NCERT Solutions for class 12 Accountancy

Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the various items of the balance sheet and the profit and loss account.

Significance of Financial Analysis for different users:-

Finance manager:- Financial analysis focuses on the facts and relationships related to managerial performance, corporate efficiency, financial strengths and weakness and credit worthiness of the company.

Top Management:- The importance of financial analysis is not limited to the finance manager alone. Its scope of importance is quite broad and includes top management in general and the other functional managers. Management of the firm would be interested in every aspect of the financial analysis.

Trade creditors:- A trade creditor, through an analysis of the financial statement, appraises not only the urgent ability of the company to meet its obligations but also judges the probability of its continued ability to meet all its financial obligations in future.

Lenders:- Suppliers of long-term debt are concerned with the firm’s long-term solvency and survival. They analyse the firm’s probability over time, its ability to generate cash to pay interest and repay the principal and the relationship between various sources of funds.

Investors:- who have invested their money in the firm’s shares are interested in the firm’s earnings. As such, they concentrate on the analysis of the firm’s present and future profitability.

Labour unions:- Labour unions analyse the financial statements to assess whether they can presently afford a wage increase and whether they can absorb a wage increase through increased productivity or by raising the prices.

Others:- Economists, researchers, etc. analyse the financial statements to study the present business and economic conditions. Government agencies need it for price regulations, taxation and other similar purposes.

Top score good marks in class 12 Accountancy one must revise all the 11 chapters but a few topics need more attention and are important too such as Fundamentals of the Partnership firms, Company Accounts, Accounting for Not-for-Profit Organizations, Accounting for Partnership Firms, Analysis of Financial Statement. 

Tools of  Financial analysis:

Comparative Statements:- These are the statements showing the profitability and financial position of a firm for different periods in a comparatively form to give an idea about the position of two or more periods.

Common Size Statements:- These are the statements which indicate the relationship of different items of a financial statement with some common item by expressing each item as a percentage of the common item.

Trend Analysis:- It is a technique of studying the operational results and financial position over a series of years. Using the previous years’ data of a business enterprise, trend analysis can be done to observe the percentage changes over time in the selected data.

Ratio Analysis:- It describes the significant relationship which exists between various items of a balance sheet and a profit and loss account of a firm.

Cash Flow Analysis:- It refers to the analysis of the actual movement of cash into and out of an organisation. 

It is also known as a component percentage statement is a financial tool for studying the key changes and trends in the financial position and operational result of a company. Hence each item in the statement is stated as a percentage of the aggregate, of which that item is a part. 

It is used for comparing enterprises which differ substantially in size as it provides insight into the structure of financial statements. Inter-firm comparison of the company’s position with the related industry as a whole is possible with the help of common size statement analysis.