Key Difference – Comparative vs Common Size Statement
Financial statements are of wide use to a number of stakeholders, especially for shareholders as such statements provide a number of important information. Comparative and common size financial statements are two forms of statements used by companies to extract financial information. The key difference between comparative and common size financial statements is that comparative financial statements present financial information for several years side by side in the form of absolute values, percentages or both whereas common size financial statements present all items in percentage terms – balance sheet items are presented as percentages of assets and income statement items are presented as percentages of sales.
CONTENTS
1. Overview and Key Difference
2. What is Comparative Statement
3. What is Common Size Statement
4. Side by Side Comparison – Comparative vs Common Size Statement
5. Summary
What is a Comparative Statement?
The comparative statement compares current year’s financial statement with prior period statements by listing results side by side. Analyst and business managers use the income statement, balance sheet and cash flow statement for comparative purposes. These are mainly prepared for internal decision-making purposes to be analyzed by the management.
Given below is the balance sheet extracts of XYZ Ltd from 2015-2016.
In the above statement, it becomes convenient to compare results and express them in following forms.
- In absolute terms
From 2015 to 2016, total assets have risen by $3,388m ($31,149m-$27,761m)
- As a percentage
From 2015 to 2016, total assets have increased by 12.2% ($3,388m/$27,761m *100)
- In a graphical form
Trend analysis can be depicted in a graph to show the trend line so that it becomes convenient for the decision makers to understand the overall performance and status of the company at a glance.
The most important aspect of comparative statement is the ratio calculation using the information in financial statements. Ratios can be compared with ratios of previous financial year ratios as well as industry standards.
What is Common Size Statement?
Common size financial statements present all items in percentage terms where balance sheet items are presented as percentages of assets and income statement items are presented as percentages of sales. Published financial statements are common size statements that contain financial results for the respective accounting period. In the above example, if the results were presented for a single accounting period, it is a common size statement. Common size statements are useful in comparing results with similar companies.
Figure 01: Published financial statements are common size statements
What is the difference between Comparative and Common Size Statement?
Comparative vs Common Size Statement |
|
| Comparative financial statements present financial information for several years side by side in the form of absolute values, percentages or both. | Common size financial statements present all items in percentage terms where balance sheet items are presented as percentages of assets and income statement items are presented as percentages of sales. |
| Purpose | |
| Comparative statements are prepared for internal decision making purpose. | Common size statements prepared for reference purpose for stakeholders. |
| Usefulness | |
| Comparative statements become more useful when comparing company results with previous financial years. | Common size statements can be used to compare company results with similar companies. |
Summary- Comparative vs Common Size Statement
The difference between comparative and common size statement depends on the way financial information in statements are presented. Since comparative financial statements present financial information for a number of years side by side, this kind statement is convenient to calculate ratios and to directly compare results. On the other hand, common size financial statements present all items in percentage terms making it useful for analyzing current period results. Both these methods are equally important to make decisions that affect the company on an informed basis and sufficient time should be dedicated to the proper analysis of financial information for effective decision-making.
References
1. VanNatta, Elina. “Comparative & Common-Size Financial Statements.” EHow. Leaf Group, 10 June 2011. Web. 19 Apr. 2017.
2. “Comparative Statement.” Investopedia. N.p., 09 Feb. 2010. Web. 19 Apr. 2017.
3. “What are common-size financial statements? | AccountingCoach.” AccountingCoach.com. N.p., n.d. Web. 19 Apr. 2017.
Image Courtesy:
1. “y2cary3n6mng-q6hnvf-balance-sheet” by Peter Baskerville (CC BY-SA 2.0) via Flickr