B Com Exam > B Com Notes > Financial Analysis and Reporting > Comparative Statement - Techniques of Financial Statement Analysis, Financial Analysis and Reporting
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Comparative financial statements
Comparative financial statements are the complete set of financial statements that an entity issues, revealing information for more than one accounting period. The financial statements that may be included in this package are:
- The income statement (showing results for multiple periods)
- The balance sheet (showing the financial position of the entity as of more than one balance sheet date)
- The statement of cash flows (showing the cash flows for more than one period)
Another variation on the comparative concept is to report information for each of the 12 preceding months on a rolling basis. Comparative financial statements are quite useful for the following reasons:
- Provides a comparison of an entity's financial performance over multiple periods, so that you can determine trends. The statements may also reveal unusual spikes in the reported information that can indicate the presence of accounting errors.
- Provides a comparison of expenses to revenues and the proportions of various items on the balance sheet over multiple periods. This information can be useful for cost management purposes.
- May be useful for predicting future performance, though you should rely more on operational indicators and leading indicators than on historical performance for this type of analysis.
It is customary to issue comparative financial statements with additional columns containing the variance between periods, as well as the percentage change between periods.
The Securities and Exchange Commission requires that a publicly held company use comparative financial statements when reporting to the public on the Form 10-K and Form 10-Q.
Comparative Financial Statements Example
The following is an example of a balance sheet that is presented on a comparative basis.
ABC International Balance Sheet
| as of 12/31/20X3 |
as of 12/31/20X2 |
as of 12/31/20X1 |
|
|
Current assets |
|
|
|
|
Cash |
$1,200 |
$900 |
$750 |
|
Accounts receivable |
4,800 |
3,600 |
3,000 |
|
Inventory |
3,600 |
2,700 |
2,300 |
|
Total current assets |
$9,600 |
$7,200 |
$6,050 |
|
Total fixed assets |
6,200 |
5,500 |
5,000 |
|
Total Assets |
$15,800 |
$12,700 |
$11,050 |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Accounts payable |
$2,400 |
$1,800 |
$1,500 |
|
Accrued expenses |
480 |
360 |
300 |
|
Short-term debt |
800 |
600 |
400 |
|
Total current liabilities |
$3,680 |
$2,760 |
$2,200 |
|
Long-term debt |
9,020 |
7,740 |
7,350 |
|
Total liabilities |
12,700 |
10,500 |
9,550 |
|
Shareholders’ equity |
3,100 |
2,200 |
1,500 |
|
Total liabilities and equity |
$15,800 |
$12,700 |
$11,050 |
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FAQs on Comparative Statement - Techniques of Financial Statement Analysis, Financial Analysis and Reporting - Financial Analysis and Reporting - B Com
| 1. What are the different techniques used in financial statement analysis? |  |
Ans. Financial statement analysis involves various techniques, including ratio analysis, trend analysis, vertical analysis, horizontal analysis, and cash flow analysis. These techniques help in evaluating the financial performance, liquidity, solvency, and profitability of a company.
| 2. How does ratio analysis help in financial statement analysis? | |
Ans. Ratio analysis is a technique used to evaluate the financial performance of a company by analyzing its financial ratios. These ratios, such as liquidity ratios, profitability ratios, and solvency ratios, provide insights into the company's financial health, efficiency, and ability to meet its financial obligations. Ratio analysis helps in comparing the company's performance with industry benchmarks and identifying areas of strength and weakness.
| 3. What is trend analysis in financial statement analysis? | |
Ans. Trend analysis is a technique used to analyze the financial statements over a period of time to identify patterns, trends, and changes in financial performance. It involves comparing the financial data of a company over multiple periods and calculating the percentage change. Trend analysis helps in understanding the company's growth rate, stability, and direction of financial performance.
| 4. How does vertical analysis assist in financial statement analysis? | |
Ans. Vertical analysis is a technique used to analyze the financial statements by expressing each line item as a percentage of a base figure. It helps in understanding the composition and relative importance of various components of the financial statements. Vertical analysis enables the comparison of different companies and industries by focusing on the proportion of each line item in relation to the base figure.
| 5. What is the importance of cash flow analysis in financial statement analysis? | |
Ans. Cash flow analysis is crucial in financial statement analysis as it provides insights into the company's cash inflows and outflows over a specific period. It helps in assessing the company's ability to generate cash, meet its financial obligations, and fund its operations. Cash flow analysis also helps in evaluating the company's cash management, liquidity, and investment decisions.
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