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The common-size balance sheet functions much like the common-size income statement. Each line item on the balance sheet is restated as a percentage of total assets. A common size financial statement is a specific type of statement that outlines and presents items as a percentage of a common base figure. The process of creating a common size financial statement is often referred to as a vertical analysis or a common-size analysis.

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It is extremely useful to construct a common size balance sheet that itemizes the results as of the end of multiple time periods, in order to construct trend lines to ascertain changes over longer time periods. A common size balance sheet displays the numeric and relative values of all presented asset, liability, and equity line items. The order of presentation of this balance sheet is the same as the one used for a normal balance sheet, where assets are listed first, then liabilities, and then equity. The main difference between a normal balance sheet and a common size one is that percentages are included next to the numeric values, showing the proportion of each line item as a percentage of total assets. In conclusion, it can be said that a common size balance sheet facilitates easy comparison of the year-on-year performance of the same company or comparison of different companies of varied sizes.

For example, it could be cash flows from financing, cash flows from operations, and cash flows from investing. Also known as the profit and loss statement, the income statement is an overview. It includes business net income, sales, and expenses over a reporting period. To find net income using the income statement equation, you simply minus sales from expenses.

1. A financial statement or balance sheet that expresses itself as a percentage of the basic number of sales or assets is considered to be of a common size.
2. A common size balance sheet allows for the relative percentage of each asset, liability, and equity account to be quickly analyzed.
3. The income statement (also referred to as the profit and loss (P&L) statement) provides an overview of flows of sales, expenses, and net income during the reporting period.
4. You can also look to determine an optimal capital structure for a given industry and compare it to the firm being analyzed.

One of the biggest benefits is that it provides investors with information to see changes in the financial statement of a company. However, a more popular version breaks down cash flow in a different way and expresses line items in terms of cash flows from operations. It will also include total financing cash flows and total investing cash flows for both of those activities.

Let’s carry on with our analysis of ABC, in comparison to its competitor XYZ. You can also prepare for the other statements, but that would not be as perfect and informative as these two statements could be. Let us take the example of Apple Inc. to see the trend in the financials of the last three years.

Essentially, it allows data entries to be listed as a percentage of a common base figure. This is instead of a traditional financial statement that would list items as absolute numerical figures. The income statement (also referred to as the profit and loss (P&L) statement) provides an overview of flows of sales, expenses, and net income during the reporting period. The income statement equation is sales minus expenses and adjustments equals net income. This is why the common size income statement defines all items as a percentage of sales.

Income Statement Common Size Analysis

And, just like with the income statement, we must compare our numbers with the industry’s averages or with major competitors. 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.

Recall that a key benefit of common-size analysis is comparing the firm’s performance to the industry. Expressing the should i claim my adult child with a disability as a dependent figures on the income statement and balance sheet as percentages rather than raw dollar figures allows for comparison to other companies regardless of size differences. 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. As well, using common size analysis can play a big role in comparing companies that are in the same industry but of varying sizes, as well as comparing companies that are in completely different industries.

What Is a Common Size Balance Sheet?

Common-size financial statements facilitate the analysis of financial performance by converting each element of the statements to a percentage. This makes it easier to compare figures from one period to the next, compare departments within an organization, and compare the firm to other companies of any size as well as industry averages. On the income statement, analysts can see how much of sales revenue is spent on each type of expense. They can see this breakdown for each firm and compare how different firms function in terms of expenses, proportionally. They can also look at the percentage for each expense over time to see if they are spending more or less on certain areas of the business, such as research and development.

It also allows you to view a horizontal perspective over a period such as the three years that were analyzed in our example. Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales.

Financial statements in dollar amounts can easily be converted to common-size statements using a spreadsheet. It’s worth noting that if two companies are using different accounting methods the comparisons might not be accurate. Balance sheets and income statements may be prepared by taking the following information.

Common size statements are generally prepared for company income statements and balance sheets. One company may be willing to sacrifice margins for market share, which would tend to make overall sales larger at the expense of gross, operating, or net profit margins. The common-size strategy from a balance sheet perspective lends insight into a firm’s capital structure and how it compares to its rivals. You can also look to determine an optimal capital structure for a given industry and compare it to the firm being analyzed. You can then conclude whether the debt level is too high, if excess cash is being retained on the balance sheet, or if inventories are growing too high. Let’s say that you’re looking into the line items on an income statement for a company.

Common-size statements allow Clear Lake to compare their statements in a meaningful way (see Figure 5.26). Notice that Clear Lake spends 50 percent of its sales on cost of goods sold while Charlie spends marginal revenue definition example and formula 59 percent. 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. Using common size percentages allows you to gain a different perspective of each line item. Or, they can also help show how each item affects the overall financial position of a company. However, it’s important to recognize that some of these limitations come due to various interpretations of the data being observed.

Analyzing Organizational Performance

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. 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). While the balance in the equipment account did change as a percentage of total assets, equipment remained the same at 20 percent. With regular financial statements, you would have line items listed as their total amounts.

He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . XYZ has stability and better profitability, so seemingly it may be a better long-term alternative.