Comparative Financial Statements Paper

Document Type:Thesis

Subject Area:Accounting

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The cash flows statements (giving the cash flows for different periods). Merits of Comparative Financial Statement: Contrast: It compares figures of different companies or years side by side Horizontal Analysis: The figures are arranged horizontally because of analysis and interpretation of data taken from financial statement for measuring productivity, Trend Analysis: It helps to analyze the trend involving the sales, expenses and so forth. It helps the financial analyst to comprehend total performance of the company. Trend and Directions: They give the required information to compare trends of interrelated items. For example, the comparison of the trend of sales of accounts receivable which has very beneficial information. A 15% growth in accounts receivable and an increase of sales by only 10% permits the examination into the explanations for this variance in the degree of growth (McMillan 113-115). Evaluation of: They helps the financial analyst to equate performance of different companies within the similar industry. It helps the companies to look at the areas to improve and invest more. Measuring Financial: Comparative financial statements help to know significant Distress financial ratios, which are used for forecasting financial distress and forecasting corporate fiasco with the aid of Multivariate Model. Disadvantages of Comparative Financial Statement: Inter-firm Comparison: Companies use different accounting principles so it will be difficult to compare. For example, some companies will allow the use of LIFO method to value their stock while others will use FIFO method. It is hard to compare different companies using different principles. Pianalto 31-54) Inflationary Effect: In case the price changes Comparative financial statements do not them as such, it will be of no use.

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Ascertaining Correct Trend: It is not easy to determine the accurate trend if there is an operational fluctuation in a company, which is commonly happening. Supply Misleading Information: In some years, comparative financial statement provides less useful information; that is, if a positive value comes in following year, and a negative amount in the base year, it becomes hard to find out the change in percentage (Norton et al 112-120). Uniformity in Principle: Consistency is very important while following accounting principles, concepts, and convention (Frias‐Aceituno et al 56-72). Practically it is not much followed and it lead to multi-year analysis becomes less useful. Breaking down Comparative Statement The importance of comparative statements is that they give the analyst report to show the progress of the company. Different trends will allow them to evaluate the performance of the staff, new products and new features installed on the company.

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They give an analysis of how different firms in the similar business react to deviations in the market. The last financial statement analysis ratio analysis that computes arithmetical relations among facts. Fiscal Statements They allow analysts to compare different ratios across numerous periods then identify the trends and the statement types. They also enable analysts to measure liquidity, productivity, and cash flow. In the financial statements, there are three types: income statement, balance sheet and cash flow statement. The balance sheet gives the big picture in period of the business's assets, obligations and investors' equity (Foster 75-83). The working part of the income statement issues information about profits and expenditures that are a direct result of regular business operations. For example, a company dealing with manufacturing of products, it should make money through the sale of the product it produces.

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The non-working section reveals income and expenditure information about happenings that are indirectly connected to a business's regular operations. For instance, if the same manufacturing business invest on real estates the money generated becomes non-operating (Norton et al 112-120). Income Statement Uses For the financial analyst to compute financial percentages like return on equity (ROE), return on assets (ROA) operating profit, gross profit, earnings before interest and amortization (EBITDA) and earnings before interest and taxes (EBIT) they usually use data from income statements (Norton et al 112-120). The company has to pay all assets by either borrowing money or money given out by the stockholders (Foster 75-83). The balance sheet has three elements that includes assets, obligations, and equity have each other minor accounts that specify company finances. These accounts vary depending on the nature of the business and they have a different implication.

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Assets An asset is an item or property owned by a company. Accounts of the assets are ordered from the top to bottom according to their liquidity. Obligations are an important element of a business since they help to finance activities and help in investing in the company for expansion. Most companies also have made a transaction to be easier and more efficient. That is because once items are issued they do require to be paid immediately but an invoice is issued to be paid later. Equity Equity is the value a company it owns or the capital used to start the business. This is money shareholders or the owner contributes to start the business or to invest in the business. They should show clearly how they source and spend the received cash.

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Breaking down cash flow statement Cash flow is categorized into two forms known as cash and accrual. Accrual accounting is the most used form of public accounting. The income statement differs from the company cash position in the annual report. For example, a company may win a contract where the contract will be recognized as revenue but the cash may not be paid immediately. Money from the equity or raised from people and a paid debt is listed on this part. Cash Flow from Investing Activities It is an element of the cash flow statement, which gives summary collective transformation in a business's position coming from any profits (or losses). It is important to factor all elements, which lead to the overall change in company's cash position. If cash flow is positive it will lead to fewer investments but if, the cash flow is very poor it means the company has to invest a lot (Norton et al 112-120).

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Breaking down cash flow from investing activities Three main financial statements used by companies includes income statements, which are used to give the company a general overview of the income and the expenses. Breaking down operating cash flow - OCF It signifies money form of a business's net revenue. Generally, Accepted Accounting Principles (GAAP) recommends the use of accrual basis to produce a report. It comprises various non-cash items. Besides, the net income must be attuned for any fluctuations in working capital accounts on a company's balance sheet (Pianalto 31-54). Increases in financial records receivables, displays revenues reserved for which cash has not been collected yet, and such increases must be subtracted from the net income.  Financial Statement Analysis, 2/e. Pearson Education India, (2004): 75-83. Frias‐Aceituno, José V. Lázaro Rodríguez‐Ariza, and Isabel M.

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Garcia‐Sánchez. Smith. A comparison of general price level and historical cost financial statements in the prediction of bankruptcy.  Accounting Review (1979): 112-120. Pianalto, Sandra. Comparative Financial Statements.

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