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5 7 Common-Size Statements Principles of Finance

Common size balance sheets are used by internal and external analysts and are not a reporting requirement of generally accepted accounting principles (GAAP). The common figure for a common-size balance sheet analysis is total assets. Based on the accounting equation, this also equals total liabilities and shareholders’ equity, making either term interchangeable in the analysis. It’s also possible to use total liabilities to indicate where a company’s obligations lie and whether it’s being conservative or risky in managing its debts.

  1. It precisely matches the common-size analysis from an income statement perspective.
  2. On the other hand, horizontal analysis refers to the analysis of specific line items and comparing them to a similar line item in the previous or subsequent financial period.
  3. Clear Lake Sporting Goods, for example, might compare their financial performance on their income statement to a key competitor, Charlie’s Camping World.
  4. Common size analysis can be conducted in two ways, i.e., vertical analysis and horizontal analysis.
  5. A common-size analysis is unlikely to provide a comprehensive and clear conclusion on a company on its own.

Share repurchase activity as a percentage of total sales in each of the three years was minimal or non-existent. Therefore, such statements are also called 100 per cent statements or component percentage statements as all the individual items are taken as a percentage of 100. Common size statements are not any kind of financial ratios but are a rather easy way to express financial statements, which makes it easier to analyse those statements. Now that you have covered the basic financial statements and a little bit about how they are used, where do we find them?

A common-size balance sheet is a comparative analysis of a company’s performance over a time period. The cash flow statement in terms of total sales indicates that it generated an impressive level of operating cash flow, averaging 26.9% of sales over three years. The common-size method is appealing for research-intensive companies because they tend to focus on research and development (R&D) and what it represents as a percent of total sales. It’s important to add short-term and long-term debt together and compare this amount to the total cash on hand in the current assets section. This lets you know how much of a cash cushion is available or if a firm is dependent on the markets to refinance debt when it comes due. (2) Each individual asset is expressed as a percentage of the total assets, i.e., 100 and different liabilities are also calculated as per total liabilities.

For example, if Company A has $1,000 in cash and $5,000 in total assets, this would be presented in a separate column as 20% in a common size balance sheet. Common size analysis, also referred as vertical analysis, is a tool that financial managers use to analyze financial statements. It evaluates financial statements by expressing each line item as a percentage of a base amount for that period. The analysis helps to understand the impact of each item in the financial statements and its contribution to the resulting figure.


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. This common-size income statement shows an R&D expense that averages close to 1.5% of revenues. However, a simple tool like Microsoft Excel can be quite handy in making the process easier and faster.

The remainder of that increase is seen in the 5 percent increase in current liabilities. Common size financial statements make it easier to determine what drives a company’s profits and to compare the company to similar businesses. It precisely matches the common-size analysis from an income statement perspective. You can see that long-term debt averages around 34% of total assets over the two-year period, which is reasonable. Cash ranges between 5% and 8.5% of total assets and short-term debt accounts for about 5% of total assets over the two years. Common size balance sheets can be used for comparing companies that differ in size.

Dynamic common size analysis over multiple periods

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. Importance of financial statements is different for different individuals in an organisation. For a manager, it would be the efficiency of the operations, and for a stockholder, it will be related to the earnings and profits of the company. Financial statements are prepared for organisations or businesses to know about the state of the business at that time or period. For an organisation or a business owner, the importance of financial statements is defined by its interpretation and analysis.

Common Size Income Statement

Such a strategy may allow the company to grow faster than 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.

A common size balance sheet is a statement in which balance sheet items are being calculated as the ratio of each asset in relation to the total assets. For the liabilities, each liability is being calculated as a ratio of the total liabilities. This type of analysis is used to analyze a company’s financial statements to identify patterns and trend lines, and to compare a company against competitors. 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.

Common size financial statements reduce all figures to a comparable figure, such as a percentage of sales or assets. Each financial statement uses a slightly different convention in standardizing figures. A common-size financial statement displays line items as a percentage of one selected or common figure. Creating common-size financial statements makes it easier to analyze a company over time and compare it to its peers. Using common-size financial statements helps spot trends that a raw financial statement may not uncover. A company could benchmark its financial position against that of a best-in-class company by using common size balance sheets to compare the relative amounts of their assets, liabilities, and equity.

Many items in the cash flow statement can be stated as a percent of total sales, similar to an income statement analysis. This can give insight into several cash flow items, including capital expenditures what is a common size balance sheet (CapEx) as a percent of revenue. 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.

Any significant movements in the financials across several years can help investors decide whether to invest in the company. On the other hand, horizontal analysis refers to the analysis of specific line items and comparing them to a similar line item in the previous or subsequent financial period. Although common size analysis is not as detailed as trend analysis using ratios, it does provide a simple way for financial managers to analyze financial statements. Common size statement is a form of analysis and interpretation of the financial statement. This method analyses financial statements by taking into consideration each of the line items as a percentage of the base amount for that particular accounting period.


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