A common size financial statement is used to analyze any changes in individual items when it comes to profit and loss. They’re also used to analyze trends in items of expenses and revenues and determine a company’s efficiency. With regular financial statements, you would have line items listed as their total amounts. When it comes to common size financial statements, each line item gets expressed as a specific percentage of revenue or sales. On the Clear Lake Sporting Goods’ common-size balance sheet, we see that current assets remained at 80 percent of total assets from the prior to current year (see Figure 5.25).

Below are some uses of this kind of analysis for the cash-flow statement and the statement of retained earnings. A company’s cash flow statement breaks down all of the uses and sources of its cash. For example, it could be cash flows from financing, cash flows from operations, and cash flows from investing.

7 Common-Size Statements

The items include selling and general administrative expenses, taxes, revenue, cost of goods sold, and net income. It can also highlight the expense items that provide a company a competitive advantage over another. For example, a company might choose to gain more market share by sacrificing operating margins. For example, you could determine the proportion of inventory using the balance sheet by using total assets as your base item.

If the company expected the cash to be 50% of holdings, then this serious deviation must be researched. If the company expected the cash to be 34%, then perhaps this is within the margin of error for their estimation, and nothing needs to be done about it. But looking up and down a financial statement using a vertical analysis allows an investor to catch significant changes at a company.

FAQs About Common Size Financial Statement

When comparing any two common size ratios, it is important to make sure that they are computed by using the same base figure. For example, if the value of long-term debt in relation to the total assets value is high, it may signal that the company may become distressed. Common-size Statements are accounting statements expressed in percentage of some base rather than rupees.

• Using common size financial statements helps you spot trends that a raw financial statement may not uncover.
• The balance sheet common size analysis mostly uses the total assets value as the base value.
• It is not another type of income statement but is a tool used to analyze the income statement.
• A common size financial statement displays entries as a percentage of a common base figure rather than as absolute numerical figures.

Common size analysis is also an excellent tool to compare companies of different sizes but in the same industry. Looking at their financial data can reveal their strategy and their largest expenses that give them a competitive edge over other comparable companies. From the table above, we calculate that cash represents 14.5% of total assets while inventory represents 12%. In the liabilities section, accounts payable is 15% of total assets, and so on. An investor may analyze the income statement and discover that research and development expenses increased from 5% of sales to 15% over the last year. Based on this, they may decide that the company has big plans for the future and buy-in, or that they are profligate spendthrifts, unable to keep costs down and sell.

Common Size Financial Statements, Process, Types, Tools, Benefit

Performing common-size calculations for several different time periods and looking for trends can be especially useful. A common size financial statement displays entries as a percentage of a common base figure rather than as absolute numerical figures. Common size statements let analysts compare companies of different sizes, in different industries, or across time in an apples-to-apples way. The balance sheet common size analysis mostly uses the total assets value as the base value. A financial manager or investor can use the common size analysis to see how a firm’s capital structure compares to rivals.

A company has $8 million in total assets, $5 million in total liabilities, and $3 million in total equity. Therefore, along with reporting the dollar amount of cash, the common size financial statement includes a column that reports that cash represents 12.5% ($1 million divided by $8 million) of total assets. A common size balance sheet allows for the relative percentage of each asset, liability, and equity account to be quickly analyzed. Likewise, any single liability is compared to the value of total liabilities, and any equity account is compared to the value of total equity.

This can give insight into several cash flow items, including capital expenditures (CapEx) as a percent of revenue. For trend analysis, it’s useful to look at a company’s activity from one time period to the next. For example, inventory might be a much larger percentage of total assets this year, which could mean the company’s chosen slow-moving merchandise needs to match prices with the competition. Also, common-size balance sheets work very well for comparing a company to its competitors or to an industry standard. This type of analysis is often used when performing due diligence for an acquisition, a valuation or any other financial transaction. Company management often analyzes financial statement data to understand how the business is performing relative to where it was historically, and relative to where it wants to go in the future.

What are the Benefits of Common Size Analysis?

Creating financial statements in this way can make it much easier when it comes to comparing companies, or even comparing periods for the same company. The base item in the income statement is usually the total sales or total revenues. Common size analysis is used to calculate net profit margin, as well as gross and operating margins. The ratios tell investors and finance managers how the company is doing in terms of revenues, and can be used to make predictions of future revenues and expenses. Companies can also use this tool to analyze competitors to know the proportion of revenues that goes to advertising, research and development, and other essential expenses.

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). 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.

One of the biggest benefits is that it provides investors with information to see changes in the financial statement of a company. All you need to have is the percentage of the base amount, the total amount of an individual item, and the amount of the base item. Essentially, it helps evaluate financial statements by expressing the line items as a percentage of the amount. It helps break down the impact that each item on the financial statement has, as well as its overall contribution. Clear Lake Sporting Goods, for example, might compare their financial performance on their income statement to a key competitor, Charlie’s Camping World.

Or, they can also help show how each item affects the overall financial position of a company. To calculate net income, you subtract the cost of goods sold, selling and general administrative expenses, and taxes from total revenue. After some calculations, you determine the revenue for the company to be $100,000. However, it’s important to recognize that some of these limitations come due to various interpretations of the data being observed.

It mainly applies when the financials are compared over a period of two or three years. Any significant movements in the financials across several years can how to calculate percentage in common size balance sheet help investors decide whether to invest in the company. Common size analysis can be conducted in two ways, i.e., vertical analysis and horizontal analysis.

This is a significant difference that would be an indicator that Clear Lake and Charlie have key differences in their operations, purchasing policies, or general performance in their core products. Common size statements are generally prepared for company income statements and balance sheets. In the case of XYZ, Inc., operating profit has dropped from 17% in Year 1 to 7.6% in Year 2. The cost of goods sold dropped, while both selling and administrative expenses and depreciation rose. The firm may have bought new fixed assets and/or sales commissions may have increased due to hiring new sales personnel. Share repurchase activity can also be considered a percent of the total top line.

Debt issuance is another important figure in proportion to the amount of annual sales it helps generate. Because these items are calculated as a percentage of sales, they help indicate how much the company uses them to generate overall revenue. Calculating a common-size balance sheet or income statement doesn’t require much, other than a calculator or spreadsheet.

What is the Common Size Balance Sheet? (Explained)

Where horizontal analysis looked at one account at a time, vertical analysis will look at one YEAR at a time. The common size balance sheet formula takes a line item divided by the base amount times 100 for a given period. For the balance sheet, line items are typically divided by total assets. Common size financial statements compare the performance of a company over periods of time. The information can be compared to competitors to see how well it is performing. One of the benefits of using common size analysis is that it allows investors to identify large changes in a company’s financial statements.

By looking at this common size income statement, we can see that the company spent 10% of revenues on research and development and 3% on advertising. The common size income statement shows that the percentage of COGS has also gone up. This suggests that the firm should try to find quality material at a lower cost and lower its direct expenses if possible.