Accounts or accountancy is an integral subject of the class 12 commerce, and analysis of financial statements class 12 forms an essential part of the accountancy syllabus of class 12. If you are thorough with your notes and prepare well, it can be scoring as well. Here in this blog, we shall discuss in brief what this chapter is all about. If you are preparing for your class 12 board, then it would be great for you. Read on to know more about the analysis of financial statements chapter in class 12.
Must Read: CBSE Accountancy Class 12
What is Financial Statement Analysis?
According to the chapter on analysis of financial statements class 12, a financial statement analysis numerically represents the relationship of one financial fact with the other to systematically measure the operational efficiency, solvency, profitability and the growth potential of the business. Listed below are certain types of financial statement analysis:
- External analysis
- Internal analysis
- Horizontal analysis
- Vertical analysis
- Long-term analysis
- Short-term analysis
What is the Process of Financial Statement Analysis?
Analysis of financial statements class 12 talks about the process of financial statement analysis. They are mentioned below.
- The first step involves the rearrangement of data
- Then, the comparison of data
- Followed by the analysis of data
- Conclusively, the interpretation of data
Importance of Financial Statement Analysis
Analysis of financial statements class 12 also discusses the importance or objectives of Financial Statement Analysis. They are mentioned below.
- Analyses the operational efficiency of businesses.
- Measures profitability.
- Measures short-term and long-term financial position.
- Indicates the trend of achievements.
- Assesses the growth potential of businesses.
We now look at the limitations of financial statement analysis according to the chapter analysis of financial statements class 12. They are mentioned below.
- Does not take into account certain essential qualitative aspects like quality of management, labour force and public relations.
- Financial statements are historical in character and hence do not show price level changes.
- The results may be misleading due to window dressing.
- The personal ability and bias of the analyst affects the financial statements.
Parties Interested in Financial Statement Analysis
The chapter on analysis of financial statements class 12 mentions the parties interested in the process of financial statement analysis. They are tabulated below along with their areas of interest.
|PARTY||AREAS OF INTEREST|
|Shareholders or Investors||· Financial Position
Future business prospects
|Management||Liability of the concern·
Short term and long-term solvency·
Short term and liquidity position
Short term and long term solvency
Tools of Financial Statement
Analysis of Financial Statements class 12 also talks about the tools of financial statement analysis. The most widely used techniques of financial analysis are listed below:
Comparative Financial Statement
It is used to compare the items of the income statement i.e. profit and loss account and position statement.
- Comparative income statement: It is a statement which shows in percentage term the total of income earned and expenses incurred during two or more accounting periods. Given below is the format of comparative income statement.
- Comparative balance sheet: It is a statement that represents the assets and liabilities of the business for two or more accounting periods. It also represents the percentage change in the monetary value of the assets and liabilities. Given below is the format of comparative balance sheet:
Common Size Statement
In these statements, figures are converted into percentage to a common base. Each percentage represents the relation of the individual item to the respective total.
- Common-size income statement : Sales figure is assumed to be 100 and all other figures are expressed as a percentage of sales. Demonstrated below is its format :
- Common-size balance sheet- The total of assets or liabilities is assumed to be 100 and figures are expressed as a percentage of the total. Demonstrated below is the format of the same:
This mathematical expression represents the relationships between various groups of items contained in the financial statements.
Cash Flow Statement
According to the chapter on the analysis of financial statements class 12, cash flow statement represents the inflows and outflows of cash and cash equivalents of an enterprise by classifying cash flows into operating, investing and financing activities during a particular period and analysing the reasons for changes in the balance of cash between the two balance sheets dates.
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