NCERT Book Class 12 Accountancy (Part 2) Chapter 4 Analysis of Financial Statements

Analysis of Financial Statements 171

Analysis of Financial Statements 4

Y ou have learnt about the financial statements
(Income Statement and Balance Sheet) of
companies. Basically, these are summarised
financial reports which provide the operating results
and financial position of companies, and the detailed
information contained therein is useful for assessing
the operational efficiency and financial soundness
of a company. This requires proper analysis and
interpretation of such information for which a
number of techniques (tools) have been developed
by financial experts. In this chapter we will have an
overview of these techniques.

4.1 Meaning of Analysis of Financial Statements
LEARNING OBJECTIVES The process of critical evaluation of the financial
After studying this chapter, information contained in the financial statements in
you will be able to : order to understand and make decisions regarding
• explain the nature and the operations of the firm is called ‘Financial
significance of financial Statement Analysis’. It is basically a study of
analysis;
• identify the objectives of
relationship among various financial facts and
financial analysis; figures as given in a set of financial statements, and
• describe the various tools the interpretation thereof to gain an insight into the
of financial analysis; profitability and operational efficiency of the firm to
• state the limitations of assess its financial health and future prospects.
financial analysis; The term ‘financial analysis’ includes both
• prepare comparative and
common size statements
‘analysis and interpretation’. The term analysis
and interpret the data means simplification of financial data by methodical
given therein; and classification given in the financial statements.
• calculate the trend Interpretation means explaining the meaning and
percentages and interpret significance of the data. These two are
them. complimentary to each other. Analysis is useless