Common size financial statements are preparing by taking a base value for the purpose of comparison and display the result in percentages. All the values are expressed in the form of ration and percentages.
These are easy to understand and easy to compare with other companies’ financial statements.
You can compare and get results of different financial periods of the same company or different companies in the same industry.
The main idea of financial statements is to give information about the business and when to convert the normal financial statements into common-sized statements you can easily compare your assets to liabilities ratio and your gross profit to sales ratio.
The formula for the calculating the common size statements are as:
Common size % = Required Item/Base Item
For example, if your required item is account receivable and your base item is total assets then you can easily calculate the:
Common size of Account Receivables = Account Receivables/Total Assets
Example of Common size income statement:
|Cost of Goods Sold||0.7|
You can prepare for the other statements also but that would not be as perfect and informative as these two statements could be.
Balance sheet and income statement may be prepared by taking the following information.
- Income statement rations generally prepare by taking total revenue as the base year.
- Balance sheet items may be compare by taking the value of total assets.
Let’s have a look common size statements.
Common Size Income Statement
The value is all determined by comparing each expense with the total sales. You can change your base to whatever you want.
Now if you want analyses your income statement with some other period or some other company’s income statement. You do not need to calculate all the figures because you can just compare the percentages that you have.
Common Size Balance Sheet?
Now you can easily compare this balance sheet with another balance sheet and get your required information very easily.
Because you can compare ratios more easily than figures. The example I have shown to you is called vertical analysis.
Limitations Common Size Financial Statements
As you have read a many benefits of common size financial statements. There are also some limitations associated.
Different companies use different accounting policies to prepare their normal financial statements and as common size statements are based on normal statements so to get better results you should adjust the values accordingly.
Every firm uses different financial years as convenient to them. So when you want to compare statements of different companies you should also check the time from which the statements belong.
So there are benefits of preparing common sized financial statements but you have to look for their limitation and think for the changes before comparing and taking results.
In this way you can get very useful information for your business and identify the key areas where you can improve.