Analyzing the Comparative Income Statement
When comparing the financial data using this type of presentation, FS users refer to the differences in dollar values as the “absolute changes." The earliest year is chosen as the arbitrary index, the point from which growth or diminution trends will be based. A quick examination of our sample Comparative Income Statement will immediately create an impression that the company is enjoying a positive trend in its operations. It can be gleaned that Revenue from Sales is on an upward trend for the past three years.
As FS readers, we may initially skim through the statement and immediately proceed to the bottom-line figure, which is the net income. This way, we can have an idea by how much the company’s earnings have increased. Although the figures presented are still positive, the reader will notice that something is out of line or out of proportion. This now calls for a closer look at the financial data, and the following are the points to be considered in our analysis:
(1) If the net income for 2007 is $21,650, it follows that the net income for 2008 should be higher than this figure, which is quite contrary because the net income for 2008 plunged to $17,121.
(2) By the year 2009, the net income elevated to $22,997, which is only around a thousand dollar increase after two years of operations. Definitely, this figure is way out of proportion if you will compare the increase in Revenue from Sales between 2007 of $437,500 vs. 2009 of $535,115.
(3) The FS reader will find it necessary to re-examine the other components of the income statement to determine where the possible causes of disproportion are rooted. Cost of Goods Sold (COGS) makes a similar upward trend, which is natural since Revenue from Sales also increased.
(4) However, if the increase in COGS is compared to increase in Sales, it is noted that the difference in Sales between 2007 and 2008 represents an increase in revenue by $61,250. This was the additional money that came in for the year. If compared to the difference in COGS between 2007 and 2008 of $55,000, this was the increase in money spent for the year. This comparison immediately presents a distortion in cash movement, because the increases show that there is a very narrow leeway between additional money that came in vs. additional money spent--an indication that the increase in COGS is related to a corresponding increment in Purchase Price and not at all attributable to the entity’s selling activity.
(5) It follows that the business in 2008 was working on a very narrow gross profit margin, although the trend in 2009 showed improvement as the amount of Revenue from Sales continued to increase. However, it is still not impressive, because it seems that the rate of increase in 2009 decelerated if compared to the rate of increase noted between 2007 vs.2008.
At this point, the FS reader will now be interested in knowing exactly the percentages that these increases and decreases represent. In having a Common Size Income Statement available, the differences in dollar figures are best analyzed if the FS reports show proportions expressed in rates and percentages.