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 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 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.
• 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 line and helps identify various trends over the period, which otherwise would have been difficult and time-consuming.
• 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.

Comparative income statement analysis

To understand your financial data, do a comparative income statement analysis. There are two ways you can look at information: horizontal and vertical.

Each kind of analysis gives different insights into business performance. The analyses help you make sense of your comparative profit and loss statement and see patterns.

Horizontal analysis

A horizontal, or time series, analysis looks at trends over time. You can see growth patterns and seasonality. When calculating growth, look at the percentage of change between accounting periods.

Vertical analysis

A vertical, or common-size, analysis looks at the relative size of line items. It allows you to compare income statements from different-sized companies. To compare competing businesses, find the percentage of revenue for each line item.

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 Profit, 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 period but can also be used for timeline analysis.

Reasons:

As a small business owner, you need to measure performance. If you don’t, how do you know if the decisions you make for your business are working? Looking at a comparative income statement helps you analyze profitability over time.

You can use a comparative income statement to look at important financial figures. Patterns in past figures can guide you in the future. For example, you compare last year’s return on investment (ROI) to the current year. This tells you if the money you put into your business brings in a greater amount of income.

Comparative income statements can also reveal if your costs and revenues are consistent. Let’s say in three years your cost of goods sold (COGS) goes from 25% of sales to 40% of sales. By recognizing the increase, you can find solutions to reduce COGS.

Business investors use comparative income statements to look at different companies. The comparison helps them decide which business is a better investment.

Advantages of a Comparative Income Statement

Spikes and dips in revenues and expenses are immediately obvious when this format is used, and can then be investigated by management. In particular, one could use the report to discern patterns in sales from month to month that might be used to forecast future sales.

• 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 Line (Sales) and Bottom Line (Net Profit) easy and more informative.

Disadvantages of a Comparative Income Statement

The results of this comparison may not be useful if an account has been shifted into a different line item at some point during the reporting period. Such a change would cause a downward spike in one line item and an upward spike in another line item. Consequently, such changes in reporting should be as infrequent as possible, or all clustered at the beginning of a fiscal year.

• Financial Data reported in the Comparative Income Statement is useful only if the same accounting principles 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.