Comparative financial statements are a type of financial statement that shows the changes in an organization’s financial position over a specific period. These statements compare the financial data from one period to another period to help users understand the organization’s financial performance and identify trends.
Comparative financial statements typically include a balance sheet, income statement, and cash flow statement. Each statement shows the financial data for two or more periods, side by side. For example, a comparative balance sheet might show the assets, liabilities, and equity of a company for the current year and the previous year. Similarly, a comparative income statement might show the revenue, expenses, and net income for the current year and the previous year.
The use of comparative financial statements allows users to analyze the financial performance of an organization over time. By comparing the financial data for multiple periods, users can identify trends in revenue, expenses, assets, liabilities, and equity. This information can help users make informed decisions about investing in or lending to the organization.
Moreover, comparative financial statements can be used to calculate financial ratios, such as liquidity ratios, profitability ratios, and solvency ratios. These ratios can provide valuable insights into the organization’s financial health and performance. For instance, a liquidity ratio such as the current ratio can be calculated by comparing the current assets and current liabilities of the organization for different periods. Similarly, a profitability ratio such as the return on equity can be calculated by comparing the net income and equity of the organization for different periods.
Comparative Financial Statements Steps
Here are the steps for preparing comparative financial statements:
- Gather financial data: Collect the financial data for the current year and at least one prior year. This data should include the balance sheet, income statement, and cash flow statement.
- Choose a format: Decide on the format you want to use for your comparative financial statements. You can choose to present the data in a horizontal format, which shows the financial data for each period side-by-side. Alternatively, you can choose a vertical format, which shows the financial data for each period in a single column.
- Adjust for changes in accounting policies: If there have been any changes in accounting policies between the two periods being compared, adjustments need to be made to ensure that the financial data is comparable.
- Calculate changes: Calculate the changes in each financial item between the periods being compared. For example, for the income statement, calculate the change in revenue, cost of goods sold, gross profit, operating expenses, and net income. For the balance sheet, calculate the change in assets, liabilities, and equity.
- Calculate percentages: Calculate the percentage change for each financial item by dividing the change by the earlier period’s amount. This will show the percentage increase or decrease between the two periods.
- Analyze the results: Analyze the comparative financial statements to identify trends and insights. Look for significant changes in revenue, expenses, assets, liabilities, and equity. Calculate financial ratios to gain further insights into the organization’s financial health and performance.
- Interpret the results: Interpret the results of the analysis and draw conclusions about the organization’s financial performance. Use this information to make informed decisions about investing in or lending to the organization.
- Present the statements: Once the analysis is complete, present the comparative financial statements in the chosen format, along with any accompanying analysis and interpretation.
Comparative Financial Statements Types
There are two main types of comparative financial statements: horizontal and vertical.
- Horizontal comparative financial statements: This type of comparative statement shows the financial data for two or more periods side by side. It allows users to see the changes in financial data over time, which can help identify trends and provide insights into the organization’s financial performance. Horizontal comparative statements are often presented in the form of a table with columns for each period being compared.
- Vertical comparative financial statements: This type of comparative statement shows the financial data for each period in a single column. It allows users to compare the percentage of each financial item to the total assets, liabilities, or equity for that period. Vertical comparative statements are often presented in the form of a common-size financial statement, which expresses each financial item as a percentage of a base amount.
Question:
XYZ Corporation has provided the following information for the years 2021 and 2020. Prepare a horizontal comparative income statement.
| 2021 | 2020 | |
| Revenue | $500 | $450 |
| Cost of Goods Sold | $300 | $275 |
| Gross Profit | $200 | $175 |
| Operating Expenses | $100 | $90 |
| Net Income | $100 | $85 |
Answer:
| 2021 | 2020 | Change | % Change | |
| Revenue | $500 | $450 | $50 | 11.1% |
| Cost of Goods Sold | $300 | $275 | $25 | 9.1% |
| Gross Profit | $200 | $175 | $25 | 14.3% |
| Operating Expenses | $100 | $90 | $10 | 11.1% |
| Net Income | $100 | $85 | $15 | 17.6% |
In the above table, the financial data for 2021 and 2020 is presented side by side. The change and percentage change for each financial item is also calculated and presented. For example, revenue increased by $50 (or 11.1%) from 2020 to 2021, while net income increased by $15 (or 17.6%). This information can be used to identify trends in revenue, expenses, and profitability over time.