Comparative Balance Sheet Meaning
The comparative balance sheet is a balance sheet that provides financial figures of assets, liabilities, and equities for “two or more periods of the same company,” or “two or more subsidiaries of the same company” or “two or more companies of the same industry” in the same format so that it can be easily understood and analyzed.
The comparative balance sheet has two amount columns against each balance sheet itemBalance Sheet ItemsAssets such as cash, inventories, accounts receivable, investments, prepaid expenses, and fixed assets; liabilities such as long-term debt, short-term debt, Accounts payable, and so on are all included in the balance sheet.. One column shows the current year’s financial position, whereas the other column shows the previous year’s financial situation. This helps investors or other stakeholders easily understand and analyze the company’s financial performance against last year.
Table of contents
- As the name suggests, comparative balance sheets are financial statements that show a company’s market position through two different periods, two subsidiaries of the same company, or two companies in the same industry over time and collate them.
- Doing a quick ratio analysis by using the firm’s data found on authoritative sources on the internet is an effective way to compare firms’ financial positions. The ratio analysis process observes the data in the financial statements, such as total expenses or net profit, to determine a relationship between the numbers.
- Some advantages of comparing balance sheets are that comparative analysis helps in finding trends in the industry, it gets easier for the investors to forecast the future, and compare the performances of different companies over time.
- Comparative analysis also poses a few drawbacks, such as the inflationary effect surrounding the market isn’t considered, it sometimes can also be misleading, and thus, authentic information is absent.
Example Format of Comparative Balance Sheet
Below is the sample format of a comparative balance sheet.
Below is the format of a comparative balance sheet of Amazon Inc. for 2018 and 2017. In this balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., the financial position of the year ended 2018 and 2017 are mentioned in columns 2018 and 2017, respectively. There are two columns – the first column shows the change in absolute terms, and the second column leads the change in % terms.
|Current Ratio Analysis||2018||2017|
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After analyzing the above balance sheet, the below observations are made:
- The company’s share capital Share CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side. is the same for both years. It implies that the company has not issued any shares for the current year.
- The company’s reserve & surplus increased by $5,000, i.e., 25%. It exhibits that the company has earned profit and added reserve and surplus.
- Long-term borrowing reduced by $5,000, i.e., 14%, which indicates that the company has paid off a $5,000 loan.
- Fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. reduced by $10,000 because of depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. .
- Inventory reduced by $9,000, and trade receivablesTrade ReceivableTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet. increased by $10,000, which means the company has sold its stock to customers, while the amount is yet to be received.
- On analyzing the current ratioCurrent RatioThe current ratio is a liquidity ratio that measures how efficiently a company can repay it' short-term loans within a year. Current ratio = current assets/current liabilities , we found it increased by $0.04 compared to last year, implying that the company has performed well in the current year compared to the previous year.
Note: – These are fundamental analyses with the help of a comparative balance sheet, which helps us understand its importance.
Advantages of Comparative Balance Sheet
- Comparison – It is effortless to compare the figures for the current year with the previous years as it gives both the years’ figures in one place. It also assists in analyzing the data of two or more companies or subsidiariesSubsidiariesA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company. of one company.
- Trend Indicator – It shows the company’s trend by putting several years’ financial figures in one place like an Increase or Decrease in profit, current assets, current liabilities, loans, reserves & surplus, or any other items that help investors make the decision.
- Ratio Analysis – Financial ratioFinancial RatioFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on. is derived from the balance sheet items. The comparative balance sheet’s financial ratio of two years of two companies can be derived to analyze the company’s financial status. For example, the current ratio is derived with the help of current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. and current liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.. If the current ratio of the current year is more than the last year, it shows the company’s liabilities have been reduced from last year against the existing assets.
- Compare performance with the Industry Performance – Helps to compare one company’s performance with another company or the industry’s average performance.
- Helps in Forecasting – It also helps in forecasting because it provides the past trend of the company based on which the management can forecast the company’s financial position.
- Uniformity in Policy and Principles – Comparative balance sheets will not give the correct comparison if two companies have adopted different policies and accounting principles while preparing the balance sheet or if the same company has adopted other accounting methods in two additional years.
- Inflationary Effect is not Considered – While preparing the comparative balance sheet, the inflation effect is not considered. Therefore, only a comparison with other balance sheets will not give the correct picture of the company’s trend.
- Market Situation and Political Conditions not Considered – While preparing the comparative balance sheet, marketing conditions, political environment, or any factor affecting the company’s business are not considered. Therefore, it does not give the correct picture every time. For example, suppose the overall economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society. is going down in the current year, or the political condition is unstable compared to last year. In that case, it will decrease the demand, and general company sales will experience de-growth, not because of its performance but external factors.
- Misleading Information – Sometimes, it gives misleading information, thus, misguiding the person who reads the comparative balance sheet. For example, if a product was unavailable for last year and is available for the current year, it will show a 100% change over the previous year. It implies that one needs to read the complete financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels., not just a comparative balance sheet.
A Comparative Balance Sheet is a balance sheet of “two or more years” or “two or more companies,” which helps investors and other stakeholdersStakeholdersA stakeholder in business refers to anyone, including a person, group, organization, government, or any other entity with a direct or indirect interest in its operations, actions, and outcomes. analyze the company’s performance and trend. It additionally assists them in making decisions and forecasting. At the same time, there are some limitations of this comparative balance sheet, like lack of uniformity in accounting practicesAccounting PracticesAccounting practice is a set of procedures and controls used by an entity's accounting department to keep track of accounting records and entries. Other reports are generated based on accounting records, such as financial statements, cash flow statements, fund flow statements, payroll, tax workings, payment and receipts statements, and so on, and they form the basis of the auditor's reliance while auditing the financial statements.. These inflationary factors need to be taken care of when analyzing the balance sheet.
Frequently Asked Questions (FAQs)
The purpose of comparative balance sheets is to ascertain the company’s financial position and assets and liabilities. It creates a conclusive interpretation of how the company has performed in the previous financial year.
No, a comparative balance sheet only works when the data is well put and presented. Balance sheets can be misleading; thus, they don’t provide an accurate picture of the company’s performance. Tools such as Total asset turnover and maintenance of cash reserves are indicators of a good company.
The absolute values of assets and liabilities are shown side by side in the comparative statement. In contrast, the proportion of each asset and liability based on the balance total is shown in the common size statement.
This article has been a guide to what is Comparative Balance Sheet and its meaning. Here we discuss its format and example along with its advantages and disadvantages. You can learn more from the following articles –