3.Tools and techniques of Financial Statement Analysis

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Comparative Statements or Comparative Financial Statements mean comparison of components or elements or items of Balance Sheet and Statement of Profit and Loss for two or more years. As a first step, the value of each component or element or item of two or more financial years is placed alongside each other. Thereafter, difference between the two amounts is determined. And lastly, the percentage change in the amount from the base year is determined. The statement so prepared is known as Comparative Statement.

Intra-firm Comparison-Comparative Statement of the firm’s financial statements of two or more years prepared, is known as Intra-firm Comparison. It is comparison of values of one period with those of another period for the same firm.

Inter-firm Comparison-Comparative Statement of the firm’s financial statements prepared taking items of the financial statements of the firm and comparing them with that of another firm or with industry data or with the budget is known as Inter-firm Comparison.

Common-size Financial Statement is Vertical Analysis of Financial Statements in which amounts of individual items of Balance Sheet or Statement of Profit and Loss (or Income Statement) are written. These amounts are further converted into percentages to a common base. Common base is Revenue from Operations of Profit and Loss and Total Assets or Total of Equity and Liabilities for the Balance Sheet. The percentage so calculated can be compared with the corresponding percentages in other periods and meaningful conclusions can be drawn.

Common-size Statement may be prepared for intra-firm and inter-firm comparison. Common-size Statements may be prepared for Balance Sheet as well as Income Statement.

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