Accrual Accounting

Financial Statement Analysis

Now that you know how financial statements are prepared, let's see how they're used to help owners, managers, investors, and creditors assess a firm's performance and financial strength. You can glean a wealth of information from financial statements, but first you need to learn a few basic principles for "unlocking" it.

The Comparative Income Statement

Let's fast-forward again and assume that your business - The College Shop - has just completed its second year of operations. After creating your second-year income statement, you decide to compare the numbers from this statement with those from your first statement. So you prepare the comparative income statement in Figure 12.19 "Comparative Income Statement for The College Shop", which shows income figures for year 2 and year 1 (accountants generally put numbers for the most recent year in the inside column).

Figure 12.19 Comparative Income Statement for The College Shop

Comparative Income Statement for The College Shop

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