What is a Comparative Balance Sheet? – Definition & Examples
A comparative balance sheet is a type of comparative statement used by business owners, investors, and analysts to evaluate a company’s performance over time.
Business owners use the comparative report to make strategic business decisions.
This guide will help you understand what a comparative balance sheet is, its advantages, and how to use it to do a comparative analysis.
Here’s What We’ll Cover:
What is a Comparative Balance Sheet?
A comparative balance sheet is a side-by-side comparison of the entire balance sheet report of a current accounting period and a previous accounting period.
A date-to-date comparison within the company helps a business owner or investor identify financial performance trends over time. Investors can also compare companies who use the same accounting principles for reasons such as how organizations in the same business vertical respond to the changes in seasons.
Investors also use comparative balance sheets to do a comparative analysis of financial ratios. We’ll expand on this in a later section.
What Is Included in a Comparative Balance Sheet
The line items that are included in a comparative balance sheet are the same that are included in an individual balance sheet. The general categories included are: assets, liabilities, and equity. The categories are further broken down into current assets, current liabilities, long-term assets, and long-term liabilities.
More specifically, common balance sheet items are as follows:
- Accounts receivable
- Prepaid expenses
- Fixed assets
- Long-term investments
- Accounts payable
- Accrued expenses (such as payroll and payroll taxes)
- Notes payable
- Long-term bank loans
- Other long-term debt
- Common stock
- Retained earnings
Additionally, you may find balance sheet figures expressed as absolute figures or in terms of percentages.
Comparative Balance Sheet Example
Here’s how a portion of a multi-period balance sheet looks. You could also add additional periods.
What Are the Advantages of a Comparative Balance Sheet
The comparative figures in comparative balance sheets can help you identify trends and areas of weaknesses or strengths. It can also help you understand fluctuations caused by seasons so that you can make better-informed business decisions.
This comparative report, along with other comparative reports such as the comparative income statement, helps potential investors determine the financial health of your business and whether it’s growing, getting worse, or stagnant.
It can help you see the variance in how much a line item has changed from one period to another so that you focus on what is causing the increase or decrease in figures in a particular area of the balance sheet.
Comparative Balance Sheet Analysis Formulas and Calculations
Earlier, we mentioned that you could express figures on comparative balance sheets as percentages and financial ratios for further analysis.
During an analysis of comparative balance sheets, these tools add alternative angles to consider.
We’ll discuss three in this guide:
- Percentage change from prior period balance
- Common size ratio
- Liquidity ratios
The percentage change simply allows you to see increases or decreases in figures expressed as a percentage.
The percentage change formula is:
Percentage Change = (Absolute figures of current period - Absolute figures of previous period of time) / Absolute figures of previous period of time) * 100
Suppose Company ABC reported a total assets value of $15,000 in the current accounting period and $20,000 in the previous accounting period.
($15,000 - $20,000) / $20,000
= - .25*100
= - 25%
Company ABC had a 25% decrease in the value of their total assets from one year to the next.
Calculating the dollar and percentage variance between the prior and current period's balance can help you or investors understand the severity of a change. For example, a decrease of $5,000 in total assets for a company with a prior period total asset balance of $200,000 would be a 2.5% decrease, which is less significant in comparison to a company with a prior period total asset value of $20,000, which is a decrease of 25%.
A common-size ratio expresses a line item as a percentage of its entire category. For example, if a company’s cash value under the assets category is $5,000 and the total assets value is $25,000, the common-size percentage would be 20%. The calculations for this specific example looks like this:
(Cash Value/ Total Assets Value) * 100
$5,000/$25,000 = .2 * 100 = 20%
So if cash made up 20% of a company’s assets on February 1, 2020, and 30% of a company’s assets on February 1, 2021, that can tell you another story rather than just knowing there was an increase in cash from $5,000 to $7,500 over one year.
An example of a liquidity ratio is the current ratio (or working capital ratio). The formula is:
Current Ratio = Current Assets / Current Liabilities
This ratio expresses a company’s ability to pay off short-term debt obligations with current assets without raising external capital. Business owners and investors can use the current ratio to either compare multiple organizations or multiple time periods.
Using Comparative Statements for Growth
Other financial statements turned into a comparison form include the comparative income statement and comparative cash flow statement.
An income statement in comparative form identifies different trends in your business than a balance sheet in comparative form, so using the two together allows for better decision-making.
Learning more about the difference between income statements and balance sheets will help you better understand how these comparative statements can help grow your business.
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