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5.2 Analysis of Financial Statements—CBSE XII

CHAPTER SUMMARY

• Comparative Financial Statement is a tool of financial analysis that shows change in each item of
the financial statement in both absolute amount and percentage terms, taking the item in preceding
accounting period as base.

• Objectives or Purposes of Comparative Financial Statements

1. To know the nature of changes influencing financial position.
2. To know the weaknesses and soundness about liquidity, profitability and solvency of the enterprise.

3. To forecast and plan.
4. To know the movements of key financial statistics.

• Tools for Comparison of Financial Statements

1. Comparative Balance Sheet.

2. Comparative Statement of Profit & Loss (Income Statement).
3. Common-size Statement of Profit & Loss.
4. Common-size Balance Sheet.

• Comparative Balance Sheet
“Comparative Balance Sheet analysis is the study of the trend of same items, group of items and computed
items in two or more Balance Sheets of the same business enterprise on different dates.” —Foulka

• Comparative Statement of Profit & Loss (Income Statement)
Comparative Statement of Profit & Loss shows the operating results for a number of accounting periods
so that changes in data in terms of money and percentage from one period to another may be known.

• Common-size Statement of Profit & Loss (Income Statement)
Common-size Statement of Profit & Loss is a statement in which amounts of individual items of Statement

of Profit & Loss for two or more years are written. These amounts are further converted into percentage
of common base which is Revenue from Operations.

• Common-size Balance Sheet

Common-size Balance Sheet is a statement in which amounts of individual items of Balance Sheet for
two or more years are written. These amounts are further converted into percentage of a common base,
which is Total Assets or Total of Equity and Liabilities of the Balance Sheet.