Comparative Income Statement or comparative statement is a financial statement that defines the current financial position of a business and compares it with prior period statements. Here, financial statements of the previous year are presented alongside the latest figures to track the company’s progress in an easy way.
Tthe primary motive of these statements is to determine the profitability of the business by comparing two or more accounting periods. Read on to understand how do Comparative Income Statements work, their types, how to prepare it and its format,
How Do Comparative Income Statements Work?
A comparative income statement provides information on the financial state of assets and liabilities of a company for different time periods. However, it also shows the changes that have taken place over different accounting periods in terms of assets and liabilities.
Individuals such as investors, analysts and business managers use a company’s income statement for comparative purposes. These statements help to check the amount spent in chasing revenues from one period to another with the various movements of cash over time.
What Are the Types of Comparative Income Statement Analysis?
Comparative Income Statement analysis has two different types, and they are as follows:
1. Horizontal Analysis
Horizontal analysis is one of the popular techniques of comparative income statements demonstrating the financial change in both absolute and percentage terms. It helps in observing seasonality and growth patterns in an easy way. Moreover, it is also known as Trend Analysis due to its ability to analyse trends.
2. Vertical Analysis
Vertical analysis is another technique of exhibiting a comparative income statement in terms of the relative size of the line items. It allows easy comparison of income statements from different-sized companies.
However, it shows each item on the income statement as a percentage, which makes the comparison easy, straightforward and understandable. Additionally, it can also be used for timeline analysis by assessing individual statements for a reporting period.
How to Prepare a Comparative Income Statement?
The steps required to prepare a comparative income statement are:
- Step 1: Specify absolute figures of items like goods sold, net sales, selling expenses, etc., relating to the accounting period under consideration for analysis.
- Step 2: Calculate the absolute change in the items mentioned in the income statement. This can be achieved by subtracting the number of the previous year’s items from the current year ones.
- Step 3: Finally, calculate and determine the percentage change in the items of the current year statement relative to the previous year’s statement.
What is the Format of a Comparative Income Statement?
The format of a comparative income statement is as follows:
1. Comparative Income Statement for the years ended:
| Particulars | Previous Year (₹) | Current Year (₹) | Absolute Change (Increase or Decrease) (₹) | Percentage Change (Increase or Decrease) (%) |
| I. Revenue from operations | xxx | xxx | xxx | xxx |
| II. Other income | xxx | xxx | xxx | xxx |
| III. Total Revenue | xxx | xxx | xxx | xxx |
| IV. Expenses | xxx | xxx | xxx | xxx |
| Cost of Materials Consumed | xxx | xxx | xxx | xxx |
| Purchases of Stock in Trade | xxx | xxx | xxx | xxx |
| Changes in inventories of Finished Goods, Work-in-Progress and Stock-in-Trade | xxx | xxx | xxx | xxx |
| Employees Benefit Expenses | xxx | xxx | xxx | xxx |
| Finance Cost | xxx | xxx | xxx | xxx |
| Depreciation and Amortisation | xxx | xxx | xxx | xxx |
| Other Expenses | xxx | xxx | xxx | xxx |
| Total Expenses | xxx | xxx | xxx | xxx |
| V. Profit before Tax (III – IV) | xxx | xxx | xxx | xxx |
| (-) Income Tax | xxx | xxx | xxx | xxx |
| VI. Profit after Tax | xxx | xxx | xxx | xxx |
Let us understand this more clearly with a comparative income statement example:
Example:
Let’s say that the following information has been taken from the statement of Profit and Loss of ABC Ltd.
| Particulars | 31st March 2021 (₹) | 31st March 2022 (₹) |
| (1) | (2) | (3) |
| Revenue from Operations | 5000000 | 7000000 |
| Employees Benefit Expenses | 500000 | 600000 |
| Depreciation and Amortisation Expenses | 100000 | 120000 |
| Purchase of Stock-in-Trade | 2500000 | 3000000 |
| Change in inventories of Stock-in-Trade | 150000 | 200000 |
| Other Expenses – Tax Rate 30% | 200000 | 300000 |
If we prepare a Comparative Income Statement based on the information provided above, it will look something like this:
2. For the years ended:
| Particulars | Note No. | Previous Year (₹) | Current Year (₹) | Absolute Change (Increase or Decrease) (₹) | Percentage Change (Increase or Decrease) (%) |
| (1) | (2) | (3) | (4) | (5) (4 – 3) | (6) (5/3×100) |
| I. Revenue from operations | 5000000 | 7000000 | 2000000 | 40.00 | |
| II. Total Revenue | 5000000 | 7000000 | 2000000 | 40.00 | |
| III. Expenses | |||||
| Purchases of Stock in Trade | 2500000 | 3000000 | 500000 | 20.00 | |
| Changes in inventories of Finished Goods, Work-in-Progress and Stock-in-Trade | 150000 | 200000 | 50000 | 33.33 | |
| Employees Benefit Expenses | 500000 | 600000 | 100000 | 20.00 | |
| Depreciation and Amortisation | 100000 | 120000 | 20000 | 20.00 | |
| Other Expenses | 200000 | 300000 | 100000 | 50.00 | |
| Total Expenses | 3450000 | 4220000 | 770000 | 22.32 | |
| V. Profit before Tax (II – III) | 1550000 | 2780000 | 1230000 | 79.35 | |
| VI. Less: Income Tax @30% | 465000 | 834000 | 369000 | 79.35 | |
| VII. Profit after Tax (IV – VI) | 1085000 | 1946000 | 861000 | 79.35 |
What Are the Benefits of a Comparative Income Statement?
The main advantages which make comparative income statements useful are:
- It expedites and simplifies financial analysis as past figures can easily be compared with current figures without the need to refer to individual past statements.
- These statements display percentage change in all income statement line items, making interpretation and analysis of top line (sales) and bottom line (net profit) informative.
- It also allows comparison across organisations which help in analysing the efficiency at both Gross and Net profit levels.
What Are the Disadvantages of a Comparative Income Statement?
The limiting disadvantages of a comparative income statement are:
- Financial data reported in this statement is helpful only if the same accounting processes are followed to prepare such statements. If any discrepancy is observed, such comparative income statements will not be purposeful.
- In case the firm diversifies into new business lines, this statement will not be very useful as the values of sales and profitability will change considerably.
Final Word
The best way to create a comparative income statement is by using accounting software or a spreadsheet application like MS Excel. However, the basis for this report is the standard income statement which contains all the revenue and expense figures for the particular period. After this, do the required calculations to show respective absolute and percentage changes from one period to another.
FAQs
Q1. What is a comparative financial analysis?
Ans: Comparative financial analysis includes developing comparative statements which establish a company’s financial situation at different times. These statements help in determining a company’s profitability by comparing values of multiple accounting periods.
Q2. What is a Comparative Balance Sheet?
Ans: A comparative balance sheet is a statement presenting side-by-side financial data of an entity’s assets, liabilities and shareholders’ equity. This results in determining the financial position of an organisation over different periods through comparison.
Q3. Is the Comparative Income Statement and Comparative Balance Sheet the same?
Ans: Although both comparative income statements and balance sheets are used to measure a company’s performance, they are not the same. A comparative income statement contains information about the revenue and expenses of the organisation, whereas a balance sheet works with assets and liabilities.
Q4. What are the limitations of comparative statements?
Ans: The primary limitation of comparative financial statements is that they do not present the changes in the values of various items in relation to assets and liabilities. Also, these statements are not useful when comparing the performance of two or more businesses.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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