Business organisations prepare financial statements in order to determine their financial position for a particular period. The primary purpose of preparing financial statements is to get an idea about the financial soundness of the organisation.
Comparative financial statements are one of the most commonly used tools for undertaking the financial analysis of the statements generated by the business.
Let us know in detail about the comparative statements as we move ahead.
What are Comparative Statements?
Comparative statements or comparative financial statements are statements of financial position of a business at different periods. These statements help in determining the profitability of the business by comparing financial data from two or more accounting periods.
The data from two or more periods are updated side by side, which is why it is also known as Horizontal Analysis. The advantage of such an analysis is that it helps investors to identify the trends of business, check a company’s progress and also compare it with that of its competitors.
The financial data will be considered to be comparative only when the same set of accounting principles are being used for preparing the statements.
Types of Comparative Statements
There are two types of comparative statements which are as follows
1. Comparative income statement
2. Comparative balance sheet
Comparative Income Statement
Income statements provide the details about the results of the operations of the business, and comparative income statements provide the progress made by the business over a period of a few years. This statement also helps in ascertaining the changes that occur in each line item of the income statement over different periods.
The comparative income statement not only shows the operational efficiency of the business but also helps in comparing the results with the competitors, over different time periods. This is possible by comparing the operational data spanning multiple periods of accounting.
The following points should be studied when analysing a comparative income statement
1. Compare the increase or decrease in sales with a relative increase in the cost of goods sold
2. Studying the operational profits of the business
3. Overall profitability of the business can be analysed by an increase or decrease in the net profit
Steps in preparing a comparative income statement
The below steps are followed
1. Specify absolute figures of all the items related to the accounting period under consideration.
2. Determine the absolute change that has occurred in the items of the income statement. It can be achieved by finding the difference between previous year values with the current year values.
3. Calculate the percentage change in the items present in the current statement with respect to previous year statements.
Comparative Balance Sheet
Comparative balance sheet analyses the assets and liabilities of business for the current year and also compares the increase or decrease in them in relative as well as absolute parameters.
A comparative balance sheet not only provides the state of assets and liabilities in different time periods, but it also provides the changes that have taken place in individual assets and liabilities over different accounting periods.
The following points should be studied when analysing a comparative balance sheet
1. The present financial and liquidity position (study working capital)
2. The financial position of the business in the long term
3. The profitability of the business
Steps in preparing a comparative balance sheet
The below steps can be followed
1. Determine the absolute value of assets and liabilities related to the accounting periods.
2. Determine absolute changes in the items of the balance sheet relative to the accounting periods in question.
3. Calculate the percentage change in assets and liabilities by comparing current year values with values of previous accounting periods.
This concludes the topic of Comparative Statements. Students can gain a good understanding of the need for using comparative statements in financial analysis. To learn more such intriguing concepts on Accountancy, stay tuned to BYJU’S.