CBSE Class 12 Accountancy – Chapter 9: Analysis of Financial Statements
NCERT/CBSE-aligned study resource
1. Meaning and Objectives
Financial statement analysis involves examining financial information to understand profitability, liquidity, solvency and operating efficiency. It helps users compare performance across periods or with relevant benchmarks.
2. Comparative Statements
Comparative statements place figures for two or more periods side by side. Absolute change is calculated as current figure minus previous figure, while percentage change expresses the change relative to the previous figure.
3. Common-Size Statements
In a common-size income statement, each item is generally expressed as a percentage of revenue from operations. In a common-size Balance Sheet, items are expressed as a percentage of an appropriate total.
% change = (Absolute change / Previous year) × 100
4. Ratio Analysis
Ratios summarise relationships between accounting figures. Common categories include liquidity ratios, solvency ratios, activity ratios and profitability ratios.
5. Important Ratios
| Ratio | Formula | Purpose |
|---|---|---|
| Current Ratio | Current Assets / Current Liabilities | Short-term liquidity |
| Quick Ratio | Quick Assets / Current Liabilities | More immediate liquidity |
| Debt-Equity Ratio | Debt / Shareholders’ Funds | Capital structure and solvency |
| Gross Profit Ratio | Gross Profit / Revenue from Operations × 100 | Gross margin |
6. Interpretation
A ratio should not be interpreted in isolation. The trend, industry context, accounting policies and relationship with other ratios should be considered before drawing a conclusion.
Worked Ratio
If current assets are ₹6,00,000 and current liabilities are ₹3,00,000, Current Ratio = ₹6,00,000 / ₹3,00,000 = 2:1.
Chapter-Specific MCQs
- Current Ratio measures primarily: (A) short-term liquidity (B) market share (C) employee productivity (D) depreciation. Answer: A.
- Percentage change is calculated using: (A) change ÷ previous figure × 100 (B) change × current figure (C) current ÷ change only (D) previous + current. Answer: A.
- A ratio should be interpreted: (A) with relevant context and trends (B) without comparison (C) only from one year (D) without knowing the formula. Answer: A.
Practice Set
- Prepare a comparative statement and calculate absolute and percentage changes.
- Calculate current, quick and debt-equity ratios from a supplied Balance Sheet.
- Interpret a set of ratios and identify areas of strength and concern.