A. ACCOUNTING TECHNIQUES
It is also known as financial techniques. Various accounting techniques such as Comparative Financial
Analysis, Common-size Financial Analysis, Trend Analysis, Fund Flow Analysis, Cash Flow Analysis, CVP
Analysis, Ratio Analysis, Value Added Analysis etc. may be used for the purpose of financial analysis.
Some of the important techniques which are suitable for the financial analysis of GSRTC are discussed
hereunder:
1. R atio Analysis
In order to evaluate financial condition and performance of a firm, the financial analyst needs certain
tools to be applied on various financial aspects. One of the widely used and powerful tools is ratio or
index. Ratios express the numerical relationship between two or more things. This relationship can be
expressed as percentages (25% of revenue), fraction (one-fourth of revenue), or proportion of numbers
(1:4). Accounting ratios are used to describe significant relationships, which exist between figures
shown on a balance sheet, in a profit and loss account, in a budgetary control system or in any other
part of the accounting organization. Ratio analysis plays an important role in determining the financial
strengths and weaknesses of a company relative to that of other companies in the same industry. The
analysis also reveals whether the company’s financial position has been improving or deteriorating
over time. Ratios can be classified into four broad groups on the basis of items used: (1) Liquidity Ratio,
(ii) Capital Structure/Leverage Ratios, (iii) Profitability Ratios, and (iv) Activity Ratios.
2. Common-Size Financial Analysis
Common-size statement is also known as component percentage statement or vertical statement. In
this technique net revenue, total assets or total liabilities is taken as 100 per cent and the percentage
of individual items are calculated like wise. It highlights the relative change in each group of expenses,
assets and liabilities.
Common Size Financial Statements
Common size ratios are used to compare financial statements of different-size companies or of the
same company over different periods. By expressing the items in proportion to some size-related
measure, standardized financial statements can be created, revealing trends and providing insight
into how the different companies compare.
The common size ratio for each line on the financial statement is calculated as follows:
Common Size Ratio = Item of Interest/ Reference Item
For example, if the item of interest is inventory and it is referenced to total assets (as it normally would
be), the common size ratio would be:
Common Size Ratio for Inventory = Inventory /Total Assets
The ratios often are expressed as percentages of the reference amount. Common size statements
usually are prepared for the income statement and balance sheet, expressing information as follows:
• Income statement items - expressed as a percentage of total revenue.
• Balance sheet items - expressed as a percentage of total assets
It is also known as financial techniques. Various accounting techniques such as Comparative Financial
Analysis, Common-size Financial Analysis, Trend Analysis, Fund Flow Analysis, Cash Flow Analysis, CVP
Analysis, Ratio Analysis, Value Added Analysis etc. may be used for the purpose of financial analysis.
Some of the important techniques which are suitable for the financial analysis of GSRTC are discussed
hereunder:
1. R atio Analysis
In order to evaluate financial condition and performance of a firm, the financial analyst needs certain
tools to be applied on various financial aspects. One of the widely used and powerful tools is ratio or
index. Ratios express the numerical relationship between two or more things. This relationship can be
expressed as percentages (25% of revenue), fraction (one-fourth of revenue), or proportion of numbers
(1:4). Accounting ratios are used to describe significant relationships, which exist between figures
shown on a balance sheet, in a profit and loss account, in a budgetary control system or in any other
part of the accounting organization. Ratio analysis plays an important role in determining the financial
strengths and weaknesses of a company relative to that of other companies in the same industry. The
analysis also reveals whether the company’s financial position has been improving or deteriorating
over time. Ratios can be classified into four broad groups on the basis of items used: (1) Liquidity Ratio,
(ii) Capital Structure/Leverage Ratios, (iii) Profitability Ratios, and (iv) Activity Ratios.
2. Common-Size Financial Analysis
Common-size statement is also known as component percentage statement or vertical statement. In
this technique net revenue, total assets or total liabilities is taken as 100 per cent and the percentage
of individual items are calculated like wise. It highlights the relative change in each group of expenses,
assets and liabilities.
Common Size Financial Statements
Common size ratios are used to compare financial statements of different-size companies or of the
same company over different periods. By expressing the items in proportion to some size-related
measure, standardized financial statements can be created, revealing trends and providing insight
into how the different companies compare.
The common size ratio for each line on the financial statement is calculated as follows:
Common Size Ratio = Item of Interest/ Reference Item
For example, if the item of interest is inventory and it is referenced to total assets (as it normally would
be), the common size ratio would be:
Common Size Ratio for Inventory = Inventory /Total Assets
The ratios often are expressed as percentages of the reference amount. Common size statements
usually are prepared for the income statement and balance sheet, expressing information as follows:
• Income statement items - expressed as a percentage of total revenue.
• Balance sheet items - expressed as a percentage of total assets
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