Comparative Statement

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.

• Comparative statement meaning refers to financial statements that allow one to compare the key financial figures, for example, figures related to income and expenses recorded by a company in different periods. It presents the figures of at least two different durations, for example, a year, in side-by-side columns.
• Comparative balance sheets, comparative income statements, and comparative expense statements are the three types of comparative statements.
• There are various advantages of comparative statements. For example, they help a company's managers spot the strong and weak points of the business and give one an idea regarding an organization's profitability and liquidity position.

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:

1. Comparative Income Statement: A comparative income statement presents absolute figures of expenses and incomes for at least two periods. Moreover, it shows the absolute change of the figures in addition to their percentage change. Simply put, such a financial statement helps analysts comprehend the absolute and percentage change in the numbers reported by a business in multiple periods.  
2. Comparative Expense Statement: This financial statement helps entities know about the changes in the various components of expenses. It helps an organization's management team to take vital business decisions in the future.  
3. Comparative Balance Sheet: Comparative balance sheet shows side-by-side details of a company's liabilities, shareholders' equity, and assets at different points in time. It gives individuals an idea regarding a business' liquidity position and working capital position in different periods. 

Let us look at a few comparative statement examples to understand the concept better.

Example #1

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.

Example #2

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.

• It presents the financial data of different periods in a straightforward and comparable form. This allows individuals to easily reach conclusions regarding a business's financial health and operating results.
• Businesses can compare their performance with the industry's average performance using these financial statements. 
• A company's management team can estimate the business's profitability and monitor the overall health by studying different periods' crucial financial figures presented in such financial statements.
• Another noteworthy advantage of comparative statements is that they help managers understand a business's strong and weak areas. They can carry out an investigation and take the necessary corrective measures.
• Such a statement presents a company's revenue from operations profits, expenses, and other key financial figures for different periods in side-by-side columns. This makes it easy for analysts and investors to spot trends. For instance, if product costs have been increasing over time, it is a sign that an organization's condition is not ideal, and managers must take measures to minimize the expenses.
• These statements offer insight into an organization's profitability, solvency, and liquidity position in different periods.

Comparative statements have the following limitations: 

• First, such statements are often useless when comparing two businesses' financial figures because a common base does not exist. 
• Ascertaining the correct trend can be challenging if structural changes occur within the organizations. 
• Preparing such statements can be difficult, especially if a company changes its accounting policies. 

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.

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 -

• Pro Forma Income Statement
• Restatement
• Income Statement Formats