Question

What are the main objectives of comparative analysis and why are they important to external users of the financial statements, such as investors?

Answer 1

The main objective of comparative analysis are mentioned below:

1. To compare the financial performance in a year of an organization with the financial performance of the same organization of any previous year.
2. To compare the financial position of an organization as on a particular date with the financial position of the organization as on an earlier date.
3. To compare the financial statements of an organization with that of its competitors to assess the financial performance and position of the organization as compared to its competitors.
4. To assess the actual performance of an organization with that of its expectations, i.e. by comparing the actual financial performance and position with the budgets.
5. In general the comparative analysis will help the management as well as other stakeholders of an organization to assess the financial performance and position of an organization with that of its competitors as well as its own performances and expectations.    

Importance of comparative analysis for investors and users of financial statements:

Users of financial statements including the investors have their interest associated with the financial performance and position of an organization. Comparative analysis will help the investors and other users of financial statements to correctly assess the position of the organization in the market as compared to its competitors. The users of financial statements including the investors would have necessary information to take correct decisions affecting their interests in the organization.