Comparative Income Statement is the income statement in which multiple periods of the income statement are dealt and compared side by side so as to allow the reader to compare the incomes from a previous year and make investment decisions on whether or not to invest in the company.
What is Comparative Income Statement?
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 also for 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..
- Comparative Income Statement format combines several Income Statements as columns in a Single Statement, which helps the reader in analyzing trends and measure the performance over different reporting periods.
- It can also be used to compare two different companies operating metrics as well. Such Analysis helps in comparing the performance with another business, which can be used to 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.
- It helps various stakeholders of the business and also 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 in identifying various trends over the period which otherwise would have been difficult and time-consuming.
- Comparative Income Statement shows absolute figures, changes in absolute figures, absolute data in terms of percentages, and also as an increase (or decrease) in terms of percentages over the different periods. With the help of a Comparative Income Statement format in one snapshot, the performance of a company over different periods can be compared, and changes in expense items and Sales can be easily ascertained.
Example and Format of Comparative Income Statement
Let’s understand the Comparative Income Statement with the help of an example.
ABC Limited has provided the following information pertaining to 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 lines 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 Expense doubled from 00 to 000 and Interest expense increased by 5.88%.
Thus we can see how Comparative Income Statement helps to ascertain the changes of various components of expenses and identify the reason for changes that help the management in decision making in the future.
Types of Comparative Income Statement Analysis
#1 – Horizontal Analysis
One of the popular techniques of Comparative Income Statement which shows the change in amount both in absolute and percentage terms over a period of time. It helps in easy analysis of trends and, as such, 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:
Colgate’s Horizontal Analysis
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.
#2 – Vertical Analysis
Another technique which 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 as well. It shows each item on the Income Statement as a percentage of Base figures (which is 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, and Cost of Sales, etc. which makes it very handy to use even when comparing different 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.
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.
Vertical Analysis of Colgate’s Income Statement
Below is the snapshot of Colgate’s Comparative Income Statement
- It makes analyses simple and fast as past figures can easily be compared with the current figures without the need for referring to separate past Income Statements.
- It makes comparisons across different companies also easy and helps in analyzing the efficiency both at Gross Profit Level and Net Profit Level.
- It shows percentage changes in all line items of the Income Statement, 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.
- Financial Data reported in 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 in the preparation of such statements. In the case where the deviation is observed, such a Comparative Income Statement will not serve the intended purpose.
- Comparative Income Statement is not of much use in cases where the company has diversified into new business lines, which have impacted Sales and Profitability drastically.
This article has been a guide to Comparative Income Statement. Here we discuss its examples and types of comparative income statement analysis (including the horizontal analysis and vertical analysis). You may learn more about financial analysis from the following articles –