Question

What is the importance of comparative statements? Illustrate your answer with particular reference to comparative income statement.

Answer 1

The following are the importance of Comparative Statements.

1. Simple Presentation

The Comparative Statements present the financial data in a simpler form. Moreover, the year-wise data of the same items are presented side-by-side, which not only makes the presentation clear but also enables easy comparisons (both intra-firm and inter-firm) conclusive.

2. Easy for Drawing Conclusion

The presentation of comparative statement is so effective that it enables the analyst to draw conclusion quickly and easily and that too without any ambiguity

3. Easy to Forecast

The comparative analysis of profitability and operational efficiency of a business over a period of time helps in analysing the trend and also assists the management to forecast and draft various future plans and policy measures accordingly.

4. Easy Detection of Problems

By comparing the financial data of two or more years, the financial management can easily detect the problems. While comparing the data, some items may have increased while others have decreased or remained constant. The comparative analysis not only enables the management in locating the problems but also helps them to put various budgetary controls and corrective measures to check whether the current performance is aligned with that of the planned targets.