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Under this method of financial analysis, figures of two or more periods are placed side by side and compared and the magnitude and direction of changes in terms of absolute figures and percentages are ascertained. The exercise can be with figures of Balance Sheet or Income Statement.
When the figures of two firms are compared in this manner, the exercise is called inter-firm comparison. Recognizing the importance of comparative financial state-mints, the entire corporate sector show the previous year figures also in the annual report as made compulsory under the provisions of the Companies Act, 1956. Comparisons can be made for lesser periods also like quarter-wise, month-wise etc.
To be comparable, consistent accounting principles, policies, practices and procedures should have been followed.
The object of the analysis determines the extent, depth and nature of analysis and varies depending upon the user – Management, Creditors, suppliers, investors etc.
Under this form of comparative financial statements both the comparative Profit and Loss Account and comparative Balance sheet are covered. Such comparative statements are prepared not only to the comparison of the various figures of two or more periods but also the relationship between various elements embodied in profit and loss account and balance sheet. It enables to measure operational efficiency and financial soundness of the concern for analysis and interpretations. The following information may be shown in the comparative statements:
- Figures are presented in the comparative statements side by side for two or more years.
- Absolute data in money value.
- Increase or Decrease between the absolute figures in money value.
- Changes or trend in various figures in terms of percentage.
Tool / Methods of Financial
- Comparative Financial Statements
- Common Size Statements
- Projected Balance Sheet
- Trend Analysis – Time Series, Index Analysis, Cross- sectional Analysis
- Statement of Changes in Working Capital – Fund Flow /
- Cash Flow Analysis
- Ratio Analysis
Comparative Financial Statements
This is an important device of horizontal financial analysis. Under this method of financial analysis, figures of two or more periods are placed side by side and compared and the magnitude and direction of changes in terms of absolute figures and percentages are ascertained. The exercise can be with figures of Balance Sheet or Income Statement. When the figures of two firms are compared in this manner, the exercise is called inter-firm comparison. Recognizing the importance of comparative financial statements, the entire corporate sector show the previous year figures also in the annual report as made compulsory under the provisions of the Companies Act, 1956. Comparisons can be made for lesser periods also like quarter-wise, month-wise etc. To be comparable, consistent accounting principles, policies, practices and procedures should have been followed.
