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Comparative Financial Statement Analysis

Comparative Financial Statement analysis provides information to assess the direction of change in the business. Financial statements are presented as on a particular date for a particular period. The financial statement Balance Sheet indicates the financial position as at the end of an accounting period and the financial statement Income Statement shows the operating and non-operating results for a period. But financial managers and top management are also interested in knowing whether the business is moving in a favorable or an unfavorable direction. For this purpose, figures of current year have to be compared with those of the previous years. In analyzing this way, comparative financial statements are prepared.

Comparative Financial Statement Analysis is also called as Horizontal analysis. The Comparative Financial Statement provides information about two or more years' figures as well as any increase or decrease from the previous year's figure and it's percentage of increase or decrease. This kind of analysis helps in identifying the major improvements and weaknesses. For example, if net income of a particular year has decreased from its previous year, despite an increase in sales during the year, is a matter of serious concern. Comparative financial statement analysis in such situations helps to find out where costs have increased which has resulted in lower net income than the previous year.

Example:

Comparative Income Statement for the years ended 31st Dec 2008 & 31st Dec 2009

 31st Dec 2008 31st Dec 2009 Increase/ (Decrease) % of increase / (decrease) Sales \$7,000 \$9,000 \$2,000 28.57% Less: Cost of goods sold \$5,000 \$6,400 \$1,400 28.00% Gross profit \$2,000 \$2,600 \$600 30.00% Less: Operating expenses General & administrative expenses \$200 \$300 \$100 50.00% Selling & distribution expenses \$400 \$500 \$100 25.00% Other operating expenses \$100 \$150 \$50 50.00% Operating profit \$1,300 \$1,650 \$350 26.92% Less: Interest expenses \$300 \$400 \$100 33.33% Net income before taxes \$1,000 \$1,250 \$250 25.00% Less: Taxes at 30% \$300 \$375 \$75 25.00% Net Income after taxes \$700 \$875 \$175 25.00%

Comparative Balance Sheets as on 31st Dec 2008 & 31st Dec 2009

 31st Dec 2008 31st Dec 2009 Increase / (Decrease) % of increase / (decrease) Current Assets: Cash \$500 \$600 \$100 20.00% Accounts Receivables \$2,000 \$3,000 \$1,000 50.00% Inventory \$1,500 \$2,500 \$1,000 66.67% Total Current Assets \$4,000 \$6,100 \$2,100 52.50% Fixed Assets: Buildings \$3,000 \$4,000 \$1,000 33.33% Furnitures & office equipments \$1,000 \$1,500 \$500 50.00% Total Fixed Assets \$4,000 \$5,500 \$1,500 37.50% Total Assets \$8,000 \$11,600 \$3,600 45.00% Liabilities: Current Liabilities: Accounts Payable \$1,000 \$1,200 \$200 20.00% Notes Payable \$500 \$500 \$0 0.00% Interest Payable \$100 \$120 \$20 20.00% Total Current Liabilities \$1,600 \$1,820 \$220 13.75% Shareholder's Equity: Common Stock \$5,000 \$7,500 \$2,500 50.00% Retained earnings \$1,400 \$2,280 \$880 62.86% Total Stockholder's equity \$6,400 \$9,780 \$3,380 52.81% Total Liabilities & Stockholder's equity \$8,000 \$11,600 \$3,600 45.00%

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