Tools for Financial Analysis: Comparative Statements Explained

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

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.