Question
Explain the significance of comparative financial statements.
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Answer
The importance of comparative statements can be described as under:
$(1)$ Intrafirm Comparison:
$(1)$ Intrafirm Comparison:
- When the accounts of business entity of current year are compared with the accounts of previous years, it is known as intrafirm comparison.
- Moreover, when one business entity has various departments, their financial performance evaluation is also done.
- When financial statements of various business entities are compared with each other it is known as interfirm comparison.
- With this comparison which business unit is financially strong or weak as compared to the other business unit can be ascertained and based on this investors may rethink on their investments decisions.
- Due to comparison of financial statements of different years and different sections of a business unit the information of trend pertaining to financial position and profitability is ascertained which helps to make decision of investment.
- Creditors of business units are of long term and short term Creditors determine credit worthiness of business units through analysis of financial statements so it is useful to creditors
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Prepare common size statement of profit and loss from the following profit and loss statements of two years.
→| Particulars | Note | $31-3-2017$ | $31-3-2016$ |
| No. | $(₹)$ | $(₹)$ | |
| $(I)$ Sales revenue | $48,00,000$ | $40,00,000$ | |
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| $(III)$ Total income | $52,80,000$ | $42,40,000$ | |
| $(IV)$ Expenses : | |||
| $(i)$ Cost of goods consumed | $26,40,000$ | $20,80,000$ | |
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| $(vi)$ Depreciation | $5,76,000$ | $4,00,000$ | |
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