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

Comparative analysis is used to perform financial comparison analysis of the business. Example- Calculating different ratios like Debt Equity ratio, Liquid Ratio, Asset Turnover Ratio Etc.

Objectives of comparative analysis are -

1. To identify operating results.

2. To identify annual profits to stockholders.

3. For making comparison among different companies.

4. To assess company's financial statements and financial position.

5. To keep a check on important trends.

6. To identify unusual or abnormal events.

7. To make strategic business decisions.

8. To determine business profitability and stability.

Importance of Comparative Analysis to external users of Financial Statements-

1. External users such as creditors, investors get an idea of business operating cost, sales, investment, revenue etc.

2. External users analyze their investment in business using different ratios such as Return on Equity, Dividend per share, Earning per share etc.

3. It helps the external users to predict about solvency and effectiveness of business.