Comparative financial statements is a term, referring to the complex of the company’s annual financial report elements, which reflect the information from different time periods. Most commonly they include comparative balance sheet (reporting company’s total assets, liabilities and equity for multiple dates), comparative profit and loss report (reflecting the financial results and financial position of the company over several periods or business cycles), comparative cash flow statement (containing information on the company’s cash flows for multiple periods), etc.
A reason for the company management to choose comparative financial statements as the reporting standard is that they provide a much wider understanding of the company’s performance trends than usual single period statements do. Comparative financial statements allow:
1. Applying horizontal analysis and compare the company’s performance indicators over multiple periods of time, determine development trends, while with the single period statement only current position can be analyzed.
2. Applying vertical analysis to see how proportions of different items of the financial report change from period to period.
3. Using analytical methods of forecasting the future performance of the entity, based on trends of the past periods, which impossible to do when you only have a current period financial report.
Commonly comparative financial statements reporting forms are being customized, containing not only lines with actual information on the company’s assets, revenues, cash flows, etc., but also the changes between different periods values, reflected as absolute values or as a percentage. Such reporting method gives analyst another advantage of comparing and analyzing different-sized companies. This happens due to the elimination of the difference in money amounts, presented in normal financial statements, by the use of percentage.
Another example of the comparative financial statement is the monthly presentation of the information for the last 12 months on a rolling basis. Using reporting method allows company management to analyze the operating performance of their business more efficiently since the reporting period is flexible and thus statements reflect the most recent and actual information.
Comparative financial statements give managers and analysts advantages, which allow more efficient and detailed analysis of the entity’s performance. While the normal financial statement is a static reflection of the current financial position of the company, comparative financial statements reflect the dynamics in its development and allow to determine trends and forecast changes.