Tools of Financial Statement Analysis
The various tools of financial statement analysis help in evaluating and interpreting the company’s financial statements for planning, investment, and performance.
The most commonly used tools of financial analysis are comparative statement (comparison of financial statements), common size statement (vertical analysis), ratio analysis (quantitative analysis), cash flow analysis, and trend analysis. Let’s quickly learn about these tools.
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Comparative Statement
Financial Statements of two years are compared and differences in absolute as well as percentage terms are calculated. It is a form of horizontal analysis.
The comparative analysis is done through a Comparative Income Statement and Comparative Balance Sheet.
Format of Comparative Income Statement
The above statement shows in percentage terms the total of income earned and the expenses incurred during two or more accounting periods.
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Format of Comparative Balance Sheet
The above statement shows the business’ assets and liabilities for two or more accounting periods. It also presents the percentage change in the monetary value of those assets and liabilities.
Common Size Statement
The figures of financial statements are converted into percentages with respect to a common base.
Just like comparative analysis, the common size statement analysis is also done through an income statement and a balance sheet.
Format of Common Size Income Statement
The above Common Size Income Statement shows the sales figure to be 100 and all other figures expressed as a percentage of sales.
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Format of Common Size Balance Sheet
The common-size balance sheet shows the total of assets or liabilities to be assumed as 100 and the figures are expressed as a percentage of the total.
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Ratio Analysis
It studies the relationship between various items in the financial statements.
Cash Flow Statement
It shows the inflow and outflow of cash and cash equivalents during a particular period. Such an analysis helps find out the causes of changes in the cash position between the two balance sheets at two different dates.
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That’s all on Financial Statement Analysis meaning and other important factors for accounting exam preparations. For more such interesting study resources and guides, do check out our Testbook App today itself! Our app contains hundreds of revision tests, mock tests, practice sets, live coaching, study note pdfs, and so on. Get it now and avail exciting deals!
