You are an expert at running your business, not financial analysis. However, as a small business owner, you must understand how your decisions affect your company. You can use data to grow your business by reviewing your accounting books. The comparative income statement is an important report to review. Let’s see the format and an example of how to use a comparative income statement for business analysis.
What is an Income Statement?
The income statement, also known as the profit and loss statement, shows sales fewer expenses. The top line is the total amount of sales earned before deducting any expenses. Then, business expenses are listed and deducted until the bottom line, or net profit is reached.
Consider the following income statement: You begin with a whole pie (your total sales dollars). Then, for each business expense, a piece of the pie is divided. The final line shows what is left after all expenses have been deducted. The bottom line is that you have a piece of the pie. The income statement shows the impact of your decisions on net income. Individual statements show results for a single accounting period. However, there are times when you want to know the long-term effects and compare more than one period. Use a comparative income statement to accomplish this.
What is a Comparative Income Statement (CIS)?
In separate columns, a comparative income statement presents the results of multiple accounting periods. The goal of this format is to allow the reader to compare the results of multiple historical periods, providing a picture of how a business performs over time.
Formats for Presentations
The most common presentation format for a comparative income statement is to show the results of the most recent accounting period in the column directly adjacent to the row titles, with the results of previous periods shown progressively further to the right. March | February | January is an example of this format for a multi-month presentation.
The results of the most recent period are listed furthest to the right in a reverse presentation format. However, this is a less usable format because the reader cannot easily associate the line descriptions on the far left side of the presentation with the most recent financial results listed on the far right side if many columns are used. January | February | March is an example of this format for a multi-month presentation.
Comparative Balance Sheet Format
The comparative income statement format combines several income statements into a single statement. This assists the business owner in understanding trends and measuring business performance over time.
A business owner can compare the operating results of its competitors in addition to comparing the income statements of its own company over different time periods.
As a result, this analysis assists the business owner in comparing his company’s performance to that of other companies in the industry. As a result, business owners can better understand the various factors that contribute to changes in different accounting periods. This is accomplished by comparing the company’s operating results over multiple accounting periods.
Example of a Comparative Income Statement Format
There is no standard format for a comparative income statement. To make a comparative income statement, simply list the accounts in the left column. Then, make a column for each accounting period, with the most recent at the top. Examine each comparative income statement example.
Comparing the accounting periods of two companies:
| Account | 2017 | 2016 | 2015 |
| Revenue | 180,000 | 165,000 | 150,000 |
| Gross Profit | 150,000 | 135,000 | 125,000 |
| EBITDA | 90,000 | 80,000 | 75,000 |
| Net Profit | 55,000 | 50,000 | 45,000 |
Comparing accounting periods for two businesses:
Business A
| Account | 2017 | 2016 | 2015 |
| Revenue | 180,000 | 165,000 | 150,000 |
| Gross Profit | 150,000 | 135,000 | 125,000 |
| EBITDA | 90,000 | 80,000 | 75,000 |
| Net Profit | 55,000 | 50,000 | 45,000 |
Business B
| Account | 2017 | 2016 | 2015 |
| Revenue | 65,000 | 61,000 | 60,000 |
| Gross Profit | 50,000 | 42,000 | 40,000 |
| EBITDA | 40,000 | 36,000 | 35,000 |
| Net Profit | 30,000 | 27,000 | 25,000 |
As you can see, figures in this type of income statement are simple to compare. However, judging performance solely on numbers can be difficult. You may need to perform some simple calculations to get a clear picture.
Different Types of Comparative Income Statement Analysis
#1. Horizontal Analysis
One popular comparative income statement technique depicts the change in an amount in both absolute and percentage terms over time. It facilitates trend analysis and is thus also known as Trend Analysis. The horizontal analysis technique makes it simple to observe growth patterns and seasonality.
The following illustration depicts Horizontal Analysis:
Horizontal Analysis by Colgate
Consider an example of Colgate’s Horizontal analysis.
We can calculate the 2015 Net Sales growth rate using the formula (Net Sales 2015 – Net Sales 2014) / Net Sales 2014. Similarly, we can use a similar formula to calculate the growth rates of other line items.
We take note of the following –
- Colgate experienced negative revenue growth in 2014 and 2015.
- During the same time period, the cost of sales has also decreased.
- Net income fell by the most in 2015, falling by 36.5 percent.
#2. Vertical Evaluation
Vertical Analysis is another technique for displaying the Comparative Income Statement in terms of the relative size of line items. This technique allows for easy comparison of income statements from companies of various sizes. It displays each item on the Income Statement as a percentage of the statement’s base figures (usually the Sales figure). Under this, all components of income statements, such as gross profit, net profit, cost of sales, and so on, are shown as a percentage of sales, which makes it very useful to use even when comparing differently because it removes size biases and makes the analysis more straightforward and understandable. It is primarily used to generate individual statements for a reporting period, but it can also be used for timeline analysis.
The illustration below depicts Vertical Analysis.
Income Statement Vertical Analysis of Colgate
The snapshot of Colgate’s Comparative Income Statement is shown below.
- Colgate’s gross profit has ranged between 56 and 59 percent.
- SG&A expenses were reduced from 36.1 percent in 2007 to 34.1 percent in 2015.
- In 2015, operating income fell dramatically.
- Net income dropped significantly to less than 10%.
- Between 2008 and 2014, the tax rate was in the 32-33 percent range.
What Should You Look For When Examining A Comparative Income Statement?
#1. Sales vs Cost of Goods Sold
Changes in sales during the specified accounting periods should be compared to changes in the cost of goods sold during the same accounting periods.
#2. Variation in Operating Profits
The change in operating profits should be examined.
#3. A company’s profitability
Understanding a company’s overall profitability while taking into account changes in net profit over the course of accounting periods.
How to Make a Comparative Income Statement
Step #1
To begin, provide absolute figures for items such as cost of goods sold, net sales, selling expenses, office expenses, and so on for the accounting periods under consideration for analysis. These figures are shown in Columns I and II of the comparative income statement.
Step #2
Determine the absolute change in the items listed on the income statement. This is accomplished by subtracting the previous year’s item totals from the current year’s. Column III of the comparative income statement mentions this increase or decrease in absolute amounts.
Step #3
Finally, compute the percentage change in the current year’s income statement items compared to the previous year. Column V of the comparative income statement shows the percentage change in items.
Advantages
- Simplifies and expedites analysis by allowing past figures to be easily compared with current figures without the need for separate past Income Statements.
- It also facilitates comparisons between companies and aids in the analysis of efficiency at both the Gross Profit and Net Profit levels.
- It displays percentage changes in all income statement line items, making top-line analysis and interpretation easier (Sales) and Bottom Line (Net Profit) is more simple and informative.
Disadvantages
- Financial data in the Comparative Income Statement is only useful if the same accounting principles are used.
- are used to create such statements. If the deviation is found, the Comparative Income Statement will not serve its intended purpose.
- In cases where the company has diversified into new business lines, which have significantly impacted sales and profitability, a comparative Income Statement is not very useful.
Why Should You Use Comparative Income Statements?
You must measure performance as a small business owner. If you don’t, how will you know if the business decisions you make are effective? A comparative income statement allows you to analyze profitability over time.
A comparative income statement can be used to examine key financial figures. Patterns in previous figures can help you predict the future. For example, you might compare last year’s return on investment (ROI) to this year’s. This tells you whether the money you put into your business generates more income.
Comparative income statements can also show you whether your costs and revenues are consistent. Let’s say your cost of goods sold (COGS) increases from 25% to 40% of sales in three years. Recognizing the increase allows you to find solutions to lower COGS. Business investors use comparative income statements to compare different companies. The comparison assists them in determining which business is a better investment.
I understand that accounting isn’t the most exciting aspect of running a business. When you take the time to go over your financial records, the results can be eye-opening. You can see the results of all of your hard work and gain insight into which decisions will help you succeed.
Conclusion
Accounting software or a spreadsheet application such as Excel® can be used to create a comparative income statement. The report is based on a standard income statement that lists all revenues, expenses, and figures for the period under review. Following that, calculations are performed to demonstrate the changes from one period to the next, as well as percentage calculations based on the choice of horizontal or vertical analysis. The spreadsheet application necessitates significantly more work to set up the calculations and leaves more room for error. Using accounting software standard reports or report writing modules to prepare a comparative income statement is a much more efficient and accurate method.
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