Page 178 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 10: Analysis of Financial Statements

3. The preparatory steps for the preparation of the comparative financial statement (income) Notes
analysis
The first and foremost important step is to have the following information and should take

preparatory steps:

1. While preparing the comparative statement of Profit & Loss Account, the particulars for

the financial factors are required.

2. The second most important for the preparation of the comparative Profit & Loss account is
yester financial data extracted from the Profit and Loss A/c or Profit and Loss Accounts.

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 of the firm or of

the other fi rms.
4. After having been procured the financial data pertaining to various time periods are ready

for comparison; to determine or identify the level of increase or decrease taken place in the
operating financial performance of the fi rms.

5. To determine the level of increase or decrease in financial performance, the percentage
analysis to be carried out in between them.
Example: Prepare the comparative income statement from the following:
Particulars 2004 (` ) 2005 (` )
Sales 2,00,000 2,50,000
(–) Cost of goods sold 1,00,000 1,30,000
1,00,000 1,20,000
(–) Operating expenses 10,000 10,000
Net profi t 90,000 1,10,000
Solution:

Particulars 2004 (`) 2005 (`) Absolute % Increase % Decrease
Change (`)
Sales 2,00,000 2,50,000 50,000 25 -
(–) Cost of goods sold 1,00,000 1,30,000 30,000 30 -
1,00,000 1,20,000 20,000 20 -
(–) Operating expenses 10,000 10,000 N.C - -
Net profi t 90,000 1,10,000 20,000 22.22
From the above table, the following inferences can be had:

1. The firm has registered 25% increase in sales from the year 2004 to 2005.

2. Cost of goods sold raised 30% from the year 2004 to 2005.
3. There is no change in the level of operating expenses.

4. The firm has got 22.22% increase in the level of net profits from the year 2004 to 2005.

Self Assessment

Choose the appropriate answer
7. Financial statement analysis is to
(i) Inter fi rm comparison

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