Financial statements are prepared by businesses to determine their financial situation for a certain time. The fundamental goal of creating financial statements is to gain an understanding of the organisation's financial health. Comparative income statements are one of the most often utilised techniques for doing financial analysis of business statements.
Did you know?
A Comparative Income Statement can be used for Horizontal and Vertical Analysis.
What is an Income Statement?
The income statement, often known as the profit and loss statement, displays sales with fewer costs. The top line represents the entire amount of sales earned before deducting any expenditures. Then, company expenditures are stated and subtracted until the bottom line, or net profit is reached.
Also read: Learn Cost and Management Accounting along with its Meaning, Objectives & Types
What is a Comparative Income Statement?
A comparative income statement summarises the operational outcomes over many fiscal quarters. It allows the reader to compare the results over time for a better understanding and comprehensive study of the variance of line-by-line items in the income statement.
The comparative income statement format includes numerous income statements as columns in a single statement, allowing the viewer to study patterns and compare performance across reporting periods. It may also be used to compare the operating data of two distinct firms. Such analysis aids in comparing performance with other businesses by analysing how companies respond to market variables impacting companies in the same industry.
Thus, the comparative income statement is an essential tool for analysing the results of a business's operations over multiple accounting periods to understand the various factors contributing to the change over time for better interpretation and analysis. It enables various business stakeholders and the analyst community to study the impact of business actions on the company's top line and bottom line. It also enables the discovery of numerous trends over time, which would otherwise be difficult and time-consuming.
The comparative income statement displays absolute values, changes in absolute figures, infinite data in percentage terms, and a rise (or decrease) in percentages over time. A company's performance across multiple periods may be compared with the use of a comparative income statement format in one go, and changes in expenditure items and sales can be clearly discovered.
A Comparative Income Statement with data of two years.
Example of a Comparative Income Statement?
A comparative income statement is an income statement in which different periods of the income statement are dealt with and compared side by side to allow the reader to compare prior year's incomes and determine whether or not to invest in the firm.
Let's look at an example to better comprehend the comparative profit and loss statement.
ABC Limited has supplied the following information on its two fiscal quarters., i.e., 2016 and 2017.
Comparative income statement meaning and its key findings:
|
Particulars |
2016 (Amount in INR) |
2017 (Amount in INR) |
|---|---|---|
|
Net Sales |
₹2,00,000 |
₹2,50,000 |
|
Cost of Goods Sold |
₹50,000 |
₹1,80,000 |
|
Selling, General and Administrative Expenses |
₹25,000 |
₹30,000 |
|
Other Income |
₹12,000 |
₹18,000 |
|
Taxes |
₹8000 |
₹16,000 |
|
Interest |
₹17,000 |
₹18,000 |
Also read: What Is Accounting Rate of Return (ARR)? Explained With ARR Formula & Example
ABC Limited's comparative income statement format for the fiscal years ended 2016 and 2017.
|
Particulars |
2016 (Amount in INR) |
2017 (Amount in INR) |
Absolute Change |
Percentage Change |
|---|---|---|---|---|
|
Net Sales |
₹2,00,000 |
₹2,50,000 |
₹50,000 |
25% |
|
Less: Cost of Goods Sold |
₹1,50,000 |
₹1,80,000 |
₹30,000 |
20% |
|
Gross Profit |
₹50,000 |
₹70,000 |
₹20,000 |
40% |
|
Less: Selling, General and Administrative Expenses |
₹25,000 |
₹30,000 |
₹5,000 |
20% |
|
Net Operating Profit |
₹25,000 |
₹40,000 |
₹15,000 |
60% |
|
Add: Other Income |
₹12,000 |
₹18,000 |
₹6000 |
50% |
|
Earnings before Interest and Taxes |
₹37,000 |
₹58,000 |
₹21,000 |
56.76% |
|
Less: Interest |
₹17,000 |
₹18,000 |
₹1000 |
5.88% |
|
Earnings before Taxes |
₹20,000 |
₹40,000 |
₹20,000 |
100% |
|
Less: Taxes |
₹8000 |
₹16,000 |
₹8000 |
100% |
|
Net Profit |
₹12,000 |
₹24,000 |
₹12,000 |
100% |
Based on ABC Limited's Comparative Income Statement, it is possible to examine how a 25% rise in sales has influenced net profit and how various line items have contributed. The following are examples of basic analysis:
- Over the course of the year, net sales climbed by 25%.
- During this time, the gross profit ratio grew from 25% to 28%.
- Over the course of the year, the Net Profit Ratio climbed from 6% to 9%.
- Income tax expenses doubled, while interest costs grew by 5.88%.
Thus, we can see how the comparative income statement assists in determining changes in various components of costs and identifying the reasons for changes, which aids management in future decision-making.
Different Kinds of Comparative Income Statement Analysis
1. Horizontal Analysis
Comparative income statement definition approach depicts the change in quantity in both absolute and percentage terms over time. It facilitates trend analysis and is hence also known as Trend Analysis. The Horizontal Analysis Technique makes it simple to observe growth trends and seasonality.
The following illustration depicts Horizontal Analysis:
Horizontal Analysis by Colgate
Consider an example of Colgate's Horizontal analysis.
The method for calculating the growth rate of Net Sales in 2015 is (Net Sales 2015 - Net Sales 2014) / Net Sales 2014. Similarly, we may use a similar technique to calculate the growth rates of other line items.
Here is the comparative income statement from the example above: The following is a horizontal analysis on the comparative income statement:
|
Account |
2017 |
2016 |
2015 |
|
Revenue |
180,000 |
165,000 |
150,000 |
|
Gross Profit |
150,000 |
135,000 |
125,000 |
|
EBITDA |
90,000 |
80,000 |
75,000 |
|
Net Profit |
55,000 |
50,000 |
45,000
|
|
Revenue |
— |
9.09% |
10% |
|
Gross Profit |
— |
11.11% |
8% |
|
— |
12.50% |
6.67% |
|
|
Net Profit |
— |
10% |
11.11%
|
2. Vertical Analysis
Vertical Analysis is another way of displaying the comparative income statement in terms of the relative size of line items. This method allows for easy comparison of income statements from organisations of various sizes. It displays each item on the income statement as a percentage of the statement's base statistics (typically the sales figure). Under this, all components of income statements, such as gross profit, net profit, cost of sales, and so on, are shown as a percentage of sales, which makes it very useful to use even when comparing differently because it removes size biases and makes the analysis more straightforward and understandable. It is mostly used to generate individual statements for a reporting period, but it may also be used for timeline analysis.
Here is the comparative income statement example above:
|
Account |
2017 (in ₹) |
2016 (in ₹) |
2015 (in ₹) |
|
Revenue |
180,000 |
165,000 |
150,000 |
|
Gross Profit |
150,000 |
135,000 |
125,000 |
|
EBITDA |
90,000 |
80,000 |
75,000 |
|
Net Profit |
55,000 |
50,000 |
45,000 |
Also read: Inventory Costs Meaning Explained With Different Types of Inventory Costs
The following is a vertical analysis on the comparative income statement:
|
Account |
2017 (in ₹) |
2016 (in ₹) |
2015 (in ₹) |
|
Revenue |
180,000 |
165,000 |
150,000 |
|
Gross Profit |
150,000 |
135,000 |
125,000 |
|
EBITDA |
90,000 |
80,000 |
75,000 |
|
Net Profit |
55,000 |
50,000 |
45,000 |
|
Revenue |
100% |
100% |
100% |
|
Gross Profit |
83.33% |
81.81% |
83.33% |
|
EBITDA |
50% |
48.48% |
50% |
|
Net Profit |
30.55% |
30.30% |
30%
|
Advantages and Disadvantages of Comparative Income Statement
Advantages
- It simplifies and expedites analysis by allowing historical statistics to be easily compared with current figures without the need for separate past income statements.
- It also facilitates comparisons across organisations and aids in the analysis of efficiency at both the Gross Profit and Net Profit levels.
- It displays percentage changes in all income statement line categories, making top-line (sales) and bottom-line (net profit) analysis and interpretation easier and more informative.
Disadvantages
- Financial data given in the comparative income statement is only helpful if such statements are prepared using the same accounting procedures. If the discrepancy is noticed, such a comparative income statement will not be useful.
- In circumstances where the firm has diversified into new business areas, which have significantly impacted sales and profitability, a comparative income statement is not very useful.
Why Should We Use Comparative Income Statements?
You must measure performance as a small business owner. If you don't, how will you know if the business decisions you make are effective? A comparative income statement allows you to examine profitability over time.
A comparative income statement can be used to examine key financial information. Patterns in previous figures might help you predict the future. For example, you may compare the previous year's Return on Investment (ROI) with this year's ROI. This informs you if the money you put into your firm is bringing in more money.
Comparative income statements may also show you whether your expenditures and revenues are constant. Assume your Cost of Goods Sold (COGS) increases from 25% to 40% of sales in three years. Recognising the rise allows you to discover methods to lower COGS.
Comparative income statements are used by business investors to compare different firms. The comparison assists them in determining whether a firm is a good investment or not.
Also read: Perpetual Inventory System - Methods, Advantages and Disadvantages
Conclusion
As we understand that accounting isn't the most interesting aspect of running a business. When you take the time to go over your financial records, the results might be eye-opening. You can see the results of all of your hard work and obtain insight into which decisions will help you achieve. This brings the topic of comparative statements to a close. We hope now you have a better knowledge of the importance of employing comparative statements in financial analysis.
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