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Comparative Financial Statements: An Alternate Accounting Report Format
Comparative financial statements feature a current period's monetary details as well as a previous periods’ monetary information. Organizations often use these comparative statements for evaluation purposes. The income statement and balance sheet are the most frequent statements prepared in this comparative format. Data specified on these reports is either in dollars or percentages on each report. Organizations frequently utilize this style to conduct a horizontal investigation on the information. This investigation analyzes the differences in each month on the financial statement and provides information on where the company is performing well and where it is underperforming.
The previous period of financial accounting data could either be the previous month or info for one year previous to the current month. As an example, a business might like to contrast April 2012 details against April 2011 data. This allows the organization to determine precisely how stable each month's financial data is year-over-year. The capacity to discover periodic trends from comparative financial statements can additionally be simpler when using an entire yearly comparison using the previous years' data. Contrasting financial data on a month-to-month basis permits a more solitary financial evaluation.
When performing a horizontal accounting analysis utilizing comparative financial statements, companies often go line by line to look for variations. Locating extreme dollar or percentage variances could assist the focus of an organization’s budgeting process. Supervisors or accountants will investigate each difference to determine why the business did much better or much worse in a specific area. The evaluation process likewise enables companies to seek and correct operational problems. Finding errors before presenting standard financial statements to external stakeholders is also necessary to make certain all data is accurate.
Many organizations will definitely use comparison financial statements internally instead of externally. The official financial statements released will often be in the standard financial statement style with only the current period’s fiscal information. In this style, the statements fall under general accounting standards. Comparative financial statements may allow a business to prepare financial information in a manner that best suits internal demands. This induces the dollar variance groundwork or relative proportion analysis common in managerial accounting.
When making use of a computerized accounting system, accountants can easily set the system to prepare comparison financial statements. Settings on financial reports are able to feature the months compared on the report and whether the data details dollar or percentage variances. In some computerized reports, the organization can include both dollar variances and percentage variations on the comparison statements. This avoids the requirement for preparing two different types of financial statements. Accounting programs might call these statements common-sized financial statements, which prepare the details in a similar method to comparison statements.