Page 36 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 3: Analysis of Financial Statements

Stock 1,29,000 2,00,000 32.25 25 Notes
Quick assets 46,000 2,00,000 11.5 25
4,00,000 8,00,000 100 100
Liabilities
Share capital 2,00,000 3,00,000 50 37.5
Reserves and surpluses 1,00,000 2,00,000 25 25
Bank overdraft 60,000 2,00,000 15 25
Quick liabilities 40,000 1,00,000 10 12.5
4,00,000 8,00,000 100 100
The above illustration highlights the share of every component in the balance sheet out of the
total volume of assets and liabilities.
This will certainly facilitate the firm to easily understand not only the share of every component
but also facilitates to have a meaningful and relevant comparison with various time horizons.

Self Assessment

State whether the following statements are true or false:
7. Common-size financial statements are a widely used vertical analysis technique.
8. A common-size income statement usually shows each revenue or expense item as a
percentage of net sales.

3.4 Comparative Statements

Comparative statements are the financial statements which follow a consistent format but which
cover different periods of time. Comparative statements are very useful for spotting trends.

Objectives of Comparative Financial Statements

1. Changes taken place in the financial performance are taken into consideration for further
analysis.
2. To reveal qualitative information about the firm in terms of solvency, liquidity profitability
and so on are extracted from the analysis of financial statements.
3. With reference to yester financial data of the enterprise, the firm is facilitated to undergo
for the preparation of forecasting and planning.
The major part of financial statement analysis is mainly focused on the comparative analysis.

3.4.1 Comparative Balance Sheet

The first and foremost important step is to have the following information and should take
preparatory steps:

1. While preparing the comparative statement of balance sheet, the particulars for the financial
factors are required.
2. The second most important for the preparation of the comparative balance sheet is yester
financial data extracted from the balance sheet or balance sheets.
3. The next most important requirement to have an effective comparison with the yester
financial data is current year information extracted from the balance sheet or balance sheet
of the firms.

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