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Class 12 Analysis of Financial Statements: cheat sheet
CBSE Accountancy. Objectives, tools and limitations of analysis, comparative statements with absolute and percentage changes, common-size statements and trend percentages.
Key ideas
- Analysis judges earning capacity, short-term and long-term solvency, and compares a firm with others and with its own past years.
- Short-term creditors look at liquidity, lenders at long-term solvency and interest cover, shareholders at profitability, management at efficiency.
- The tools are comparative statements, common-size statements, ratio analysis, cash flow analysis and trend analysis.
- A comparative statement puts two years side by side with the absolute and percentage change of each item (horizontal analysis).
- A common-size statement shows each item as a percentage of one base: revenue from operations, or the balance sheet total (vertical analysis).
- Trend percentages show each year’s figure as a percentage of the base year, taken as 100.
- Analysis ignores price-level changes and qualitative factors, can be distorted by window dressing and depends on the methods chosen.
Remember
| Absolute change | this year − last year |
| Percentage change | absolute change ÷ last year × 100 |
| Common-size, profit and loss | item ÷ revenue from operations × 100 |
| Common-size, balance sheet | item ÷ balance sheet total × 100 |
| Trend percentage | year’s figure ÷ base year’s figure × 100 |
| Last year from this year | this year ÷ (1 + percentage change ÷ 100) |
Watch out
- Dividing the change by this year’s figure instead of last year’s.
- Showing a fall as a positive percentage change.
- Using a different base for different items in a common-size statement.
Worked example
Sunrise Ltd has revenue from operations of ₹3,80,000, cost of materials consumed of ₹1,48,200 and employee benefits expense of ₹38,000. Find each expense as a percentage of revenue from operations: (a) materials (b) employee benefits.
Working: (a) ₹1,48,200 ÷ ₹3,80,000 × 100 (b) ₹38,000 ÷ ₹3,80,000 × 100
Answer: (a) 39%; (b) 10%
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