Comparative financial statements are the complete set of financial statements that an entity issues, revealing information for more than one reporting period. The financial statements that may be included in this package are:
- The income statement (showing results for multiple periods)
- The balance sheet (showing the financial position of the entity as of more than one balance sheet date)
- The statement of cash flows (showing the cash flows for more than one period)
Another variation on the comparative concept is to report information for each of the 12 preceding months on a rolling basis. Comparative financial statements are quite useful for the following reasons:
- Provides a comparison of an entity’s financial performance over multiple periods, so that you can determine trends. The statements may also reveal unusual spikes in the reported information that can indicate the presence of accounting errors.
- Provides a comparison of expenses to revenues and the proportions of various items on the balance sheet over multiple periods. This information can be useful for cost management purposes.
- May be useful for predicting future performance, though you should rely more on operational indicators and leading indicators than on historical performance for this type of analysis.
It is customary to issue comparative financial statements with additional columns containing the variance between periods, as well as the percentage change between periods.
This course from Grazing Minds will help you draw critical inferences from financial statements of companies.