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C H A P T E R

Financial Statement Analysis

MEANING OF FINANCIAL STATEMENT ANALYSIS
Analysis of Financial Statements is a systematic process of analysing the financial information in
the financial statements to understand and make decisions regarding the operations of the enterprise.

TOOLS OR TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS

Comparative Statements
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.

Common-size Statements

Common-size Statements or Common-size Financial Statements mean statements in
which individual items of financial statements of two or more years are placed side
by side and thereafter converted into percentage taking a common base. Common
base normally taken is Total Assets or Total of Equity and Liabilities, in the case of Common-
size Balance Sheet and Revenue from Operations, in the case of Common-size Statement of
Profit & Loss.

Ratio Analysis
Ratio is an arithmetical expression of relationship between two related or interdependent
components of financial statements of an accounting period.

Cash Flow Statement
Cash Flow Statement is a statement showing flow of Cash and Cash Equivalents during the
accounting period, classified under Operating Activities, Investing Activities and Financing
Activities.

TYPES OF FINANCIAL STATEMENT ANALYSIS

External Analysis
Internal Analysis

External analysis is carried out by outsiders such as creditors, bankers, debentureholders
and government agencies. Internal analysis is meant for management.