Comparative Income Analysis

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II. Comparative Income Statement The comparative income statement is prepared to study the trend of different items of income statement by studying simultaneously the income statements of two or more periods. It is useful to analyze the changes of amount and direction of changes in sales, cost of goods sold, operating expenses, operating profit, and different heads of expenses and incomes from one period to another. The significant points to be measured in this analysis are: a) The effect of inflation on value of the currency needs to be considered as absolute changes without accounting for real price changes may not accurate results. b) It involves only horizontal comparisons. Comparative statements pay no attention to the interrelationship…show more content…
b) Each type of asset is articulated as a percentage of total assets c) Each items on the capital and liability side of the balance sheet is expressed as the percentage of total of the capital and the liabilities of the balance sheet. In order to have comparison of one year with that of another year, ot is necessary to ensure that the organization as followed consistently a same accounting policy and practices from year after year. 3.4 Trend Percentage It is useful for studying the financial statement for several years. In this technique, the profit and loss account and the balance sheet of an accounting year are taken as the base year. This may be any year; it can be the earliest year involved or any prevailing year. Base should usually be the initial year in the study period is taken as the base year. Every item of the base year’s financial statement is considered as 100. All the corresponding figures in the financial statements of other years are expressed as a percentage of their value in the financial statements of the base year. 3.5 Ratio Analysis…show more content…
The management can compare the actual with standards and can take corrective measures to remove the variances and rectification of errors committed in the past. Limitations of ratio analysis Ratio analysis plays a significant role in the process of analysis and interpretation of financial statements. Though it plays a pivotal role, it is subject to certain limitations. • Limitations of accounting data Accounting ratios are based on the information available in the books of accounts. If the books of accounts do not provide correct values for assets, liabilities and other items, it is not possible to compute the correct realistic, meaningful and useful ratios. • Lack of standards No standards have been established for most of the accounting ratios. Lack of adequate standards makes it difficult to provide adequate comparisons. • Different meanings are put on different terms There are a number of accounting ratios where in different meanings are used for different terms. For example a firm may work out ROI on the basis of profits after interest and taxes, the other firms may consider profits before interest but after tax for computation of ROI. Obviously the ratios which will be worked out will not be comparable. It is important to ensure before comparison that the ratios have been worked out on the same

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