18 3: Common-Size Financial Statements Business LibreTexts

A common-size balance sheet is a comparative analysis of a company’s performance over a time period. Making a common-size balance sheet requires stating each line item as a percentage of total asset. Common size statements are generally prepared for company income statements and balance sheets.

To make comparisons of the business with other businesses irrespective of their relative size

It helps identify the relative importance of different balance sheet items and highlights changes in the company’s financial position over time. The main idea of financial statements is to give information about the business. 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. One version of the common size cash flow statement expresses all line items as a percentage of total cash flow. Common size financial statements reduce all figures to a comparable figure, such as a percentage of sales or assets.

1. The main idea of financial statements is to give information about the business.
2. 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.
3. Liquidity refers to how quickly an asset can be turned into cash without affecting its value.
4. You can use it in financial analysis to compare the relative results of two or more companies.
5. An analyst can further deep dive to determine the reason behind the same to make a more meaningful insight.
6. Common size balance sheet is the balance sheet that prepares by management to show both values of each item in assets, liabilities, and equity in currency (USD) and percentages (%) at the end of the accounting period.

Common Size Financial Statement: Definition and Example

Each financial statement uses a slightly different convention in standardizing figures. Common size analysis, also referred to as vertical analysis, is a tool that financial managers use to analyse financial statements. It evaluates financial statements by expressing each line item as a percentage of the base amount for that period. A common size balance sheet is one that has an additional column showing each monetary amount as a percentage of the total assets of the business. It is important to realize that the common size balance sheet is not required by Accounting Standards, and is used more as a management tool rather than a formal reporting document.

Liquidity Ratios

Similarly the comparison could equally be done between the business and a competitor in the same industry or with industry averages, thereby highlighting any differences in operation which may need correcting. Building a common size statement balance sheet is convenient because it helps build trend lines to discover the patterns over a specific period. Still, it also captures each single line item as a percentage of total assets, total liabilities, and total equity besides the usual numeric value. 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. Examining a company’s balance sheet can reveal information about its liquidity and solvency at the time the balance sheet is prepared, as well as the economic resources under the company’s control.

Common Size Cash Flow Statement

We earn almost 11 cents of net income before taxes and over 7 cents in net income after taxes on every sales dollar. This is a little easier to understand than the larger numbers showing Synotech earned $762 million dollars. Analysts also use vertical analysis of a single financial statement, such as an income statement.

When figures are expressed as a percentage of a whole, analysts can assess how each part contributes relative to another. The common size balance sheet reports the total assets first in order of liquidity. Liquidity refers to how quickly an asset can be turned into cash without affecting its value.

1. A common size balance sheet is one that has an additional column showing each monetary amount as a percentage of the total assets of the business.
2. These items are calculated as a percentage of sales so they help indicate how much the company uses them to generate overall revenue.
3. The most valuable aspect of a common size balance sheet is that it supports ease of comparability.
4. Notice that Clear Lake spends 50 percent of its sales on cost of goods sold while Charlie spends 59 percent.
5. Furthermore, comparability can be hindered by the lack of uniformity in a company’s operational activities.
6. It gives investors a clear comparison of a company’s performance vis-à-vis the other players in the segment, in spite of the differences in size.

For this reason, common size balance sheet format each major classification of account will equal 100%, as all smaller components will add up to the major account classification. The common size balance sheet format is useful for comparing the proportions of assets, liabilities, and equity between different companies, particularly as part of an industry analysis or an acquisition analysis. 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.

But rather than act as an alarm, this indicates that the company had been hugely successful in generating cash to buy back shares, far exceeding what it had retained on its balance sheet. Just looking at a raw financial statement makes this more difficult, but looking up and down a financial statement using a vertical analysis allows an investor to catch significant changes at a company. 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. Clear Lake Sporting Goods, for example, might compare their financial performance on their income statement to a key competitor, Charlie’s Camping World. Charlie is a much bigger retailer for outdoor gear, as Charlie has nearly seven times greater sales than Clear Lake. Common-size statements allow Clear Lake to compare their statements in a meaningful way (see Figure 5.26).

A vertical common-size balance sheet is a financial statement that expresses each item as a percentage of total assets. Doing so highlights the relative importance of each item on the balance sheet and allows for easy comparison of different categories. This can help financial managers identify trends and make informed decisions about the company’s financial position. A common-size balance sheet helps financial managers by providing a more detailed analysis of a company’s financial position.

To circumvent this limitation, diversified companies active in multiple industries can employ industry-specific ratios for distinct business segments can enhance comparison. Now you can easily compare this balance sheet with another and get your required information quickly because you can compare ratios more easily than figures. A Common-Size balancesheet scales down each element of the asset composition as per how much they contribute to the total assets (or liability and equity). It gives investors a clear comparison of a company’s performance vis-à-vis the other players in the segment, in spite of the differences in size. This is just an analytical representation of a balancesheet and not a requirement of GAAP. Using Clear Lake Sporting Goods’ current balance sheet, we can see how each line item in its statement is divided by total assets in order to assemble a common-size balance sheet (see Figure 5.22).