Page 186 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 10: Analysis of Financial Statements

10.6 Summary Notes

Financial statement analysis can be explained as a method used by interested parties
such as investors, creditors, and management to evaluate the past, current, and projected
conditions and performance of the fi rm.

Under the financial statement analysis, the information available are grouped together in
order to cull out the meaningful relationship which is already available among them; for
interpretation and analysis.

Three primary types of financial statement analysis are commonly known as horizontal
analysis, vertical analysis, and ratio analysis.

To reveal qualitative information about the firm in terms of solvency, liquidity, profi tability,
etc., are extracted from the analysis of fi nancial statements.

Comparative (income) financial statement analysis is being carried out in between the

income statements of the various accounting durations of the firm, with other firms in the

industry and with the industrial average.

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.

Trend analysis involves calculating each year’s financial statement balances as percentages

of the first year, also known as the base year. When expressed as percentages, the base
year figures are always 100 percent, and percentage changes from the base year can be

determined.
10.7 Keywords

Assets: Assets are economic resources owned by business or company.
Balance Sheet: A balance sheet or statement of financial position is a summary of a person’s or

organization’s balances.
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.

Financial Statement: A written report which quantitatively describes the financial health of a
company.
Trend Analysis: In trend analysis, financial ratios are compared over time, typically years.

10.8 Review Questions

1. From the following information, prepare a comparative income statement:

Particulars 2001 (`) 2002 (`)
Sales 10,00,000 8,00,000
Cost of goods sold 6,00,000 4,00,000
Administration Expenses 2,00,000 1,40,000
Other Income 40,000 20,000
Income tax 1,20,000 1,40,000

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