TOOLS OF FINANCIAL ANALYSIS
The various tools or methods of Financial Analysis are as follows:
a) Comparative Financial Statements
In these statements, figures for two or more periods are placed side by side to facilitate comparison.
Both the Income Statement and Balance Sheet can be prepared in the form of Comparative Financial Statements.
The American Institute of Certified Public Accountants has explained the utility of preparing the
Comparative Financial Statements as follows:
“ The presentation of comparative financial statements in annual and other reports enhance the usefulness of such reports
and brings out more clearly the nature and trend of current changes affecting the enterprise.
Such presentation emphasises the fact that statements for a series of periods are far more significant than those of a single
period and that the accounts of one period are but an installment of what is essentially a continuous history.
In any one year, it is ordinarily desired that the Balance Sheet, the Income Statement and the Surplus Statement be given for
one or more preceding years as well as for the current year.”
In India, the Companies Act, 1956, provides that companies should give figures for different items for the previous period,
together with current period figures in their Profit and Loss Account and Balance Sheet.
b) Trend Percentages
Trend percentages are calculated for making a comparative study of the financial statements for several years.
Usually the earliest year is taken as the base year and a relationship is established
with percentages of each item of each of the years.
However, the defect of this tool is that trend percentages are not calculated for all the items
in the financial statements, instead, they are usually calculated only for major items since the purpose
is to highlight important changes.
c) Funds Flow Analysis
Funds flow analysis is an important analytical tool of financial analysts, credit...