Comparative balance sheet definition

The balance sheet reports the financial position of a company at a single point in time. Imagine how much more useful a variety of balance sheets with different dates would be. A comparative balance sheet presents side-by-side information about an entity’s assets, liabilities, and shareholders’ equity as of multiple points in time. For example, a comparative balance sheet could present the balance sheet as of the end of each year for the past three years. Another variation is to present the balance sheet as of the end of each month for the past 12 months on a rolling basis. To review, a comparative balance sheet contains one or more balance sheets at multiple points of time.

Why use a comparative balance sheet?

The purpose of comparative balance sheets is to ascertain the company's financial position and assets and liabilities. It creates a conclusive interpretation of how the company has performed in the previous financial year.

This financial statement lists everything a company owns and all of its debt. A company will be able to quickly assess whether it has borrowed too much money, whether the assets it owns are not liquid enough, or whether it has enough cash on hand to meet current demands. If a company takes out a five-year, $4,000 loan from a bank, its assets (specifically, the cash account) will increase by $4,000. Its liabilities (specifically, the long-term debt account) will also increase by $4,000, balancing the two sides of the equation. If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholder equity. All revenues the company generates in excess of its expenses will go into the shareholder equity account.

Income Statement

In such a way, the comparative financial statement can show errors in reporting financial information that can be useful for investors to check whether the company has been prudent in reporting financial data to them. The key advantage of a comparative balance sheet is that it gives you the ability to spot trends in the presented data. When the presentation is over a short period of time, these trends probably relate to seasonal changes in financial position. A well-conducted Comparative Balance Sheet Definition financial analysis can improve the financial position of a business by identifying operational and financial issues that can be corrected. Public companies, on the other hand, are required to obtain external audits by public accountants, and must also ensure that their books are kept to a much higher standard. In short, the balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.

Comparative Balance Sheet Definition

Looking at a single balance sheet by itself may make it difficult to extract whether a company is performing well. For example, imagine a company reports $1,000,000 of cash on hand at the end of the month. Without context, a comparative point, knowledge of its previous cash balance, and an understanding of industry operating demands, knowing how much cash on hand a company has yields limited value. The comparative financial statements report the achievements of the company for two accounting periods, making it easier to check whether the company is progressing in terms of financials or not. As it is cumbersome to compare values in two financial statements, the presentation of facts in one statement makes enough sense.

Comparative balance sheet definition

Last, a balance sheet is subject to several areas of professional judgement that may materially impact the report. For example, accounts receivable must be continually assessed for impairment and adjusted to reflect potential uncollectible accounts. Without knowing which receivables a company is likely to actually receive, a company must make estimates and reflect their best guess as part of the balance sheet.

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Analysts, investors, and business managers use a company’s income statement, balance sheet, and cash flow statement for comparative purposes. They want to see how much is spent chasing revenues from one period to the next and how items on the balance sheet and the movements of cash vary over time. It can also show abnormal spikes in the values of data which means there are errors in the given data.

What are Comparative Financial Statements?

They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot. Assume, for example, that a manufacturer’s cost of goods sold (COGS) increases from 30% of sales to 45% of sales over three years. Management can use that data to make changes, such as finding more competitive pricing for materials or training employees to lower labor costs. On the other hand, an analyst may see the cost of sales trend and conclude that the higher costs make the company less attractive to investors. It is also prepared to analyse an increase or decrease in every item of Equity and Liabilities, and Assets in terms of percentage and rupees, and also to determine the trend and effect of each item.

  • Total equity is calculated as the sum of net income, retained earnings, owner contributions, and share of stock issued.
  • The key advantage of a comparative balance sheet is that it gives you the ability to spot trends in the presented data.
  • Balance sheets should also be compared with those of other businesses in the same industry since different industries have unique approaches to financing.
  • The remaining amount is distributed to shareholders in the form of dividends.
  • As opposed to an income statement which reports financial information over a period of time, a balance sheet is used to determine the health of a company on a specific day.
  • In this example, Apple’s total assets of $323.8 billion is segregated towards the top of the report.
  • If company sales are growing, the manufacturer requires more cash to operate each month, which is reflected in the ending cash balance.

He is a writer, editor and has experience in public and private accounting. Some liabilities are considered off the balance sheet, meaning they do not appear on the balance sheet. If the current year’s value of a company has decreased, then show the Absolute Change and Percentage Change in brackets to reflect the negative item. It can be sold at a later date to raise cash or reserved to repel a hostile takeover. Balance sheets should also be compared with those of other businesses in the same industry since different industries have unique approaches to financing.

Reporting just the latest dollar amounts makes it hard to compare the performances of companies of various sizes. Adding prior period figures, complete with percentage changes, helps to eliminate this problem. The comparative financial statement makes it easier to look at the performances of the company in multiple periods just by looking at only one document.

Comparative Balance Sheet Definition