Comparative financial statement analysis refers to the scrutiny, comparison of a company’s financials with respect to two or more adjacent periods. This is an indicator of the health of the business across time. Changes in income, expenses, profits, and assets are easily understood. Comparative financial statement analysis is mainly used to identify trends, assess performance and make decisions. Learning about financial ratios helps owners, investors, and students understand if a business is growing or not. In this article, you will find the meaning, steps, and importance of comparative analysis of financial statements defined in simple words.
Comparative Financial Statement Analysis
The analysis of comparative financial statements is extremely crucial for all companies or investors. It does help us determine if a company is improving or declining over time. Having data for two or more years gives us a glance of what’s working and what’s not in the business.
Why This Analysis Is Needed?
It provides a tool to view the past and present next to each other. This provides a deeper insight into performance. One year’s statement may not mean much. But when we do across several years, we get some useful info. It helps in:
- Business Financial Performance Analysis.
- Compare the changes in profit or loss using the income statement.
- Balances comparison with study of assets and liabilities.
- Trend analysis in accounting: Understanding patterns
- Supporting future years planning and forecasting.
Use for stakeholders
- Various individuals do this analysis for their needs:
- Business owners review results.
- Investors make a decision on their investment.
- Lending analyse whether the company can repay its loans.
Actual Business Data
The key part is, it tells where is the scope of improvement. The company can quickly respond to falling sales or rising expenses.
Example Table for Comparison
| Particulars | Year 1 (₹) | Year 2 (₹) | Change (₹) | % Change |
| Revenue | 10,00,000 | 12,00,000 | 2,00,000 | 20% |
| Cost of Goods Sold | 6,00,000 | 7,20,000 | 1,20,000 | 20% |
| Net Profit | 1,50,000 | 2,00,000 | 50,000 | 33.3% |
The table above shows the comparison of income statements. From this we can see how and why each number has changed.
How to Conduct a Comparative Analysis of Financial Statements?
Collecting financial data of prior years is essential for conducting comparative financial statement analysis. That means income statements and balance sheets. With that in hand, we can start to compare numbers to look for changes and trends.
- Collecting Financial Statements
Always use a minimum of two years of financial statements. Things will yield better results in three or more years. Collect income statements and balance sheets of the same company but for different years.
- Horizontal And Vertical Analysis
The horizontal analysis must be used in order to detect changes in the years. That illustrates how numbers grow or dip. We take a base year and compare all the following years against that base year.
Use vertical analysis to analyze how each item relates to the total. So, if sales be ₹10,00,000, and cost, ₹6,00,000, then cost is 60% of sales.
Horizontal Analysis Example
| Items | 2023 (₹) | 2024 (₹) | Difference | % Change |
| Sales | 15,00,000 | 18,00,000 | 3,00,000 | 20% |
| Expenses | 9,00,000 | 10,00,000 | 1,00,000 | 11.1% |
| Profit | 6,00,000 | 8,00,000 | 2,00,000 | 33.3% |
That tells us profit grew faster than sales or expenses.
Vertical Analysis Example
| Items | Amount (₹) | % of Sales |
| Sales | 10,00,000 | 100% |
| Cost of Goods Sold | 6,00,000 | 60% |
| Gross Profit | 4,00,000 | 40% |
This enables studying how large each item is in relation to the whole.
- Do Financial Ratio Analysis
Ratios make sense of numbers. We analyse the company’s health with financial ratio analysis.
Some key ratios are:
- Current ratio = Current assets / Current liabilities
- Net Profit Margin = Net Profit / Sales
- Debt-Equity Ratio = Total Debt / Shareholders’ Equity
They tell you if the business is strong or weak.
- Make Trend Analysis In Accounting.
Trend analysis in accounting means analyzing a trend over a long period of time. Understanding this shows long-term changes and growth. We can analyze, for instance sales trends for five years to examine growth.
Sample Trend Analysis Table:
| Year | Sales (₹) | Trend (%) |
| 2020 | 8,00,000 | 100% |
| 2021 | 9,00,000 | 112.5% |
| 2022 | 10,00,000 | 125% |
| 2023 | 11,00,000 | 137.5% |
This shows sales grew 12.5% each year.
Process of Comparative Financial Statements Analysis
But, you have to do the right things to do solid financial statement comparison analysis. It is more than simply to connect discordance in numbers. It’s about knowing what those changes mean.
Step 1: Take out The Right Amount Of Money
Check out an income statement and a balance sheet for multiple years. Ensure they are valid and from the same company.
Step 2: Build Comparison tables
TABLE: Display figures for each year alongside one another. Next, do the absolute and percentage change calculations. Such analysis is referred as horizontal analysis.
Step 3: Do Vertical Analysis
you perform horizontal analysis first then, vertical analysis. the all items as a percent of total sales, or total asset. this allows year on year comparisons across different scales.
Step 4 : Analyze The Ratios
Testing expected values for statistics of analysis ratios. The comparisons gain real meaning from such ratios — gross profit margin, net profit margin, return on assets, debt ratio.
| Ratio Name | Formula |
| Current Ratio | Current Assets ÷ Current Liabilities |
| Gross Profit Margin | Gross Profit ÷ Sales |
| Return on Equity | Net Profit ÷ Shareholders’ Equity |
Step 5: Find Trends
Learn now how numbers change from year to year. This is the year on year profitability comparison.Learn trend analysis in accounting
Step 6: Interpret Results
Once all of that is calculated, you have to write or explain what those results mean. Is the profit growing? Are expenses under control? Is the company getting too much indebted? These answers help guide the decisions.
Step 7: Apply It To Decisions
Better decisions is the end goal of financial statement analysis. The owners can decide where they economize. Investors can either opt to invest more or peruse through categories and invest less. It teaches students what a real business is like.
Relevance to ACCA Syllabus
This enables students to understand changes in financial performance from year to year, spot trends and conduct relevant assessments in support of decision making. This method helps to assess financial strength as well as offering comparability, an important area for ACCA students preparing for their future roles in performance and reporting.
Comparative Financial Statement Analysis ACCA Questions
Q1: As it relates to financial reporting, what is the primary goal of comparative financial statements?
A) Use for calculating taxes owed
B) As a means to compare performance between reporting periods
C) To capture non monetary viz.
D) To distribute the costs of production
Ans: B) To understand performance against reporting periods
Q2: Profitability cycle statement of income on annual and multi-annual basis is similar to statement of income. When comparing the annual profitability cycle with those of the multi-annual profitability cycle, what is the correct metric to use?
A) Current Ratio
B) Debt-to-Equity Ratio
C) Gross Profit Margin
D) Quick Ratio
Ans: C) Gross Profit Margin
Q3: Prior to the host’s financial statements, a declining inventory turnover ratio would indicate:
A) High sales
B) Poor inventory management
C) Lower current liabilities
D) Increase in equity
Ans: B — Inefficient management of inventory
Question 4 Why is horizontal analysis of the financial statements beneficial?
A) Max also explains some one-off items
B) Traces movement over multiple intervals
C) Lists future projections
D) Highlights tax expenses
Ans: B) Varies over the spectrum of different walks of life
Q5: The increase in trade receivables in accounting data compared to higher sale data in FS may imply
A) Improved profitability
B) Better liquidity
C) Weak collection practices
D) Enhanced asset turnover
Ans: C) Bad Collection practice
Relevance to US CMA Syllabus
You cover Financial statement analysis, especially comparative, which correlates with US CMA part 1 syllabus, specifically, Financial Planning, Performance and Analytics. And that data helps candidates assess finances, see how operating performance has varied over time and aid strategic planning. Such analysis results in management decision support with informative year on year financial comparison.
Comparative Financial Statement Analysis CMA Questions
Q1: When analyzing a company’s performance, comparative financial statements are primarily used to:
A) Abide by tax obligations
B) Perform time series trend analysis on metrics
C) Determine employee bonuses
D) Allocate Manpower Costs
Ans : B) To track performance trends over period of time
Q2: In vertical analysis, an income statement uses its most common base of what?
A) Total liabilities
B) Net profit
C) Total sales
D) Operating income
Ans: C) Total sales
Q3: If you see declining gross margins in comparative income statements, it could mean:
A) Stable costs of goods sold
B) Increasing product pricing
C) Increasing cost of goods sold versus profits
D) Higher operating performance
Ans: C) Higher sales than cost of goods sold
Q4: What does a horizontal analysis consist of?
A) Data comparison of Quarters through different ventures
B): Predicts cash flows in the future
C) Comparison of amounts on financial statements from period to period
D) Return on assets
Ans: C) Comparing changes in financial statement items with each other over a period of time
Q5. With analytical financial statement analysis, it is possible to conduct for trend analysis How much and financial statements of Quotes is likely to Quotes
A) Statement of Cash Flows
B) Statement of Changes in Equity
C) Balance Sheet
D) Income Statement
Ans: D) Income Statement
Relevance to US CPA Syllabus
Comparative financial statement analysis is taught so that we can actually interpret financial statements in their own right, and this is within the context of the US CPA curriculum (more specifically the Financial Accounting and Reporting (FAR) part). Knowledge of Financial trends, as well as the approach to analyze the inter-period’s can be expected from the candidates. It enhances the ability to prepare and analyze financial statements in accordance with GAAP, a requirement for CPA positions.
Comparative Financial Statement Analysis CPA Questions
Q1: What is the main purpose for doing vertical analysis in comparative financial statements?
A) Financial Accounting – 4th Edition by Ace Accountant
B) To determine the present value of cash flows
C) Percentages relative to a constant هو.
D) To project future revenue
Ans: C) Show all items as a percent of a total
Q2: at what point would one know that the comparative current ratio has improved?
A) Better solvency
B) Strong revenue growth
C) liquidity constrained in the short-run
D) Improved asset efficiency
Ans: C) There is contraction of short term liquidity
Q3: Which of the following is least useful to comparative financial statements?
A) Identifying trends
B) Calculating depreciation
C) examine differences in account balances
D) Judging performance history
Ans: B) Calculation of Depreciation
Q4: For GAAP comparatives directly present previous period adjustments in:
A) P/L for current year
B) Retained Earnings section (one-stop-shop)
( C ) Statement of changes in net assets.
D) As a footnote only
Ans: B) A retated retained earnings sectio
Q5: An increase in the accounts payable days from one period to another may be a sign of:
A) Higher net sales
B) Improved operational efficiency
C) Slower supplier payments
D) Improved cash collections
Ans: C) Make less payments to suppliers
Relevance to CFA Syllabus
Comparative financial statement analysis is part of the CFA Institute Level I and II curriculum and is part of Financial Reporting and Analysis. It should allow candidates to identify trends and compare between the financial data over multiple periods and to derive at performance, risk and valuation. It is used for investment decisions as well as financial modelling.
Comparative Financial Statements Analysis CFA Questions
Q1: What do you use for comparative performance across different reporting period?
A) Vertical analysis
B) Ratio analysis
C: Analysis across Time (horizontal)
D) Regression analysis
Ans: C) horizontal(time-series) analysis
Q2: Why do businesses commonly use index numbers in financial analysis?
A) Adjust data for inflation
B) For repeated factor adjustments
C) Align pricing models
D) To predict tax obligations
Ans: A) Adjust data for inflation
Q3: The comparative statements are
(A) Internal period analysis
B) financial periods for comparison presented alongside each other
C) Budget allocations
D) Variance analysis only
Ans: B) Side by side presentation of data for comparable periods
Q4: You are analyzing a company you might invest in, you are looking at a comparative income statement. You saw that net income has decreased, whereas sales have increased. What is a likely cause?
A) Higher fixed costs
B) Rising interest income
C) Falling variable costs
D) Increased profitability
Ans: A) Higher fixed costs
Q5: Horizontal analysis is one of the method that can be used for comparison when same financial metric is compared over period in financial years.
A) Cross-sectional analysis
B) Time-series analysis
C) Sensitivity analysis
D) Vertical analysis
Ans: B) Time-series analysis
