Financial Statements :Nature, uses and limitations. Analysis and interpretations – meaning, procedure, objectives, and importance. Comparative statement, Common Size Statements and Trend Analysis - practical problems. Comparative financial statements are prepared by arranging financial data of two or more financial years in two side by side column. Any financial statement that reports and comparison of data of two or more consecutive accounting periods are known as comparative financial statements. Income statement or profit and loss account.

1. MANAGEMENTACCOUNTING
FinancialAnalysis and Interpretation :
Comparative Financial StatementAnalysis
By:
Smt.UMA MINAJIGI REUR
HEAD, DEPT. OF COMMERCE & Management
Smt. V G Degree College for Women, Kalaburagi

2. MANAGEMENT
ACCOUNTING
B.COM SIXTH SEMESTER
&
BBA FOURTH SEMESTER
6.3: PRINCIPLES OF MANAGEMENT ACCOUNTING

3. B.COM SIXTH SEMESTER
6.3: PRINCIPLES OF MANAGEMENT ACCOUNTING
Unit I: Management Accounting (08 Hours):
Definition and objectives of Management Accounting - Relationship between Cost, Financial and Managerial Accounting.
Unit II : Financial Statements (15 Hours):
Nature, uses and limitations. Analysis and interpretations – meaning, procedure, objectives, and importance. Comparative
statement, Common Size Statements and Trend Analysis - practical problems.
Unit III: Ratio Analysis (15 Hours):
Definition and meaning of Ratio Analysis, importance and limitations, Profitability Ratio – Gross profit Ratio, operating
Ratio, Overall profitability ratio – Earning per share. Turnover Ratios- Inventory Turnover Ratio, Debtors Turnover Ratio,
Debt collection period , Creditors Turnover Ratio, Debt payment period, Liquidity Ratio- current ratio, liquid ratio.
Financial positions and Leverage Ratios- Debt Equity Ratio, Proprietary Ratio - Problems thereon.
Unit IV: Analysis through Leverages (12 Hours):
Meaning- types of Leverages- operating – financial and combined leverages- problems thereon.
Unit V: Fund Flow Statement (15 Hours):
Meaning , uses and limitations – preparation of fund-flow statement. Cash Flow Statement: Meaning and preparation of
Cash flow statement- problems thereon.

4. Unit II : Financial Statements :
• Nature, uses and limitations.
• Analysis and interpretations – meaning,
procedure, objectives, and importance.
• Comparative statement,
• Common Size Statements and
• Trend Analysis - practical problems.

5. Definition:
J.S. Batty defines, “Management accounting is the term used
to describe the accounting methods, systems and techniques
which coupled with special knowledge and ability to assist
management in its task of maximising profit and minimising
losses.”
Management Accounting is a system for gathering data and
other financial information primarily for the internal needs of
management. It is designed to assist internal management in
the efficient formulation, execution and appraisal of business
plans.

6. Financial Statements:
Financial Statements refer to statements which give financial information about the
concerns. Financial statements are also called as Financial reports, Final accounts or Annual
accounts.
Financial Statements communicate information relating to financial performance, financial
position and special need to those interested in the business enterprise.
Definition:
John M. Myer defines, “The financial statements provide summary of the accounts of a
business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a
certain date and the income statement showing the results of operations during a certain
period.”
Thus, Financial Statements are like mirror which reflects the financial position and
operating strength or weakness of the concern. It is also called SWOT analysis of the
business.

7. Financial Analysis: To analyse financial statement means to make a critical
examination of accounting information given to them.
Analysis of a financial statement is a study of relationships among different
components of financial activities of a business enterprise as has been
disclosed in financial statements.
Financial analysis refers to the process of determining financial strengths
and weaknesses of the firm by establishing strategic relationship between
the items of the balance sheet, profit & Loss account and other operative
data.
A process of grouping or sun grouping of a given data for the purpose of
developing some relationships among the groups either for decisions or for
future prediction is known as analysis.
Financial Analysis and Interpretation

8. Definition:
John M Myer defined, “Financial statement analysis is largely a study of
relationships among the various financial factors in a business, as disclosed by a
single set of statements and study of these factors as shown in a series of
statements.”
Financial Analysis involves the following:
1. Presentation of financial data in logical and simple manner.
2. Grouping and sub grouping of the various items given in the financial
statements.
3. Study and understanding of the data given in the financial statements.
4. Development of relationship from one group to another group.
5. Data provided in the financial statement is rearranged and classified for
comparison.

9. Financial Interpretation: Interpretation is a wider term and includes criticism,
examination and analysis. Interpretation tells the story of actual progress and financial
position of a business concern in a clear and simple language easily understood be the
layman.
Definition:
Kennedy and Muller: “Analysis and Interpretation of financial statement are an attempt to
determine the significance and meaning of the financial data. So that the forecast may be
made of the prospects for future earnings easily to pay interest and debt maturities and
profitability of a sound dividend policy.”
Interpretation includes the following:
1. Criticism
2. Analysis
3. Comparison
4. Study of trend
5. Drawing conclusion

10. Objectives of Financial Analysis & Interpretation of Financial Statements:
1. To assess the present and future earning capacity of the business.
2. To judge the efficiency of the future business concern.
3. To make comparative study of different firms in an industry and of different departments in a
firm.
4. To examine the stability of the business entity and future.
5. To estimate future possibilities of the business.
6. To examine efficiency of the management.
7. To assess the financial performance of the concern.
8. To assess the future prospects of the business.
9. To facilitate decision making and policy formulation.
10.To assess the borrowing capacity.
11.To prepare budget and plan for the next financial period.
12.To know the trend of the business i.e, purchases, sales, profits and solvency.
13.To facilitate analytical presentation of data.
14.To provide the information about short term, long term solvency of the concern in order to
serve the intending investors, shareholders and debenture holder of the company.

11. Tools / Techniques / Methods of Financial Analysis
Tools are classified into three classes:
I. Vertical Analysis
a. Common size statements
b. Financial Ratios
II. Horizontal Analysis
a. Comparative Statement
b. Trend Analysis
III. Other tools of Analysis
a. Funds flow Analysis
b. Cash Flow Analysis
c. Break even Analysis
d. Net Working capital Analysis

12. Comparative Financial Statement Analysis
Comparative financial statements are prepared by arranging financial
data of two or more financial years in two side by side column.
Any financial statement that reports and comparison of data of two
or more consecutive accounting periods are known as comparative
financial statements.
According to A.F. Foulke, “Comparative financial statements are
statements of the financial position of a business so designed as to
provide time prospective to the consideration of various elements of
financial position embodied in such statements.”

13. The Comparative Statement Shows:
1. Absolute figures (rupees amount)
2. Changes in absolute figures i.e, increase or decrease in absolute figures.
3. Absolute data in terms of percentage.
4. Increase or decrease in terms of percentage.
1. Absolute figures (rupees amount)
In this case, amount or values of difference items for two or more periods are
shown in comparative statements.
Example 1: Purchases Rs.8,00,000 for the current year 2007 and Rs. 6,00,000
for the previous year.
1. Changes in absolute figures i.e, increase or decrease in absolute figures.
In this case, increase or decrease in absolute figures of different items will be
stated in comparative statement.
Example 2: The purchases of current year 2007 have increased by Rs. 2,00,000
as compared to the purchases of the last year 2006 as given in example 1.

14. Percentage =
Increase in purchases in current year
X 100
Purchases in last year
Percentage =
200000
X 100
800000
3. Absolute data in terms of percentage.
In this case, increase or decrease in various items are expressed in terms of
percentage in the comparative statement.
Example 3: Purchase of current year 2007 have increased by 25% as compared
to the previous year 2006.
= 25%

15. 4. Increase or decrease in terms of percentage.
In this case, ratios are calculated and presented in the comparative statement.
Such ratio is calculated by dividing the absolute figures of current year by the
absolute figures of the last year.
Ratio =
Absolute figures of current year
Absolute figures of last year
After calculating, if the ratio is more than 1
It indicates increase and if a ratio is less than 1, indicates decrease.
Example 4:
Current year purchases
Last year purchases
800000
600000
= 1.33
Example 1: Purchases
Rs.8,00,000 for the current
year 2007 and Rs.
6,00,000 for the previous
year.

16. Types of Comparative Financial Statements
The following are two comparative statements:
1. Income statement or profit and loss account.
2. Balance Sheet or Financial position statement.
Income statement or profit and loss account:
A comparative income statement is prepared in terms of numerical data as well as in
terms of percentage. In this case the figures two or more of periods are shown side by
side, which makes the reader to understand the statement quickly.
This statement helps to analyse the cause of increase or decrease in the volume of
sales along with the increase or decrease of cost of sales, administrative expenses and
selling and distribution expenses.

17. Income statement contains four columns,
• First column for last year absolute figures.
• Second column for current year figures.
• Third column for increase or decrease in figures, in absolute
• Amounts recorded in plus(+) for increase and minus(-) for decrease.
• Fourth column for percentage.

18. Guidelines Or Steps For Interpretations Of Income Statements
The following are the guidelines or steps for the analysis and interpretation of the
income statement:
Firstly, the amount gross profit should be analysed:
The increase or decrease in sales should be compared with the increase in cost of
goods sold. If the increase in sales is more than cost of goods sold indicates Gross
profit. If sales is less than cost of goods indicates Gross Loss.
Secondly, analysis of the operating profit.
One has to deduct the operating expenses such as administrative expenses, selling
distribution expenses from gross profit to analyse the operating profit.

19. Thirdly, analysis of the net profit.
Net profit includes operating profit plus non-operating profit.
Non-Operating profit means non-operating incomes less non-operating expenses.
Non-operating incomes:
Rent received
Interest received
Dividend received
Profit on sale of fixed assets
Non-operating expenses:
Interest paid
Loss on sale of fixed assets
Payment of tax
Writing of deferred expenses
Loss of goodwill
Loss of goods destroyed
The increase or decrease in net profit will give an idea about the overall profitability of
the concern.
Finally, an opinion should be given about the overall profitability of the concern at the
end.

20. Comparative Income Statement
For the year ended 31st Dec, 2019 and 2020
Format:
Particulars 31-12-2019 31-12-2020 Increase or
Decrease in
amount
Increase or
Decrease in
percentage
%
I. Continuing operations
1. Revenue from operations 14,19,736 16,40,694 +2,20,958 +15.56
2. Other income 22,090 12,824 -9266 -41.94
Total Revenue (A) 14,41,826 16,53,518 +2,11,692 +14.68
3. Less: Expenses
Cost of Sales 9,26,500 9,67,798 +41,298 +4.46
Finance Cost 8,550 7,000 -1,550 -18.13
Other Expenses 2,89,216 3,40,238 +51,022 +17.64
Total Expenses (B) 12,24,266 13,15,036 +90,770 +7.41
Profit before tax (A-B) 2,17,560 3,38,482 +1,20,922 +55.58
4. Less: Tax expenses 86,076 1,60,780 +74,704 +86.79
Profit after Tax 1,31,484 1,77,702 +46,218 +35.15

21. Thank You
Watch next PPT & Video for
Problems on Comparative
Income Statement