Comparative statement is a kind of financial document of the company, created to compares a particular financial statement with prior period. It contains various financial factors of the company for two or more periods, thanks to which it is possible to make a comparative analysis of individual periods of time (at least two time periods). These are substantial implements for long-distance financial analysis. It should be placed side by side to facilitate comparison . Compared data gives a real financial situation of the enterprise and it's helpful to make a business decision for the decision-makers in the company.
Meaning for the company
Comparative statement is very useful in the case of Balance Sheet, profit and loss account and income statement. It's made to show:
- Financial data, as money values,
- Level of increase and decrease financial absolute data,
- Percentage condition in absolute data.
These documents are very serviceable for the person responsible for the financial analysis of the company due to the fact that they present at least two periods of time, thanks to which it is possible to analyse profits and losses. It gives the possibility of a reasonable planning of the company's revenues and expenses.
Comparative statement is not always reliable, because there are situations when accounting reports are incorrect. In a comparative statement, the most important factors that must be done correctly to make a document reflect reality are administrative expenses, fixed and current assets, long and short term funds. Also those factors needs to be similar each time, otherwise statement will be defective .
Comparative statement is very useful in the enterprise, it provides information that allows to:
- progress or regression of the company's financial situation, note the difference between two statements; business owners can speculate why the difference occurred
- allows to assess the validity of decisions made in previous financial periods,
- it opens up opportunities for more effective decision making and financial management of the company,
- it is also useful for further investors of the company that they can see company's financial result, can give concept, an illustrative picture of the company's operating costs and sales.
Comparative interim financial statements
IAS 34 declares approval for the idea of comparative reporting, which is admitted as more practical and useful than is the demonstration of information about only an individual period. Nevertheless, IAS 34 authorizes not only comparative provisional declarations of comprehensive profit. In that case a provisional declaration of comprehensive profit would perfectly be consisted of four columns of data. In another way in the event of the remaining parts of provisional financial declaration, the demonstration of two columns of data would come across the demands of IAS 34. Therefore, the other parts of the provisional financial statement shall demonstrate the following data for the two periods:
- the declaration of financial position as of the end of the present provisional period and a comparative declaration of financial position as of the end of instantly preceding fiscal year
- the declaration of cash flows incrementally for the present financial year to date, with a comparative declaration for a comparable year-to-date period of the Instantly preceding financial year, and
- IAS 34 demands that the declaration which shows changes in equity incrementally for the present financial year to date be depicted with a comparative declaration for a comparable year-to-date period of the Instantly preceding financial year .
Examples of Comparative statements
- Balance Sheet: The balance sheet is a financial statement that provides a detailed description of the company’s assets, liabilities and equity. The comparative balance sheet allows users to compare the same financial items at different periods of time. It provides a comprehensive view of the company’s financial position at different points in time.
- Income Statement: The income statement is a financial statement that reports the company’s revenues and expenses over a specified period of time. It also includes details about the company’s net income. The comparative income statement can be used to compare the same financial items at different time periods. It provides an analysis of the company’s performance over the specified period of time.
- Cash Flow Statement: The cash flow statement is a financial statement that reports the company’s cash inflows and outflows over a specified period of time. The comparative cash flow statement allows users to compare the same financial items at different periods of time. It provides an analysis of the company’s cash flows over the specified period of time.
Advantages of Comparative statements
A comparative statement is a valuable tool for financial analysis as it offers the following advantages:
- It provides a clear comparison of the financial performance of a company over a period of time. This helps to identify trends and assess the effectiveness of the company's operations.
- It helps to identify areas of improvement as well as areas of excellence, which can be used to make strategic decisions.
- It facilitates benchmarking with other companies, enabling better decision making.
- It helps to quickly identify any discrepancies between the two financial statements, which can be used to investigate any irregularities.
- Finally, it helps to provide an objective assessment of the financial performance of the company, which can be used to inform stakeholders.
Limitations of Comparative statements
A Comparative statement provides a helpful tool for analyzing the financial performance of a company, however there are some limitations to consider when using this tool.
- Firstly, the accuracy of the statement relies heavily on the quality of the input data. If the data is not accurate, it may result in a false understanding of the financial performance of the company.
- Secondly, the statement may not take into account certain external factors that may have an effect on the financial performance of the company, such as changes in the market or the economy that may have an impact on the financial performance.
- Thirdly, the statement may not provide an accurate comparison between different periods, as the data may not be collected in the same manner.
- Finally, the statement may not provide a comprehensive picture of the financial performance, as it may only account for certain aspects and not take into account the entire financial picture.
Other approaches related to Comparative statements are:
- Ratio Analysis: This approach is used to compare the ratios of two or more companies to assess their financial performance. Ratios like return on assets, current ratio, debt-equity ratio are compared to calculate the relative performance.
- Trend Analysis: Trend analysis looks at the changes in financial data over a period of time. This helps to identify whether performance is improving or declining and to identify areas of potential improvement.
- Horizontal Analysis: This approach looks at the year-on-year changes in financial data. It helps to identify the areas of improvement or decline in performance.
- Common-Size Statements: This approach compares the financial data as a percentage of total sales or total assets. This helps to identify trends in the data and assess the performance.
Comparative statement is a type of financial document that includes various financial factors to compare two or more periods of time. Other approaches related to comparative statements include ratio analysis, trend analysis, horizontal analysis and common-size statements, which all help to identify areas of improvement and decline in performance.
- Goel D.K. (2008) APC Twenty Sample Papers in Accountancy Arya Publications, p.127
- Brigham E., Ehrhardt M. (2016). Financial Management: Theory and Practice Thomson South Western, p.587
- PKF International Ltd (2015). Wiley IFRS 2015: Interpretation and Application of International Financial Reporting Standards Great Britain by TJ Internastional Ltd Cornwall, p.918
|Comparative statements — recommended articles
|Annual Basis — Time period concept — Exceptional Item — Interim Statement — Cost principle — Aging schedule — Common-size financial statement — Account Analysis — Accrual method
- Brigham E., Ehrhardt M. (2008) Financial Management: Theory and Practice, Thomson South Western
- Goel D.K. (2016) APC Twenty Sample Papers in Accountancy , Arya Publications
- PKF International Ltd (2015) Wiley IFRS 2015: Interpretation and Application of International Financial Reporting Standards, Great Britain by TJ International Ltd Cornwall
Author: Wioleta Kozioł