Accountants prepare financial statements at the end of each period. These include the balance sheet, the income statement and the statement of cash flows. Financial analysts and managers use these financial statements to analyze the company’s activities over the period. Financial statement users incorporate a variety of tools to analyze the financial results. These include calculating ratios or using comparative statements. Comparative statements provide several advantages not included in the standard financial statements. Whether you're the accountant tasked with this duty or you're the business trying to make sense of what your accountant has handed you, knowing how comparative statements can be used for figuring out finances is good practice.
How Comparative Statements Work
Comparative statements calculate the difference between multiple years of data and report that difference in percentages. Your accountant will review the balances on each financial statement for the current year and the previous year. For each line item, she'll subtract the current year amount from the previous year amount to determine the difference. She'll then divide the difference by the previous year amount to calculate the percentage.
Percentage Highlights
One advantage of using comparative statements is the ability to highlight the percentages. By restating the change of each line item as a percentage, comparative statements help you see large changes from one year to the next. As the percentage increases, the total change in that account balance increases. If you're reading a financial statement, you'll be able to easily identify those accounts with the biggest changes. You can then investigate the reason for the change.
Trend Analysis
Another advantage involves the use of trend analysis. Trends refer to a consistent pattern within a particular financial account. Start by choosing a financial account to analyze. Then use comparative statements for several years and look at the percentage reported for that account each year. Observe whether the percentages increase, decrease or remain the same. If the percentages remain the same, you'll know that the company has experienced steady growth in that account. If the percentages increase, that account value is growing rapidly. If the percentages decrease, that account growth is slowing.
Company Comparison
The ability to compare various size companies is another advantage of using comparative statements for financial analysis. Comparative statements let you analyze companies of different sizes. Comparative statements address the challenge of comparing the performance of a large company versus a smaller company. The use of percentages eliminates the difference in dollar amounts presented in the financial statements of different size companies.
