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Importance of Comparative Balance Sheet

Comparative balance sheet is the part of financial analysis in management accounting. We can explain the importance of comparative balance sheet in the answer of following questions:

1. # Where did we Use our Fresh Share Capital Fund?

If any company issues new shares and get the fund. This will easily be found by preparing comparative balance sheet. Exact figure, we can find. For example, we had  $ 100000 total share capital in 2010 and $ 180000 in 2011. Now, by comparing both share capital, we find that there is 80% increase in our total share capital. But if we compare our fixed assets and suppose increase in fixed assets is 40%. At that time, we did not utilize our share capital for buying new fixed capital. There where did we use our share capital. We can not make our shareholder fool by telling that we still use all share capital money for buying fixed assets because every shareholder may have capacity to appoint CA or CPA or CFA. Company can never speak white lie. So, management of company will be responsible for balance 40% use. Next part of comparative balance sheet may give answer above question.

2# Why is Current Liabilities are more than Current Assets?

If our comparative balance sheet shows net increase in current liabilities is 300% and net increase in current assets is 100%. Difference of this will negative increase in working capital. Let me simplify this. It means liabilities have increased by 300% but we have not capacity to pay just 100% current liabilities with our current assets. Next 200% current liabilities will not get anything via cash without liquidation. So, management has to concentration on this point.

3. # Where did we use our Long Term Debt?

Sometime company gets long term debt for different needs. If we compare long term debt of 2010 and 2011 and suppose, we find that it also increase 100% and assets side, we see 200% increase of profit and loss account's debit balance. At that time, total picture of company may be clear. Company is using his share fund and long term funds in very very bad projects in which its capital and debt is sunken. So, company is increasing debt and same debt is using for covering loss but loss is still increasing fast for consuming company's debt and capital. This is worst situation of company.


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Accounting Education: Importance of Comparative Balance Sheet
Importance of Comparative Balance Sheet
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