A comparative statement is a financial statement that helps compare components of a business's income statement and balance sheet over a duration of at least two periods, in percentage and absolute form. It presents previous figures with the latest financials, enabling one to compare a company's performance against its competitors.
With the help of such a statement, businesses can identify the problem areas and check whether their current performance aligns with the set objectives. This helps them take corrective measures if necessary. In addition, the statement consists of the financial data from multiple periods in side-by-side columns. This helps one get an idea of a business's progress easily.
The comparative statement meaning refers to a financial statement that helps one compare a business's financial performance in one period against that of another period. It lets one know about a business's performance results for multiple periods without looking at different financial statements. In other words, it presents financial figures from multiple periods in a single statement. Usually, it consists of financial data of only two periods, as too many columns can be difficult to read for individuals.
Viewing this financial statement, one can get an idea of the impact of business decisions on a business's bottom line. Moreover, it enables entities to spot trends, know about managers' performance, and evaluate new offerings without looking at different individual financial statements.
Individuals can also utilize such statements to compare different organizations in the same industry, assuming they adhere to identical accounting principles. Moreover, companies can use this statement to understand which business aspects require improvements.
Usually, one prepares such a statement using financial data from different financial statements. However, individuals must remember that they can also prepare the statement using financial figures from other sources, for example, market research reports.
When comparing the performance of multiple periods using comparative financial statements, one must consider the impact of inflation on the financial figures. This is because the numbers of business reports may change due to inflation, even if the organization's performance remains unchanged.
All public companies in the U.S. must publish these financial statements in 10-Q and 10-K reports to fulfill the requirement of the Securities and Exchange Commission or SEC.
Let us look at the different types of comparative statements:
Let us look at a few comparative statement examples to understand the concept better.
Suppose a financial statement prepared by Panther Tees, an online t-shirt retailer, shows the company's income and expenses recorded in FY2021 and FY2022. An additional side-by-side column presents the absolute variance between the two years. The company's creditors and investors can look at the variance column to determine the reason for the profit increase or decrease.
For example, Panther's net sales were higher in FY22 than in FY21, but the profit earned in the former year was significantly lower. From the same statement, the company's investors found out that the higher marketing expenses and salaries in FY22 were the main reason for the significant gap in profit.
Suppose Active Footwear, a footwear manufacturing firm, prepared a comparative statement and discovered that its COGS, or cost of goods sold, jumped from 25% to 50% of sales over two years. The organization's management team utilized the information to take corrective measures. It trained its workers to lower labor costs and procured raw materials at a cheaper price.
Let us look at the following points to understand the importance of these financial statements.
Comparative statements have the following limitations:
Both common size and comparative statements can help one convey a business' accounting information to banks, investors, creditors, etc. Moreover, both statements can help entities compare an organization's financial performance in different periods. The two have distinct characteristics; one must know the differences to avoid confusion.
| Common Size Statement | Comparative Statement |
|---|---|
| These statements help compare a business's crucial financial figures in percentage and absolute form for different periods. | Such a statement presents the financial data in percentage form only. |
| The main purpose of preparing this statement is to help a business's decision-makers take crucial internal decisions. | Businesses primarily prepare this document for shareholders. |
| Such statements are more useful when comparing a business's financial figures recorded in different periods. | This statement is more useful when comparing the financial results of two companies in the same industry. |
Such a financial statement is based on the financial data of at least two periods, usually a year.
Why comparative statement is prepared?These financial statements help individuals determine a business's profitability, liquidity, and solvency position. Moreover, they enable one to compare financial figures from at least two accounting periods. Individuals can also identify the strengths and weaknesses of an organization and compare its performance against other businesses in the industry by preparing this statement.
What is the objective of comparative statement?The main objective of such financial statements is to present financial data in a simple side-by-side format to make it easier for managers, shareholders, banks, creditors, etc., to compare the data without any hassle.
How comparative statement is prepared?One can prepare a comparative income statement by following these steps:
- Enter the absolute figures of every item related to the periods under consideration.
- Compute e difference between each item's current and previous years' values to get the absolute change.
- Compute the percentage change in each item's value.
This article has been a guide to what is Comparative Statement. We explain its examples, importance, limitations, types, & differences with a common size statement. You may also find some useful articles here -
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