In this topic
Learning outcomes
- Explain the relevant accounting rule and terminology.
- Prepare a correctly classified calculation or statement.
- Show working notes and verify the debit-credit or balance check.
Key vocabulary
Concepts to know
Shows absolute and percentage change across periods for each item.
Expresses each item as a percentage of a common base such as revenue or total assets.
Current assets ÷ current liabilities.
Quick assets ÷ current liabilities; inventory and prepaid expenses are normally excluded from quick assets.
Core notes
Tools and formats
Financial statement analysis helps users assess profitability, liquidity, solvency and operating efficiency. Comparative statements show change over time; common-size statements support structural comparison; ratios relate selected figures. Results depend on accounting policies, seasonality, industry and data quality, so a ratio alone is not a final judgement.
Comparative amount change = current year − previous year. Percentage change = change ÷ previous year × 100. Common-size income statement percentage = item ÷ revenue from operations × 100; balance-sheet percentage = item ÷ total assets/equity and liabilities × 100. State the base.
Core notes
Ratio families and formulas
Liquidity: current ratio = current assets/current liabilities; quick ratio = (current assets − inventory − prepaid expenses)/current liabilities. Solvency: debt-equity = long-term debt/shareholders’ funds; debt to capital employed = long-term debt/capital employed; total assets to debt = total assets/long-term debt; proprietary ratio = shareholders’ funds/total assets; interest coverage = EBIT/interest. Activity: inventory turnover = cost of revenue from operations/average inventory; receivables turnover = net credit revenue/average trade receivables; payables turnover = net credit purchases/average trade payables; working capital turnover = revenue from operations/working capital.
Profitability: gross profit ratio = gross profit/revenue from operations ×100; operating ratio = (cost of revenue from operations + operating expenses)/revenue ×100; operating profit ratio = operating profit/revenue ×100; net profit ratio = net profit/revenue ×100; calculate it using profit before tax or profit after tax as the question specifies. ROI = EBIT/capital employed ×100 (use the prescribed definition and components). Use average balances when the formula calls for turnover.
Syllabus detail
Scope and denominator checks
The CBSE 2026–27 list includes current and quick ratios; debt-equity, debt to capital employed, total assets to debt, proprietary and interest coverage ratios; the specified turnover ratios; and gross profit, operating, operating profit, net profit and return on investment ratios.
Use the balance-sheet date figures or average balances exactly as the formula and question require. For turnover, average opening and closing balances are typically used when both are supplied. For the net profit ratio, the syllabus specifies calculation on both a before-tax and after-tax basis; label which profit measure you use. ROI should use the prescribed EBIT and capital-employed components.
Ratios describe relationships, not causes. Compare like periods and accounting classifications, then explain what changed and what further information is needed.
Worked example
Step-by-step illustration
Current assets ₹3,00,000; inventory ₹80,000; prepaid expenses ₹10,000; current liabilities ₹1,50,000.
Quick ratio = (3,00,000 − 80,000 − 10,000) ÷ 1,50,000 = 1.4:1
Board preparation
Original practice questions
- Calculate and interpret quick ratio from a balance sheet extract.
- Why use average inventory in inventory turnover?
- Prepare a comparative statement and explain both absolute and percentage changes.
Write formula → identify numerator/denominator → show substitutions and units → calculate → interpret with context. Check that totals and time periods are comparable.
These are original practice questions, not claimed previous-year questions. Follow the exact method and rounding instructions in your prescribed text and school guidance.
Current syllabus
How this topic fits the course
Analysis of Financial Statements is part of the CBSE Class XII Accountancy course structure. Computerised Accounting is an alternative to Financial Statement Analysis, not an additional compulsory unit.
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