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How to Analyze Comparative Financial Statement?
What is Comparative Financial Statements?
Comparative financial statements provide a comparison between key financial metrics for two consecutive years. It is a very useful tool to check whether the company’s financials are moving in the right direction. It is a document that lists two or more years of financial performance of a company to offer a bird’s eye view of the comparison between two years of financial data. However, some caution must be taken while comparing the items in two financial statements.
Analyzing Comparative Financial Statements is not tough as the interpretation of data does not require expert knowledge. However, in the case, you want to analyze complex sets of data or want to check the performance of your company vis-a-vis others in your industry consulting a professional may be required.
There are many professional steps one can have to analyze the Comparative Financial Statements in order to get an advantage in learning about the company’s performance. However, the most notable ones include comparing items in terms of financial ratios to get a holistic idea of the company’s performance in general.
Ways to Compare Data for Comparative Financial Statement
Following are some tips to compare the data and build a useful comparative financial statement correctly −
Compare Two Items That Match with One Another
The first and most important rule to follow while analyzing or comparing financial data is to compare two items of the statements that match with one another. Without matching two similar items, the comparative analysis may offer erroneous results. Therefore, comparing apples to apples is the first and foremost rule to analyze comparative financial statements.
Companies Must Be from the Same Industry
It is also important to remember that companies must be from the same industry while making a comparison or creating a comparative financial statement. The financial items of two companies from two different industries may differ widely which is why comparing them without having a reason to compare may prove to have many errors.
Adhere to Similar Accounting Procedures
Two financial statements made by two different analysts or in two different methods of reporting cannot be compared in a comparative financial statement. Although it is important to get the comparison done by a neutral, third-party analyst, in case two analysts are not available, at least the accounting procedures followed must be the same.
Data Must Be from Same Accounting Period
The statements that are compared in a comparative financial statement must also be for the same accounting period. One cannot compare two statements that have been made for different accounting periods while comparing the statements.
For example, the comparative financial statements can be of two January to December periods. One cannot use one January to December statement and another that is created for March to February.
It is useful to do some ratio analysis in order to make the comparative financial statement more meaningful. Some of the most useful ratios that can be found using the statements are net profit and return on assets ratios. Some other ratios that can be found are liquidity, asset turnover, and financial leverage ratios.
The idea behind checking the ratios is to see how the company is performing in two consecutive financial periods and take corrective measures if a fault in management or operation is found.
It is important to analyze the Comparative Financial Statement via the financial ratios in order to check whether the company is doing well enough in its business industry. Usually, comparative financial statements of two companies in the same industry can also be used to check which is better in terms of management and operations.
Checking the comparative financial statements can also reveal the point of trouble in the operation of a business. This can help the management and business owners take corrective measures when something goes wrong in the operations.
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