Such analysis is useful in comparing the performance

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Such analysis is useful in comparing the performance of several companies in the same group, or divisions or departments in the same company. Since this analysis depends on the data for one period, this is not very conducive to a proper analysis of company financial position. It is also called static analysis as it is frequently used for referring to ratios developed on one date or for one accounting period. It is to be noted that both analysis vertical and horizontal can be done simultaneously also. For example, the income statement of a company for several years may be given. Horizontally it may show the cange in different elements of cost and sales over a number of years. On the other hand, vertically it may show the percentage of each element of cost to sales. 5.3.4 TECHNIQUES OF FINANCIAL ANALYSIS A financial analyst can adopt one or more of the following techniques/tools of financial analysis Comparative financial statements Comparative financial statement are those statement which have been designed in a way so as to provide time perspective to the consideration of various elements of financial position embodies in such statements. In these statement 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. Common size financial statement Common size financial statements are those in which figures reported are converted into percentages to some common base. In the income statement the sale figure is assumed to be 100 and all figures are expressed as a percentage of this total. Trend percentages Trend percentages are immensely helpfull in making a comparative study of the financial statements for several years. The method of calculating trend percentages involves the calculation of percentage relationship that each item bears to the same item in the base year. Funds flow analysis Funds flow analysis has become an important tool in the analytical kit of financial analysts, credit grating institutions and financial mangers. This is because the balance sheet of a business reveals its financial status at a particular point of time. It does not sharply focus those major financial transactions which have been behind the balance sheet changes. Cost volume profit analysis Cost volume profit analysis is an important tool of profit planning. It studies the relationship between cost, volume of production, sales and profit. Of course, it is not strictly a technique used for analysis of financial statements.
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64 Ratio analysis This is the most important tool available to financial analysis for their work. An accounting ratio shows the relationship in mathematical terms between two interrelated accounting figures.
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