financial statements to
have a better understanding of the working and the financial position of a business.
"Financial Analysis consists in separating facts according to some definite plan,

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arranging them in groups according to certain circumstances and then presenting
them in a convenient and easily able and understandable form."
— Finney and Miller

Objectives or Purposes of Financial Statement Analysis

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· To measure the Profitability or Earning Capacity of the business

· To measure the Financial Strength of the business

· To make Comparative Study within the firm (intra-firm) and with other firms

·
(interfirm)
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To judge the Efficiency of Management
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· To provide Useful Information's to the Management

· To find out the Capability for payment of interest, dividend etc.


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· To measure the Short-term and Long-term Solvency of the business.

Financial Statement Analysis


· Based on basic financial statement which themselves suffer from certain limitations.
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· Ignores changes in price level.

· Affected by the personal ability and bias of the analyst.


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· Lack of qualitative analysis as only those transaction and events are recorded which
can be measured in terms of money.
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· When different accounting policies are followed by the two firms then comparison
between their financial statement becomes unreliable.
· Analysis of single year's financial statement have limited use.

· Also affected by the Window dressing

317 [Class XII : Accountancy]


Types of Financial Statement Analysis

There are two main approaches for the analysis of financial statements.

Horizontal Analysis: In this type of analysis, figure in the financial statements for two or
more years are compared and analysed. It helps in knowing the trends of the business
over a period of time. It is also known as Time series analysis or Dynamic Analysis.
Comparative statements and cash flow statements are example of horizontal analysis.

Vertical Analysis: In this type of analysis, figures in the financial statement for a single

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year are analysed. It involves the study of relationship between various items of Balance
Sheet or Statement of Profit & Loss of a single year or period. It is also known as Static
Analysis. Ratio Analysis relating to a particular accounting period are examples of this
type of analysis.

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Significance or Importance of Financial Analysis:

· For Management: To know the profitability, liquidity and solvency position; to


measure the effectiveness of its own decisions taken and to take corrective
measure in future.
·

·
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For Investors: Investors want to know the earning capacity and future growth
prospects of the business which helps in assessing the safety of their investment
and reasonable return.
For Creditors: Short-term creditors want to know the liquidity position of the
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business where as long term creditors want to know about the solvency
position and ability to pay the interest consistently.
· For Govt.: To know the profitability position for taking taxation decision and to
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take decisions about the price regulations.


· For Employees: To know the progress of the company for assessing bonus,
possible increase in wages and to ensure stability of their jobs.
· For Customers: To know about the continuance of the business in future.
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[Class XII : Accountancy] 318

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