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How to Prepare a Comparative Financial Statement

written by: •edited by: Jean Scheid•updated: 6/1/2011

A comparative financial statement includes figures relating to a previous accounting period, normally shown in a separate column beside the main statement. For the comparative financial statements to be meaningful, they must be prepared on a consistent basis in the relevant accounting periods.

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    Preparing Comparative Financial Statements

    In looking at how to do a comparative financial statement, it is above all to maintain consistency in the way financial statements are compiled in each accounting period. Comparative financial statements are statements that have been prepared consistently and contain comparative figures for another period, for example the previous year. The comparative figures would normally be in a separate column that is adjacent to and, therefore, easily comparable to the figures for the current period. Such comparative figures would normally be included in statutory financial statements such as the profit and loss statement, balance sheet or cash flow statement. As the figures for both periods have been prepared on a consistent basis, a meaningful comparison may be made on the basis of the comparative figures for the two periods.

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    Comparative Financial Statements and Accounting Standards

    Financial Statements Financial reporting standards require that comparative financial statements are prepared showing comparative figures for the previous accounting period. Normally, such comparative figures would be required not only in the main financial statements but also in the notes to the financial statements. For most figures in the accounts, this will enable the users to examine trends in various categories of income and expenses.

    Comparative financial statements are very useful for potential investors in a company and can reveal much useful information about a company's activities to a careful investor who is interested in studying the financial position of the company in which an investment is to be made. For example, the provision of comparative figures enables the investor to look at movements in various accounting ratios from one period to another, which may reveal important information about the company's liquidity and profitability. Any unusual or atypical figures in the latest financial statements will become clearer through the provision of comparative figures for the previous period.

    The need to provide comparative figures may make it more difficult for a company to improve the appearance of its accounts in any particular period by "window dressing" them, making last minute adjustments to make the balance sheet look stronger than is actually the case.

    Where certain amounts in the previous period are not directly comparable to the figures in the period under review, financial reporting standards would require suitable adjustments to be made, and the details of these adjustments and the reasons for making them would be disclosed in notes to the financial statements. For reasons of clarity and to avoid misleading or confusing comparisons, some comparative figures in the financial statements may not be required. For example, comparative figures in relation to additions to and disposals of fixed assets, transfers to and from reserves or details of shareholdings in subsidiaries or other undertakings would not necessarily be useful to the person reading the comparative financial statements and some financial reporting standards, therefore, permit them to be omitted. This enables investors and other users to understand the position as clearly as possible.

    A comparative figure might also be omitted where company law requirements in the previous period exempted the figure from the disclosure requirements, but it is no longer exempt in the current period. This could apply for example to some of the figures that are disclosed in notes to the financial statements and is a point for preparers of comparative financial statements to bear in mind. In looking at how to do a comparative financial statement, those preparing such statements should carefully examine the applicable company law and financial reporting standards before they begin the task and they should establish which comparative figures are required and which may be omitted.

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    Problems Arising from Comparative Financial Statements

    The preparation of comparative financial statements may give rise to some problems in presenting the comparative figures. These problems may arise when figures from the previous period are not fully comparable to those in the later period owing to changes in accounting policies or changes in the way that certain income or expense headings are categorized.

    As mentioned above, in this situation, financial reporting standards require appropriate adjustments to be made to the figures for the previous period, and for details of the adjustments to be disclosed in notes to the financial statements. Those preparing the comparative financial statements should always bear in mind the real purpose of the financial statements which is to provide useful and accurate information to the users of those statements, including shareholders, loan creditors, employees and potential investors. The adjustments should be done in accordance with the applicable financial reporting standards and company law and in a way that clarifies the position for the users of the financial statements.

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    Users of Comparative Financial Statements

    Financial Reporting Users of comparative financial statements should be aware that the comparative figures are there to assist their analysis of the company's financial position and performance, and full use should be made of the information provided. The comparative figures enable users to identify trends in various categories of expenses as compared with the trend in income received. They also enable the users of the comparative financial statements to look at the trend in accounting ratios relating to liquidity and profitability.

    For example, the trend in the current ratio which is found by dividing current assets by current liabilities can be examined over two years and the movement may give an indication of the liquidity position of the company. Likewise, the user of the financial statements may compute the liquidity ratio, found by dividing current assets minus inventory by current liabilities, and may draw conclusions from the trend over the two periods. Profitability ratios such as the gross profit ratio and the net profit margin ratio may also be examined over two periods and may give an indication of the trend in the profitability of the company.

    The use of such ratios is of course only an initial indication of the financial health of the company and the users would need to examine other evidence available in the financial statements and elsewhere. However, the comparative figures are required by financial reporting standards because they are useful to the people looking at the accounts. When considering how to do comparative financial statement, it is worth bearing in mind that much care should be taken with the previous year's comparative figures as is taken with the figures for the accounting period to which the financial statements relate.

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    References

    Maps of World Finance - "Comparative financial statements" retrieved at http://finance.mapsofworld.com/financial-report/statement/comparative-financial-statements.html

    IAS Plus (Deloitte) retrieved at http://www.iasplus.com/index.htm

    ASC (Singapore) - "Presentation of Financial Statements" retrieved at http://www.asc.gov.sg/frs/attachments/2004/FRS_1_2006.pdf

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