- Comparative Statements – Compare figures of different years to study trends and performance.
- Common Size Statements – Show data as percentages for easy comparison.
- Trend Analysis – Tracks the increase or decrease in items over the years using a base year.
- Ratio Analysis – Uses ratios to assess profitability, liquidity, and financial health.
- Cash & Funds Flow – Cash Flow shows cash movement; Funds Flow shows changes in financial position.
Definitions [4]
Definition: Financial Statement Analysis
- "Financial analysis consists in separating facts according to some definite plan, arranging them in groups according to certain circumstances and then presenting them in a convenient and easily read and understandable form.'' - Finney and Miller
- "Financial statement analysis is largely a study ofrelationships among the various financial factors in a business, as disclosed by a single set of statements and a study of the trends of these factors as shown in a series of statements." - John N. Myres
Definition: Comparative Statement
- Comparative Statements or Comparative Financial Statements mean a comparative study of individual items or components of financial statements, i.e., Balance Sheet and Statement of Profit & Loss of two or more years of the enterprise itself.
- Statement showing financial data for two or more than two years placed aside by side to facilitate comparisons are called Comparative Financial Statement.
Definition: Comparative Balance Sheet
"Comparative Balance Sheet analysis is the study of the trend of the same items, group of items and computed items in two or more Balance Sheets of the same business enterprise on different dates." - Foulka
Definition: Common-Size Statement
- "Common-size Statements are accounting statements expressed in percentage of some base rather than rupees." - Kohler
- Common-size Statements are the Statements which show the relationship of different items of financial statements with some common item (base) by expressing each item as a percentage of that common base.
Formulae [3]
Percentage Change
\[\text{Percentage Change}\ =\ \frac{\text{Absolute Change}}{\text{Amount of Previous Year}}\times100\]
Absolute Change
Absolute Change = Current Year - Previous Year
Common Size Percentage Change
\[\text{Common Size Percentage Change }=\frac{\text{Amount of Item}}{\text{Total Fund Employed}}\times100\]
Key Points
Key Points: Financial Statement Analysis
- Meaning: Study of financial data to understand profit, performance, solvency, and efficiency.
- Tools: Comparative & Common-size Statements, Cash Flow, Ratio Analysis.
- Purpose/Use: Helps assess trends, make decisions on investment, credit, dividends, and compare firms.
- Users: Management, investors, creditors, banks, govt., employees, etc.
- Limitations: Based on past data, may be biased, ignores price changes & qualitative factors, affected by window dressing.
Key Points: Methods of Financial Statement Analysis
- Internal Analysis: Done by management using internal records; helps in planning and decision-making.
- External Analysis: Done by outsiders like investors, creditors, and the government using published financial data.
- Horizontal (Dynamic) Analysis: Compares financial data over 2 or more years to identify trends and changes. Useful for long-term planning.
- Vertical (Static) Analysis: Analyses data of a single year by expressing items as a percentage of a base figure. Useful for comparing performance within departments or firms.
- Horizontal vs. Vertical: Horizontal shows trends over time (more useful), while vertical shows structure in a single period (limited use).
Difference Between Horizontal Analysis and Vertical Analysis
| Basis | Horizontal Analysis | Vertical Analysis |
|---|---|---|
| Period | Uses financial data of two or more periods | Uses data of one accounting period |
| Items | Same items across different periods | Different items of the same period |
| Information | Shows data in absolute & percentage terms | Shows data only in percentage terms |
| Usefulness | Used for Time Series Analysis (trend over time) | Used for Cross-Sectional Analysis (within a period) |
| Method | Comparative Balance Sheet & P&L Statement | Common Size Balance Sheet, P&L, and ratios |
Key Points: Tools for Financial Analysis
Key Points: Comparative Financial Statement
- Meaning: Comparative Statements present financial data of two or more years side‑by‑side to show changes in amount and percentage.
- Types: Intra‑firm comparison compares the same firm over different years, while Inter‑firm comparison compares different firms.
- Uses: They simplify financial data, show trends, identify strengths and weaknesses, help compare with industry performance, and assist in forecasting.
- Limitations: They are based on past data, affected by estimates and personal judgement, ignore qualitative factors, do not consider price level changes, and are unreliable if accounting policies differ.
- Formats: Information can be shown as absolute changes, percentage changes, ratios, averages, and through comparative Balance Sheet and Profit & Loss statements.
Format: Comparative Balance Sheet
COMPARATIVE BALANCE SHEET as at........
| Particulars (1) |
Note No. (2) |
Current Year (₹) | Previous Year (₹) | Absolute Change (Increase/Decrease) ₹ | Percentage Change (Increase/Decrease) % |
|---|---|---|---|---|---|
| A (3) |
B (4) |
C = A – B (5) |
(D = C/B × 100) (6) |
||
| I. EQUITY AND LIABILITIES | |||||
| 1. Shareholders’ Funds | |||||
| (a) Share Capital: | |||||
| (i) Equity Share Capital | … | … | … | … | |
| (ii) Preference Share Capital | … | … | … | … | |
| (b) Reserves and Surplus | … | … | … | … | |
| 2. Non-Current Liabilities | |||||
| (a) Long-term Borrowings | … | … | … | … | |
| (b) Long-term Provisions | … | … | … | … | |
| 3. Current Liabilities | |||||
| (a) Short-term Borrowings | … | … | … | … | |
| (b) Trade Payables | … | … | … | … | |
| (c) Other Current Liabilities | … | … | … | … | |
| (d) Short-term Provisions | … | … | … | … | |
| Total | … | … | … | … | |
| II. ASSETS | |||||
| 1. Non-Current Assets | |||||
| (a) Property, Plant and Equipment and | |||||
| Intangible Assets: | |||||
| (i) Property, Plant and Equipment | … | … | … | … | |
| (ii) Intangible Assets | … | … | … | … | |
| (b) Non-current Investments | … | … | … | … | |
| (c) Long-term Loans and Advances | … | … | … | … | |
| 2. Current Assets | |||||
| (a) Current Investments | … | … | … | … | |
| (b) Inventories | … | … | … | … | |
| (c) Trade Receivables | … | … | … | … | |
| (d) Cash and Bank Balances | … | … | … | … | |
| (e) Short-term Loans and Advances | … | … | … | … | |
| (f) Other Current Assets | … | … | … | … | |
| Total | … | … | … | … |
Format: Comparative Income Statement
COMPARATIVE STATEMENT OF PROFIT & LOSS
for the year ended 31st March....
| Particulars | Note No. | Figures for the Current Year | Figures for the Previous Year |
Absolute Change (Increase/Decrease) |
Percentage (Increase/Decrease) |
|---|---|---|---|---|---|
| 1 | 2 | 3 | 4 | 5 | |
| A | B | (A - B) = C | \[\frac{C}{B}\times100=D\] | ||
| ₹ | ₹ | ₹ | ₹ | ||
| I. Revenue from Operations | ... | ... | ... | ... | |
| II. Add: Other Incomes | ... | ... | ... | ... | |
| III. Total Revenue(I + II) | ... | ... | ... | ... | |
| IV. Less: Expenses | |||||
| - Cost of Materials Consumed | ... | ... | ... | ... | |
| - Purchase of Stock in Trade | ... | ... | ... | ... | |
| - Changes in Inventories of Finished Goods, Work-in-Progress and Stock in Trade | ... | ... | ... | ... | |
| - Employee Benefit Expenses | ... | ... | ... | ... | |
| - Finance Costs | ... | ... | ... | ... | |
| - Depreciation and Amortization Expense | ... | ... | ... | ... | |
| - Other Expenses | ... | ... | ... | ... | |
| Total Expenses | ... | ... | ... | ... | |
| V. Profit before Tax (III – IV) | ... | ... | ... | ... | |
| VI. Less: Tax | (...) | (...) | (...) | (...) | |
| VII. Profit after Tax (V – VI) | ... | ... | ... | ... |
Key Points: Common-Size Statement
- Common-size statements show each financial item as a percentage of a common base.
- They are used in the Balance Sheet and Income Statement for better comparison.
- The main purpose is to compare data, analyse trends, and understand financial relationships.
- Each item is shown in actual figures and as a percentage of the base amount.
- They help in tracking changes, identifying trends, and assessing business efficiency.
Format: Common Size Balance Sheet
COMMON SIZE BALANCE SHEET
as at 31st March........
| Particulars | Note No. | Absolute Amounts | Percentage of Balance Sheet Total | ||
|---|---|---|---|---|---|
| Current Year | Previous Year | Current Year | Previous Year | ||
| ₹ | ₹ | % | % | ||
| I. EQUITY AND LIABILITIES: | |||||
| 1. Shareholders’ Funds | |||||
| (a) Share Capital | … | … | … | … | |
| (b) Reserves & Surplus | … | … | … | … | |
| 2. Non‑Current Liabilities | |||||
| (a) Long‑term Borrowings | … | … | … | … | |
| (b) Long‑term Provisions | … | … | … | … | |
| 3. Current Liabilities | |||||
| (a) Short‑term Borrowings | … | … | … | … | |
| (b) Trade Payables | … | … | … | … | |
| (c) Other Current Liabilities | … | … | … | … | |
| (d) Short‑term Provisions | … | … | … | … | |
| Total | … | … | 100 | 100 | |
| II. ASSETS: | |||||
| 1. Non-Current Assets | |||||
| (a) Property, Plant and Equipment and Intangible Assets | |||||
| (i) Property, Plant and Equipment | … | … | … | … | |
| (ii) Intangible Assets | … | … | … | … | |
| (b) Non-Current Investments | … | … | … | … | |
| (c) Long-term Loans and Advances | … | … | … | … | |
| 2. Current Assets | |||||
| (a) Current Investments | … | … | … | … | |
| (b) Inventories | … | … | … | … | |
| (c) Trade Receivables | … | … | … | … | |
| (d) Cash & Bank Balance | … | … | … | … | |
| (e) Short-term Loans and Advances | … | … | … | … | |
| (f) Other Current Assets | … | … | … | … | |
| Total | … | … | 100 | 100 | |
Format: Common Size Income Statement
COMMON SIZE STATEMENT OF PROFIT & LOSS
for the year ended 31st March........
| Particulars | Note No. | Absolute Amounts | Percentage of Revenue from Operations | ||
|---|---|---|---|---|---|
| Current Year | Previous Year | Current Year | Previous Year | ||
| ₹ |
₹ |
% |
% |
||
| I. Revenue from Operations | … | … | 100 | 100 | |
| II. Add: Other Incomes | … | … | … | … | |
| III. Total Revenue(I + II) | … | … | … | … | |
| IV. Less: Expenses | |||||
| Cost of Materials Consumed | … | … | … | … | |
| Purchase of Stock in Trade | … | … | … | … | |
| Changes in Inventories of Finished Goods, Work‑in‑Progress and Stock in Trade | … | … | … | … | |
| Employee Benefit Expenses | … | … | … | … | |
| Finance Costs | … | … | … | … | |
| Depreciation and Amortization Expenses | … | … | … | … | |
| Other Expenses | … | … | … | … | |
| Total Expenses | … | … | … | … | |
| V. Profit before Tax (III – IV) | … | … | … | … | |
| VI. Less: Tax | (… ) | (… ) | (… ) | (… ) | |
| VII. Profit after Tax (V – VI) | … | … | … | … | |
Key Points: Trend Analysis
- Trend Percentage Analysis helps compare financial data over several years.
- It shows the direction of change (increase or decrease) in financial items.
- Helps assess favourable or unfavourable trends in business performance.
- Useful for making future forecasts and decisions.
- Any year can be taken as the base year (value = 100); other years are shown as a percentage of it.
