Common Size Statement, Comparative Satement and Trend Analysis

Topics: Balance sheet, Income statement, Financial statements Pages: 11 (3124 words) Published: September 12, 2010

We know business is mainly concerned with the financial activities. In order to ascertain the financial status of the business every enterprise prepares certain statements, known as financial statements. Financial statements are mainly prepared for decision making purpose. But the information as is provided in the financial statements is not adequately helpful in drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial statements is required. Analysis means establishing a meaningful relationship between various items of the two financial statements with each other in such a way that a conclusion is drawn. By financial statements we mean two statements: (i) Profit and loss Account or Income Statement

(ii) Balance Sheet or Position Statement
These are prepared at the end of a given period of time. They are the indicators of profitability and financial soundness of the business concern. The term financial analysis is also known as analysis and interpretation of financial statements. It refers to the establishing meaningful relationship between various items of the two financial statements i.e. Income statement and position statement. It determines financial strength and weaknesses of the firm. Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. Thus, the analysis and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Types of financial statement are:

1) Comparative statement
2) Common size statement
3) Trend analysis
Financial analysis serves the following purposes:
1. Measuring the profitability
The main objective of a business is to earn a satisfactory return on the funds invested in it. Financial analysis helps in ascertaining whether adequate profits are being earned on the capital invested in the business or not. It also helps in knowing the capacity to pay the interest and dividend. 2. Indicating the trend of Achievements

Financial statements of the previous years can be compared and the trend regarding various expenses, purchases, sales, gross profits and net profit etc. can be ascertained. Value of assets and liabilities can be compared and the future prospects of the business can be envisaged. Assessing the growth potential of the business. The trend and other analysis of the business provides sufficient information indicating the growth potential of the business. 3. Comparative position in relation to other firms

The purpose of financial statements analysis is to help the management to make a comparative study of the profitability of various firms engaged in similar businesses. Such comparison also helps the management to study the position of their firm in respect of sales, expenses, profitability and utilising capital, etc. 4. Assess overall financial strength

The purpose of financial analysis is to assess the financial strength of the business. Analysis also helps in taking decisions, whether funds required for the purchase of new machines and equipments are provided from internal sources of the business or not if yes, how much? And also to assess how much funds have been received from external sources. 5. Assess solvency of the firm

The different tools of an analysis tell us whether the firm has sufficient funds to meet its short term and long term liabilities or not. PARTIES INTERESTED
Analysis of financial statements has become very significant due to widespread interest of various parties in the financial results of a business unit. The various parties interested in the analysis of financial statements are: (i) Investors :

Shareholders or proprietors of the business are interested in the well being of the business. They like to know the earning capacity of the business and its prospects...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Common Size Financial Statement Analysis Research Paper
  • Common Size And Percentage Change Analysis Essay
  • Common Size Analysis Essay
  • Walmart Financial statement Analysis Essay
  • Trend Analysis Essay
  • Comparative Analysis of Financial Statements Between Two Companies Essay
  • Kingdee and Yonyon Financial Statement Analysis Essay
  • Essay about Vertical Analysis of Financial Statements

Become a StudyMode Member

Sign Up - It's Free