Comparative financial statement analysis involves examination of financial statements for a single company for 2 or more accounting periods (years, quarters, or months) and noting the change in both amount and percentage between periods. The financial statement analysis method is used by investors, creditors and management to evaluate the past, current and projected conditions and performance of the firm. This form of analysis provides evidence of significant changes in individual accounts and can give a user valuable insight into items that should be further investigated. We help to provide consulting and accounting services to SMEs, startups and MNCs.
Ratio analysis is the most common form of financial analysis. It provides relative measures of the firm’s conditions and performance. Horizontal analysis and vertical analysis are also popular forms. When comparing the financial ratios, a financial analyst makes two types of comparisons: Trend analysis and Industry comparison.
Trend analysis is a form of comparative analysis, but instead of examining the entire balance sheet and income statement for 2 years, this form of analysis involves examination of selected financial statement information over longer periods of time (usually at least 5 years and as much as 10 to 20 years). Trend analysis is performanced by selecting a base year, and assigning a value of 100% to the amount of the selected financial statement item or items. Each successive year would be compared to the base year on a percentage basis. Analysis of the actual sales, gross profit, and income data indicates continuing growth in sales and income. Trend analysis, however, shows a different picture. Income is continuing to increase but at a slower percentage than sales. This, combined with the indication that gross profit is increasing faster than sales, may indicate management is doing a good job of continuing to reduce material and direct labour costs, but is not controlling administrative or overhead expenses. This indicates a need for further investigation as to the cause of this trend.