EXERCISE 1-1 Discretion in Comparative Financial Statement Analysis The preparation and analysis of comparative balance sheets and income statements

EXERCISE 1–1Discretion inComparative FinancialStatement AnalysisThe preparation and analysis of comparative balance sheets and income statements arecommonly applied tools of financial statement analysis and interpretation.Required:a. Discuss the inherent limitations of analyzing and interpreting financial statements for a single year. Include inyour discussion the extent that these limitations are overcome by use of comparative financial statements computedover more than one year.b. A year-to-year analysis of comparative balance sheets and income statements is a useful analysis tool. Still,without proper care, such analysis can be misleading. Discuss factors or conditions that contribute to such apossibility. How can additional information and supplementary data (beyond financial statements) help preventthis possibility?