Financial Accounting Concepts

# What is a Common Size Financial Statement in Accounting?

A common-size financial statement is a financial statement where each line item is presented as a percentage of a base figure.

The base figure is typically total assets or total revenue. Common-size financial statements are useful for analyzing trends over time.

For example, if a company’s total assets increase from \$100,000 to \$200,000, but its total liabilities also increase from \$50,000 to \$100,000, the common size statement would show that the company’s asset growth is outpacing its liability growth. This would be a positive sign for the company’s financial health.

Similarly, if a company’s total revenue increases from \$100,000 to \$200,000, but its costs of goods sold also increase from \$50,000 to \$100,000, the common size statement would show that the company’s costs are increasing at a faster rate than its revenue. This would be a negative sign for the company’s financial health.

Common size financial statements can be created for any type of financial statement, including the balance sheet, income statement, and cash flow statement.

These statements demonstrate the relationship of multiple financial statement items with a common item by expressing each item as a percentage of that common item. The figures in these statements are shown as percentages of total assets, total liabilities, and total sales correspondingly.

This analysis is also known as vertical analysis. Now going on to the aspects of a common sight statement, a common sight statement analysis demonstrates the relationship of each component to the total. It is used for vertical financial analysis and comparison of two companies or two years of financial data. Absolute statistics from the financial statement are tough to compare, but when converted and expressed as % of any common item, it becomes more meaningful to relate.

## Why Are Common-Size Statements Used?

A common-size statement is a tool for financial statement analysis. Common statements include the balance sheet, and income statements are shown in analytical percentages. In common size statements, the various figure is shown as a percentage of total assets, total sales, and total liabilities.

Total assets are taken as 100%, and different assets are expressed as a percentage of the total assets. Similarly, total liabilities are taken as 100%, and different liabilities are expressed as a percentage of the total liabilities.

There are two types of common size statements:

• Common-size Balances Sheet
• Common Size Income Statement

### Common-size Balance Sheet

A common-size balance sheet is a type of financial statement that expresses each item on the balance sheet as a percentage of total assets. This makes it easier to compare balance sheets from different companies and time periods. It is also sometimes referred to as a normalized balance sheet.

The biggest advantage of a common-size balance sheet is that it makes it easier to compare balance sheets from different companies and across different periods. This is because all of the items on the balance sheet are expressed as a percentage of total assets.

A common-size balance sheet can also be helpful in spotting trends. For example, suppose a company’s inventory level has been steadily rising as a percentage of total assets. In that case, that could be a sign that the company is having trouble selling its products.

One downside of a common-size balance sheet is that it can be difficult to interpret without a good understanding of financial statements. Another downside is that it doesn’t give you any information about a company’s absolute financial position.

### Common-size Income Statement

A common-size income statement is a type of financial statement that expresses all items on the income statement as a percentage of a common base figure. The Common-size Income Statement can be used to compare different companies or to compare the same company over time.

For example, if company ABC has total revenue of \$100,000 and company XYZ has total revenue of \$200,000, we can express this as follows:

Company ABC: 100,000 / 100,000 = 100%
Company XYZ: 200,000 / 200,000 = 100%

From this example, we can see that both companies have the same total revenue. However, if we were to look at the individual line items on the income statement, we would see that they may differ.

Let’s say that company ABC has the following income statement:

Total Revenue: \$100,000
Cost of Goods Sold: \$40,000
Gross Profit: \$60,000

And company XYZ has the following income statement:

Total Revenue: \$200,000
Cost of Goods Sold: \$70,000
Gross Profit: \$130,000

We can express these numbers as percentages of total revenue to get a common-size income statement:

Company ABC:
Total Revenue: 100,000 / 100,000 = 100%
Cost of Goods Sold: 40,000 / 100,000 = 40%
Gross Profit: 60,000 / 100,000 = 60%

Company XYZ:
Total Revenue: 200,000 / 200,000 = 100%
Cost of Goods Sold: 70,000 / 200,000 = 35%
Gross Profit: 130,000 / 200,000 = 65%

This common-size income statement shows that although company XYZ has a higher total revenue, company ABC has a higher gross profit percentage. This means that company ABC is more efficient at generating profit from its sales.

A common-size income statement is a useful tool for analyzing a company’s financial performance. It allows you to compare different companies or the same company over time. By Expressing all items on the income statement as a percentage of a common base figure, you can better understand where a company is making or losing money.