What is a Comparative statement?
A comparative statement is a type of financial report that aids in comparing elements of an organization's balance sheet and income statement over at least two periods in both percentage and absolute terms. It allows one to compare a company's performance to its rivals by presenting previous numbers alongside the most recent financials.
How Do Comparative Statements Work?
Investors, analysts, and corporate management use income statements, balance sheets, and cash flow statements for comparisons. They want to see how much money is used to chase revenues from a particular period to the subsequent and how the balance sheet items and cash flow changes over time.
Comparative statements demonstrate the financial impact of corporate decisions. Without needing to flick through individual financial records, trends can be found, and managers' accomplishments, new company ventures, and new product success can all be assessed.
If they adhere to the same accounting rules, comparative statements can also be utilized to compare various businesses. They can demonstrate, for instance, how several companies involved in the same industry respond to market circumstances.
It is difficult to gauge the performances of businesses of varied sizes when reporting only the most recent dollar figures. This issue is resolved by adding preceding period statistics along with percentage changes.
Read more about: What is Financial Management and Key Scope of Financial Management
Understanding Income Statement
Income statements give information about a company's operations' outcomes, and comparative income statements show how far the company has come over a few years. This statement aids in determining how each line item on the income statement evolves across various time periods.
Example of a Comparative Statement
Suppose there’s a manufacturer whose COGS (cost of goods sold) surges from 60% of sales to 75% within three consecutive years. An organization can now leverage this data to make necessary adjustments, like offering on-job training to cut labor costs or locating more competitive-priced supplies.
Moreover, the analyst within the organization can observe and analyze the trend in the cost of sales and may discover whether the company is less investment-worthy given the surged costs.
Read about: Financial Accounting Terms
Different Types of Comparative Statements
Let us look at the different types of comparative statements:
Comparative Income Statement
A comparative income statement shows the absolute costs and revenues for at least two periods. Moreover, it displays both the absolute change and % change of the values. Simply defined, this type of comparative statement aids analysts in understanding the absolute and percentage change in the figures produced by a company over time.
When examining a comparative income statement, it is important to keep the following things in mind:
- Compare and evaluate changes in sales with a corresponding rise in the cost of items sold.
- Examining the company's operating earnings
- An increase or reduction in net profit can be used to assess the business's overall profitability.
Comparative Expense Statement
This comparative statement assists companies in understanding changes to the various spending components. It supports the executive team in making future strategic business decisions. A comparative expense statement should be examined for the following things:
- Alterations to Absolute Values: This will demonstrate the rate of change in each expense over time.
- Changes Expressed in Percentages: You can then evaluate how each item has changed concerning the overall change in expenses.
- The Pattern of Expenditures: Are the costs rising, falling, or remaining the same?
- The Connection Between Costs: Do some expenses rise more quickly than others?
Comparative Balance Sheet
A comparative balance sheet compares a corporation's obligations, shareholders' equity, and assets at various times. It provides information on an organization's working capital and liquidity condition over time. When examining a comparable balance sheet, the following details should be considered.
- Current financial and liquidity situation (look at working capital)
- The business's long-term financial situation
- The company's profitability
Difference Between Common Size And Comparative Statement
One can use common size and comparative statements to communicate accounting information about a company to banks, investors, creditors, etc.
Also, both statements can be used to compare a company's financial performance over time by different parties. One must be aware of their differences to prevent confusion, as they have different qualities.
|Common Size Statement
|These statements assist in comparing key financial metrics for a company over several time periods in both percentage and absolute terms.
||The financial information is only presented in percentage form in this statement.
|The major goal of creating this statement is to assist decision-makers within a firm in making critical internal decisions.
||This document is typically created for investors by businesses.
|These statements are more helpful when comparing a company's financial data collected over time.
||This claim is more relevant when contrasting the financial performance of two businesses operating in the same sector.
Comparative Statement Limitations
Comparative assertions are less trustworthy when businesses go through a significant transformation. Businesses can change significantly due to significant acquisitions and expansion into new end markets, becoming new legal entities from prior reporting periods.
For instance, if Company A buys Company B, its sales may suddenly and sharply increase to reflect all the additional revenues that Company B generates. In addition, because Company B has a less efficient production method and must spend more money to make the products it sells, profit margins may begin to contract at a startling rate.
So, we come to an end to our comprehensive guide on financial comparative statements. Students can better understand the necessity of leveraging and implementing comparison statements in financial analysis when they pursue our certification course on Financial Analysis, Valuation, & Risk Management course.
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The three different kinds of comparative statements are comparable balance sheets, comparative income statements, and comparative expense statements.
Comparative statements, or comparative financial statements, are summaries of a company's financial situation. These statements compare the financial information from multiple accounting periods in order to assess the business's profitability.
A comparison statement gives the financial data more context. It assesses how well business operations are carried out. Also, comparative statement analysis is utilized for intra- and inter-firm analyses.
The following justifies the value of comparative statements:
<ul><li>To identify trends, compare a company's financial performance across time.</li>
<li>The statements may also show odd increases in the reported information, which may indicate accounting problems.</li></ul>
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