Home

Learning Hub

Articles

Comparative Statement: Definition, Types, and Examples

Any business enterprise, be it small or big, performs comparative financial statement analysis to determine and gauge its financial standing. People intending a career in accounting and finance must have a basic knowledge of comparative statements, the types of comparative statements, and more. 

This Hero Vired article will give you conceptual clarity on comparative statement analysis and help you step closer to becoming a master in accounts.

Table of Content –

• What is a Comparative statement?
• How Do Comparative Statements work ?
• Understanding Income statement
• Different types of comparative statements
• Difference Between Common Size and Comparative Statement
• FAQs

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. 

Importance of Comparative Statements

 Comparative statements play a crucial role in financial analysis, offering valuable insights into the performance and health of a company over multiple years. Several key reasons highlight the importance of these statements:

• Simplifying Data for Understanding:
  
  Comparative Financial Statements serve the primary purpose of presenting data from various years in a clear and comparable format. This side-by-side presentation facilitates easier comparison of figures, enabling stakeholders to analyse and draw conclusions regarding the company’s operating results and overall financial well-being.

• Identifying Strengths and Weaknesses:
  
  Through a comparative analysis of financial statements over several years, it becomes possible to pinpoint the strengths and weaknesses of a company. This identification allows management to delve deeper, investigating the reasons behind weaknesses and implementing corrective measures to enhance overall performance.

• Indicating Trends:
  
  Comparative Financial Statements provide a visual representation of the changing trends within a company. By juxtaposing figures for revenue, production, expenses, and profits over multiple years, these statements reveal patterns. For instance, a consistent increase in the Cost of Production coupled with rising expenses may signal potential issues, prompting the need for corrective actions.

• Benchmarking Against Industry Averages:
  
  A significant advantage of comparative statements is the ability to compare a company’s performance against industry averages. This benchmarking helps assess how well the business is faring in comparison to its peers, providing valuable insights for strategic decision-making.

• Facilitating Forecasting:
  
  Through a comprehensive comparative study of key financial indicators, comparative statements empower management to make informed forecasts about a company’s profitability and financial robustness. The historical perspective allows for a more accurate prediction of future trends and assists in developing strategic plans accordingly.

 Comparative statements are indispensable tools for stakeholders seeking a comprehensive understanding of a company’s financial performance, trends, and positioning within its industry. These statements empower management to make informed decisions, identify areas for improvement, and navigate the dynamic landscape of business with greater foresight.

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

Comparative Statement Format

The format typically includes vital details such as the company name, the period of comparison, and the total revenue. Furthermore, essential components encompass the cost of goods sold, operating expenses, income tax expense, and gross profit.

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.

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. 

Conclusion

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. Keep an eye on HeroVired to understand more fascinating accounting topics.