Here is the complete Analysis of Financial Statements Class 12 chapter — NCERT Class 12 Accountancy Part II, Chapter 4, from the book Company Accounts and Analysis of Financial Statements. The chapter is printed on pages 172–194 of the textbook, and the official PDF is available right below.
The chapter defines financial statement analysis, explains why different users need it, lists its objectives, and then teaches the main tools: comparative statements, common size statements, trend analysis, ratio analysis and cash flow analysis. It closes with the limitations of financial analysis and a full set of practice questions.
Download the NCERT Class 12 Accountancy Chapter 4 PDF
Open the official NCERT Class 12 Accountancy Chapter 4 Analysis of Financial Statements PDF to read the chapter exactly as printed in the book — this is the authoritative file from ncert.nic.in, best for following every illustration and exercise on your own device.
Use it alongside this page: the page references below match the printed book, so you can move between the two without getting lost.
You can also verify the full Part II textbook and its chapter files on the official NCERT textbook portal.
| What the chapter holds | Count | Where it is used |
|---|---|---|
| Printed pages | 23 | |
| Sections in the chapter | 5 | |
| Tables | 32 | |
| Worked examples | 7 | solved step by step in our NCERT Solutions |
| Official NCERT PDF | Download the chapter PDF | the chapter exactly as NCERT publishes it |
Chapter 4 at a Glance: What the PDF Contains
Use this as a reading map before you open the file — it names the kinds of content the chapter holds and the order they appear in.
The chapter opens with a list of learning objectives on page 172, then moves through the meaning of financial analysis, its significance for different users, its objectives, and the tools of analysis. The middle of the chapter is practical work: preparing and interpreting comparative statements, common size statements and trend percentages, each supported by worked illustrations showing the full columnar layout.
- Comparative statements — how to build them and read the change columns, with solved illustrations for the statement of profit and loss and the balance sheet.
- Common size statements — income statement, statement of profit and loss and balance sheet, with solved illustrations.
- Trend analysis — the base-year percentage technique, treated briefly.
- Three ‘Test your Understanding’ sets placed at pages 176, 187 and 188, with answers given at the end of the chapter on page 194.
- A limitations of financial analysis section on page 188.
- A closing list of terms introduced in the chapter (pages 188–189) and short answer, long answer and numerical question sets running from page 189 to page 193.
What This Chapter Teaches: Meaning, Users and Tools
This section is a guided tour of the chapter’s structure. Read it once to know what each part of the chapter is doing before you start.
Meaning (page 172). Financial statement analysis is the process of critical evaluation of the financial information contained in the statements, so that the firm’s operations can be understood and decisions can be taken.
It is essentially a study of the relationships among the financial facts and figures in a set of statements, plus the interpretation of those relationships to judge profitability, operational efficiency, financial health and future prospects.
Significance (page 173). The nature of analysis differs with the purpose of the analyst — a technique useful to one user need not serve another. The chapter lists the main users and what each one looks for:
| User of analysis | What they look for in the statements |
|---|---|
| Finance manager | Managerial performance, corporate efficiency, financial strengths and creditworthiness; uses the tools for financial control and corrective action |
| Top management | Efficient use of resources, sound financial condition, success of operations, evaluation of individual performance and internal control |
| Trade payables | Ability to meet short-term claims — the firm’s liquidity position |
| Lenders | Long-term solvency and survival: profitability over time, ability to generate cash, pay interest and repay principal, capital structure relationships |
| Investors | Present and future earnings, the effect of capital structure on earning and risk, efficiency of management |
| Labour unions | Whether the firm can presently afford a wage increase, or can absorb it through higher productivity or prices |
| Government, economists, researchers | Business and economic conditions; price regulation, taxation and similar purposes |
Objectives (page 174). The analysis is undertaken to:
- assess the current profitability and operational efficiency of the firm as a whole and of its departments;
- ascertain the relative importance of different components of the financial position;
- identify the reasons for change in the profitability or financial position of the firm;
- judge the firm’s ability to repay its debt and assess its short-term and long-term liquidity position.
Tools (page 175). The five commonly used techniques are comparative statements, common size statements, trend analysis, ratio analysis and cash flow analysis. The chapter covers the first three in outline and notes that ratio analysis and cash flow analysis are dealt with in detail in Chapters 5 and 6 respectively.
Limitations (page 188). The chapter ends by warning that analysis inherits the limitations of the financial statements themselves — a point developed later on this page.
Key Concepts: Analysis of Financial Statements Class 12
These are the ideas the whole chapter turns on. Master these blocks and the illustrations become routine.
Analysis and interpretation are not the same thing
The term financial analysis includes both analysis and interpretation, and the chapter is careful to separate them (NCERT, p. 172). Analysis is the simplification of financial data by methodical classification. Interpretation is explaining the meaning and significance of the data. The two are complementary: analysis without interpretation is useless, and interpretation without analysis is difficult or even impossible.
Why does this matter? A column of numbers tells you nothing until someone explains what the change means. A 25% rise in revenue is only good news if costs have not risen faster — the analysis classifies, the interpretation judges.
The five tools, split into horizontal and vertical analysis
Of the five tools, two get the most working space in this chapter. Comparative statements show the profitability and financial position of a firm for different periods in comparative form, so they are also known as horizontal analysis (NCERT, p. 175).
Common size statements express each item as a percentage of a common item, so they are known as vertical analysis (NCERT, p. 175).
Why those names? In a comparative statement you read across a row — two years of one item sitting side by side, so you see movement over time, horizontally. In a common size statement you read down a column of percentages that add to roughly 100, so you see the structure of one statement at one point, vertically.
The distinction is a favourite exam point, so fix the pairing now: comparative = horizontal, common size = vertical.
Trend analysis (NCERT, p. 175) is the technique of studying operational results and financial position over a series of years. Each item in different years is expressed as a percentage of the same item in the base year.
The chapter introduces it briefly and does not work a full numerical example — know its definition and its purpose: a long-run view may point to basic changes in the nature of the business.
Percentage change in a comparative statement
A comparative statement shows both absolute and percentage change for every item. The formula given in the chapter is (NCERT, pp. 176–177):
\[ \text{Percentage change} = \frac{\text{Absolute increase or decrease (Col. 4)}}{\text{First year figure (Col. 2)}} \times 100 \]
The base is always the first year figure — the earlier of the two years. That is the single rule students drop under time pressure: divide by the earlier year, never by the second year and never by the change itself.
Work the change in two steps: subtract the first year figure from the second year figure to get the absolute change, then divide that change by the first year figure and multiply by 100.
Worked example: comparative statement of profit and loss
Here is a comparative statement built from numbers different from any NCERT illustration, so you can follow the column logic yourself. Suppose a company reports:
- Revenue from operations: Rs 50,00,000 in Year 1 and Rs 62,50,000 in Year 2
- Other income: Rs 2,00,000 in Year 1 and Rs 1,50,000 in Year 2
- Expenses: Rs 30,00,000 in Year 1 and Rs 36,00,000 in Year 2
- Income tax at 30% of profit before tax in both years
| Particulars | Year 1 (Rs) | Year 2 (Rs) | Absolute change (Rs) | % change |
|---|---|---|---|---|
| I. Revenue from operations | 50,00,000 | 62,50,000 | +12,50,000 | +25.00 |
| II. Add: Other income | 2,00,000 | 1,50,000 | (50,000) | (25.00) |
| III. Total revenue (I + II) | 52,00,000 | 64,00,000 | +12,00,000 | +23.08 |
| IV. Less: Expenses | 30,00,000 | 36,00,000 | +6,00,000 | +20.00 |
| Profit before tax | 22,00,000 | 28,00,000 | +6,00,000 | +27.27 |
| Less: Tax @ 30% | 6,60,000 | 8,40,000 | +1,80,000 | +27.27 |
| Profit after tax | 15,40,000 | 19,60,000 | +4,20,000 | +27.27 |
Check how one row was filled. Total revenue for Year 1 is 50,00,000 + 2,00,000 = 52,00,000. The absolute change is 64,00,000 − 52,00,000 = 12,00,000. The percentage change is:
\[ \frac{12{,}00{,}000}{52{,}00{,}000} \times 100 = 23.08\% \]
Three things to notice about this layout:
- Other income is added to revenue from operations before expenses are subtracted — the ‘Total revenue’ line is compulsory, as it is in Illustrations 1 and 2 of the chapter (NCERT, p. 177).
- A bracketed figure means a decrease relative to the first year, not a loss. Other income fell by 25%, so the bracket simply flags the fall.
- With a constant 30% tax rate, profit before tax, tax and profit after tax all change by the same 27.27% — the ratio structure is preserved because the tax rate did not move.
Common size statements: the right common base
In a common size statement, also called a component percentage statement, each item is stated as a percentage of a common base (NCERT, p. 183). The chapter fixes the bases precisely:
- For the statement of profit and loss, the base is revenue from operations, taken as 100.
- For the balance sheet, the base is total assets or total liabilities, taken as 100.
Bringing all numbers to a common base is what makes comparison fair — you can compare a large firm with a small one in the same industry, because absolute size no longer swamps the picture. Common size statements therefore serve both intra-firm comparison (the same firm over different years) and inter-firm comparison (different firms, same year or several years) (NCERT, p. 175).
One surprise trips students: a percentage can exceed 100. In the chapter’s Illustration 6, total revenue is shown as 113% in 2026-27 (NCERT, p. 185) — the base is revenue from operations alone, and other income is added on top of it, so total revenue naturally crosses the 100 mark. That is correct, not an error.
How the Chapter’s Statement Tables Work: Exhibits 4.1 and 4.2
This chapter teaches through tables, not diagrams, so knowing how to read the two exhibits unlocks every illustration that follows.
Exhibit 4.1 (NCERT, pp. 176–177) is the skeleton of every comparative statement. It has five columns: particulars, first year, second year, absolute increase or decrease, and percentage increase or decrease. The chapter gives three preparation steps that never change:
- List the absolute figures in rupees for the two points of time.
- Subtract the first year figure from the second year figure and enter the change as an increase (+) or decrease (−).
- Calculate the percentage change on the first year figure and enter it in the final column.
Read across any row of Exhibit 4.1 and you see the trend of one item over time; the percentage column tells you whether that item is growing faster or slower than the others.
Exhibit 4.2 (NCERT, p. 183) is the skeleton of every common size statement. It carries the absolute figures for two years plus, for each year, the percentage that each item bears to the common base.
Read down a year’s column and you see the structure of the statement — what fraction of total assets sits in plant, in inventory, in cash; read across and you see how that structure shifted between the years.
The solved formats a student should copy from the chapter are these:
- Comparative statement of profit and loss — Illustration 1 and Illustration 2 (NCERT, pp. 177–178).
- Comparative balance sheet — Illustration 3 and Illustration 4 (NCERT, pp. 180–182).
- Common size income statement and common size statement of profit and loss — Illustration 5 and Illustration 6 (NCERT, pp. 184–185).
- Common size balance sheet — Illustration 7 (NCERT, pp. 185–186).
Note also the Notes to Accounts block on page 179 that supports the Narang Colours ‘Do it yourself’ exercise — the chapter expects you to know which items in the notes are the expenses that appear in the statement’s expense line.
Definitions: The Terms This Chapter Introduces
The chapter closes with a list of terms it introduced, and this section puts those definitions in plain words (NCERT, pp. 175, 183, 188–189).
| Term | Plain meaning |
|---|---|
| Financial analysis | Critical evaluation of the financial information in the statements to understand the firm’s operations and make decisions |
| Comparative statements | Statements showing two or more periods side by side, with absolute and percentage changes for every item |
| Common size statements (component percentage statements) | Statements expressing each item as a percentage of a common base — revenue from operations for the profit and loss statement, total assets or total liabilities for the balance sheet |
| Trend analysis | Studying results over a series of years by expressing each item as a percentage of the same item in the base year |
| Ratio analysis | Describing the significant relationships between items of the balance sheet and the statement of profit and loss |
| Cash flow statement | A statement of actual cash moving into and out of the organisation, showing sources of receipts and purposes of payments |
| Horizontal analysis | Comparing figures of different periods, as in comparative statements |
| Vertical analysis | Expressing each item as a percentage of a common base, as in common size statements |
| Intra-firm comparison | Comparison of a firm’s own data over different years |
| Inter-firm comparison | Comparison between firms, often of different sizes, in the same industry |
| Annual report | The company’s basic financial statements — balance sheet, statement of profit and loss and cash flow statement — plus management’s discussion of the year’s performance and future prospects |
Common Mistakes Students Make in This Chapter
These are the characteristic errors the chapter’s structure invites — name them before you make them, and check every answer against the last column.
| Mistake | Correct rule | How to check your answer |
|---|---|---|
| Treating analysis and interpretation as the same thing | Analysis simplifies and classifies the data; interpretation explains its meaning; one is useless without the other (NCERT, p. 172) | Ask: am I sorting the figures, or saying what they mean? A table is analysis; the conclusion is interpretation |
| Mixing up horizontal and vertical analysis | Comparative statements are horizontal; common size statements are vertical (NCERT, p. 175) | Two years side by side = horizontal; items as percentages of one base = vertical |
| Using the wrong base in percentage change | The base is always the first year figure (NCERT, pp. 176–177) | Divide by the earlier year’s figure, never by the second year or by the change itself |
| Forgetting the ‘Total revenue’ line in a comparative statement of profit and loss | Other income must be added to revenue from operations before expenses are deducted (NCERT, p. 177) | Check that revenue, other income and total revenue appear before the expenses line |
| Using the wrong common base in common size statements | Revenue from operations for the profit and loss statement; total assets or total liabilities for the balance sheet (NCERT, p. 183) | The base column must total 100; nothing above the base line may exceed it except when other income pushes total revenue past 100 |
| Misreading bracketed figures as losses | Brackets mean a decrease relative to the earlier year (NCERT, pp. 178, 180) | A bracketed reserve figure means reserves fell, not that the company made a loss |
| Interpreting results without the limitations | Price level changes, window dressing and changed accounting policies can mislead the analyst (NCERT, p. 188) | Before concluding, ask what the reported figures cannot show about inflation or policy changes |
Using This Chapter for Revision and Exam Preparation
Practice the right illustration for each statement type — this map tells you exactly which solved formats in the chapter to copy.
| Statement type | NCERT illustrations and practice | Book pages |
|---|---|---|
| Comparative statement of profit and loss | Illustration 1, Illustration 2, Narang Colours ‘Do it yourself’ | 177–179 |
| Comparative balance sheet | Illustration 3, Illustration 4, Omega Chemicals ‘Do it yourself’ | 180–182 |
| Common size income statement / statement of profit and loss | Illustration 5, Illustration 6 | 184–185 |
| Common size balance sheet | Illustration 7, Raj Co. ‘Do it yourself’ | 185–186 |
Use the three ‘Test your Understanding’ sets as quick self-checks: fill in the blanks on page 176, choose the right answer on page 187, and true or false on page 188. All answers are at the end of the chapter on page 194 — do the set, then check, rather than reading the answers first.
The closing question bank runs from short answer questions (page 189) and long answer questions (page 190) to six numerical questions (pages 190–193).
Every numerical question asks you to prepare a comparative or common size statement from given data: questions 1 and 2 are comparative balance sheets, questions 3 and 4 are comparative statements of profit and loss, question 5 is a common size statement of profit and loss, and question 6 is a common size balance sheet.
Finally, treat the learning objectives on page 172 as your checklist: after studying, you should be able to explain the nature and significance of financial analysis, identify its objectives, describe its tools, state its limitations, prepare and interpret comparative and common size statements, and calculate and interpret trend percentages. If you can do all six, the chapter is done.
One honest note: textbook contents and the examinable syllabus are not always identical — check the current official CBSE syllabus to confirm which parts of this chapter are examinable this session. The worked statements here, for instance, are the core skill, while the relative weight of each section is set by the syllabus, not the book.
Chapter Summary: The Closing Points in Brief
A night-before pass over what the chapter itself closes with, in tighter words.
- Financial analysis is the critical evaluation of financial statements — simplification of data by classification plus interpretation of its meaning.
- The tools of financial analysis are comparative statements, common size statements, trend analysis, ratio analysis and cash flow analysis.
- Comparative statements are horizontal analysis: absolute and percentage changes of every item over time.
- Common size statements are vertical analysis: every item as a percentage of a common base — revenue from operations for the profit and loss statement, total assets or total liabilities for the balance sheet.
- Trend analysis expresses each item of different years as a percentage of the same item in the base year.
- An annual report carries the balance sheet, the statement of profit and loss, the cash flow statement, and management’s discussion of the year’s performance.
- Limitations: analysis does not consider price level changes; it can mislead when accounting policies have changed; it studies reports alone; it uses only monetary information; and statements prepared on historical cost do not reflect the current position (NCERT, p. 188).
Related Chapters and Resources
Chapter 4 sits in the middle of the company accounts part of the book, and the chapter itself tells you where the remaining tools live: ratio analysis is covered in Chapter 5 and cash flow analysis in Chapter 6 (NCERT, p. 175).
- Read Chapter 3 Financial Statements of a Company if you need to revise the statements this chapter analyses.
- Continue to Chapter 5 Accounting Ratios for the next tool in detail, or use the Class 12 Accounting Ratios notes for a quicker pass.
- Browse the full Class 12 Accountancy book for every chapter of Part II.
- For revision across the subject, see the Class 12 Accountancy revision notes and the wider Class 12 revision notes hub.
Reference: NCERT Class 12 Accountancy textbook, chapter 4, official edition on ncert.nic.in.
Sources and Data Verification
- The figures and page references on this page describe the NCERT Class 12 Accountancy Part II textbook (Company Accounts and Analysis of Financial Statements), Chapter 4, current NCERT edition.
- This page covers this single chapter, not the full Part II book.
- The page is maintained for the current academic session using the NCERT information available to us.
- NCERT settles textbooks, editions and PDFs; CBSE settles curriculum, syllabus and examinations. Consult ncert.nic.in for the book and cbse.gov.in for the current syllabus.
Frequently Asked Questions
What is the difference between comparative statements and common size statements?
Comparative statements show the absolute figures of two or more periods side by side with the absolute and percentage change for every item, revealing direction and trend over time. Common size statements express each item as a percentage of one common base, revealing the structure of the statement and allowing firms of different sizes to be compared (NCERT, pp. 175, 183).
Why is comparative analysis called horizontal analysis and common size analysis vertical analysis?
Comparative statements place the figures of different periods across a row, so you read changes over time in a horizontal direction. Common size statements convert every item into a percentage of a single base within one column that adds to roughly 100, so you read the structure downwards, vertically (NCERT, p. 175).
In a comparative statement, how is the percentage change calculated?
Divide the absolute increase or decrease by the first year figure and multiply by 100 (NCERT, pp. 176–177):
\[ \text{Percentage change} = \frac{\text{Absolute increase or decrease}}{\text{First year figure}} \times 100 \]
The base is always the earlier year. A bracketed result means a decrease relative to that earlier year, not a loss.
What are the limitations of financial analysis given in NCERT Class 12 Accountancy Chapter 4?
NCERT lists five limitations (p. 188): analysis does not consider price level changes; it may mislead without knowledge of changes in accounting procedure; it is only a study of the company’s reports; it considers monetary information alone and ignores non-monetary aspects; and because financial statements are prepared on historical cost, analysis does not reflect the current position.
The analyst must also be conscious of window dressing and of personal judgement in the figures.
Where are ratio analysis and cash flow analysis covered in Class 12 Accountancy?
Chapter 4 gives only a brief idea of the first three tools. Ratio analysis is covered in detail in Chapter 5 and cash flow analysis in Chapter 6 (NCERT, p. 175).
What is window dressing in financial analysis?
Window dressing is the presentation of financial statements in a way that shows a more favourable position than the actual one. NCERT names it among the things an analyst must be conscious of when interpreting statements (p. 188): because reported figures can be dressed up, analysis based only on those figures can mislead.
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