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Comparative Financial Statement: Definition and Purpose
What are Comparative Financial Statements?
Comparative financial statements are statements which show a company’s statement in two or more consecutive periods in a single statement. Usually, the entities included in the comparative financial statements include balance sheets, profit and loss accounts, and cash flow statements for two consecutive years.
The idea behind preparing a comparative financial statement is to evaluate or judge the performance of the company in two financial years.
Generally speaking, the financial statements which are usually included in a comparative financial statement are as the following −
The Balance Sheets of two or more financial periods.
The income statements with data from multiple accounting periods, and
The cash flow statements with the flow of cash for more than one accounting period.
Purposes of Comparative Financial Statements
Unlike comparisons of two companies in the same industry that most financial ratios perform, the comparative balance sheet checks the performance of the same firm in two or more financial periods.
Following are the key purposes of utilizing comparative financial statements −
Easier to See Company’s Performance
The comparative financial statement makes it easier to look at the performances of the company in multiple periods just by looking at only one document. Without a comparative statement, a person or a company would need to check the performances in two statements which can be tedious and non-systematic.
Easier to Check Company’s Financial Progress
The comparative financial statements report the achievements of the company for two accounting periods, making it easier to check whether the company is progressing in terms of financials or not. As it is cumbersome to compare values in two financial statements, the presentation of facts in one statement makes enough sense.
Moreover, as the comparative financial statement contains data for two or more financial periods, it makes analyzing the basics of two companies easier by looking at a single statement.
Significance of Data Limitation
Another basic quality of the comparative balance sheet is that it contains data from only two or three consecutive financial years’ performances. Having information for a lot of accounting periods can be confusing and difficult to have an idea. Therefore, the comparative financial statement is created with the data for two more years.
One point to note here is that it is perfectly possible to form a comparative financial statement with five or more years’ data, but since the purpose of the entity is to compare data from two consecutive years easily, the inclusion of data for more than two years are not done while preparing the comparative financial statement.
A comparative financial statement can be considered as two years of financial data presented side by side on a document. Although there are only specific given items in the document, some advanced comparative analysis statements may also contain the value of financial ratios. As is obvious, this makes analyzing the statement easier to comprehend and use.
Tool to Determine Trends
The comparative financial statement is a great tool to determine trends. It can also show abnormal spikes in the values of data which means there are errors in the given data. In such a way, the comparative financial statement can show errors in reporting financial information that can be useful for investors to check whether the company has been prudent in reporting financial data to them.
Provides Comparison of Expenses to That of Revenues
The comparative financial statement also provides a comparison of expenses to that of revenues which can be useful for cost management purposes. Moreover, as the statement offers an insight into future trends, it can help companies manage their costs in different operational and financial domains.
The major purpose of comparative financial statements is to offer a comparison of the performance of a company on a yearly basis. However, the statement may also be used to measure the variance of data from one to the other year that can be shown in a specific, different column in the statement.
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