Comparative Income Statement

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 Statement.

  • 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. read more 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.read more, i.e., 2016 and 2017.

Prepare a Comparative Income Statement and interpret the basic findings.

Particulars2016 (Amount in USD)2017 (Amount in USD)
Net Sales200000250000
Cost of Goods Sold150000180000
Selling, General and Administrative Expenses2500030000
Other Income1200018000
Taxes800016000
Interest1700018000

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

Particulars2016 (Amount in USD)2017 (Amount in USD)Absolute ChangePercentage Change
Net Sales2000002500005000025%
Less: Cost of Goods Sold1500001800003000020%
Gross Profit50000700002000040%
Less: Selling, General and Administrative Expenses2500030000500020%
Net Operating Profit25000400001500060%
Add: Other Income1200018000600050%
Earnings before Interest and Taxes37000580002100056.76%
Less: Interest170001800010005.88%
Earnings before Taxes200004000020000100%
Less: Taxes8000160008000100%
Net Profit120002400012000100%

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:

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

Comparative Income Statement Types

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For eg:
Source: Comparative Income Statement (wallstreetmojo.com)

#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.read more.

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.
Horizontal Analysis - Income Statement Colgate

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.

#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.read more, 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.read more 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 100read more is depicted below.

Vertical Analysis of Colgate’s Income Statement

Below is the snapshot of Colgate’s Comparative Income Statement

Vertical Analysis of Colgate Income Statement

  • 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%.

Advantages

Disadvantages 

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 –

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Comments

  1. AvatarPRIYANKA VADOARIYA says

    YOUR INFORMATION IS SO EASIEST TO UNDERSTAND, AND ALSO THAT IS HELPING IN OUR STUDY. YOUR INFOMATION WITH DIFFERENT EXAMPLES SO THAT IS TO GOOD TO UNDESTAND.

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