Accountancy for Class 12, Part 1, Chapter 4 Analysis of Financial Statements

Learn CBSE Accountancy Index Terms for Class 12, Part I, Chapter 4 Analysis of Financial Statements

1. Analysis of Financial Statements – Financial statement analysis is the most common way of checking on and examining an organisation’s fiscal statements to settle on better financial choices to procure income in the future. These statements incorporate the balance sheet, statement of cash flows, notes to accounts, a statement of changes in equity, and income statements.

In other words, the practice of going over and evaluating a company’s financial statements in order to improve business decisions and generate income in the future.

2. Financial Analysis – Financial analysis is the method involved in assessing an organisation’s activities, financial plans, and other money-related exchanges and transactions to decide their suitability and performance. Normally, financial analysis is used to examine whether an organisation is steady, liquid, solvent, or sufficiently productive to warrant a money-related venture.

3. Comparative Statements – A comparative statement is a report used to contrast and compare a specific budget summary and earlier period statements. Past financials are presented alongside the most recent figures next to each other in sections or columns, empowering financial backers to recognise patterns, track an organisation’s advancement and compare it and industry rivals.

4. Common Size Statements – An income statement with a common size is one in which each line item is expressed as a proportion of revenue or sales. It is used for vertical analysis, in which each line item in the financial statement is portrayed as a percentage of a base figure in the statement.

Common size financial statements are useful for analysing, comparing, and contrasting a company’s performance, throughout a range of time periods with various sales figures. The performance of the company in relation to its competitors can, therefore, be ascertained by comparing the common size percentages.

5. Trend Analysis – Trend analysis includes gathering information and data from various periods, and plotting the collected data on a horizontal line to track down significant patterns from the given data. In finance, trend analysis is utilised for specialised investigations or technical analysis and accounting analysis of inventory or stock.

6. Ratio Analysis – Ratio analysis is the study or analysis of the line items present in the financial statements of the company. It can be used to clarify various factors of an organisation, such as liquidity, solvency, efficiency, and profitability of the business or of an organisation.

Ratio analysis is mainly performed by external analysts as financial statements are the primary source of information for external analysts. These analysts are most likely to depend on past and current financial statements to acquire important information and data for analysing the company’s financial performance. The information or data thus acquired in the course of the analysis is helpful in determining whether the financial position of a company is deteriorating or improving.

7. Cash Flow Analysis – Cash flow analysis is concerned with the cash inflows in an association and business obtained from operating, investing, and financing activities. In other words, one can say that it decides the manner in which the organisation acquires money.

It estimates how much money is created, generated, and spent on the business during a given accounting period. While performing a cash flow analysis, the business needs to really take a look at all the line items that go under the three cash flow categories or classes to see whether the progression of capital is coming in or going out.

8. Inter-firm Comparision – Inter-firm comparison is the method that studies the efficiencies, costs, profits, and performance of various businesses in an industry, with the help of an exchange of data and information, in order to have a relative comparison.

In other words, inter-firm comparison means a comparison of two or more similar organisations with the objective of finding a competitive position to improve the efficiency, productivity, and profitability of those business organisations. Thus, an inter-firm comparison is a technique used by the management or a business to compare its financial results and operating performance with those of similar businesses engaged in the same industry.

9. Intra-firm Comparision – Intra-firm comparison means a comparison of two or more divisions or departments within the organisation itself with the purpose of meaningful scrutiny in order to improve the operational effectiveness of all the divisions or departments.

Both the intra-firm comparison and inter-firm comparison have similar objectives. The comparison may cover the operating results, financial position, or both.

10. Horizontal Analysis – Horizontal analysis is concerned with the comparison of an item of the financial statement of one period or a period to its corresponding item of the base accounting period. Its primary aim is to ascertain the change in an item during an accounting period. The change in the item is portrayed either in absolute figures or in percentage, or in both terms. It indicates the growth or decline of the item.

11. Vertical Analysis – Vertical analysis is concerned with the comparison of items on the financial statement to the common item of the same accounting period. The main aim is to ascertain the proportion or percentage of items to the common item of the same accounting period. The change in the item is portrayed either in the form of a ratio or in percentage terms. It assists in determining and predicting the future relative proportion of an item to the common item.

We hope that the offered Accountancy Index Terms for Class 11 with respect to Part 2, Chapter 4: Analysis of Financial Statements will help you.

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