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Class 12 DK Goel Solutions Volume 2 Chapter 3 - Tools for Financial Analysis: Comparative Statements

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Last updated date: 22nd Mar 2024
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MVSAT 2024

Tools For Financial Analysis: Comparative Statements

Learning accountancy involves a variety of diverse topics, and one such field is tools for financial analysis. The essential tools utilized for this purpose are ratio analysis, cash flow statement, comparative statements of profit and loss, and common-size statements. Students will get in-depth knowledge on these topics in DK Goel Accountancy Class 12 Solutions Chapter 3 Tools for Financial Analysis: Comparative Statements. All the topics and subtopics are explained in detail by accountancy experts who have designed the solutions for a better understanding of the topics.

Deep Dive into DK Goel Solutions Class 12 Analysis of Financial Statements

The quantitative analysis of financial statements in companies is done via ratio analysis. To gauge the performance of the company in the current year, ratios are calculated concerning the previous year’s numbers, other companies, or industries. This kind of analysis is useful in translating the data contained in various financial statements of the company into a more meaningful form that can be presented to interested parties like shareholders. Class 12 Accountancy Volume 2 Chapter 3 DK Goel Solutions have comprehensive explanations on different types of ratio analysis and solved examples on how to prepare comparative statements. The key topics covered are:

  • The four types of ratio analysis, i.e. liquidity ratio, solvency ratio, activity ratio, and profitability ratio.

  • Comparative statements – This gives changes in each item of the financial statement in absolute amount, with the base as the preceding counting period. It is of two types: Comparative balance sheets and Comparative statements of profit and loss.

  • Common size statement – In these statements amounts are converted into percentages.

 

Financial Statements of a Company

Financial statements are written papers that communicate the financial pursuits and conditions of a trading concern or institution. They are made up of four primary components. Financial statements are often intended to provide the financial statistics of the company in question as clearly and simply as possible for both the company and the readers. Financial statements for trading companies typically include balance sheets, statements of retained earnings, cash flows, and income statements, but may require further clarification based on the suitable accounting foundation. These statements are audited by government businesses, accountants, and organizations, among others, to ensure their accuracy and for tax, financing, or investment purposes.

 

The Characteristics of Financial Statements

Financial statements are described using facts connected with occurrences that are reported progressively. All of this information must be documented in monetary terms. Later, we must process them in accordance with all applicable rules and laws.

 

Finally, we can use all of this data to generate financial statements. In other words, the chronologically documented facts regarding occurrences conveyed in monetary terms for a specific time frame serve as the foundation for the creation of journal financial statements that acknowledge the financial position as of a specific date and the financial outcomes obtained during a period.

 

According to the American Institute of Certified Public Accountants (AICPA), financial statements are "statements outlined for the purpose of declaring a periodical analysis of the report on development by management and in accordance with the condition of investment in the trade and the outcomes accomplished during the period under analysis." They are based on a mix of accounting rules, individual judgments, and documented facts."

 

The character of financial statements is based on the following points:

  • In order to produce financial statements, we must first document certainty in monetary terms. We must explain figures of accounts such as cash, trade receivables, fixed assets, and so on.

  • Accounting practices: Accounting Standards define certain norms that are relevant to the accounting process. These norms must be followed while preparing the financial statements. For example, estimating inventories at cost or market pricing, depending on which is lowest.

  • Postulates: In the process of creating financial accounts, postulates are quite important. We make assumptions like this all the time in accounting. The going concern hypothesis, for example, presupposes that a trading concern will continue to exist for a long period. As a result, we treat assets at their historical cost.

  • Personal judgments and views: Personal judgments and opinions play a significant part in the preparation of financial statements. As a result, while calculating depreciation, we must rely on our own estimates.

 

Let's take a closer look at each notion in a company's financial statements:

  • Types of Financial Statements- Financial statements are the documents that show an organization's real financial performance at the conclusion of the fiscal year. It is a documented record of financial transactions that occur within a company. These statements assist information users in determining the organization's financial status, liquidity, and performance. An entity is obliged to prepare four (4) different types of financial statements. These are the statements:

    • Profit and loss statement,

    • The balance sheet, often known as the statement of financial position, is a financial statement that shows how much money

    • a cash flow statement,

    • Financial statements have been noted (disclosure).

  • Uses and Importance of Financial Statements-- Financial statements are the documents that reveal an organization's real financial performance at the conclusion of a fiscal year. It is a documented record of financial transactions that occur within a company. These statements assist information users in determining the organization's financial status, liquidity, and performance. Following are some of the uses of financial statements:

    • Determine the financial situation of the company: The most significant function of financial statements is to offer information about the company's financial position at a certain date. This data is utilized by a variety of stakeholders to make key business choices.

    • To earn credit, follow these steps: Financial statements give potential lenders a picture of the firm, and this information may be utilized to either grant extra credit for corporate development or limit credit to begin the recovery process.

    • Financial statements provide all of the necessary information for potential investors to determine how much they wish to invest in the firm. It is also beneficial in determining the price per share at which investors choose to invest. The key to acquiring investments is a strong financial statement.

    • Aids in the formulation of policy: The financial statements assist the government in determining taxation and regulatory policies depending on how the business is conducted. Government agencies have the authority to tax a company based on its income and assets.

    • Financial statements are useful for stock traders since they provide them with information about the company's financial status, allowing them to alter their quotations accordingly.

  • Limitations of Financial Statements-  Financial statements have limits that a user should be aware of before relying on them heavily. Knowing about these factors might result in a trading company's invested capital being devalued or steps being made to investigate more.

Financial statements are the most important sources of information for shareholders and other external parties to understand a trading company's profitability and financial status. They provide information on the trading company's assets and liabilities during a certain time period, which serves as the basis for making choices. As a result, the major purpose of financial statements is to assist end-users in making decisions. The following are the specific objectives:

  • Financial accounts show the exact situation of an organization's economic assets and liabilities. External stakeholders, such as investors and governments, do not have access to this information.

  • They aid in predicting a company's capacity to make a profit. This data may be used by investors and shareholders to make informed financial decisions.

  • The financial accounts of a company reveal how effective its management is. The profitability of a business determines how well it operates, as seen by these assertions.

  • They help readers understand the accounting techniques utilized in these financial statements. This makes it easier to understand the assertions in general.

  • These financial statements also include information on the company's cash flows. This information may be used by creditors and investors to forecast the company's financial needs and liquidity.

  • Finally, financial accounts reveal how enterprises affect society. This is because the enterprise's external factors have an impact on its operations.

 

Illustration

Below is a prime example of a common size balance sheet of XYZ ltd. for the accounting period of 2019

Particulars

Note no

2018 (A)

2019 (B)

Percentage 2018 (divide by total 530000)

Percentage 2019 (divide by total 320000)

Shareholder fund


500000

300000

94.3

93.75

Current liabilities


30000

20000

5.7

6.25

Total liabilities


530000

320000

100

100

 

Preparation Tips

  • Have short forms for memorizing different financial ratios like Liquidity ratio has current and quick ratio with similar denominator "current liabilities'' and the numerator of current is CMAP, and that of quick is CMA. Here C – cash, M – marketable securities, A – accounts receivable, I – inventories, and P – Prepaid expenses.

  • Prepare short notes for all important topics discussed in Tools for Financial Analysis: Comparative Statements Class 12 Accountancy DK Goel solutions. It will help in quick revision just before exams.

 

Conclusion

Class 12 Accountancy Volume 2 Chapter 3 DK Goel solutions is a valuable resource for students of Class 12 in learning accountancy concepts. The solutions are provided by scholars and experts who have a lot of experience in this subject. By going through these Class 12 DK Goel Accountancy Solutions Chapter 2, students do not have to cram up formulas and concepts as many easy tricks would be provided to them for remembering them easily. The solutions would also give students the ability to attempt complicated problems independently.

FAQs on Class 12 DK Goel Solutions Volume 2 Chapter 3 - Tools for Financial Analysis: Comparative Statements

1. What are the types of financial statements? Mention any two uses.

  • Financial statements are records that disclose a company's true financial status at the end of a fiscal year. It is a written record of all financial transactions that take place within a corporation. These statements assist information users in determining the financial position, liquidity, and performance of the company. The following are some of the applications of financial statements:

  • Determine the company's financial situation: The primary purpose of financial statements is to provide information about a company's financial situation as of a specific date. This information is used by a range of stakeholders to make important business decisions.

  • Follow these steps to gain credit: Financial statements paint a picture of the company for potential lenders, and this information may be used to either extend further credit for corporate expansion or limit credit to begin the recovery process.

2. What exactly are the financial statements?

  • Financial accounts reveal the precise condition of an organization's economic assets and liabilities. This information is not available to external parties such as investors and governments.

  • They help anticipate a company's ability to produce a profit. Investors and stockholders can utilize this information to make sound financial decisions.

  • A company's financial accounts reflect how successful its management is. According to these beliefs, the profitability of a firm dictates how effectively it performs.

  • They assist readers in comprehending the accounting processes used in these financial statements. This makes the statements more understandable in general.

  • These financial accounts also offer cash flow details for the firm. Creditors and investors may use this information to anticipate the company's financial requirements and liquidity.

  • Finally, financial statements show how businesses affect society. This is due to the fact that the enterprise's external circumstances have an effect on its operations.

3. The character of financial statements is based on what points?

  • We must first record confidence in monetary terms before we can make financial statements. Account numbers like cash, trade receivables, fixed assets, and so on must be explained.

  • Accounting procedures: Accounting Standards set certain principles related to the accounting process. These guidelines must be followed while generating financial statements. For example, projecting inventory at cost or market pricing, whichever is lower.

  • Postulates: Postulates are very crucial in the process of producing financial accounts. In accounting, we make assumptions like this all the time. The going concern hypothesis, for example, assumes that a trading company will continue to exist for an extended length of time. As a result, assets are treated at their historical cost.

  • Personal opinions and judgments: Personal judgements and views are heavily weighted in the creation of financial accounts. As a result, we must rely on our own assumptions when computing depreciation.

4. What are the different kinds of financial statements?

Financial statements are records that indicate a company's true financial status at the end of the fiscal year. It is a written record of all financial transactions that take place within a corporation. These statements assist information users in determining the financial position, liquidity, and performance of the company. A company is required to prepare four (4) types of financial statements. The following are the statements:

  • Profit and loss account,

  • The balance sheet

  • Cash flow statement

  • Financial statements have been made available (disclosure)

5. What are a company's financial statements?

Financial statements are frequently designed to offer the financial information of the firm in question in the most plain and simple manner feasible for both the company and the readers. Trading company financial statements normally comprise balance sheets, statements of retained earnings, cash flows, and income statements, but may require further clarification based on the appropriate accounting basis. Government entities, accountants, and organizations, among others, audit these statements to assure their correctness and for tax, financing, or investment purposes.