Comparative financial statements definition

Comparative Financial Statements Definition

One can form an opinion on the progress of an enterprise based on the comparative statements. Comparative financial statements are statements which show a company’s statement in two or more consecutive periods in a single statement. Usually, the entities included in the comparative financial statements include balance sheets, profit and loss accounts, and cash flow statements for two consecutive years. Moreover, comparative financial statements can be used to calculate financial ratios, such as liquidity ratios, profitability ratios, and solvency ratios.

Comparative Financial Statements Definition

This resulted in only a slight increase in net income for 2019 over 2018. For example, a $1 million increase in General Motors’ cash balance is likely to represent a much smaller percentage increase Comparative Financial Statements Definition than a corresponding $1 million increase in American Motors’ cash balance. In percentage comparison, the increase or decrease in amounts is expressed as a percentage of the amount in the base year.

Related IFRS Standards

So if cash made up 20% of a company’s assets on February 1, 2020, and 30% of a company’s assets on February 1, 2021, that can tell you another story rather than just knowing there was an increase in cash from $5,000 to $7,500 over one year. It makes analysis simple and fast as past figures can easily be compared with the current figures without referring to separate past Income Statements. Cost Of SalesThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales. The following is an example of a balance sheet that is presented on a comparative basis. May be useful for predicting future performance, though you should rely more on operational indicators and leading indicators than on historical performance for this type of analysis.

Comparative Financial Statements Definition

After this, do the required calculations to show respective absolute and percentage changes from one period to another. Horizontal analysis is one of the popular techniques of comparative income statements demonstrating the financial change in both absolute and percentage terms. Moreover, it is also known as Trend Analysis due to its ability to analyse trends. The comparative income statement reveals that there has been increase in net sales of 25% while the cost of goods sold has increased disproportionately by 50% thereby resulting in a decrease of gross profit of 25%. Although the operating expenses have remained constant, there has been decrease in net profit of 29.41%.

Comparative Statement: Definition, Types, and Examples

The use of comparative financial statements allows users to analyze the financial performance of an organization over time. By comparing the financial data for multiple periods, users can identify trends in revenue, expenses, assets, liabilities, and equity. This information can help users make informed decisions about investing in or lending to the organization.

It expedites and simplifies financial analysis as past figures can easily be compared with current figures without the need to refer to individual past statements. Comparative financial statements do not recognise the change in prices level and, as such, it will be of no use. This has been possible for two reasons, one is that the company has increased sales by Rs 1,00,000 in 2011 from 2010, the second reason is that the company has not only controlled but reduced its operating cost.

What Are the Benefits of a Comparative Income Statement?

Business owners and investors can use the current ratio to either compare multiple organizations or multiple time periods. This comparative report, along with other comparative reports such as the comparative income statement, helps potential investors determine the financial health of your business and whether it’s growing, getting worse, or stagnant. The comparative figures in comparative balance sheets can help you identify trends and areas of weaknesses or strengths. It can also help you understand fluctuations caused by seasons so that you can make better-informed business decisions.

  • So if cash made up 20% of a company’s assets on February 1, 2020, and 30% of a company’s assets on February 1, 2021, that can tell you another story rather than just knowing there was an increase in cash from $5,000 to $7,500 over one year.
  • You’re an expert at running your business, not analyzing financial numbers.
  • The comparative income statement gives an idea of the progress of a business over a period of time.
  • Similarly, comparative figures will indicate the trend and direction of financial position and operating results.
  • This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company’s overall performance.
  • The comparative income statement given above reveals that there has been an increase in net sales of 14.65% while the cost of goods sold has increased nearly by 11% thereby resulting in an increase in the gross profit of 19.4%.