Comparative and Common Size Statements — Notes

Financial statement analysis is the study of the Statement of Profit and Loss and the Balance Sheet to judge a company's profitability, solvency and efficiency, by comparing items over time, with other firms, and with each other.

Tools: comparative statements and common-size statements (this chapter), the cash flow statement (Chapter 11) and ratio analysis (Chapter 12).

• Horizontal (dynamic) analysis: the same item across two or more periods; tool: comparative statements.
• Vertical (static) analysis: each item against a base of the same period; tool: common-size statements.

Not in the ISC 2027 syllabus: notes to accounts. The statements in this chapter are prepared at head and sub-head level only, without a Note No. column.

Significance

1. Show the trend of revenue, costs, profit, assets and liabilities, and the speed of each change.
2. Point to strengths and weaknesses (costs outgrowing revenue, rising borrowing, slow-moving stock) so management can act.
3. Help judge profitability and solvency for shareholders, lenders and suppliers.
4. Make inter-firm comparison possible; common-size figures remove the effect of size.
5. Support planning and forecasting.

Limitations

1. Based on historical figures; decisions concern the future.
2. Price-level changes are ignored; a rise in rupees may be inflation.
3. Qualitative factors (management, labour relations, competition) are left out.
4. Different accounting policies make firms hard to compare.
5. Figures may be window-dressed.
6. They show symptoms, not causes; interpretation needs judgement. Common-size statements have no accepted standard share for each item.

A comparative statement shows the Statement of Profit and Loss or the Balance Sheet of two (or more) years, or of two firms, side by side, with the change in each item.

Rounding rule: every percentage is rounded to two decimal places, a third decimal of 5 or more raising the second decimal (in size). A decrease is shown in brackets in both change columns. If the earlier figure is nil, the percentage change is shown as a dash. A total or a head gets its own percentage on its own earlier total.

Layout (Schedule III Part II heads): I. Revenue from Operations; II. Other Income; III. Total Income (I + II); IV. Expenses (cost of materials consumed, purchases of stock-in-trade, changes in inventories, employee benefits expense, finance costs, depreciation and amortisation expense, other expenses) and Total Expenses; V. Profit before Tax (III − IV); VI. Tax; VII. Profit after Tax (V − VI).

Steps: (1) complete both years in rupees; (2) absolute change for every line; (3) percentage change for every line, totals included, on the earlier year.

Shivneri Fruit Pulp Ltd (imagined): revenue 20.00%, total expenses 20.73%, profit after tax 14.00% (₹7,00,000 to ₹7,98,000). Because expenses grew faster than revenue, profit grew more slowly than sales.

Comparative Balance Sheet: both dates side by side in the Schedule III Part I order (I. Equity and Liabilities: Shareholders' Funds, Non-current Liabilities, Current Liabilities; II. Assets: Non-current Assets, Current Assets), with the absolute and percentage change of every sub-head and of the totals.

Check: both totals change by the same amount and the same percentage.

Reading: sources of funds (the top half) against their uses (the bottom half); current assets against current liabilities for liquidity.

Inter-firm comparative statement: the two firms' figures for the same year side by side; difference = other firm − base firm; percentage difference = difference ÷ base firm × 100.

Shivneri (imagined): total ₹42,00,000 to ₹48,40,000 (15.24%); shareholders' funds 26.92%, long-term borrowings −20.00%.

Base: revenue from operations of the same year = 100.

Each line % = amount ÷ revenue from operations × 100 (two decimals). Other income is also divided by revenue, so total income may exceed 100.00; profit before tax = total income % − total expenses %.

Steps: complete both years in rupees; divide every line of each year by that year's revenue; check that the rounded lines re-add (total expenses, profit before tax, profit after tax).

Panhala Jaggery Ltd (imagined): materials 55.00% → 58.00%; profit after tax 16.10% → 14.70% of revenue, though in rupees it rose from ₹6,44,000 to ₹7,35,000.

Base: the balance sheet total on that date (total equity and liabilities = total assets) = 100.

Each line % = amount ÷ total × 100. Each part of each column must total 100.00.

Rounding rule: every percentage is rounded to two decimal places, a third decimal of 5 or more raising the second decimal (in size). If the rounded lines of a part add to 100.01 or 99.99, the line whose rounding error lies furthest in that direction is moved by 0.01 and marked †, with a note. No line is then more than 0.01 from its exact value.

Panhala (imagined), 31 March 2026: the rounded assets add to 100.01; non-current investments (about 4.5455%) is shown as 4.54 †. Owners' funds 60.00% → 60.61%; non-current assets 65.00% → 68.18%.

Inter-firm common-size statement: each firm's items divided by that firm's own revenue or total; the effect of size disappears, so cost structure, margins and financing can be compared.

Sindhudurg and Vijaydurg Fish Foods (imagined): profit after tax 15.00% against 14.25% of revenue, although Vijaydurg's rupee profit (₹11,40,000) is far larger.

Interpreting both tools together: a comparative statement shows how far each item moved; a common-size statement shows whether its share grew. A large percentage change on a tiny base, or a falling share that hides a rising amount, misleads when one tool is read alone.