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Comparative financial statements include the current and previous periods' financial information for review. The balance sheet and income statement are the two most common statements prepared in this format. Information listed is either in dollars or percentages of the total information on the reports. Companies often use this format to conduct a horizontal analysis of their information. This analysis looks for variances between the months and attempts to define where the company is doing well and where it is not.
The previous period of financial information can either be for the previous month or year. For example, a company may want to compare April 2011 information against April 2010 data. This allows the company to determine how stable each month’s financial data is each year. The ability to discover seasonal trends from comparative financial statements can also be easier using a yearly comparison with the previous year's information. Comparing information on a month-to-month basis allows for a single year review.
When conducting a horizontal analysis using comparative financial statements, companies often go line by line to look for variances. Finding extreme dollar differences can help focus the budgeting review of a firm. Managers or accountants research each variance to determine why the company did better or worse in a particular area. The review process also allows for companies to look for errors. Finding errors before releasing financial statements to external stakeholders is also necessary to ensure the accuracy of information.
Most companies often use comparative financial statements internally rather than externally. The final statements released are in the traditional format with just the current period’s information. In this format, the statements fall under management accounting principles. This allows the company to prepare financial data in a manner that best suits internal needs. This gives rise to the dollar variance preparation or relative percentage analysis.
When using a computerized software accounting system, accountants can program it to prepare comparative financial statements in a specific manner. Settings on the report can include the months compared on the report and whether the information lists dollar or percentage differences. In some automatic reports, the company can include both dollar variances and percentage differences on their comparative financial statements. This avoids the need for preparing two sets of financial statements. Accounting programs may call these statements common-sized financial statements, which prepare the information in similar manners.
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