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Common Size Balance Sheet: Meaning, Objectives and Format of Common Size Balance Sheet

Common Size Balance Sheet: Meaning, Objectives and Format of Common Size Balance Sheet

September 21, 2022 2:07 am

How to Figure the Common Size Balance-Sheet Percentages

When converting standard financial statements into common-sized statements, you can easily compare your assets to liabilities ratio and your gross profit to sales ratio. Common-size financial statements are the financial statements the company prepares by taking a base value for comparison and displaying the result in percentages. These financial statements are prepared for internal purposes rather than for compliance with external stakeholder requirements. For instance, we can see that our company’s long-term debt as a percentage of total assets is 17.0%. Common size ratios are used to compare financial statements of different-size companies, or of the same company over different periods.

The common size balance sheet shows the makeup of a company’s various assets and liabilities through the presentation of percentages, in addition to absolute dollar values. This affords the ability to quickly compare the historical trend of various line items or categories and provides a baseline for comparison of two firms of different market capitalizations. Additionally, the relative percentages may be compared across companies and industries. Common‐size analysis expresses each line item on a single year’s financial statement as a percent of one line item, which is referred to as a base amount. The base amount for the balance sheet is usually total assets (which is the same number as total liabilities plus stockholders’ equity), and for the income statement it is usually net sales or revenues. By comparing two or more years of common‐size statements, changes in the mixture of assets, liabilities, and equity become evident. On the income statement, changes in the mix of revenues and in the spending for different types of expenses can be identified.

Common size balance sheet example

This allows for a more accurate comparison of items from different statements and different time periods. The next point of the analysis is the company’s non-operating expenses, such as interest expense. The income statement does not tell us how much debt the company has, but since depreciation increased, it is reasonable to assume that the firm bought new fixed assets and used debt financing to do it. This firm may have purchased new fixed assets at the wrong time since its COGS was rising during the same period. Common size financial statement analysis, which is also called a “vertical” analysis, is a technique that financial managers use to analyze their financial statements.

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In our case, half of the company’s asset base is comprised of PP&E, with the rest coming from its current assets. Suppose we’ve been tasked with performing vertical analysis on a company’s financial performance in its latest fiscal year, 2021. Different firms may use different accounting calendars, so the accounting periods may not be directly comparable.

What Are the Advantages of Common Size Balance Sheets?

While vertical analysis is a great tool for analyzing your current financial position, horizontal analysis is better for spotting trends between two accounting periods. Now, if you want to analyze your income statement with another period or company’s income statement, you do not need to calculate all the figures because you can compare your percentages. A common-size income statement is usually created alongside a regular income How to Figure the Common Size Balance-Sheet Percentages statement. The top line on the income statement provides the base figure for the calculations. With a common size horizontal analysis, you can easily see if, for example, your expenses increased as a percentage of revenue, stayed the same or decreased among different time periods. The process is virtually identical to our common size income statement, however, the base figure is “Total Assets” as opposed to “Revenue”.

How to Figure the Common Size Balance-Sheet Percentages

Common size statements let analysts compare companies of different sizes, in different industries, or across time in an apples-to-apples way. A statement that shows the percentage relation of each asset/liability to the total assets/total of equity and liabilities, is known as a Common-size Balance Sheet. To express the amounts as the percentage of the total, the total assets or total equity and liabilities are taken as 100. With the help of a Comparative Common-size Balance Sheet of different periods, one can highlight the trends in different items. If a Common-size Balance Sheet is prepared for the industry, it facilitates the assessment of the relative financial soundness and helps in understanding the financial strategy of the organisation. When you show the items on the income statement as a percentage of the sales figure, it makes it easier to compare the income and expenses and understand the financial position of the company. Common size analysis is an excellent tool to compare companies of different sizes or to compare different years of data for the same company, as in the example below.

Common Size Balance Sheet

The company also pays interest to the shareholders, which is 2% of the total revenue for the year. Most accounting computer programs, including QuickBooks, Peachtree, and MAS 90, provide common-size analysis reports. You simply select the appropriate report format and financial statement date, and the system prints the report. Thus accountants using this type of software can focus more on analyzing common-size information than on preparing it. Debt-equity RatioThe debt to equity ratio is a representation of the company’s capital structure that determines the proportion of external liabilities to the shareholders’ equity.

  • If this continues over several months, revisiting credit practices or collection methods may be in order.
  • Coca-Cola’s gross margin is 63.9 percent of net sales compared to 54.1 percent at PepsiCo.
  • Calculating a common-size balance sheet or income statement doesn’t require much, other than a calculator or spreadsheet.
  • 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.

However, net income only accounted for 10% of 2022 revenue, whereas net income accounted for more than a quarter of 2021 revenue. The company should look for ways to cut costs and increase sales in order to boost profitability.

What is the main objective of common size statement?

If cash is $406,062 and total assets are $1,163,028, then the common size percentage is 35%. Depending on the company’s expectations, this can be noteworthy or unnoteworthy. 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.

  • Also, common-size balance sheets work very well for comparing a company to its competitors or to an industry standard.
  • Here, we’ve chosen “Revenue” as the base figure for the common size income statement, followed by “Total Assets” for the common size balance sheet.
  • Common-size income statement analysis states every line of an income statement as a percentage of sales.
  • In general, managers prefer expenses as a percent of net sales to decrease over time, and profit figures as a percent of net sales to increase over time.
  • A Common-size Statement can be prepared for inter-firm and intra-firm comparisons or a Balance Sheet and Income Statement.

Liquidity Position Of A CompanyLiquidity is the ease of converting assets or securities into cash. It fails to identify the qualitative elements while gauging a company’s performance, although it is not a good practice to ignore the same.