Wednesday, May 30, 2012

Using Comparative Income Statement

Accountants will use a comparative income statement in many different ways to assess the income of a company over a specified period of time.

Put simply, the comparative income statement examines accounting  trends of the same items/group in multiple accounting income statements that have been generated over multiple periods of time.

For the careful observer, changes in the income statement items over the period show the performance of the company in a comparative format.

When examining a comparative income statement, examine the following things closely:

  1. Increases in operating expenses or decreases in sales usually indicate that there is a decrease in net operating profit and a decrease in operating expenses.
  2. Changes in sales need to be compared with the changes in cost of goods sold (COGS). If the major increase in sales is more than the increase in the company's cost of goods sold COGS), then there will be a noticeable increase in the company's profitability.

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