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1.2 Management Accounting (Section B)—ISC XII

SUMMARY OF THE CHAPTER

• Analysis of Financial Statements is a systematic process of identifying the financial strengths and
weaknesses of the firm by properly establishing relationships between the items of the Balance Sheet
and Statement of Profit and Loss.

• Tools or Techniques of Financial Statement Analysis
1. Comparative Financial Statements 2. Common-size Financial Statements
3. Cash Flow Statement 4. Ratio Analysis.

• Types of Financial Statement Analysis
1. External Analysis 2. Internal Analysis
3. Horizontal Analysis 4. Vertical Analysis.

• Objectives of Financial Analysis
1. To assess the enterprise’s operating efficiency and profitability.
2. To assess the financial stability of an enterprise.

3. To assess the enterprise’s short-term and long-term solvency.
4. To compare intra-firm position, inter-firm position and pattern position within industry.
5. To assess the future prospects of the enterprise.

• Parties Interested in Financial Statement Analysis
1. Management, 2. Employees and Trade Unions,
3. Shareholders or Owners or Investors, 4. Potential Investors,
5. Suppliers or Creditors, 6. Bankers and Lenders,
7. Researchers, 8. Government,

9. Tax Authorities, 10. Customers.
• Limitations of Financial Statement Analysis
1. Analysis of Historical Data.

2. Ignores price level changes.
3. Qualitative aspect is ignored.
4. Limitations of Financial Statements are also the limitations of Financial Statements Analysis.

5. Not free from bias.
6. Variation in Accounting Practices.
7. Financial Analysis identifies the symptoms but does not suggest the diagnosis.
8. Window Dressing.