mail-box-lead-generation

written by | September 9, 2022

Comparative Income Statement: Examples, Analysis and Format

×

Table of Content


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.

 

An example of a Comparative Income Statement.

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%

EBITDA

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. 
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: What are the advantages and disadvantages of comparative income statements?

Ans:

Advantage: When this style is employed, spikes and dips in revenue and costs are instantly visible and may be explored by management. The report, for an example, might be used to identify patterns in sales from month to month that could be utilised to estimate future sales.
Disadvantages: If an account was moved to a different line item during the reporting period, the results of this comparison may be useless. A change of this magnitude would result in a decrease in one line item and an increase in another. As a result, such reporting adjustments should be made as infrequently as feasible, preferably all at the start of a fiscal year.

Q: What is the comparative balance sheet format?

Ans:

A comparative income statement and balance sheet is a statement that demonstrates an organisation's financial situation throughout different time periods for which a comparison is made or requested. To represent the trend, the direction of change, assessment, and take appropriate decisions, the financial situation is compared with two or more periods.

Q: What is comparative financial analysis?

Ans:

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.

Q: What is the format of a comparative income statement?

Ans:

There is no standard format to prepare a comparative income statement. The simplest approach to producing a comparative income statement is to list the accounts in the left column. Then, establish columns for each accounting period, with the most recent at the top. Examine each example of a comparative income statement.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
×
mail-box-lead-generation
Get Started
Access Tally data on Your Mobile
Error: Invalid Phone Number

Are you a licensed Tally user?

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.