Comparison of Financial Statements

Q.1. What is meant by Comparison of Financial Statements?

Answer: "Comparison of Financial Statements is primarily an analytical study of the different items shown in the Income Statement and Position Statement (Balance Sheet) over a period of time. It may refer to:

1. Financial statements of an enterprise for two or more accounting years.
2. Financial statements of different enterprises for the same accounting year.

Q.2. What is meant by Comparative Income Statement? Why is it prepared?

Answer: The Profit & Loss Account reveals the trading results of a concern i.e. its profit or loss during the year. But the Comparative Income Statement presents a review of two or more years. It shows the absolute change from one period to another.

Comparative Income Statement is prepared:

1. To study increase or decrease in ‘Sales’.
2. To study the increasing or decreasing tendency of ‘Cost of Goods Sold’.
3. To study the increase or decrease in Gross Profit, Net Profit and Operating Profits.
4. To analyse the various items of incomes.

Q.3. What are the purposes of Comparative Financial Statement? Explain.

Answer: The basic objectives of Comparative Financial Statements are as under:

1. Comparison of financial statements helps to identify the size and direction of changes in financial position of an enterprise.
2. These statements help to ascertain the weakness and soundness about liquidity, profitability and solvency of an enterprise.
3. These statements help the management in making forecasts for the future.

Q.4. What are the various methods of presenting Comparative Financial Statements?

Answer: The various methods of presenting Comparative Financial Statements are:

1. Ratio Analysis
2. Funds Flow Statement
3. Cash Flow Statement
4. Comparative Income Statement
5. Comparative Position Statement
6. Common Size Statement
7. Trend Percentage

Q.5. What is the meaning and objective of "Trend Analysis"?

Answer: Trend analysis is an important tool of horizontal financial analysis. This is helpful in making a comparative study of the financial statements for several years. Under this method trend percentages are calculated for each item of the financial statements taking the figure of base year as 100. The starting year is taken as the base year.

The trend percentages show the relationship of each item with its preceding year’s percentages. These percentages can also be presented in the form of Index Numbers showing relative change in the financial date of certain period. This will exhibit the direction to which the concern is proceeding. The trend ratio may be compared with the industry, in order to know the strong or weak points of a concern. These are calculated only for major items instead of calculating for all items in the financial statements.