NCERT Solutions Class 12 Accountancy Company Accounts And Analysis Of Financial Statements Chapter 4

NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4

Accounting is the discipline of keeping track of, categorising, and reporting on a company’s financial activities. It offers managers information on an organisation’s economic outcomes and status.

Chapter 4, Analysis of Financial Statements, is essentially the study of the relationships between various financial facts and figures as presented in a set of financial statements, as well as their interpretation, to gain insight into the profitability and operational efficiency of a company to assess its financial health and prospects.

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Key Topics Covered In NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4

The following major topics are covered in NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4.

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Analysis of Financial Statements

Financial statement analysis can be referred to as Examining an organisation’s financial statements to make choices and understand the organisation’s overall health. Financial statements include financial data that must be evaluated through financial statement analysis to make it more helpful for the shareholders, managers, investors, and other stakeholders. 

Tools of Analysis of Financial Statements

The following are the most often used financial analysis tools:

• Comparative Statements: 

These statements show an enterprise’s financial situation and profitability over time in a comparative format to give a sense of position across two or more periods. It generally refers to the essential financial statements, profit and loss statements, and comparative balance sheets. The direction and trend of the financial status and operating results are shown by relative numbers.

• Common Size Statements: 

Standard size statements show the relationship between different items of financial information by showing each item as a percentage of the common item. These statements enable an analyst to evaluate the finance and operating characteristics of two businesses of different sizes in the same industry.

• Cash Flow Analysis: 

It examines the actual movement of cash into and out of business. Cash inflow or positive cash flow flows money into a trading company, whereas negative cash flow or cash outflow is the movement of money out of the company. The net cash flow is the difference between the outflow and inflow of cash. As a result, it combines the explanations for changes in a trading concern’s cash position between two balance sheet dates.

• Ratio Analysis: 

It describes the critical relationship between numerous elements on a B/S (balance sheet) and an enterprise’s P&L statement. Accounting ratios are a financial analysis tool that calculates the relative importance of individual items in the balance and income statements. The ratio analysis method may be used to assess a company’s solvency, efficiency, and profitability.

The Significance of Analysis of Financial Statements

The financial analysis identifies a company’s financial strengths and weaknesses by charting the links between various elements on the balance sheet and the profit and loss statement. Economic analysis can be started by the company’s management or by outside parties such as the finance manager, trade payables, lenders, labour organisations, etc. Financial analysis is beneficial and necessary for many users in the following ways as explained by Extramarks NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4:

1. Management- Top management benefits from the financial analysis:

• To determine if the company’s resources are being used to their full potential.
• Whether or not the company’s financial situation is sound.
• To determine the success of the company’s operations.
• Individual performance is calculated.
• Internal control structure evaluation.
• To investigate the company’s prospects.

2. Trade Payables- Trade payables examine the financial accounts for:

• Calculating an organisation’s capacity to satisfy its short-term obligations
• Considering the enterprise’s capacity to satisfy all of its financial obligations soon
• The capacity of an organisation to satisfy payables claims on time.
• Evaluating the financial situation and ability to pay off the debts.

3. Lenders- Long-term debt providers are concerned about the company’s long-term financial viability and existence. They examine the financial accounts of the company:

• Determine the enterprise’s profitability over a while.
• To determine a company’s capacity to get funds, repay the principal, and pay interest.
• To assess the relationship between various capital sources (i.e.capital structure associations).
• To assess financial documents containing historical performance data and understand it as a basis for forecasting future rates of return and evaluating risk factors.
• For determining credit risk and the terms and conditions of a loan, such as maturity date and interest rate, if one is granted.

4. Labour Unions- Labour unions scrutinise financial statements:

• To determine if a company’s salary can be increased.
• To see if a company can absorb a salary rise by increasing productivity or increasing the cost of services/products.

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Objectives of Analysis of Financial Statements

Financial statement analysis reveals essential data about management performance and the effectiveness of the business. To be more specific, the inspection is being carried out to achieve the following objectives:

• To assess the company’s current profitability and functional competence as a whole, as well as its many units and to determine its financial health.
• Determine the relative importance of various aspects of the company’s financial situation.
• Recognise the reasons for the company’s shift in profitability or financial situation.
• To assess the company’s capacity to repay its debt and its short and long-term liquidity status.

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Limitations of Analysis of Financial Statements

Financial analysis is instrumental in determining an organisation’s financial shortcomings and strengths since it is based on facts available in financial statements. The economic analysis also examines the financial statements’ limitations. As a result, the analyst must be aware of the impact of changes in cost pricing levels, changes in an enterprise’s accounting practice, financial statement window dressing, personal judgement, accounting principles, traditions, etc. 

 As per Extramarks NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4 some more financial analysis’ limitations are as follows:

• Cost price level variations are not considered in the economic analysis
• Without previous awareness of an organisation’s accounting method changes, the financial analysis may be confusing.
• Financial analysis is the study of business reporting.
• Only economic data is considered in financial analysis, while non-monetary aspects are ignored.
• The financial statements are established on the premise of the accounting concept. As such, it does not match the current condition.

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NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4 Accounting for Share Capital: Important Links

Click on the below links to view NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4: 

• Class 12 Accounting Chapter 4: Very Short Answer Type Questions
• Class 12 Accounting Chapter 4: Short Answer Type Questions
• Class 12 Accounting Chapter 4: Long Answer Type Questions

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Key Features on NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 4

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