COMPARATIVE STATEMENT

COMMON SIZE STATEMENT

AND
TREND ANALYSIS
 INTRODUCTION
We know business is mainly concerned with the financial activities. In order to ascertain the
financial status of the business every enterprise prepares certain statements, known as
financial statements. Financial statements are mainly prepared for decision making purpose.
But the information as is provided in the financial statements is not adequately helpful in
drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial
statements is required. Analysis means establishing a meaningful relationship between
various items of the two financial statements with each other in such a way that a
conclusion is drawn. By financial statements we mean two statements:

(i) Profit and loss Account or Income Statement

(ii) Balance Sheet or Position Statement

These are prepared at the end of a given period of time. They are the indicators of
profitability and financial soundness of the business concern. The term financial analysis is
also known as analysis and interpretation of financial statements. It refers to the
establishing meaningful relationship between various items of the two financial statements
i.e. Income statement and position statement. It determines financial strength and
weaknesses of the firm. Analysis of financial statements is an attempt to assess the
efficiency and performance of an enterprise. Thus, the analysis and interpretation of
financial statements is very essential to measure the efficiency, profitability, financial
soundness and future prospects of the business units.

Types of financial statement are:

1) Comparative statement
2) Common size statement
3) Trend analysis

Financial analysis serves the following purposes:

1. Measuring the profitability

The main objective of a business is to earn a satisfactory return on the funds invested in it.
Financial analysis helps in ascertaining whether adequate profits are being earned on the
capital invested in the business or not. It also helps in knowing the capacity to pay the
interest and dividend.

2. Indicating the trend of Achievements

Financial statements of the previous years can be compared and the trend regarding various
expenses, purchases, sales, gross profits and net profit etc. can be ascertained. Value of
assets and liabilities can be compared and the future prospects of the business can be
envisaged. Assessing the growth potential of the business. The trend and other analysis of
the business provides sufficient information indicating the growth potential of the business.

3. Comparative position in relation to other firms

The purpose of financial statements analysis is to help the management to make a

comparative study of the profitability of various firms engaged in similar businesses. Such
comparison also helps the management to study the position of their firm in respect of
sales, expenses, profitability and utilising capital, etc.

4. Assess overall financial strength

The purpose of financial analysis is to assess the financial strength of the business. Analysis
also helps in taking decisions, whether funds required for the purchase of new machines
and equipments are provided from internal sources of the business or not if yes, how much?
And also to assess how much funds have been received from external sources.

5. Assess solvency of the firm

The different tools of an analysis tell us whether the firm has sufficient funds to meet its
short term and long term liabilities or not.

PARTIES INTERESTED
Analysis of financial statements has become very significant due to widespread interest of
various parties in the financial results of a business unit. The various parties interested in
the analysis of financial statements are:

(i) Investors :

Shareholders or proprietors of the business are interested in the well being of the business.
They like to know the earning capacity of the business and its prospects of future growth.

(ii) Management :

The management is interested in the financial position and performance of the enterprise as
a whole and of its various divisions. It helps them in preparing budgets and assessing the
performance of various departmental heads.

(iii) Trade unions :

They are interested in financial statements for negotiating the wages or salaries or bonus
agreement with the management.
 (iv) Lenders :

Lenders to the business like debenture holders, suppliers of loans and lease are interested
to know short term as well as long term solvency position of the entity.

(v) Suppliers and trade creditors :

The suppliers and other creditors are interested to know about the solvency of the business
i.e. the ability of the company to meet the debts as and when they fall due.

(vi) Tax authorities :

Tax authorities are interested in financial statements for determining the tax liability.

(vii) Researchers:

They are interested in financial statements in undertaking research work in business affairs
and practices.

(viii) Employees :

They are interested to know the growth of profit. As a result of which they can demand
better remuneration and congenial working environment.

(ix) Government and their agencies :

Government and their agencies need financial information to regulate the activities of the
enterprises/ industries and determine taxation policy. They suggest measures to formulate
policies and regulations.

(x) Stock exchange :

The stock exchange members take interest in financial statements for the purpose of
analysis because they provide useful financial information about companies. Thus, we find
that different parties have interest in financial statements for different reasons.
 COMPARATIVE STATEMENT
Comparative statements are financial statements that cover a different time frame, but are
formatted in a manner that makes comparing line items from one period to those of a
different period an easy process. This quality means that the comparative statement is a
financial statement that lends itself well to the process of comparative analysis. Many
companies make use of standardized formats in accounting functions that make the
generation of a comparative statement quick and easy.

IMPORTANCE AND USES

The benefits of a comparative statement are varied for a corporation. Because of the
uniform format of the statement, it is a simple process to compare the gross sales of a given
product or all products of the company with the gross sales generated in a previous month,
quarter, or year. Comparing generated revenue from one period to a different period can
add another dimension to analyzing the effectiveness of the sales effort, as the process
makes it possible to identify trends such as a drop in revenue in spite of an increase in units
sold.

Along with being an excellent way to broaden the understanding of the success of the sales
effort, a comparative statement can also help address changes in production costs. By
comparing line items that catalogue the expense for raw materials in one quarter with
another quarter where the number of units produced is similar can make it possible to spot
trends in expense increases, and thus help isolate the origin of those increases. This type of
data can prove helpful to allowing the company to find raw materials from another source
before the increased price for materials cuts into the overall profitability of the company.

A comparative statement can be helpful for just about any organization that has to deal with
finances in some manner. Even non-profit organizations can use the comparative statement
method to ascertain trends in annual fund raising efforts. By making use of the comparative
statement for the most recent effort and comparing the figures with those of the previous
year’s event, it is possible to determine where expenses increased or decreased, and
provide some insight in how to plan the following year’s event.
FEATURES OF COMPARITIVE STATEMENTS:-
1) A comparative statement adds meaning to the financial data.

2) It is used to effectively measure the conduct of the business activities.

3) Comparative statement analysis is used for intra firm analysis and inters firm
analysis.

4) A comparative statement analysis indicates change in amount as well as change in

percentage.

5) A positive change in amount and percentage indicates an increase and a negative

change in amount and percentage indicates a decrease.

6) If the value in the first year is zero then change in percentage cannot be indicated.
This is the limitation of comparative statement analysis. While interpreting the
results qualitative inferences need to be drawn.

7) It is a popular tool useful for analysis by the financial analysts.

8) A comparative statement analysis cannot be used to compare more than two years
financial data.
 COMMON SIZE FINANCIAL STATEMENTS
Common size ratios are used to compare financial statements of different-size companies or
of the same company over different periods. By expressing the items in proportion to some
size-related measure, standardized financial statements can be created, revealing trends
and providing insight into how the different companies compare.

The common size ratio for each line on the financial statement is calculated as follows:

Item of Interest
Common Size Ratio =
Reference Item

For example, if the item of interest is inventory and it is referenced to total assets (as it
normally would be), the common size ratio would be:

Inventory
Common Size Ratio for Inventory =
Total Assets

The ratios often are expressed as percentages of the reference amount. Common size
statements usually are prepared for the income statement and balance sheet, expressing
information as follows:

 Income statement items - expressed as a percentage of total revenue

 Balance sheet items - expressed as a percentage of total assets

The following example income statement shows both the rupee amounts and the common
size ratios:

Common Size Income Statement

Income Statement Common-Size Income Statement
Revenue 70,134 100%
Cost of Goods Sold 44,221 63.1%
36.9%
Gross Profit 25,913

SG&A Expense 13,531 19.3%

Operating Income 12,382 17.7%
Interest Expense 2,862 4.1%
Provision for Taxes 3,766 5.4%
Net Income 5,754 8.2%
For the balance sheet, the common size percentages are referenced to the total assets. The
following sample balance sheet shows both the dollar amounts and the common size ratios:

Common Size Balance Sheet

Common-Size
Balance Sheet
Balance Sheet
ASSETS
Cash & Marketable Securities 6,029 15.1%
Accounts Receivable 14,378 36.0%
Inventory 17,136 42.9%
Total Current Assets 37,543 93.9%
Property, Plant, & Equipment 2,442 6.1%
Total Assets 39,985 100%

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities 14,251 35.6%
Long-Term Debt 12,624 31.6%
Total Liabilities 26,875 67.2%
Shareholders' Equity 13,110 32.8%
Total Liabilities & Equity 39,985 100%

The above common size statements are prepared in a vertical analysis, referencing each line
on the financial statement to a total value on the statement in a given period.

The ratios in common size statements tend to have less variation than the absolute values
themselves, and trends in the ratios can reveal important changes in the business. Historical
comparisons can be made in a time-series analysis to identify such trends.

Common size statements also can be used to compare the firm to other firms.

Comparisons Between Companies (Cross-Sectional Analysis)

Common size financial statements can be used to compare multiple companies at the same
point in time. A common-size analysis is especially useful when comparing companies of
different sizes. It often is insightful to compare a firm to the best performing firm in its
industry (benchmarking). A firm also can be compared to its industry as a whole. To
compare to the industry, the ratios are calculated for each firm in the industry and an
average for the industry is calculated. Comparative statements then may be constructed
with the company of interest in one column and the industry averages in another. The result
is a quick overview of where the firm stands in the industry with respect to key items on the
financial statements

FEATURES OF COMMON SIZE STATEMENT

1. A common size statement analysis indicates the relation of each component to the
whole.
2. In case of a Common Size Income statement analysis Net Sales is taken as 100% and
in case of Common Size Balance Sheet analysis total funds available/total capital
employed is considered as 100%.
3. It is used for vertical financial analysis and comparison of two business enterprises or
two years financial data.
4. Absolute figures from the financial statement are difficult to compare but when
converted and expressed as percentage of net sales in case of income statement and
in case of Balance Sheet as percentage of total net assets or total funds employed it
becomes more meaningful to relate.
5. A common size analysis is a type of ratio analysis where in case of income statement
sales is the denominator (base) and in case of Balance Sheet funds employed or total
net assets is the denominator (base) and all items are expressed as a relation to it.
6. In case of common size statement analysis the absolute figures are converted to
proportions for the purpose of inter-firm as well as intra-firm analysis.

Limitations
As with financial statements in general, the interpretation of common size statements is
subject to many of the limitations in the accounting data used to construct them. For
example:

1. Different accounting policies may be used by different firms or within the same firm
at different points in time. Adjustments should be made for such differences.
2. Different firms may use different accounting calendars, so the accounting periods
may not be directly comparable.
 TREND STATEMENT

Trend analysis calculates the percentage change for one account over a period of time of
two years or more.

Percentage change
To calculate the percentage change between two periods:

Calculate the amount of the increase/ (decrease) for the period by subtracting the earlier
year from the later year. If the difference is negative, the change is a decrease and if the
difference is positive, it is an increase.

Divide the change by the earlier year's balance. The result is the percentage change.

Calculation of Percentage Change :

(amount in 000 rupees)

(N/M: not meaningful)

2001 2000 Increase/(Decrease) Percent Change

Cash 6,950 6,330 620 9.8%

Accounts Receivable, net 18,567 19,330 (763) (3.9%)

Sales 129,000 103,000 26,000 25.2%

Rent Expense 10,000 0 10,000 N/M

Net Income (Loss) 8,130 (1,400) 9,530 N/M

Calculation notes:

1. 2000 is the earlier year so the amount in the 20X0 column is subtracted from the
amount in the 2001 column.
2. The percent change is the increase or decrease divided by the earlier amount (2000
in this example) times 100. Written as a formula, the percent change is:
 3. If the earliest year is zero or negative, the percent calculated will not be meaningful.
N/M is used in the above table for not meaningful.
4. Most percents are rounded to one decimal place unless more are meaningful.
5. A small absolute rupee item may have a large percentage change and be considered
misleading.

Trend percentages
To calculate the change over a longer period of time—for example, to develop a sales
trend—follow the steps below:

1. Select the base year.

2. For each line item, divide the amount in each non base year by the amount in the
base year and multiply by 100.
3. In the following example, 2007 is the base year, so its percentages (see bottom half
of the following table) are all 100.0. The percentages in the other years were
calculated by dividing each amount in a particular year by the corresponding amount
in the base year and multiply by 100.

Calculation of Trend Percentages

(amount in rupees)

2001 2000 2009 2008 2007

Historical Data

Inventory 12,309 12,202 12,102 11,973 11,743

Property & equipment 74,422 78,938 64,203 65,239 68,450

Current liabilities 27,945 30,347 27,670 28,259 26,737

Sales 129,000 97,000 95,000 87,000 81,000

Cost of goods sold 70,950 59,740 48,100 47,200 45,500

Operating expenses 42,600 38,055 32,990 29,690 27,050

Net income (loss) 8,130 (1,400) 7,869 5,093 3,812

 Trend Percentages

Inventory 104.8 103.9 103.1 102.0 100.0

Property & equipment 108.7 115.3 93.8 95.3 100.0

Current liabilities 104.5 113.5 103.5 105.7 100.0

Sales 159.3 119.8 117.3 107.4 100.0

Cost of goods sold 155.9 131.3 105.7 103.7 100.0

Operating expenses 157.5 140.7 122.0 109.8 100.0

Net income (loss) 213.3 (36.7) 206.4 133.6 100.0

Calculation notes:

1. The base year trend percentage is always 100.0%. A trend percentage of less than
100.0% means the balance has decreased below the base year level in that particular
year. A trend percentage greater than 100.0% means the balance in that year has
increased over the base year. A negative trend percentage represents a negative
number.
2. If the base year is zero or negative, the trend percentage calculated will not be
meaningful.
3. In this example, the sales have increased 59.3% over the five-year period while the
cost of goods sold has increased only 55.9% and the operating expenses have
increased only 57.5%. The trends look different if evaluated after four years. At the
end of 2000, the sales had increased almost 20%, but the cost of goods sold had
increased 31%, and the operating expenses had increased almost 41%. These 2000
trend percentages reflect an unfavourable impact on net income because costs
increased at a faster rate than sales. The trend percentages for net income appear to
be higher because the base year amount is much smaller than the other balances.
FEATURES OF TREND ANALYSIS

1) In case of a trend analysis all the given years are arranged in an ascending order.
2) The first year is termed as the “Base year” and all figures of the base year are taken
as 100%.
3) Item in the subsequent years are compared with that of the base year.
4) If the percentages in the following years is above 100% it indicates an increase over
the base year and if the percentages are below 100% it indicates a decrease over the
base year.
5) A trend analysis gives a better picture of the overall performance of the business.
6) A trend analysis helps in analysing the financial performance over a period of time.
7) A trend analysis indicates in which direction a business is moving i.e. upward or
downwards.
8) A trend analysis facilitates effective comparative study of the financial performance
over a period of time.
9) For trend analysis at least three years financial data is essential. Broader the base the
more reliable is the data and analysis.
SUBMITTED BY

1. JAIVEER DUGGAL 21
2. HARDIK GOKEL 29
3. AFTAB KHAN 45
4. RAJDEEP PANDERE 71
5. POOJA PATIL 76
6. RITEN SAKHIYA 85
7. SAGAR SANGANI 86
8. SWATI TIKKU 101