# Chapter 4 Analysis of Financial Statement

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### Exercise 1 ( Page No. : 186 )

•  Q1 List the techniques of Financial Statement Analysis. Ans: (a)Trend analysis (b)Common-size financial analysis (c)Financial ratio analysis (d)Cost volume profit analysis (e)Benchmarking (industry) analysis Q2 Distinguish between Vertical and Horizontal Analysis of financial data. Ans: In Horizontal Financial Analysis, the comparison is made between an item of financial statement, with that of the base years corresponding item. On the other hand, in Vertical Financial Analysis, an item of the financial statement is compared with the common item of the same accounting period. Q3 State the meaning of Analysis and Interpretation. Ans: Analysis and Interpretation refers to a systematic and critical examination of the financial statements. It not only establishes cause and e Tect relationship among the various items of the financial statements but also presents the financial data in a proper manner. The main purpose of Analysis and Interpretation is to present the financial data in such a manner that is easily understandable and self-explanatory. This not only helps the accounting users to assess the fi nancial performance of the business over a period of time but also enables them in decision making and policy and financial designing process. Q4 State the importance of Financial Analysis? Ans: Financial Analysis has great importance to various accounting users on various matters: 1. It helps in evaluating the profit earning capacity and financial feasibility of a business. 2. It helps in assessing the long-term solvency of the business. 53. Many business owners and company managers have found that insight gained from their examination of company financial statements can be invaluable. Such insight can help businesses improve their profitability, cash flow, and value. Q5 What are Comparative Financial Statements? Ans: A comparative statement is a document used to compare a particular financial statement with prior period statements. Previous financials are presented alongside the latest figures in side-by-side columns, enabling investors to identify trends, track a companys progress and compare it with industry rivals. Q6 What do you mean by Common Size Statements? Ans: A common size income statement is an income statement in which each line item is expressed as a percentage of the value of revenue or sales. Common size financial statements help to analyze and compare a companys performance over several periods with varying sales figures.