The study of mutual relationship between different components or their totals of the financial statements for a definite period of time is called :

Question

Accepted Answer

The correct option is 2:
Vertical or Static analysis. This is the correct methodology because it is specifically designed to evaluate the relationship between different items on a financial statement for a singular, definite period of time. This technique is often executed by preparing Common-Size Statements, where every item on the statement is expressed as a percentage of a base figure (e.g., all balance sheet items as a percentage of total assets). The result is a proportional breakdown of the financial structure, which allows an analyst to instantly grasp the internal composition and relative importance of each component—such as the proportion of cost of goods sold to total sales—without relying on comparisons to prior periods. This 'static' view gives a powerful internal snapshot of the firm's financial position at that particular moment.

The incorrect option is 1:
Horizontal or Dynamic analysis. This option is incorrect because it fundamentally involves comparing financial data and trends *over a series of multiple accounting periods*. For example, a horizontal analysis would compare the change in sales or net profit between 2022 and 2023. The objective of this 'dynamic' method is to identify changes and determine the direction of growth or decline over a timeline, not to study the inter-relationship of components *within* a single year, which is what the question describes.

The incorrect option is 3:
Internal analysis. This option is a classification based on the *user* of the financial information, not the *method* of analysis itself. Internal analysis refers to the analysis conducted by the company's own management, internal auditors, or employees. They use the information for internal decision-making purposes such as efficiency assessment, budgetary control, and strategic planning. While internal users certainly employ various analytical methods, the term itself describes the *scope or purpose* (internal use), not the specific *technique* of relating different components within a single set of financial statements.

The incorrect option is 4:
External analysis. Similar to internal analysis, this term classifies financial statement analysis based on *who* is performing the study. External analysis is conducted by parties outside the business, such as existing and potential investors, creditors, banks, and regulators. These external parties use the analysis to evaluate the firm's creditworthiness, profitability, and solvency from a purely outside perspective. Therefore, 'External analysis' is a classification by *user*, and does not describe the specific analytical procedure of studying mutual component relationships for a definite period.