What are comparative financial statements name two tools of financial analysis?

1) Comparative Statements:

All items are put in a Comparative manner, Comparing the Current Data with Previous Accounting Period Data.

2) Common Size Statements:

In such Statements, The Change is shown in a percentage form taking One of the items as a Base and considering it equal to 100%.

3) Ratio Analysis:

The Accounting Ratio Analysis, helps to understand different aspects of a Business such as its Liquidity and Ownership.

4) Cash Flow Statement:

It is a Comprehensive record of the Cash and Non cash transactions taking place in the business, it finally shows the Cash flow from Different activities.

Comparative Statements

MEANING

Comparative Statements compare the the items in a tabular form taking the Data for 2 year period. Comparative Analysis Is a Part of Horizontal Analysis. It shows the Change in both absolute and Percentage form.

OBJECTIVES/PURPOSES OF COMPARATIVE FINANCIAL STATEMENTS

1) Data Presentation becomes simple and Comparable

Comparative Statements is a simple Statement showing data from multiple periods in a tabular form, Making the Information Siimple To Understand.

2) Brings out Changes in Trends

Since there is Comparison of different phases of a Business, It brings out the trend of the Business and Hence Helps in Forecasting.

3) Strength and Weakness Analysis

The Comparative Statements help in understanding the Strong and Weak points of an Enterprise with Respect to Its Operations.

4) Comparisons

The Firms can easily Compare their Output, using the Comparative Statements. The Data is present in both Percentage as well as Absolute Figures to be Compared.

5) Policy Making

The Results derived from the comparison of different year's Data, Reveals the Fault/Success of Policies and hence Facilitates decision Making.

IMPORTANCE OF COMPARATIVE FINANCIAL STATEMENTS

1) Planning

Since the Comparative Statements bring out the trend of the business it helps in the decision making process.

2) Lenders

The Lenders depend upon the Results of the Comparative Statement Analysis to see Whether their Investment in the firm is Profitable or not.

3) Investors

The Financial documents of a Firm can be studied by anyone from the Common Public, Hence the Investors go through the Comparative Statement to Understand whether their Investment would bear fruits or not.

LIMITATIONS OF COMPARATIVE FINANCIAL STATEMENTS

1) Historical records

These Statements present only the Information of the Past and hence indicate the trend of the Past.

2) Affected by Personal Judgement

A lot many times Digits are Rounded off to get Absolute Figures, Such Personal Changes might bring out absurd Results.

3) Qualitative Elements Ignored

All The Qualitative Elements such as Work Environment and Efficient Management are ignored while preparing such Records.

COMPARATIVE BALANCE SHEET

It is a Comparison of the Assets and Liabilities of a Firm Compared through the Balance Sheet Format on Two Different Dates. It is a form of Horizontal Analysis.

ADVANTAGES OF COMPARATIVE BALANCE SHEET

1) Brings out the Real Change

Since Balance Sheet is the Final Statement Prepared, It Brings out the Total Changes Undergone Clearly.

2) Facilitates Planning

The Trend of Different balance sheet heads comes out Clearly hence Bringing out The necessary steps be taken for development via New Policies.

3) Reflects Trend

Since the changes in Both Assets and Liabilities are reflected Clearly, It Brings out the Change of Trend in Different Heads of the Balance sheet.

Financial analysis tools are different ways to evaluate and interpret a company’s financial statements for various purposes like planning, investment, and performance. Some of the most used financial tools based on their usage and requirements are common size statements (vertical analysis), comparative financial statements (comparison of financial statements), ratio analysis (quantitative analysis), cash flow analysis, and trend analysis.

When an analyst, business executive, or a student is dealing with a financial issue or wishes to understand the financial implications and economic trade-offs involved in decisions about business investment, operations, or financing; a wide variety of analytical techniques and infrequent rules of thumb is available to generate quantitative answers. Therefore, choosing the appropriate tools from the available alternatives is an important aspect of the analytical task.

The top four most common financial analysis tools are: –

You are free to use this image on your website, templates, etc, Please provide us with an attribution link

Source: Financial Analysis Tools (wallstreetmojo.com)

Let us discuss each tool one by one in detail

Let us evaluate different tools used for analysis: –

#1 – Common Size Statements

It is the first financial analysis tool. In the market, companies of various sizes and structures are available. To compare them, one must prepare their financial statement in absolute formats bringing all the particulars. The globally acceptable form to disclose the financials for comparison is to bring in data in a percentage format. The organization will prepare main financial statements like financial statementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more like Common size Balance sheetThe term "common size balance sheet" refers to a percentage analysis of balance sheet items based on a common figure, with each item presented as an easy-to-compare percentage. For example, each asset is expressed as a percentage of total assets, and each liability is expressed as a percentage of total liabilities.read more, Common size Income statementCommon Size Income Statement is a Company’s financial statement that presents every listed line item as a percentage of total revenue or sales. Moreover, it helps analyze the contribution of every item towards the profitability of the Company. read more, and common-size cash flow statement.

It will adequately disclose all the items for internal or external analysis with the peer group in percentage form. For example, the balance sheet can consider the base of total assetsTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equityread more. The income statementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more may contemplate the base level of net sales, and the cash flow statementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more can depend on the base level of total cash flows.

#2 – Comparative Financial Statement

Comparative financial statements are used in horizontal analysisHorizontal analysis interprets the change in financial statements over two or more accounting periods based on the historical data. It denotes the percentage change in the same line item of the next accounting period compared to the value of the baseline accounting period.read more or trend analysisTrend analysis is an analysis of the company's trend by comparing its financial statements to analyze the market trend or analysis of the future based on past performance results, and it is an attempt to make the best decisions based on the results of the analysis done.read more. It helps analyze the periodic change in various components of the financial statementsThe components of financial statements are the income statement, balance sheet, cash flow statement, and shareholders equity statement, which are the building blocks that together form the statements and help in understanding the financial health of the business.read more and displays which element has the maximum impact.

One can prepare such financial statements in currency amount terms or percentage terms.

Thus, one can easily compare the periodic data numerically or in percentage terms from the above.

The comparative financial statement has advantages like easy comparability, observing the trend, periodic performance evaluation, etc. However, it has disadvantages like ignoring inflationary impact, high dependability on financial information that can be manipulated, use of a different method of accountingAccounting methods define the set of rules and procedure that an organization must adhere to while recording the business revenue and expenditure. Cash accounting and accrual accounting are the two significant accounting methods.read more by various entities, etc.

#3 – Ratio Analysis

Ratio analysis is the most commonly used financial analysis tool by analysts, experts, internal financial planners, the analysis department, and other stakeholders. It has various kinds of ratios, which can help in commenting on.

Moreover, an entity based on their requirement can prepare the ratios for their analysis and manage the operations.

However, below are the odd side of ratio analysis:

Learn more from these Top 28 Financial Ratios with FormulasFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more

#4 – Benchmarking

Benchmarking is the process of comparing the actuals with the targets set by the top management. It also refers to the comparison made with the best practices and strives to achieve the same.

In this procedure, the below steps are to be performed: –

For benchmarking, ratios, operating margin matrix, etc., can be used. The operating margin of the industry average can be compared and should try to arrive at a better position. For example, the company known as Xerox initiated benchmarking to sustain itself in the photocopy business. They have currently optimized more than 100 functions compared to industry standards. Benchmarking can be considered a tool for improvement with customer-oriented activities driven by customer and internal organization needs. Eventually, it is the practice of being humble enough to accept that someone else is better at something and wise enough to learn how to match and surpass them.

Conclusion

In today’s competitive world, it is of utmost importance to follow the organization’s performance and the competitor, as it will help maintain and thrive the performance of the business. There are numerous tools available in the market to carry out the financial analysisFinancial analysis is an analysis of finance-related projects/activities, company's financial statements (balance sheet, income statement, and notes to accounts) or financial ratios to evaluate the company's results, performance, and trends, which is useful for making significant decisions such as investment, project planning and financing activities.read more based on the various needs. Furthermore, based on their conditions, organizations also build various in-house tools which help them track their requirements.