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Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.
Updated November 21, 2020A comparative statement is a document used to compare a particular financial statement with prior period statements. Previous financials are presented alongside the latest figures in side-by-side columns, enabling investors to identify trends, track a company’s progress and compare it with industry rivals.
Analysts, investors, and business managers use a company’s income statement, balance sheet, and cash flow statement for comparative purposes. They want to see how much is spent chasing revenues from one period to the next and how items on the balance sheet and the movements of cash vary over time.
Comparative statements show the effect of business decisions on a company's bottom line. Trends are identified and the performance of managers, new lines of business and new products can be evaluated, without having to flip through individual financial statements.
Comparative statements can also be used to compare different companies, assuming that they follow the same accounting principles. For example, they can show how different businesses operating in the same industry react to market conditions. Reporting just the latest dollar amounts makes it hard to compare the performances of companies of various sizes. Adding prior period figures, complete with percentage changes, helps to eliminate this problem.
The Securities and Exchange Commission (SEC) requires public companies to publish comparative statements in 10-K and 10-Q reports.
Every business must generate sufficient cash inflows to pay for operations. For example, managers may compare the ending balance in cash each month over the past two years to determine if the ending cash balance is increasing or declining. If company sales are growing, the manufacturer requires more cash to operate each month, which is reflected in the ending cash balance.
A downward trend in the ending cash balance means that the accounts receivable balance is growing and that the firm needs to take steps to collect cash faster.
A percentage of sales presentation is often used to generate comparative financial statements for the income statement — the area of a financial statement dedicated to a company’s revenues and expenses. Presenting each revenue and expense category as a percentage of sales makes it easier to compare periods and assess company performance.
Assume, for example, that a manufacturer's cost of goods sold (COGS) increases from 30% of sales to 45% of sales over three years. Management can use that data to make changes, such as finding more competitive pricing for materials or training employees to lower labor costs. On the other hand, an analyst may see the cost of sales trend and conclude that the higher costs make the company less attractive to investors.
Comparative statements are less reliable when companies undergo huge changes. A big acquisition and move into new end markets can transform businesses, making them different entities from previous reporting periods.
For example, if Company A acquires Company B it may report a sudden sharp jump in sales to account for all the extra revenues that Company B generates. At the same time, profit margins might tighten at an alarming rate because Company B has a less lean manufacturing process, spending more money to produce the goods it sells.
