Financial statements serve as an important tool used in almost every business. The money that comes in and the payments going out tell a story about a company’s financial health. Firms have different motivations for producing comparative and non-comparative financial statements, and each provides useful information in its own way.
Comparative statements represent data from several accounting periods. This might consist of a few years’ worth of financial statements on an annual basis. Comparative statements are also put in terms of month-to-month comparisons or quarter-to-quarter comparisons. Financial statements may also be reformatted as “common-size” statements. Common-size financial statements put all the accounting data in terms of a percentage of a base figure, which is usually sales.
Non-comparative statements may result from a few causes. Expense items may be reclassed from one account to another, such as administrative expense that is reclassed into cost of goods sold. Once a change like this is made, the financial statement is not directly comparable any more to previous period statements. Financial statements published in non-standard formats may be used in internal presentations, but will not be comparable to the company’s regular financial statements. Different time periods cannot be compared in a meaningful way, and accounting policy changes such as new requirements for expensing items such as stock options put current financial statements out of sync with historical financial statements.
Analysis of Comparative Statements
The benefit of using comparative statements is that they provide a great deal of information about a company. They reveal sales growth from period to period, in addition to expense trends, whether good or bad. Financial statements from different periods also show overall profit margins and profit growth. Common-size statements help analysts compare expenses easily since they are set as a percentage of sales. For example, even if sales are growing each period, certain costs may become larger as a percent of sales, which might make sense, but is something company management should be aware of.
Analysis of Non-Comparative Statements
Non-comparative statements are not bad on their own; as long as the accounting work has been performed with high standards of quality, the information is still meaningful. However, financial statements provide the most information over time if they can be directly compared to previous periods. Additionally, some companies may publish numerous sets of internal financial statements for different divisions or joint ventures. If these statements are non-comparative for any reason, the company will not be able to easily consolidate the financial results to produce financial statements for the company as a whole.