Comparative Financial statement Analysis

23, Jan, 2023 0 Comments

Comparative Financial statement Analysis | Advantages of Comparative Financial Statements | Limitations of Comparative Financial Statements

What is Comparative statement Analysis ?

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Comparative Financial statement Analysis

Any financial statement that reports the comparison of data of two or more consecutive accounting periods is known as Comparative Financial Statement. According to A.F. Foulke. “Comparative financial statements are statements of the financial position of a business so designed as to provide time prospective to the consideration of various elements of financial position embodied in such statements.” Such a statements spot- lights trends and establishes relationship between items that appear on the same row of a Comparative Financial Statement. It discloses changes in items of financial statements over time in both rupees and percentage form. Each item (such as debtors) on a row for one fiscal period is compared with the same item in a different period. The analyst calculates the absolute changes. The difference between the figures of one year and the next and also the percentage change from one year to the next, using the earlier year as the base year.

Advantages of Comparative Financial Statements

Following are the advantages of Comparative Financial Statements:

1. Easy Comparison: In comparative statements figures of two or more periods are placed side by side, hence the comparison of various items becomes easy. The inter period and inter firm comparisons are also facilitated from such arrangements.

2. Indicate Trend of Progress : As the comparative statements show sales, cost of goods sold, gross profit, net profit and also the values of different assets and liabilities in a particular form, the performance, efficiency and financial position can be easily evaluated and their trend is easily visible. The common man can form an idea just by a glance on the trend of various items. Thus they indicate the direction of movement with respect to the financial position and operating results.

3. Weakness Easily Diagnosed: When a comparative study of the two similar firms of two periods is made through the comparative statements, the if any are diagnosed easily. This enables the management to take corrective action at right time.

Limitations of Comparative Financial Statements

There are certain limitations of the comparative statements, which should be taken into consideration while interpreting the results, are as follows:

1. Price Level Changes: The analyst should also keep in mind that accounting data are recorded on the dates of occurrence of the transactions and, therefore, the accounts usually reflect a great variation of price level. Hence in case the price level has fluctuated substantially, the analyst must exercise caution in interpreting the trends expressed by comparative statements.

2. Change in Accounting Policies: The main object of comparative statement is to facilitate comparisons which enable to know the real position of business concern. But the comparisons can be made between similar situations. Hence, if frequent changes are made in principles, conventions and policies, during a period of time from date to date, the comparisons become force and misleading.

3. Similar Companies but Different Positions: The interfirm comparison also becomes misleading if the two similar concerns compared are of different standing, different size and do not follow, uniform policies. There may be also different accounting policies and practices adopted by different concerns with regard to providing depreciation, creation of various provisions etc. which make the comparison difficult and misleading.

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Comparative Financial statement Analysis | Advantages of Comparative Financial Statements | Limitations of Comparative Financial Statements

Comparative Financial statement Analysis

Advantages of Comparative Financial Statements

Limitations of Comparative Financial Statements

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