ACCOUNTING TECHNIQUES

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

Types Of Financial Performance Analysis

Financial performance analysis can be classified into different categories on the basis of material used
and modes operandi as under:
A. Material used: On the basis of material used financial performance can be analyzed in following
two ways:
1. E xternal analysis
This analysis is undertaken by the outsiders of the business namely investors, credit agencies,
government agencies, and other creditors who have no access to the internal records of
the company. They mainly use published financial statements for the analysis and as it serves
limited purposes.
2. Internal analysis
This analysis is undertaken by the persons namely executives and employees of the
organization or by the officers appointed by government or court who have access to the
books of account and other information related to the business.
B. Modus operandi: On the basis of modus operandi financial performance can be analyze in the
following two ways:
1. Horizontal Analysis
In this type of analysis financial statements for a number of years are reviewed and analyzed.
The current year’s figures are compared with the standard or base year and changes are
shown usually in the form of percentage. This analysis helps the management to have an
insight into levels and areas of strength and weaknesses. This analysis is also called Dynamic
Analysis as it based on data from various years.
2. Vertical Analysis
In this type of Analysis study is made of quantitative relationship of the various items of financial
statements on a particular date. This analysis is useful in comparing the performance of
several companies in the same group, or divisions or departments in the same company. This
analysis is not much helpful in proper analysis of firm’s financial position because it depends
on the data for one period. This analysis is also called Static Analysis as it based on data from
one date or for one accounting period.

Significance Of Financial Performance Analysis

Interest of various related groups is affected by the financial performance of a firm. Therefore, these
groups analyze the financial performance of the firm. The type of analysis varies according to the
specific interest of the party involved.
Trade creditors: interested in the liquidity of the firm (appraisal of firm’s liquidity)
Bond holders: interested in the cash-flow ability of the firm (appraisal of firm’s capital structure, the
major sources and uses of funds, profitability over time, and projection of future profitability)
Investors: interested in present and expected future earnings as well as stability of these earnings
(appraisal of firm’s profitability and financial condition)
Management: interested in internal control, better financial condition and better performance
(appraisal of firm’s present financial condition, evaluation of opportunities in relation to this current
position, return on investment provided by various assets of the company, etc).