FAA UNIT-5

MBA 1st SEMESTER
UNIT-5
Financial Statement Analysis

Financial statement analysis reviews financial information found on financial
statements to make informed decisions about the business. The income statement,
statement of retained earnings, balance sheet, and statement of cash flows, among
other financial information, can be analyzed. The information obtained from this
analysis can benefit decision-making for internal and external stakeholders and can
give a company valuable information on overall performance and specific areas for
improvement. The analysis can help them with budgeting, deciding where to cut
costs, how to increase revenues and future capital investment opportunities.
Horizontal Analysis
Horizontal analysis (also known as trend analysis) looks at trends over time on
various financial statement line items. A company will look at one period (usually a
year) and compare it to another period. For example, a company may compare sales
from their current year to sales from the prior year. The trending of items on these
financial statements can give a company valuable information on overall
performance and specific areas for improvement. It is most valuable to do horizontal
analysis for information over multiple periods to see how change is occurring for
each line item. If multiple periods are not used, it can be difficult to identify a trend.
The year being used for comparison purposes is called the base year (usually the
prior period). The year of comparison for horizontal analysis is analyzed for dollar
and percent changes against the base year.
Vertical Analysis
Vertical analysis shows a comparison of a line item within a statement to another line
item within that same statement. For example, a company may compare cash to
total assets in the current year. This allows a company to see what percentage of
cash (the comparison line item) makes up total assets (the other line item) during the
period. This is different from horizontal analysis, which compares across years.
Vertical analysis compares line items within a statement in the current year. This can
help a business to know how much of one item is contributing to overall operations.
For example, a company may want to know how much inventory contributes to total
assets. They can then use this information to make business decisions such as
preparing the budget, cutting costs, increasing revenues, or capital investments.
Here are the main types of accounting:

• Tax accounting.
• Financial accounting.
• Management accounting.
• Cost accounting.
• Forensic accounting.
• Governmental accounting.
• International accounting.
• Auditing.
Common size statement is a form of analysis and interpretation of

the financial statement. It is also known as vertical analysis. This
method analyses financial statements by taking into consideration
each of the line items as a percentage of the base amount for that
particular accounting period.
What is Common Size Statement?

Common size statement is a form of analysis and interpretation of the
financial statement. It is also known as vertical analysis. This method
analyses financial statements by taking into consideration each of the line
items as a percentage of the base amount for that particular accounting
period.
Common size statements are not any kind of financial ratios but are a
rather easy way to express financial statements, which makes it easier to
analyse those statements.
Common size statements are always expressed in the form of

percentages. Therefore, such statements are also called 100 percent
statements or component percentage statements as all the individual
items are taken as a percentage of 100.
Types of Common Size Statements

There are two types of common size statements:
1. Common size income statement

2. Common size balance sheet
1. Common Size Income Statement

This is one type of common size statement where the sales is taken as the
base for all calculations. Therefore, the calculation of each line item will
take into account the sales as a base, and each item will be expressed as
a percentage of the sales.
Use of Common Size Income Statement
It helps the business owner understand the following points
1. Whether profits are showing an increase or decrease in relation to the sales

obtained.
2. Percentage change in cost of goods that were sold during the accounting
period.
3. Variation that might have occurred in expense.
4. If the increase in retained earnings is in proportion to the increase in profit of
the business.
5. Helps to compare income statements of two or more periods.
6. Recognises the changes happening in the financial statements of the
organization, which will help investors in making decisions about investing in
the business.
2. Common Size Balance Sheet:
A common-size balance sheet is a statement in which balance

sheet items are calculated as the ratio of each asset in relation to the total
assets. For the liabilities, each liability is calculated as a ratio of the total
liabilities.
Common-size balance sheets can be used for comparing companies that

differ in size. The comparison of such figures for the different periods is not
found to be that useful because the total figures seem to be affected by a
number of factors.
Standard values for various assets cannot be established by this method

as the trends of the figures cannot be studied and may not give proper
results.
Common Size Income Statement Format

The common size income statement format is as follows:
The common size income statement format is as follows:

Preparing Common Size Balance Sheet
(1) Take the total of assets or liabilities as 100.
(2) Each individual asset is expressed as a percentage of the total assets,

i.e., 100 and different liabilities are also calculated as per total liabilities. For
example, suppose total assets are around Rs. 4 lakhs, and inventory value
is Rs. 1 lakh. In that case, it will be counted as 25% of the total assets.
Human Resource Accounting (HRA) is the process of identifying and

reporting investments made in the human resources of an organization
that are presently unaccounted for in the conventional accounting
practice. It is an extension of standard accounting principles.
Human Resource Accounting is the process of identifying and measuring

data about Human Resources and communicating this information to the
interested parties. It is an attempt to identify and report the Investments
made in Human Resources of an organization that are currently not
accounted for in the Conventional Accounting Practices.
The objective of Human Resource Accounting
The Aim of HR Accounting is to depict the Potential of the Employees in

Monetary Terms. This concept can be examined from 2 directions i.e.
1. Cost of Human Resources i.e. the expenditure incurred for recruiting,

staffing and training the Quality of the Employees and
2. Value of Human Resources i.e. the yield which the above investment
can yield in the future.
Benefits of Human Resource Accounting
The main benefits of Human Resource Accounting are:-
1. HR Accounting helps the company ascertain how much Investment it has

made in its Employees and how much return it can expect from this
investment
2. The Ratio of Human Capital to Non-Human Capital computed as per the

HR Accounting Concept indicates the degree of Labour Intensity of an
Organisation.
3. HR Accounting provides a basis for planning physical assets vis-a-vis

Human Resources
4. HR Accounting provides valuable information to Investors interested in

making Long Term Investments in Service Sector Companies
Forensic Accounting
Forensic accounting is a type of accounting that investigates financial

information for potential evidence of crimes. Forensic accountants use
accounting, auditing, and investigative skills to understand whether a
person or company has committed financial misconduct, such as
embezzlement or fraud

FAA UNIT-5

Uploaded by

Copyright:

Available Formats

FAA UNIT-5

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FAA UNIT-5

Uploaded by

Copyright:

Available Formats

MBA 1st SEMESTER

Financial Statement Analysis

Here are the main types of accounting:

Common size statement is a form of analysis and interpretation of

What is Common Size Statement?

Common size statements are always expressed in the form of

Types of Common Size Statements

1. Common size income statement

1. Common Size Income Statement

Use of Common Size Income Statement

It helps the business owner understand the following points

1. Whether profits are showing an increase or decrease in relation to the sales

2. Common Size Balance Sheet:

A common-size balance sheet is a statement in which balance

Common-size balance sheets can be used for comparing companies that

Standard values for various assets cannot be established by this method

Common Size Income Statement Format

The common size income statement format is as follows:

(2) Each individual asset is expressed as a percentage of the total assets,

Human Resource Accounting (HRA) is the process of identifying and

Human Resource Accounting is the process of identifying and measuring

The objective of Human Resource Accounting

The Aim of HR Accounting is to depict the Potential of the Employees in

1. Cost of Human Resources i.e. the expenditure incurred for recruiting,

Benefits of Human Resource Accounting

The main benefits of Human Resource Accounting are:-

1. HR Accounting helps the company ascertain how much Investment it has

2. The Ratio of Human Capital to Non-Human Capital computed as per the

3. HR Accounting provides a basis for planning physical assets vis-a-vis

4. HR Accounting provides valuable information to Investors interested in

Forensic accounting is a type of accounting that investigates financial

You might also like