NCERT Solutions for Class 12 Accountancy II Chapter 4 Analysis Of Financial Statements

Ans : The following are the commonly used techniques of Financial Statement analysis :
1. Comparative Financial Statements
2. Common Size Financial Statements
3. Trend Analysis
4. Ratio Analysis
5. Cash Flow Statement
6. Fund Flow Statement
The above listed techniques can be classified on the following basis:
A. On the basis of Comparison
1. Inter-firm Comparison
a) Comparative Statement (Balance Sheet, Profit and Loss Account)
b) Common size Statement (of the same period)
c) Ratio of two or more Competitive Firms (of the same period)
d) Cash Flow Statement of two or more Competitive firms
e) Polygon, Bar Diagram
2. Intra-firm Comparison
a) Comparative Statement (Balance Sheet, Profit and Loss Account)
b) Common size Statement (of the same period)
c) Ratio of two or more Competitive Firms (of the same period)
d) Cash Flow Statement of two or more Competitive firms
e) Polygon, Bar Diagram
3. Horizontal Comparison
4. Vertical Comparison
B. On the basis of Time
1. Inter-period Comparison
a) Comparative statement (two or more periods)
b) Cash Flow statement (two or more period) etc.
2. Cross Sectional (Intra-period) Comparison
a) Common size statement
b) Ratio Analysis
C. Horizontal Analysis
1. Time series
2. Bar Diagram
3. Polygon
4. Comparative statement
5. Ratio Analysis
D. Vertical Analysis
1. Common size statement
2. Pie Diagram 

Ans : Analysis and Interpretation refers to a systematic and critical examination of the financial statements. It not only establishes cause and effect relationship among the various items of the financial statements but also presents the financial data in a proper manner. The main purpose of Analysis and Interpretation is to present the financial data in such a manner that is easily understandable and self explanatory. This not only helps the accounting users to assess the financial performance of the business over a period of time but also enables them in decision making and policy and financial designing process. 

Ans : Financial Analysis has great importance to various accounting users on various matters. Income Statements, Balance Sheets and other financial data provides information about expenses and sources of income, profit or loss and also helps in assessing the financial position of a business. These financial data are not useful until they are analysed. There are various tools and methods such as Ratio Analysis, Cash Flow Statements that make the financial data to cater varying needs of various accounting users.
The following are the reasons that advocate in favour of Financial Analysis:
1. It helps in evaluating the profit earning capacity and financial feasibility of a business.
2. It helps in assessing the long-term solvency of the business.
3. It helps in evaluating the relative financial status of a firm in comparison to other competitive firms.
4. It assists management in decision making process, drafting various plans and also in establishing an effective controlling system 

Ans : Those financial statements that enable intra-firm and inter-firm comparisons of financial statements over a period of time are called Comparative Financial Statements. In other words, these statements help the accounting users to evaluate and assess the financial progress in the relative terms. These statements express the absolute figures, absolute change and the percentage change in the financial items over a period of time. Comparative Financial Statements present the financial data in such a manner that is easily understandable and can be analysed without any ambiguity. If the accounting policies and practices for the treatment of the items are same over the period of study, only then the Comparative Financial Statements enable meaningful comparisons.
The following are the two Comparative Financial Statements that are commonly prepared:
1. Comparative Balance Sheet
2. Comparative Income Statements 

Ans : These statements depict the relationship between various items of financial statements and some common items (like Net Sales and the Total of Balance Sheet) in percentage terms. In other words, various items of Trading and Profit and Loss Account such as Cost of Goods Sold, Non-Operating Incomes and Expenses are expressed in terms of percentage of Net Sales. On the other hand, different items of Balance Sheet such as Fixed Assets, Current Assets, Share Capital etc are expressed in terms of percentage of Total of Balance Sheet. These percentage figures are easily comparable with that of the previous years' and with that of the figures of other firms in the same industry {i.e., inter-firm comparison) as well. The analyses based on these statements are commonly known as Vertical Analysis. The following are commonly prepared Common Size Statements. 
(i) Common Size Balance Sheet 
(ii) Common Size Income Statements