Both the Comparative and the Common-Size financial statements give a more or less view of the financial statement of the company. Common-size financial statements present all the financial items under their head in percentage terms. While the Comparative financial statements present the financial data for numerous years side by side. This data is to be presented in the form of absolute values, percentages, or both.
The striking difference between the comparative and the common size financial statements is that comparative financial statements present the financial information for several years side by side in the form of absolute values or percentages or both. Whereas the common size financial statements present all these items in percentage terms more often.
The Comparative financial statements are the set of complete financial statements an entity issues, by revealing its information for more than one reporting period. The financial statements which are included in this statement are:
The Income Statement shows the results for multiple periods.
The balance sheet shows the financial position of the entity.
The cash flow statement is defined as more than one period.
Variation of comparative concept also exists which is to report the information for each of the 12 previous months. The comparative financial statements are quite useful for the following reasons:
This provides a comparison of an entity's financial performance over multiple periods, which will help to determine the trends of the business.
The statements also reveal unusual spikes in the information which will help to indicate the presence of accounting errors.
This statement also enables a comparison of the expenses and revenues. This will help in the process of Cost Management.
The statements predict future performance.
A comparative statement is a type of document that is used to compare a particular financial statement with the period statements. The Previous financials are presented alongside the latest figures in side-by-side columns, this enables the investors to identify the trends, the track on which a company’s progress is determined and the same can be compared with industry rivals.
Comparative statements are used to figure out finances which is a good practice for the business owner.
The common size income statement is another type of income statement in which basically each line item is expressed as a percentage of the value of revenue or the sales. Common size financial statements analyze and then compare a company's performance over several periods with varying sales figures.
Analysts analyses this common size as an income statement whereby dividing each line item (for example, gross profit, operating income, and sales and marketing expenses) by the top line (sales). Then this item is then expressed as a percentage of sales.
The standard figure that is used in the analysis of a common size income statement is the total sales revenue. The common size percentages are then calculated to show each line item as a percentage of the standard figure or the revenue.
This is quite important to note that the common size calculation is the same as calculating the margins for a company. The net profit margin is the net income that is divided by the sales revenue, and this is typically the common-size analysis. This is the same for calculating the gross margin (sales revenue minus the cost of goods sold, divided by sales revenue), and the operating margin (that is the gross profit minus the selling & general administrative expenses, divided by the sales revenue).
The main differences between the comparative analysis and the common size analysis are chalked as follows −
This analysis shows the previous year’s financial results which occur side by side along with the changes in the amount or its percentage.
This compares the current year’s results with the base year.
This is a horizontal analysis.
The results are expressed in both forms - percentages as well as pictorial form.
Both provide an inter and intra firm which can be compared.
This helps in internal decision making.
The statements are useful to compare results with their previous financial years.
Quite an importance of individual figures is shown in a statement with a comparative analysis.
Common Size Analysis
This shows the results of the same year in percentage form.
Common Size analysis compares figures of the same year.
This is a vertical analysis.
The results are to be expressed in percentages only.
Only inter-firm are required to be compared.
This common size statement prepares the references for the stakeholders.
This is used to compare the company’s results with their competitors.
This shows the relative importance of the individual figures in the statement.
1. What are Financial Statements?
Ans. Financial statements are the written records that convey that the business activities and the financial performance of a company is on or off track. These financial statements are audited by governmental agencies, by accountants, and by law firms.
Financial Statements are of the following types:
(1) balance sheets
(2) income statements
(3) cash flow statements
(4) statements that show shareholders' equity.
The financial statements are records that represent a business's financial situation which includes standard reports like the balance sheet, income or profit, and loss statements, and the cash flow statement.
2. Define Accounting Errors.
Ans. An accounting error is a type of error that occurs in an accounting entry that was not at all intentional. When spotted, the error or this mistake is often fixed soon
Types of accounting errors are Error of omission, Error of commission, Error of principle.
While if there is no immediate resolution to the errors, then an investigation into the error is done. An accounting error is different from fraud, which is an intentional act to hide or alter the entries for the benefit of the firm. There are numerous types of errors, which are the most common accounting errors which are either clerical mistakes or errors of accounting principle.
3. What are Expenses and Revenues?
Ans. Revenue is a term that is used to describe the income that is earned through the provision of a business that is by selling primary goods or services.
Whereas, the expense is the term that means the cost which is incurred in the process of producing or offering a primary business operation.
An expense is the cost of operations that a company incurs to generate revenue.