- Difference Between Income Statement vs. Balance Sheet vs. Cash Flow
- A Comparison of Financial Ratio to Industry Average
- How to Calculate Financial Statements in Accounting
- How to Calculate the Probability of Bankruptcy
- A Comparison of the Advantages of a Flexible Budget & a Static Budget
- Importance of Accounting Principles
Accountants prepare financial statements at the end of each period. These include the balance sheet, the income statement and the statement of cash flows. Financial analysts and managers use these financial statements to analyze the company’s activities over the period. Financial statement users incorporate a variety of tools to analyze the financial results. These include calculating ratios or using comparative statements. Comparative statements provide several advantages not included in the standard financial statements.
Comparative statements calculate the difference between multiple years of data and report that difference in percentages. The accountant reviews the balances on each financial statement for the current year and the previous year. For each line item, the accountant subtracts the current year amount from the previous year amount to determine the difference. The accountant then divides the difference by the previous year amount to calculate the percentage.
One advantage of using comparative statements is the ability to highlight the percentages. By restating the change of each line item as a percentage, comparative statements allow the user to notice large changes from one year to the next. As the percentage increases, the total change in that account balance increases. The financial statement user identifies those accounts with the highest changes. She can then investigate the reason for the change.
Another advantage involves the use of trend analysis. Trends refer to a consistent pattern within a particular financial account. The financial statement user chooses a financial account to analyze. He uses comparative statements for several years and looks at the percentage reported for that account each year. He observes whether the percentages increase, decrease or remain the same. If the percentages remain the same, the company experiences steady growth in that account. If the percentages increase, that account value is growing rapidly. If the percentages decrease, that account growth is slowing.
Various Size Companies
The ability to compare various size companies is another advantage offered. Comparative statements allow the user to analyze companies of different sizes. Comparative statements address the challenge of comparing the performance of a large company versus a smaller company. The use of percentages eliminates the difference in dollar amounts presented in the financial statements of different size companies.