Comparative Statement: Meaning, Importance and Techniques of Presenting Financial Statements
Financial Statements are prepared to know the profitability and financial position of the business in the market. The content of a financial statement does not reveal the earning capacity, financial soundness, and liquidity of a company. The users cannot easily understand them; therefore, the data is analysed for presenting it in a simple and understandable form. Different tools used for the analysis of financial statements are Comparative Statements, Common Size Statements, Trend Analysis/Ratios, Accounting Ratios/Ratio Analysis, Cash Flow Statement, Funds Flow Statement, and Break-Even Point Analysis.
What is a Comparative Statement?
For the estimation of an organisation’s future progress, it is essential to look into its past performance, for which performing a comparative study of two or more years of company financial statements becomes necessary. A statement that helps in the comparative study of the components of a company’s balance sheet and income statement over a period of two or more years, both in absolute and percentage form, is known as a Comparative Statement. It is a horizontal type of analysis and not only provides the absolute figures of various years but also, the columns to indicate any increase or decrease in these figures from one year to another in absolute and in percentage form. One can form an opinion on the progress of an enterprise based on the comparative statements.
When the comparative statements of two or more years of a firm are presented and compared, it is known as inter-period comparison or intra-firm comparison. However, when the comparative statements of two or more firms are compared over a number of years, then it is known as an inter-firm comparison.
Comparative Analysis is the study of the trend of same items, groups of items, compound items in two or more financial statements of the same business enterprise of different dates.
– Ray. A. Foulke
Purpose or Importance of Comparative Statements:
The importance of Comparative Statements are as follows:
1. To make the data simpler and more understandable: The main aim behind the preparation of Comparative Financial Statements is to put the data for a number of years in a simple and comparable form. When the data for a number of years are put side by side, the comparison between their figures becomes easier. Besides, one can also easily draw conclusions regarding the operating results and financial health of the company/companies.
2. To indicate the strong points and weak points of the concern: By making a comparison between the financial statements for a number of years, one can also indicate the strong and weak points of the firm. With these strong and weak points, the management of the firm can then investigate and find out the reasons for its weak points and can take corrective measures.
3. To indicate the trend: The Comparative Financial Statements of a company indicate its trend of change by putting the figures of revenue from operations, production, expenses, profits, etc., for a number of years, side-by-side. For example, If the Cost of Production is increasing over the years along with an increase in its expenses, it indicates that the business is not in good condition and needs to perform some corrective measures.
4. To compare the firm’s performance with the average performance of the industry: With the help of Comparative Financial Statements, a business unit can compare its performance with the average performance of the industry.
5. To help in forecasting: By performing a comparative study of the changes in the key figures of a company over a period can help its management in forecasting the profitability and financial soundness of the business.
The American Institute of Certified Public Accountants has explained the utility of preparing the Comparative Financial Statements as follows:
“The presentation of Comparative Financial Statements in annual and other reports enhances the usefulness of such reports and brings out more clearly the nature and trends of current changes affecting the enterprise. Such presentation emphasises the fact that statements for a series of periods are far more significant than those for a single period and that the accounts for one period are but an instalment of what is essentially a continuous history.”
Note: Because of the usefulness provided by the Comparative Statements of a Company, the Companies Act, 2013 has stated that a company’s Statement of Profit & Loss Account and Balance Sheet must include the figures of the previous year along with the figures of the current year. However, to make a valid comparison between financial statements, it is essential for a company to prepare the statements as per the Generally Accepted Accounting Principles. Also, the firm should not make any changes in its accounting policies over the period of comparison. In simple words, the method of charging depreciation, valuation of inventory, etc., should remain the same over the years. If not done, the comparison will lose its significance.
6. To make data comparable: When an organisation is preparing comparative financial statements, it should put the data in a comparable form, as it will facilitate comparison and will help the company in drawing conclusions regarding its operating and financial performance.
7. To indicate the soundness of an enterprise: The Comparative Financial Statements of a Company also indicate its weakness and soundness about its liquidity, profitability, and solvency position over a period of time.
Forms or Techniques of Presenting Financial Statements:
The techniques of presenting Financial Statements are as follows:
1. To show the absolute data in Rupee amount only: One way to present the Financial Statements of a company is by showing only rupee amounts for various periods. For example, the Revenue from Operations of Tanya Ltd. in 2020 and 2021 are ₹4,00,000 and ₹6,00,000, respectively.
2. To show the increases and decreases in absolute data in terms of money value: For example, in comparison to 2020, revenue from operations of Tanya Ltd. in 2021 increased by ₹2,00,000.
3. To show the increases and decreases in absolute data in terms of percentages: For example, in comparison to 2020, revenue from operations of Tanya Ltd. in 2021 increased by 50%.
4. Comparisons expressed in ratios: Sometimes, an extra column is added in the Comparative Financial Statements, which shows the changes over the years in terms of ratio. To determine the ratio, the data of the current year is divided by the data of the previous year. If the ratio is more than 1, it indicates an increase in the current year as compared to the previous year. However, if the ratio is less than 1, it indicates a decrease in the current year as compared to the previous year. For example, If the Revenue from Operations of Tanya Ltd. in 2020 and 2021 are ₹4,00,000 and ₹6,00,000, respectively, then the ratio will be 6,00,000/4,00,000 = 3:2 or 1.5.
5. Use of cumulative figures and averages: For example, Revenue from operation of Tanya Ltd. in 2018, 2019, 2020, and 2021 are ₹2,50,000; ₹3,00,000; ₹4,00,000; and ₹6,00,000, respectively, then average revenue from operations will be 15,50,000/4 = ₹3,87,500. Now the average figure of revenue from operations will be used for making a comparison between the individual figures of revenue from operations of each year and then deviations are calculated.
There are different types of financial statements that are prepared in comparative form for analysis; however, in practice, generally the Statement of Profit & Loss and Balance Sheet is prepared in a comparative form as they are the most essential financial statements of a company.
Please Login to comment...