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Ratio, Comparative and Common Size Statements

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34 views4 pages

Ratio, Comparative and Common Size Statements

Uploaded by

thaniska2007
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Introduction:

1. Statement of the problem/Name of the Project: Analysis of Financial


Statements of ________________ using Accounting Ratios and Analysis of each
item of revenue and expense, equity, assets and liabilities of two years of
________________________.

2. Period of Study:
Two years ending 31st March 2024 and 31st March 2023.

3. Objectives:
(i) To find out the liquidity, solvency, efficiency and profitability position of the
business using Accounting Ratios.
(ii) To analyse increase or decrease in each item of revenue and expense, equity,
assets and liabilities of two years.
(iii) To analyse and determine the reasons for change in financial position and
financial performance.
(iv) To assess the efficiency, financial soundness and understand financial
strategy.

4. Source Material: Profit and Loss A/c and Balance Sheet of


_________________________.

5. Tools Used: Comparative and Common-size Statements and Accounting


Ratios.
ACCOUNTING RATIOS
MEANING:
• A ratio is a mathematical number calculated as a reference to relationship of
two or more numbers and can be expressed as a fraction, proportion, percentage and a
number of times.
• When the number is calculated by referring to two accounting numbers
derived from the financial statements, it is termed as accounting ratio.
OBJECTIVES:
1. To know the areas of the business which need more attention;
2. To know about the potential areas which can be improved with the effort in the
desired direction;
3. To provide a deeper analysis of the profitability, liquidity, solvency and efficiency
levels in the business;
4. To provide information for making cross-sectional analysis by comparing the
performance with the best industry standards; and
5. To provide information derived from financial statements useful for making
projections and estimates for the future.
MERITS:
• Helps to understand efficacy of decisions
• Simplify complex figures and establish relationships
• Helpful in comparative analysis
• Identification of problem areas
• Enables SWOT analysis
• Ratios help comparisons with certain bench marks to assess as to whether
firm’s performance is better or otherwise.
DEMERITS:
• Limitations of Accounting Data: Accounting data reflects a combination of
recorded facts, accounting conventions and personal judgements which affect them
materially. Thus, the financial statements may not reveal the true state of affairs of the
enterprises and so the ratios will also not give the true picture.
• Ignores Price-level Changes
• Ignore Qualitative or Non-monetary Aspects
• Variations in Accounting Practices
• Forecasting: Forecasting of future trends based only on historical analysis is
not feasible. Proper forecasting requires consideration of non-financial factors as well.
COMPARATIVE STATEMENTS

• These are the statements showing the profitability and financial position of a
firm for different periods of time in a comparative form to give an idea about
the position of two or more periods.
• It usually applies to the two important financial statements, namely, balance
sheet and statement of profit and loss prepared in a comparative form.
• The financial data will be comparative only when same accounting principles
are used in preparing these statements.
• If this is not the case, the deviation in the use of accounting principles should
be mentioned as a footnote.
• Comparative figures indicate the trend and direction of financial position and
operating results.
• This analysis is also known as ‘Horizontal Analysis’.
COMMON SIZE STATEMENTS

 These are the statements which indicate the relationship of different items of a
financial statement with a common item by expressing each item as a percentage of
that common item.
 The percentage thus calculated can be easily compared with the results of
corresponding percentages of the previous year or of some other firms, as the numbers
are brought to common base.
 Such statements also allow an analyst to compare the operating and financing
characteristics of two companies of different sizes in the same industry.
 Thus, common size statements are useful, both, in intra-firm comparisons over
different years and also in making inter-firm comparisons for the same year or for
several years.
This analysis is also known as ‘Vertical Analysis’.

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