What is a Comparative Statement
A comparative statement is a document that compares a particular financial statement with prior period statements or with the same financial report generated by another company. Analysts and business managers use the income statement, balance sheet and cash flow statement for comparative purposes. The process reveals trends in the financials and compares one company's performance with another business.
BREAKING DOWN Comparative Statement
Analysts like comparative statements because the reports show the effect of business decisions on a company's bottom line. Analysts can identify trends and evaluate the performance of managers, new lines of business and new products on one report, instead of having to flip through individual financial statements. When comparing different companies, a comparative statement shows how a business reacts to market conditions affecting an entire industry.
Examples of Income Statement Analysis
The income statement is based on the revenue minus the expenses, and analysts often use a percentage of sales presentation to generate comparative financial statements for the income statement. This report presents each revenue and expense category as a percentage of sales, which makes it easier to compare periods and assess company performance.
A multi-step income statement, for example, lists (sales less cost of sales equals gross profit), and other expenses are subtracted from gross profit to arrive at net income. Cost of sales includes costs that are incurred specifically to make a product, such as material and labor costs, and cost of sales is usually the largest cost for the business. Using a percentage of sales report can reveal important information about costs.
How Managers and Analysts View Trends
Assume, for example, that a manufacturer's cost of sales 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.
Factoring in Cash Flow
The statement of cash flows is another important report used for comparative statements. 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 receivable balance is growing and that the firm needs to take steps to collect cash faster.