1) What is the advantage of using comparative statements for financial analysis
ID: 2376018 • Letter: 1
Question
1) What is the advantage of using comparative statements for financial analysis rather than statements for a single date or period?
2)What do the following data taken from a comparative balance sheet indicate about the company's ability to borrow additional funds on a long-term basis in the current year as compared to the preceding year?
current year Preceding year
fixed assets(net) 600,000 720,000
total long term liabilities 120,000 180,000
3)a. How does the rate earned on total assets differ from the rate earned on stockholders' equity?
b. Which ratio is normally higher? Explain.
4)The net income (after income tax) of McCants Inc. was $40 per common share in the latest year and $100 per common share for the preceding year. At the beginning of the latest year, the number of shares outstanding was doubled by a stock split. There were no other changes in the amount of stock outstanding. What were the earnings per share in the preceding year, adjusted for comparison with the latest year?
5) Describe two reports provided by independent auditors in the annual report to shareholders.
Explanation / Answer
Benefits of comparative statements for financial analysis on single data statements
Comparative statements calculate the difference between multiple years of data and report that difference in percentages. The accountant reviews the balances on each financial statement for the current year and the previous year. For each line item, the accountant subtracts the current year amount from the previous year amount to determine the difference. The accountant then divides the difference by the previous year amount to calculate the percentage.
One advantage of using comparative statements is the ability to highlight the percentages. By restating the change of each line item as a percentage, comparative statements allow the user to notice large changes from one year to the next. As the percentage increases, the total change in that account balance increases. The financial statement user identifies those accounts with the highest changes. She can then investigate the reason for the change.
Another advantage involves the use of trend analysis. Trends refer to a consistent pattern within a particular financial account. The financial statement user chooses a financial account to analyze. He uses comparative statements for several years and looks at the percentage reported for that account each year. He observes whether the percentages increase, decrease or remain the same. If the percentages remain the same, the company experiences steady growth in that account. If the percentages increase, that account value is growing rapidly. If the percentages decrease, that account growth is slowing.
The ability to compare various size companies is another advantage offered. Comparative statements allow the user to analyze companies of different sizes. Comparative statements address the challenge of comparing the performance of a large company versus a smaller company. The use of percentages eliminates the difference in dollar amounts presented in the financial statements of different size companies.
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