Page 217 - DMGT104_FINANCIAL_ACCOUNTING

Unit 9: Analysis and Interpretation of Financial Statements

Ratio Analysis Notes

This technique is based on the ratios. The ratios are the relationship among the different accounting
figures. Ratio analysis helps the management and different users of financial statements in
determining the profitability of business and the financial position of the business. Profitability,
solvency, liquidity and efficiency of the business can be easily determined by this analysis.

Break-even Analysis

This is an important technique of the management to take some decision. Under this analysis the
costs of production are divided into fixed and variable cost. From sales the fixed cost is subtracted
to find the contribution. On the basis of contribution, the break-even point (BEP) is determined.
It is that point of sales or production at which the company gains no profit, and suffers no loss.
Several managerial decisions as make or buy, shut down point, price determination, etc. are
taken with the help of break-even analysis.

Self Assessment

Fill in the blanks:
3. The …………………… are the relationship among the different accounting figures.
4. Cash flow analysis is also similar to …………………….

5. …………………… does not reveal the financial position of the business like the financial
statement but it reveals the changes in the working capital in two periods.

9.5 Summary

 Analysis of financial statements is the process of critically examining the data of financial
accounts. The main work of this process is to find the strengths and weakness of the
business.

 Interpretation is relating to the drawing of conclusion, inference and criticism of the
analysed financial data.
 Analysis and interpretation of the financial statements are closely associated. Without
interpretation the analysis is useless and without analysis, interpretation is impossible.
 Analysis of financial statements is of two types—analysis according to materials used and
analysis according to modus operandi.
 Analysis according to materials used is of two types i.e. internal analysis and external
analysis.

 Similarly, the analysis according to modus operandi is also divided into two - horizontal
analysis and vertical analysis.

 For the interpretation and analysis of the financial statement the following techniques are
used:
 Comparative Financial Statement Analysis

 Common Size Statement Analysis
 Trend Analysis
 Fund Flow Analysis

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