A comparative income statement provides information on the financial state of assets and liabilities of a company for different time periods. However, it also shows the changes that have taken place over different accounting periods in terms of assets and liabilities. Comparative Income Statement or comparative statement is a financial statement that defines the current financial position of a business and compares it with prior period statements. Here, financial statements of the previous year are presented alongside the latest figures to track the company’s progress in an easy way. In this example, comparative balance sheets reveal an increase in both total assets and liabilities between Year 1 and Year 2. The shareholders’ equity also increased, reflecting the growth in the company’s net worth.
Comparative statements, often known as comparative financial statements, are statements of a company’s financial situation at different times. These statements aid in establishing a company’s profitability by comparing financial data from two or more accounting periods. A comparative income statement presents the results of multiple accounting periods in separate columns. The intent of this format is to allow the reader to compare the results of multiple historical periods, thereby giving a view of how a business is performing over time. The format of the comparative income statement puts together several income statements into a single statement. This helps the business owner in understanding the trends and measuring the business performance over different time periods.
- Finally, calculate the percentage change in the assets and liabilities of the current year relative to the previous year.
- The simplest approach to producing a comparative income statement is to list the accounts in the left column.
- Similarly, when financial statements of two or more firms are compared over a number of years then it is known as an inter-firm comparison.
- However, it also shows the changes that have taken place over different accounting periods in terms of assets and liabilities.
- Comparative income statement definition approach depicts the change in quantity in both absolute and percentage terms over time.
Reporting just the latest dollar amounts makes it hard to compare the performances of companies of various sizes. Adding prior period figures, complete with percentage changes, helps to eliminate this problem. Analysts, investors, and business managers use a company’s income statement, balance sheet, and cash flow statement for comparative purposes. They want to see how much is spent chasing revenues from one period to the next and how items on the balance sheet and the movements of cash vary over time. A comparative statement is a document used to compare a particular financial statement with prior period statements. As we understand that accounting isn’t the most interesting aspect of running a business.
Trying to locate information on different statements can be confusing and frustrating. A comparative income statement makes it easy to point out trends in performance. You don’t have to flip back and forth between individual documents. You’re an expert at running your business, not analyzing financial numbers. But as a small business owner, you need to know how your decisions affect your company.
How to Prepare a Comparative Income Statement?
Comparative income statements can also reveal if your costs and revenues are consistent. Let’s say in three years your cost of goods sold (COGS) goes from 25% of sales to 40% of sales. By recognizing the increase, you can find solutions to reduce COGS. Information on a comparative income statement helps you make smart business decisions. Learn about comparative statements in finance, including their definition, types, and real-life examples. Gain a better understanding of financial analysis and decision-making.
Finally, calculate the percentage change in the income statement items of the current year relative to the previous year. This percentage change in items is mentioned in Column V of the comparative income statement. Furthermore, there is a provision attached to comparing the financial data showcased by such statements. This relates to making use of the same accounting principles for preparing each of the comparative statements. In case the same accounting principles are not followed to prepare such statements, then the difference must be disclosed in the footnote below.
What is an Income Statement?
Next, calculations are done to show the changes from one period to the next along with percentage calculations based on the choice between horizontal or vertical analysis. The spreadsheet application requires a great deal more work to set up the calculations and does leave more room for error. The use of accounting software standard reports, or report writing modules is a much more efficient and accurate way to prepare a comparative income statement.
So, business owners can also understand the various causes that lead to changes in different accounting periods. This is achieved by comparing the operating results of the business over multiple accounting periods. Every business needs to prepare basic financial statements that summarize its operating results and financial position for a particular period. These statements primarily include income statements, balance sheets, and cash flow statements.
Comparative Income Statement: Examples, Analysis and Format
Furthermore, this analysis is supported by the increase in the advertisement expenses of the company for the year 2018. These increased by 33% which is much higher as against the increase in net sales that was just 12%. Thus, this entire scenario indicates that it was quite challenging to sell the goods during the average american’s charitable donations 2018. Now, the sales value would have increased significantly if the company would have made sales at the previous sales price. But that is not the case as sales value did not change to a greater extent. This hints towards the fact that incremental sales have been made at a price lower than the sales price.
Income Statement Example
Management can use that data to make changes, such as finding more competitive pricing for materials or training employees to lower labor costs. On the other hand, an analyst may see the cost of sales trend and conclude that the higher costs make the company less attractive to investors. The Securities and Exchange Commission (SEC) requires public companies to publish comparative statements in 10-K and 10-Q reports. Comparative statements show the effect of business decisions on a company’s bottom line. Trends are identified and the performance of managers, new lines of business and new products can be evaluated, without having to flip through individual financial statements. Spikes and dips in revenues and expenses are immediately obvious when this format is used, and can then be investigated by management.
It provides a way to analyze the results of operations over multiple accounting periods with a few different options for review. The best way to create a comparative income statement is by using accounting software or a spreadsheet application like MS Excel. However, the basis for this report is the standard income statement which contains all the revenue and expense figures for the particular period. After this, do the required calculations to show respective absolute and percentage changes from one period to another. In this example, comparative income statements reveal that the company experienced an increase in both revenue and expenses between Year 1 and Year 2.
It provides a picture of profitability and the total for the period for each revenue and expense line item. However, it shows each item on the income statement as a percentage, which makes the comparison easy, straightforward and understandable. Additionally, it can also be used for timeline analysis by assessing individual statements for a reporting period. Vertical analysis is another technique of exhibiting a comparative income statement in terms of the relative size of the line items. It allows easy comparison of income statements from different-sized companies.
This increase or decrease in absolute amounts is mentioned in Column III of the comparative income statement. Vertical Analysis allows you to see the relationship between each item in the statement as a percentage of the whole. For example, in the vertical analysis of the income statement, each expense account is represented as a percentage of total revenue. This type of analysis can be very useful in reviewing expenses as well. For example, total revenue increased at the same time wages, as a percentage of revenue, decreased from 65.31% to 64.81%. To represent the trend, the direction of change, assessment, and take appropriate decisions, the financial situation is compared with two or more periods.
