CHAPTER 7

ANALYSIS AND INTERPRETATION OF

FINANCIAL STATEMENTS
 COMPARISON STANDARDS
 One of the qualitative characteristics of a good financial statement is
comparability. This is the ability of the financial statement to create a basis and
allow the identification of similarities and differences between the statements
being compared.
 The following are the comparison standards that can be used by entities:

1. Intracomparability
The company’s financial statements for the current period are
being compared with the financial statements of prior or earlier periods.
This would point out the areas for improvements and may be used as
performance evaluation tools for employees.
2. Intercomparability
Intercomparability deals with the comparative analysis of
the company’s financial statement against a direct competitor.
More than anything else, the direct competitor’s financial
statements could show if our entity underperformed or
overachieved in the recently concluded accounting period
3. Industry standard
In an open market industry where there are many players
involved, it would be more prudent for some to compare their
company’s financial statements with the standard average for
that certain industry. By looking at the industry averages as a
whole instead on a per competitor basis, the process would
negate the seasonal fluctuations affecting the direct
competitor.
HORIZONTAL ANALYSIS VS VERTICAL
ANALYSIS
 The two most basic tools that could be used by entities in analysing
their own financial statements are horizontal analysis and vertical
analysis.
ABC Company
BALANCE SHEET
As of December 31,2016
Assets
Cash 500,000
Account Receivable 80,000
Inventory 60,000
Land 700,000
Patent 90,000
Total Assets 1,430,000
 Liabilities
Account Payable 400,000
Notes Payable 250,000
Total Liabilities 650,000

Owner’s Equity
X, Capital 780,000

Total Liabilities & Owner’s Equity 1,430,000