Chapter 4 of Class 12 Accountancy Part 2 focuses on Analysis of Financial Statements, one of the most practical and scoring topics in the entire syllabus. This chapter teaches us how to read financial reports and understand a company’s real performance using data. It includes tools like comparative and common size statements, which help in understanding trends and financial health over time.
I’ve chosen to write on this chapter because many students think that analysing financial statements means just solving big tables. But it’s much more than that. Once you understand how to spot the change in profits, expenses, and capital structure across years, it becomes easy and logical. It is also one of the few topics that directly connect textbook learning to what companies actually report in the business world. If you plan to study B.Com, CA or MBA later, these concepts will help you from day one. So it’s better to understand them properly while you’re still in school.
What Is Analysis of Financial Statements?
Analysis of financial statements means studying and interpreting the figures shown in a company’s financial reports to find out how well it is performing. This chapter helps you to:
- Compare performance across years
- Find out strengths and weaknesses
- Identify reasons for changes in profits, assets or liabilities
The two main tools discussed in this chapter are:
1. Comparative Statements
These show the change in figures (like revenue, expenses, net profit) from one year to another in both absolute numbers and percentages. This helps to understand whether the company has improved or declined over time.
Example: Comparative Income Statement
| Particulars | 2023 (₹) | 2024 (₹) | Change (₹) | % Change |
|---|---|---|---|---|
| Revenue from Operations | 10,00,000 | 12,00,000 | 2,00,000 | 20% |
| Expenses | 7,00,000 | 8,50,000 | 1,50,000 | 21.4% |
| Net Profit | 3,00,000 | 3,50,000 | 50,000 | 16.7% |
2. Common Size Statements
These express all items as a percentage of a base amount. In the income statement, sales is the base, and in the balance sheet, total assets or liabilities is the base.
Example: Common Size Income Statement
| Particulars | Amount (₹) | % of Sales |
|---|---|---|
| Revenue from Operations | 10,00,000 | 100% |
| Expenses | 7,00,000 | 70% |
| Net Profit | 3,00,000 | 30% |
This helps in comparing two companies of different sizes or the same company over multiple years.
Importance of Financial Statement Analysis
- Helps in decision making by shareholders, management, and creditors
- Shows profitability, liquidity, and financial stability
- Makes it easy to compare a company’s performance with others in the same industry
- Useful in identifying areas that need improvement
Key Concepts in Chapter 4
- Objectives of financial statement analysis
- Types and tools of financial statement analysis
- Limitations of financial statements
- Preparation of comparative and common size income statements and balance sheets
This chapter mostly includes theoretical explanations followed by practical problems. So understanding the format and logic is more important than memorising anything.
How to Score Full Marks in this Chapter
- First understand the format of each type of statement
- Practise multiple sums from NCERT exercises
- Learn how to calculate percentage changes and ratios
- Focus on presentation, as marks are often given for proper layout
- Read the analysis part of sample questions carefully and practise writing conclusions
Download PDF – NCERT Class 12 Accountancy Part 2 Chapter 4
If you want to study or revise this chapter offline, you can easily download the PDF version from the official NCERT website or app.
