Analysis of Financial Statements

CBSE Class 12 Accountancy | 2026–27

1. Objectives

Analysis interprets financial information to understand relationships, trends and changes in profitability, liquidity, solvency and operating performance.

2. Comparative Statements

Absolute change = Current year − Previous year. Percentage change = Absolute change ÷ Previous year × 100.

Worked Example

Revenue rises from ₹5,00,000 to ₹6,25,000. Increase = ₹1,25,000. Percentage increase = ₹1,25,000 ÷ ₹5,00,000 × 100 = 25%.

3. Common-Size Statements

Each item is expressed as a percentage of a common base. This makes structure easier to compare across periods or entities of different size.

4. Ratio Analysis

Ratios express relationships between accounting figures. They should be interpreted with the direction of change, business context and relevant benchmarks.

Illustrative Ratios

• Current Ratio: Current Assets ÷ Current Liabilities.
• Debt-Equity Ratio: Debt ÷ Shareholders’ Funds, using the definitions specified in the question/syllabus.
• Gross Profit Ratio: Gross Profit ÷ Revenue from Operations × 100.
• Net Profit Ratio: Net Profit ÷ Revenue from Operations × 100, using the prescribed profit figure.

5. Interpretation Example

If current assets are ₹3,00,000 and current liabilities ₹1,50,000, current ratio = 2:1. The number alone is not a final judgement; interpretation requires the firm’s context and comparison with prior periods or relevant norms.

6. Limitations

Analysis depends on accounting policies, estimates, classification, inflation and the quality of source data. A ratio can change because of accounting presentation as well as underlying economics.

🖼️ Analysis Framework

Exam Practice

1. Prepare a comparative statement with absolute and percentage changes.
2. Prepare a common-size statement.
3. Calculate specified ratios from financial statements.
4. Write a two-paragraph interpretation using actual figures and trend.

MCQs

1. Percentage change uses the previous-period figure as denominator. True.
2. Common-size statements use a common base. True.
3. Current Ratio = Current Assets ÷ Current Liabilities. True.
4. A ratio should be interpreted with context. True.
5. A balanced calculation automatically proves a company is financially strong. False.