Comparative analysis entails comparing different data sets or items in financial statements at the same time. The main objectives of carrying out comparative analysis is to identify trends among the given financial figures and any existing errors since it entails thorough study of the financial statements, to evaluate a company’s operations with relation to its financial resources and make predictions of future business performances based on the interpretation of the information (NCERT. N.d.). Comparative analysis is important to external users such as investors, creditors, auditors and regulatory agencies since it provides them with information that could be used to determine the profitability of the company’s that they would have been dealing with. This analysis is also used to evaluate the performance of the management in terms of making financial decisions regarding the company. It is also important in ascertaining the financial structure of a firm and identify the possible risks that could arise (NCERT, N.d.).
When carrying out a comparative analysis, one year data is not sufficient as the same might make it difficult to establish trends of financial performance and to identify past performances in relation to the same.
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Financial statements produce useful data when performing the comparative analysis of a company’s financial data. These include income statement, cash flow statements, balance sheets and profit and loss statements. These provide a wide range of data that is useful for analysis since they include the company’s gross profit, net income, ending cash balances, assets, liabilities and equities which have items that are useful in evaluating the performance of a company.
The three types of comparisons that could be used to improve the usefulness of financial statement information re intracompany basis, intercompany basis and industry averages (Kimmel, Weygandt & Kieso, 2016). Intracompany makes comparisons within a company for statements of the same year or given period before the current year to establish the trend. On the other hand, intercompany comparison entails comparing financial statements between two or more business units within the same company. Meanwhile, industry averages are used to make comparisons with the stock market and this helps to establish the market share of the company at given time period.
The roles of financial accounting differ from those of managerial accounting in several ways. First, financial accounting is purposefully carried out for general purposes such as for reporting the total cost of sales while managerial accounting is carried out for special purposes such as to make specific decisions, for example in the case of determining the price of a unit cost of producing a good (Kimmel, Weygandt & Kieso, 2016). Financial accounting is used to analyze the profitability, liquidity and solvency of a company by establishing an analysis of different ratios from the company’s financial statements. These are useful when seeking investors or loans from banks. On the other hand, managerial accounting is used to formulate strategies that can add value to a business such as set prices for goods and price at which the company can be sold (Kimmel, Weygandt & Kieso, 2016). Financial accounting is also used to assign duties to employees while monitoring their activities to ensure that there is no occurrence of fraud or theft. Managerial accounting is used to control internal activities by ensuring that goals of the business are met, while making necessary changes.
Financial analysis entails the study of financial statements of a company to identify financial strengths and weaknesses, profits and losses. The importance of this process is that it allows financial managers to make rational decisions as shall have regarded the financial situation of a firm. This is by identifying whether the firm is able to meet its long-term and short-term financial obligations (NCERT, N.d.). Financial analysis also allows management to constantly review its financial operations and find corrective measures in cases where deviations are observed. It also helps financial managers to efficiently distribute financial resources within a firm based on the profitability of the firm. Financial analysis also gives investors an overview of the profitability of a company and helps to ascertain financial risks presented by the company’s capital structure.
The comparison of companies that differ in terms of size could be done by way of comparing their financial statements (Kimmel, 2014). This could first be done by obtaining the values of the items that would have been traded by the said items, and this in turn, should come after having divided the said values by the total available sales in view of obtaining the percentage of sales. The two should then be compared. Another way of making these comparisons would be by way of using ratios (Kimmel, 2014). Ratios that could be used in this case include current ratio to measure liquidity, net income to net sales ratio and earnings per share to determine profitability of the companies under comparison.
Horizontal analysis is an analysis techniques, whereby changes in amounts of different items in financial statement are compared across a given period of time (Accountingformanagement.org, N.d.). This can be used to compare schedule of current assets, balance sheets, statements of retained earnings and income statements for a number of years. When carrying out a horizontal analysis, financial statements for 2 and more periods are selected, with the financial statement for the earliest period being used as the base period (Accountingformanagement.org, N.d.). This means that the items on financial statements of the other periods of time will be compared against items on the financial statement for the base period. The differences are calculated in dollars and in percentage form. To get the dollar change, a given item in the base period is subtracted from the similar item in the comparison year. The value obtained is then expressed as a fraction by dividing it with the amount of the item in the base year, then multiplied by 100 per cent to find its percentage value (Accountingformanagement.org, N.d.). Comparisons are then made using these two values to establish the financial trend of a given company and make financial decisions based on the interpretation of the results.
The differences between managerial and financial accounting arises in the ways in which each one of them is applied by managements to deal with economic events within and outside the business. Managerial accounting provides economic and financial information that is applicable for use by managers and other internal users within a company, while financial accounting provides financial information that is applicable for use by external users such as investors, regulatory agencies and auditors. Financial accounting is used by external users to gauge profitability and evaluate the overall performance of a company. On the other hand, managerial accounting is used by managers to formulate objectives of the company which may be used to increase short-term profits and significantly increase the market share of the business (Kimmel, Weygandt & Kieso, 2016). Information obtained from financial accounting is also used by managers to make general reports such as total cost of production of a company ad total profit made. This helps to analyze specific aspects of the business of a company such as monthly sales. Information from managerial accounting is however useful in making specific decisions and reports such as profit per unit of good sold (Kimmel, Weygandt & Kieso, 2016). This is then used by managers to make decisions such as increase price of goods or reduce cost of production.
References
Accountingformanagement.org (N.d.). Horizontal or Trend Analysis of Financial Statements. Retrieved from http://www.accountingformanagement.org/horizontal-analysis-of-financial-statements/
Kimmel, P. (2014).Comparing Companies. [Video Transcript](Original work broadcast May 27, 2014)
Kimmel, P. (2014). Financial Statement Analysis. [Video Transcript] (Original work broadcast May 27, 2014)
Kimmel. P. D., Weygandt, J. J., Kieso, D. E. (2016). Accounting: Tools for Business Decision Making. Hoboken, NJ: John Wiley & Sons.
NCERT. (N.d.). Analysis of Financial Statements. Retrieved from http://ncert.nic.in/ncerts/l/leac204.pdf
