Page 180 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 10: Analysis of Financial Statements

Notes
Particulars Amount % of Balance sheet total
Assets 2000 (`) 2001 (`) 2000 2001
Fixed assets 2,25,000 4,00,000 56.25 50
Stock 1,29,000 2,00,000 32.25 25
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:

13. Common size financial statements are a widely used vertical analysis technique.
14. A common-size income statement usually shows each revenue or expense item as a
percentage of net sales.

10.5 Trend Analysis

The next important tool of analysis is trend percentage which plays significant role in analyzing

the financial stature of the enterprise through base years’ performance ratio computation. This
not only reveals the trend movement of the financial performance of the enterprise but also

highlights the strengths and weaknesses of the enterprise.
The following ratio is being used to compute the trend percentage
Current year
= × 100
Base year
This trend ratio is being computed for every component for many numbers of years which not
only facilitates comparison but also guides the firm to understand the trend path of the fi rm.

In the analysis of financial information, trend analysis is the presentation of amounts as a
percentage of a base year.

Example: If I want to see the trend of a company’s revenues, net income, and number of
clients during the years 2001 through 2007, trend analysis will present 2001 as the base year and
the 2001 amounts will be restated to be 100. The amounts for the years 2002 through 2007 will be
presented as the percentages of the 2001 amounts.

In other words, each year’s amounts will be divided by the 2001 amounts and the resulting
percentage will be presented. If revenues for the years 2001 through 2007 might have been

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