comparative balance sheet definition and meaning

Mamiladen 27. September 2021 Bookkeeping 0

These increased by 33% which is much higher as against the increase in net sales that was just 12%. Thus, this entire scenario indicates that it was quite challenging to sell the goods during 2018. Firstly, a higher increase in the cost of goods sold can be on account of either increased sales volume or higher input cost. Furthermore, it is evident that the cost of goods sold for the company improved as an outcome of increased sales volume. Such additional machinery leads to an incredible improvement in the production capacity of the company during the year. This expenditure was provided for by the company proprietors and the external lenders.

The comparison of balance sheets from different periods can highlight areas of strength and weakness. For example, a consistent cash and cash equivalents increase may indicate improved liquidity management. Similarly, a declining inventory turnover ratio could signify inventory management challenges.

How do businesses prepare comparative balance sheet in modern day’s business?

In this example, we start our comparative balance sheet analysis by examining how each account changed from the first year to the second. In this case, the company’s cash has increased quite a bit, alongside a steep decline in inventory. The decline in inventory is greater than the increase in cash, driving a decrease in total assets. By comparing balance sheets from different periods, stakeholders can identify trends, changes, and improvements or declines in the company’s financial position. This information helps in assessing the company’s liquidity, solvency, and overall financial performance.

The stakeholder must be aware that past performance doesn’t necessarily predict future performance. Pay attention to the possibility of economic influences influencing the analysis, like inflation or the onset of a recession. It will help understand the nature of the company’s current operation and the shifts needed to improve productivity. Next is Net Cash Flows from Operating Activities, the summary of the first section of the Statement of Cash Flows.

The report helps analyze trends and performance variations between periods.
It fosters investor confidence and attracts potential investment for expansion.
The financial statement only captures the financial position of a company on a specific day.

The first column of amounts contains the amounts as of a recent moment or point in time, say December 31, 2022. To the right will be a column containing the corresponding amounts from an earlier date, such as December 31, 2021. The older amounts appear further from the account titles or descriptions since the older amounts are less important. The comparative balance sheet serves as a valuable input for strategic planning sessions. You can leverage the insights gained from the analysis to set realistic goals and establish growth targets. If your company does not follow standardized accounting formats, it can lead to variations in the presentation of the balance sheets.

Format of Comparative Balance Sheet

When this happens, the balance in the original line item will drop, while the balance in the receiving line item will increase. The reason for this change will not be apparent to the financial statement user, who may be confused by the change. Find out the absolute change in the items mentioned in the income statement. This what is a w2 form is done by subtracting the previous year’s item amounts from the current year ones. This increase or decrease in absolute amounts is mentioned in Column III of the comparative income statement. Comparative statements can also be used to compare different companies, assuming that they follow the same accounting principles.

Part-B Chapter 1: Overview of Computerised Accounting System

It further hints towards the fact that the company might find it challenging to meet its short-term obligations. 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. The percentage change simply allows you to see increases or decreases in figures expressed as a percentage. Additionally, you may find balance sheet figures expressed as absolute figures or in terms of percentages.

What is Comparative Balance Sheet and Why Does it Matter?

When you add up the adjustments to net income and depreciation, you get $150,500. The firm is generating a positive net cash flow from its operating activities. Let’s consider the following hypothetical balance sheet, with common-sized calculations already included. Providing the amounts from an earlier date gives the reader of the balance sheet a point of reference—something to which the recent amounts can be compared.

Part-B Chapter 1: Financial Statements of a Company

This analysis enables stakeholders to make informed decisions regarding investment opportunities, operational strategies, and financial risks. Collect the balance sheets of the different accounting periods you want to compare. These financial statements should provide a detailed breakdown of the company’s assets, liabilities, and shareholders’ equity for the period. Performing a comparative balance sheet analysis is a straightforward and highly effective method for analyzing a company’s balance sheet. As you follow the company over time, the trends and changes will become even easier to spot with more familiarity. Without the income statement, statement of cash flows, and the ability to ask management questions, we can’t know for sure what drove these changes to the company’s balance sheet.

To take your analysis to the next level, you can add additional techniques to make the comparative balance sheet analysis even more powerful. For example, you can show each of the balance sheet accounts as a percentage of the company’s total assets. By comparing how these numbers change over time, you can see not just how the balance sheet is changing, but also how its composition is shifting on a common-sized basis. The first step to complete a comparative balance sheet analysis is to get organized. Locate the company’s balance sheet data and arrange it in a table such that each account is shown side by side over time.