Comparative and Common Size Statements — Part 1: Meaning, Significance, Limitations and Comparative Statements: visual lesson, ISC Class 12 Accounts

Lesson

Financial Statement Analysis: Comparative Statements

Part 1 — what comparative and common-size statements are for, why they matter, where they fall short, and how to prepare comparative statements of one firm over two years and of two firms in one year. Every company and figure in this chapter is imagined.

In this lesson you will

Explain the purpose of comparative and common-size statements as tools of financial statement analysis
State their significance to different readers and their limitations
Prepare a Comparative Statement of Profit and Loss and a Comparative Balance Sheet with absolute and percentage change
Prepare and read an inter-firm comparative statement

Part 1 at a glance

Concept

Tools of financial statement analysis

Your syllabus pairs comparative and common-size statements in this chapter; the cash flow statement and ratios follow.

This chapter covers the first two tools.
Tool	What it shows	Kind of analysis
Comparative statements	The same items for two or more years (or two firms) side by side, with the absolute and percentage change	Horizontal (dynamic)
Common-size statements	Every item as a percentage of a common base of the same statement	Vertical (static)
Cash flow statement (Chapter 11)	Inflows and outflows of cash by activity	Movement of cash
Ratio analysis (Chapter 12)	One figure related to another, such as current assets to current liabilities	Relationships

Concept

Horizontal and vertical analysis

Comparative statements read across the years; common-size statements read down one statement.

Table contrasting horizontal and vertical analysis: horizontal analysis studies how each item moved across years with the earlier year as base, using comparative statements; vertical analysis studies the share of each item in a base of the same year, using common-size statements
Basis	Horizontal (dynamic) analysis	Vertical (static) analysis
Periods studied	Two or more years (or firms)	One statement of one year
Question asked	How far has each item moved?	What share of the base is each item?
Base of the percentage	The same item in the earlier year	Revenue from operations, or the balance sheet total
Usual tool	Comparative statement	Common-size statement

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