Comparative Income Statement

A comparative Income Statement is the income statement in which multiple periods of the income statement are dealt with and compared side by side to allow the reader to compare the incomes from a previous year and decide whether or not to invest in the company.

It helps various stakeholders of the business and the Analyst community to analyze the impact of business decisions over the company’s top line and bottom line and helps identify various trends over the period, which otherwise would have been difficult and time-consuming.

• A comparative income statement is an income statement in which numerous periods are considered and compared to enable the reader to reach the last year's income and decide about investing in the company.
• Horizontal and vertical analyses are the two comparative income statement analysis types.
• Financial data recorded in the comparative income statement is valid only when similar accounting principles are used to create these statements. Therefore, such a consolidated income statement will serve a different purpose than in case of deviation.

A Comparative Income Statement shows the operating results for several accounting periods. It helps the reader of such a statement to compare the results over the different periods for better understanding and detailed analysis of variation of line-wise items of Income Statement.

The common size comparative income statement format combines several Income Statements as columns in a Single Statement, which helps the reader analyze trends and measure the performance over different reporting periods.

It can also be used to compare two different companies' operating metrics. Such Analysis helps in comparing the performance with another business, which can analyze how companies react to market conditions affecting the companies belonging to the same Industry.

Thus Comparative Income Statement is an essential tool through which the result of operations of a business (or, say, the operation of the business of different companies) over multiple accounting periods can be analyzed to understand the various factors contributing to the change over the period for better interpretation and analysis.

The common size comparative income statement shows absolute figures, changes in absolute figures, unlimited data in terms of percentages, and an increase (or decrease) in percentages over the different periods. With the help of a Comparative Income Statement format in one snapshot, a company's performance over different periods can be compared, and changes in expense items and Sales can be easily ascertained.

The process of preparation of financial statement and presenting it for comparison over different accounting periods is called comparative income statement. It is an important process which involves comparative income statement analysis of revenue, expense, profits, etc. Preparation and presentation of this information is necessary and useful for both the company and investors. The steps for the same are given below:

• Identify the time period- It is important to decide between which time period the comparison has to be made. Ideally they cover two or more accounting periods, usually two quarters or two years.
• Data accumulation – Next is accumulation or collection of data for the comparison. The financial data should include revenue, COGS, all operating and non-operating expenses, the incomes, tax details, etc. It is necessary for the statements to be complete and accurate.
• Formating – The data and the statements collected for comparison purpose should be properly formatted so that it dosed not contain extra details which are not relevant and at the same time it is easy to understand and do comparative income statement analysis.
• Calculate changes – The next step is to calculate the chaed amount along with the percentage change between the periods for each and every line item. Then we need to deduct the value or the amount of the earlier period from the later period to get the changed amount. To get the percentage change, we need to divide the change by the earlier amount and then multiply it by 100.
• Calculate totals and subtotal – A god presentation will involve proper segregation of the totals and subtotals so that all calculations are clearly visible and can be interpreted by anyone.
• Trend analysis – Then comes the analysis part where the trends and patterns are identified and the comparison is made. The increase or decreae in revenue, expenses, profits are evaluated to identify and understand the reason for such changes. If there is any significant fluctuation or important note for the readers and investors, they should be explained with proper comments.
• Review – It is always a good idea to review the preparation to that any other important information that should be include can be pointed out and presented.

However, this document is not a wholesome process for analysis. It is important to prepare comparative income statement which should be accompanied by other financial statements in order to make the comparison useful.

The various types of income statements comparisons that are used are as follows:

#1 - Horizontal Analysis

One of the popular techniques of Comparative Income Statement shows the change in amount both in absolute and percentage terms over some time. It helps in easy analysis of trends and, as such, is also known as Trend Analysis. One can easily observe growth patterns and seasonality using the Horizontal Analysis Technique.

An Illustration showing Horizontal Analysis is depicted below:

#2 - Vertical Analysis

Another technique that exhibits Comparative Income Statement in terms of the relative size of line items is the Vertical Analysis. This technique enables easy comparison of Income statements of companies of different sizes. It shows each item on the Income Statement as a percentage of Base figures (usually the Sales figure) with the statement. Under this, all components of Income statements are shown as a percentage of sales, such as Gross Profit, Net Profit, Cost of Sales, etc., which makes it very handy to use even when comparing differently as it removes the Size biases and makes the analysis more straightforward and understandable. It is mostly used for individual statements for a reporting period but can also be used for timeline analysis.

Let’s understand how to prepare comparative income statement with the help of some suitable examples.

Example #1

ABC Limited has provided the following information about its two accounting periods, i.e., 2016 and 2017.

Prepare a Comparative Income Statement and interpret the basic findings.

Comparative Income Statement format of ABC Limited for the period ended 2016 and 2017

Based on the above Comparative Income Statement of ABC Limited, it can be analyzed how an increase in sales (25% over the previous year) has impacted the Net profit (increased by 100% in absolute terms over the previous year) and how various line items have contributed. Basic Analysis includes the following:

• Net Sales increased by 25% over the period.
• Gross Profit Ratio increased from 25% to 28% over the period.
• Net Profit Ratio increased from 6% to 9% over the period.
• Income Tax Expenses doubled from 00 to 000 and Interest expense increased by 5.88%.

Example #2

Let us now look at an example of Colgate’s Horizontal analysis.

We can find the growth rate of Net Sales of 2015; the formula is (Net Sales 2015 – Net Sales 2014) / Net Sales 2014. Likewise, we can find the growth rates of other line items using a similar formula.

We note the following -

• In 2014 and 2015, Colgate saw negative revenue growth.
• The cost of Sales has also decreased during the corresponding period.
• Net Income decreased the most in 2015, with a 36.5% decline in 2015.

An Illustration showing Vertical Analysis is depicted below.

• In Colgate, Gross profit has been in the range of 56%-59%.
• SG&A expenses decreased from 36.1% in 2007 to 34.1% in the year ending 2015.
• Operating income dropped significantly in 2015.
• Net income decreased substantially to less than 10%.
• Between 2008 to 2014, the tax rate was in the range of 32-33%.

Thus we can see how Comparative Income Statement helps ascertain the changes of various components of expenses and identify the reason for changes that help the management in decision making in the future.

Just as every financial concept has its own advantage and disadvantage, so does this concept. Let us try to analyse the advantages of comparative income statement in management accounting as given below:

•  It makes analysis simple and fast as past figures can easily be compared with the current figures without referring to separate past Income Statements.
• It makes comparisons across different companies also easy and helps analyze the efficiency both at Gross Profit Level and Net Profit Level.
• It shows percentage changes in all income statement line items, which makes analysis and Interpretation of Top Line (Sales) and Bottom Line (Net Profit) easy and more informative.

Let us go through the disadvantages of the concept of comparative income statement in management accounting in detail.

• Financial Data reported in the Comparative Income Statement is useful only if the same accounting principles are followed to prepare such statements. If the deviation is observed, such a Comparative Income Statement will not serve the intended purpose.
• A comparative Income Statement is not of much use in cases where the company has diversified into new business lines, which have drastically impacted Sales and profitability.

This article has been a guide to what is Comparative Income Statement. We explain It with examples, how to prepare it along with advantages, disadvantages & types. You may learn more about financial analysis from the following articles –

• Vertical Analysis of Income Statement
• Basics Examples of Income Statement
• Multi-Step Income Statement
• Partial Income Statement