Comparative Analysis of Financial Statements


Comparative Analysis of Financial Statements

Financial statement data are often used for comparative analysis of two types:
Comparisons of data of one firm with another or other firms at the same point or points in time, this is cross-sectional analysis.
Comparisons of data of a firm at different points in time, this is time series analysis.

Cross-sectional Analysis
For comparisons of one firm with another or other firms to be meaningful, those firms must have some similar attributes. This could be based on the following groupings:

a)      Firms having similar production processes or similar distribution systems.
b)     Firms producing or dealing with similar products.

In cross-sectional comparison, there must be some benchmark or standard developed for firms operating in the same grouping. These are known as industry standard or ratios.

Time-series Analysis
This form of analysis seeks to describe a pattern or behavior over time for some variables like Sales, Profits or Return on Capital Employed. For such analysis to be meaningful, data in financial statements being observed must have been prepared on the same accounting bases. Time series analysis must also take account of any structural change that has taken place in a firm.

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