NCERT Solutions for Class 12 Accountancy Chapter 4, Analysis of Financial Statements

NCERT Solutions for Class 12 Accountancy Chapter 4, Analysis of Financial Statements: Students can find attached NCERT Solutions for CBSE Class 12 Accountancy Part 2, Chapter 4, Analysis of Financial Statements. A PDF download link has been attached below for free download of complete NCERT Solutions.

NCERT Solutions Class 12 Analysis of Financial Statements: This article brings to you complete NCERT Solutions for CBSE Class 12 Accountancy Chapter 4, Analysis of Financial Statements. A PDF download link has been attached below for you to save and download for future reference. Students can be carefree while referring to these NCERT Solutions since they have been prepared according to CBSE’s updated Syllabus 2023-2024. Students appearing for upcoming CBSE Board Examinations in 2024 must have a look at these easy and detailed NCERT Solutions.

Before students start preparing for Board Examinations, it is advised to first have a look at the syllabus, exam pattern, and curriculum for the current academic session 2023-2024. Then, students can start practicing NCERT Solutions from below. We have also attached links to some important resources for the preparation of upcoming CBSE Board Examinations.

Related:

CBSE Class 12 Accountancy Syllabus 2023-24 (PDF)

CBSE Class 12 Accountancy Sample Paper 2023-24 (PDF)

NCERT Solutions for Class 12 Accountancy 2023-2024

MCQs for CBSE Class 12 Accountancy 2023-2024

NCERT Solutions for Class 12 Accountancy Chapter Analysis of Financial Statements are:

Short Answer Questions

1.List the techniques of Financial Statement Analysis.

Answer. The techniques of Financial Statement Analysis are:

• Comparative Statements– The financial report indicating the profit and loss situation of a company at different time intervals is called a comparative statement. This is used to indicate the positive or negative growth of a company.
• Common Size Statements– This statement compares the relationship between various elements with one element being at the center.
• Trend Analysis– It is a technique where the operations of a business and the financial position of the company are analysed over a series of years.
• Ratio Analysis– This technique describes the relationship between various items of a balance sheet and a statement of profit and loss of a firm
• Cash Flow Analysis– The analysis of the inflow and outflow of cash into and out from an organization is called cash flow analysis. There are two types of flows, positive or inflow of cash which occurs when cash enters the organization and the other one is the outflow or negative flow of cash which occurs when cash flows out of the company.

2. Distinguish between Vertical and Horizontal Analysis of financial data.

Answer. Differences between vertical and horizontal analysis of financial data are:

3. State the meaning of Analysis and Interpretation.

Answer. Analysis is the process of simplifying and classifying financial data into simpler trends or patterns by using tools and techniques in accounting. Interpretation on the other hand refers to explaining the meaning and significance of data. Both analysis and interpretation are used as a tool for analyzing financial statements.

4. State the importance of Financial Analysis?

Answer. Financial analysis is important because of the mentioned reasons:

• Financial analysis is important to the finance manager to assess the managerial performance, corporate efficiency, financial strengths, and weaknesses. Appropriate tools and techniques help in making rational decisions.
• Top management requires financial analysis to ensure that the financial position of the company keeps flourishing.
• Through financial analysis, trade payables keep the company’s ability to meet its short-term obligations, in check.
• Lenders look forward to financial analysis to determine the financial health of the company.
• Investors too look forward to financial analysis to determine the profitability of the company.
• Labor unions want to look at the wage situation and increment opportunities through financial analysis.
• Financial analysis is equally important for economists and researchers to keep updated about market trends and leadership.

5. What are Comparative Financial Statements?

Answer. The comparative financial statements refer to the statement of profit and loss and the balance sheet prepared by providing columns for the figures for both the current year as well as for the previous year and for the changes during the year, both in absolute and relative terms. It is the financial report indicating the profit and loss situation of a company at different time intervals called comparative statements. This is used to indicate the positive or negative growth of a company.

6. What do you mean by Common Size Statements?

Answer. This statement is a financial tool that compares the relationship between various elements with one element being at the centre. Common Size Statement is also known as a component percentage statement,

Long Answer Questions

1. Describe the different techniques of financial analysis and explain the limitations of financial analysis.

Answer.  The techniques of Financial Statement Analysis are:

• Comparative Statements– The financial report indicating the profit and loss situation of a company at different time intervals is called a comparative statement. This is used to indicate the positive or negative growth of a company.
• Common Size Statements– This statement compares the relationship between various elements with one element being at the center.
• Trend Analysis– It is a technique where the operations of a business and the financial position of the company are analysed over a series of years.
• Ratio Analysis– This technique describes the relationship between various items of a balance sheet and a statement of profit and loss of a firm
• Cash Flow Analysis– The analysis of the inflow and outflow of cash into and out from an organization is called cash flow analysis. There are two types of flows, positive or inflow of cash which occurs when cash enters the organization and the other one is the outflow or negative flow of cash which occurs when cash flows out of the company.

The limitation of financial analysis are:

• It does not consider price changes
• It is just a study of the reports
• Non monetary aspects are completely ignored.
• It also just like other accounting concepts ignores current situation.
• It can be misleading without appropriate knowledge of changes in accounting procedures.

2. Explain the usefulness of trend percentages in interpretation of financial performance of a company.

Answer. Trend percentages are useful in interpretation of financial performance of a company in the following manner:

• They decode the pattern of growth and failure of an organization, thus indicating what a company is doing right and wrong.
• These trends help in the decision-making process and taking corrective measures as per the analysis.
• They are also an opportunity to do something new and fresh for the company.
• They help in determining the relationships between economic factors and a company’s associated growth with it.
• They present the entire journey of a business and let the top management make certain decisions.
• Trend percentage also assists in setting and acknowledging future trends.
• They are easy to present, decode, and understand.

3. What is the importance of comparative statements? Illustrate your answer with particular reference to comparative income statement.

Answer.  The importance of comparative statements are:

• They help in identifying the direction of change in trends to showcase different indicators of performance.
• They assist in forecasting future trends and adaptations.
• The information presented is easier to interpret and understand
• Since the information is presented in an easy way, trends can be easily acknowledged and financial positions easily decoded. Thus, it makes conclusions an easy affair.

4. What do you understand by analysis and interpretation of financial statements? Discuss its importance.

Answer.  Analysis is the process of simplifying and classifying financial data into simpler trends or patterns by using tools and techniques in accounting. Interpretation on the other hand refers to explaining the meaning and significance of data. Both analysis and interpretation are used as a tool for analyzing financial statements.

Financial analysis is important because of the mentioned reasons:

• Financial analysis is important to the finance manager to assess the managerial performance, corporate efficiency, financial strengths, and weaknesses. Appropriate tools and techniques help in making rational decisions.
• Top management requires financial analysis to ensure that the financial position of the company keeps flourishing.
• Through financial analysis, trade payables keep the company’s ability to meet its short-term obligations, in check.
• Lenders look forward to financial analysis to determine the financial health of the company.
• Investors too look forward to financial analysis to determine the profitability of the company.
• Labour unions want to look at the wage situation and increment opportunities through financial analysis.
• Financial analysis is equally important for economists and researchers to keep updated about market trends and leadership.

5. Explain how common size statements are prepared giving an example.

Answer. The following procedure is followed in preparation for common size statements:

• List out absolute figures in rupees at two points in time, say year 1, and year 2
• Choose a common base (as 100)
• For both years, work out the total and show the percentages in the columns.

Example: Let’s say year 1 and year 2 are the two absolute figures. Then, we take revenue from operations as the base for 100. Then, the common size statement would be presented as:

For complete NCERT Solutions for CBSE Class 12 Analysis of financial statements, click on the link below

Also Find:

CBSE Class 12 Syllabus 2023-24 (All Subjects)

CBSE Class 12 Sample Papers 2023-24 (All Subjects)

NCERT Books for Class 12 (All Subjects)

NCERT Solutions for Class 12 (All Subjects)