The correct answer is option 4- Historical Cost Analysis.
The tool that is not used for the analysis of financial statements is Historical Cost Analysis. While historical cost is a fundamental accounting principle stating that assets should be recorded at their original cost, it is not a specific tool used for the analysis of financial statements. Instead, it's a basis for recording transactions and valuing assets in accounting.
DIFFERENT TOOLS ARE USED FOR ANALYSIS OF THE STATEMENT.
- Ratio Analysis: It describes the significant relationship which exists between various items of a balance sheet and a statement of profit and loss of a firm. As a technique of financial analysis, accounting ratios measure the comparative significance of the individual items of the income and position statements. It is possible to assess the profitability, solvency and efficiency of an enterprise through the technique of ratio analysis.
- Comparative Statements: This technique involves preparing financial statements, such as the balance sheet and income statement, for multiple periods in a comparative form. By presenting data from different periods side by side, it allows for an easy comparison of the company's performance and financial position over time.
- Common Size Statements: In this approach, each item on the financial statement is expressed as a percentage of a common base, typically a key figure such as total revenue or total assets. By using percentages, it becomes easier to compare the relative proportions of different items within a single period or between different companies.
- Cash flow statement: The Cash Flow Statement helps in ascertaining the liquidity of an enterprise. Cash Flow Statement is to be prepared and reported by Indian companies according to AS-3 notified as per Companies Act 2013. The cash flows are categorised into flows from operating, investing and financing activities. This statement helps the users to ascertain the amount and certainty of cash flows to be generated by company.
- Trend Analysis: It is a technique of studying the operational results and financial position over a series of years. Using the previous years’ data of a business enterprise, trend analysis can be done to observe the percentage changes over time in the selected data. The trend percentage is the percentage relationship, in which each item of different years bear to the same item in the base year. Trend analysis is important because, with its long run view, it may point to basic changes in the nature of the business. By looking at a trend in a particular ratio, one may find whether the ratio is falling, rising or remaining relatively constant. From this observation, a problem is detected or the sign of good or poor management is detected.
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