What are Comparative Statements - Know their Types

A financial statement is a record of a company's financial transactions. It shows a company's revenue, expenses, and profit or loss. The financial statement is important because it shows a company's financial health. It can help investors and creditors make decisions about whether to invest in or lend to a company. The financial statement can also help managers make decisions about where to allocate resources.

Comparative financial statements are special because they allow users to compare the financial performance of a company over time. This is possible because the statements show the same items for different periods side by side. This makes it easy to see how a company's financial performance has changed over time.

Did You Know? Comparative statements show the effect of business decisions on a company's bottom line.

What are Comparative Financial Statements?

Comparative statements are financial statements that compare two or more periods. The periods can be months, years, or even decades. Comparative statements can be used to show how a company's financial performance has changed over time. They can also be used to compare a company's financial performance to that of its competitors.

Comparative statements can be useful in spotting trends in a company's financial performance. For example, if a company's sales have been increasing steadily for the past few years, that trend will be evident in a comparative statement. Comparative statements can also be used to identify areas where a company may need to improve its performance.

Also read: What is Management Accounting? Learn Definition, Importance, Objectives

Comparative statements are typically prepared using data from a company's financial statements. However, comparative statements can also be prepared using data from other sources, such as market research reports.

When comparing two or more periods, it is important to consider the effect of inflation on the data. Inflation can cause financial data to increase over time, even if a company's actual performance has not changed. As a result, comparative statements should be adjusted for inflation when necessary.

Comparative statements can be prepared using either historical data or projected data. Historical data is data that has already been reported. Projected data is data that has been estimated for a future period. Comparative statements can be helpful in both decision-making and planning.

How does Comparative Financial System work?

The purpose of comparative financial statements is to provide financial information about an entity for two or more reporting periods. The information in comparative financial statements can be useful in assessing trends, making comparisons, and evaluating performance.

• The first step in preparing comparative financial statements is to select the reporting periods to be compared. For example, a company may prepare comparative financial statements for the current year and the prior year.
• Once the reporting periods have been selected, the financial statements for each period must be prepared. The balance sheet, income statement, and statement of cash flows are the most common financial statements.
• Once the financial statements have been prepared, they can be compared. The most common method of comparison is to show the financial statements side-by-side. This allows for an easy comparison of the data.
• Another method of comparison is to use common-size financial statements. Common-size financial statements show each item on the financial statements as a percentage of a common base. For example, the common-size income statement would show each revenue and expense item as a percentage of total revenue.
• Common-size financial statements are useful in assessing trends. For example, if revenue is increasing but expenses are also increasing, this may be a cause for concern.
• Once the financial statements have been compared, any trends or differences can be analyzed. This analysis can be used to make decisions about the future.

Importance of Comparative Financial Statements

1. Provides Important Statistics. 

Comparative financial statements provide information about an entity's financial position, financial performance, and cash flows over multiple periods. This information helps users assess whether an entity is improving, deteriorating, or maintaining its financial position, performance, and cash flows.

2. Reveals Trends. 

Comparative financial statements can also reveal trends that may not be immediately apparent when looking at a single period's financial statements. For example, a trend of decreasing net income over several years may not be immediately evident when looking at only one year's financial statements.

3. Improves Financial Status. 

Users of financial statements can use comparative financial statements to make informed decisions about investing in, lending to, or doing business with an entity. For example, comparative financial statements can be used to assess an entity's creditworthiness or to compare an entity's financial performance to its peers.

4. Measures Performances. 

Comparative financial statements can also be useful for benchmarking an entity's performance against its peers. This can be helpful for management in setting goals and measuring progress.

5. Aids in Legal Requirements. 

In some cases, comparative financial statements may be required by law or regulation. For public companies, the Securities and Exchange Board of India (SEBI) requires the use of comparative financial statements in filings.

6. GAAP Requirements.

Generally accepted accounting principles (GAAP) also require the use of comparative financial statements in financial statements that are prepared using accrual basis accounting.

7. Follows by Procedures.

Comparative financial statements can be prepared using either the same accounting policies and procedures or different accounting policies and procedures. When different accounting policies and procedures are used, the financial statements should include disclosures that explain the differences.

8. Impacts Decision Making. 

Comparative financial statements can provide valuable information for users of financial statements. This information can be used to make informed decisions about investing in, lending to, or doing business with an entity.

Also read: Learn about Inventory Accounting - Meaning, Objectives, Types & Method

Types of Comparative Financial Statements

The two most common types of comparative financial statements are the balance sheet and the income statement. The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a particular point in time, while the income statement provides information on a company's revenue and expenses over some time. 

Steps to Make a Comparative Balance Sheet

1. Choose the period you want to compare. This could be two years, two quarters, or two months.
2. Gather the balance sheets for the chosen period. If you are comparing two years, you will need the balance sheets from the end of each year.
3. Compare the assets of the two balance sheets. Look for any changes in the types of assets, the values of assets, and the mix of assets.
4. Compare the liabilities of the two balance sheets. Look for any changes in the types of liabilities, the values of liabilities, and the mix of liabilities.
5. Compare the equity of the two balance sheets. Look for any changes in the types of equity, the values of equity, and the mix of equity.
6. Analyze the changes you see in the assets, liabilities, and equity. Try to identify any trends or patterns in the data.

Steps to Make a Comparative Income Statement.

1. Choose the period you want to compare. This could be two years, two quarters, or two months.
2. Gather the income statements for the chosen period. If you are comparing two years, you will need the income statements from the end of each year.
3. Compare the revenue of the two income statements. Look for any changes in the types of revenue, the values of revenue, and the mix of revenue.
4. Compare the expenses of the two income statements. Look for any changes in the types of expenses, the values of expenses, and the mix of expenses.
5. Analyze the changes you see in the revenue and expenses. Try to identify any trends or patterns in the data.

Limitations of Comparative Financial Statements

1. Complexity of Preparing Comparative Financial Statements

Comparative financial statements can be complex to prepare, especially if a company has changed its accounting policies or there have been other significant changes from one period to the next. This can make it difficult to accurately compare financial results from one period to the next.

2. Factors Affecting Comparative Financial Statements

Comparative financial statements can be subject to interpretation and may not always give a complete picture of a company’s financial health. This is because financial statements can be impacted by a variety of factors, both within and outside of a company’s control.

3. Comparative Financial Statements not Always Comparable 

Comparative financial statements may not be comparable if the companies being compared have different accounting policies or use different accounting standards. This can make it difficult to accurately compare financial results from one company to another.

4. Different Fiscal Years 

Comparative financial statements may not be comparable if the companies being compared have different fiscal years. This can make it difficult to accurately compare financial results from one year to the next.

5. Different Business Models or Industries

Comparative financial statements may not be comparable if the companies being compared have different business models or operate in different industries. This can make it difficult to accurately compare financial results from one company to another.

Also read: What is Royalty in Accountings? Meaning, Types, Functions & Working Criteria

Conclusion

In India, comparative financial statements are required by the Companies Act, 2013. For listed companies, the Securities and Exchange Board of India (SEBI) also requires the publication of comparative financial statements.

Comparative financial statements provide valuable information to users by presenting data for multiple periods side by side. This allows for easy comparison and analysis of a company’s financial performance over time.

Some key things that can be understood from comparative financial statements include:

• Trends in revenue, expenses, and profits
• Changes in key financial ratios
• The impact of new accounting standards
• The impact of one-time items on financial results

Overall, comparative financial statements give users a more complete picture of a company’s financial health and performance.

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.