What Is 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 lineBottom LineThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its bottom line. and helps identify various trends over the period, which otherwise would have been difficult and time-consuming.
Table of contents
- 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.
Comparative Income Statement Explained
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 StatementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements..
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.
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How To Prepare?
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 TechniqueHorizontal Analysis TechniqueHorizontal analysis interprets the change in financial statements over two or more accounting periods based on the historical data. It denotes the percentage change in the same line item of the next accounting period compared to the value of the baseline accounting period..
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 ProfitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services., 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 periodIndividual Statements For A Reporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements. but can also be used for timeline analysis.
Let’s understand how to prepare comparative income statement with the help of some suitable examples.
ABC Limited has provided the following information about its two accounting periodsAccounting PeriodsAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance., i.e., 2016 and 2017.
Prepare a Comparative Income Statement and interpret the basic findings.
|Particulars||2016 (Amount in USD)||2017 (Amount in USD)|
|Cost of Goods Sold||150000||180000|
|Selling, General and Administrative Expenses||25000||30000|
Comparative Income Statement format of ABC Limited for the period ended 2016 and 2017
|Particulars||2016 (Amount in USD)||2017 (Amount in USD)||Absolute Change||Percentage Change|
|Less: Cost of Goods Sold||150000||180000||30000||20%|
|Less: Selling, General and Administrative Expenses||25000||30000||5000||20%|
|Net Operating Profit||25000||40000||15000||60%|
|Add: Other Income||12000||18000||6000||50%|
|Earnings before Interest and Taxes||37000||58000||21000||56.76%|
|Earnings before Taxes||20000||40000||20000||100%|
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 RatioGross Profit RatioThe gross profit ratio evaluates the proportion of the direct profit a company generates from its net sales. Here, the gross profit is the returns acquired after considering the cost of goods sold, trade discounts and sales returns for deduction from the total revenue. 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%.
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 SalesCost Of SalesThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as 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 AnalysisVertical AnalysisVertical analysis is a kind of financial statement analysis wherein each item in the financial statement is shown in percentage of the base figure. The formula is: (Statement line item / Total base figure) X 100 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 incomeOperating IncomeOperating Income, also known as EBIT or Recurring Profit, is an important yardstick of profit measurement and reflects the operating performance of the business. It doesn’t take into consideration non-operating gains or losses suffered by businesses, the impact of financial leverage, and tax factors. It is calculated as the difference between Gross Profit and Operating Expenses of the business. 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 LineTop LineThe top line is the revenue earned by the business by selling goods or services, reported in the income statement for a defined period. (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 principlesAccounting PrinciplesAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts. 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.
Frequently Asked Questions (FAQs)
A comparative income statement shows the multiple accounting period outcomes in separate columns. This format enables the reader to compare the numerous historical period’s effects, looking at how a business did over the period.
Comparative statement of profit and loss is the statement’s horizontal analysis of profit and loss. It displays the functional outcomes for the compared accounting periods and data absolute amount and percentage changes from period to period.
Using a comparative income statement, one may compare income statements from various-sized companies. To reach the competing businesses, one must know the revenue percentage for each line item. Moreover, divide each line item by the revenue to find the percentage of income. Then, multiply the number by 100 to obtain a percentage.
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 –