Posted in Finance, Accounting and Economics Terms, Total Reads: 335
Definition: Common Size Financial Statement
Common size financial statement is a format of the financial statements (balance sheet, income statement, cash flow statement) in which all the dollar amounts in the statement are expressed as a percentage of a common measure.
In the case of balance sheets, common size financial statements are created by using all the dollar amounts as a percentage of the common measure: Total Assets. And in income statements, the common measure is Net Sales. Using a common base to express all the other dollar amounts, the financial statement becomes standardized and thus can be used to compare the company, itself over different time periods or with other companies of different sizes. By providing a vertical analysis of the financial data of an organization, common size financial statements allows for a smoother analysis of the firm internally as well as externally. The ratios obtained in the common size statements do not fluctuate much and thus provide a trend of the firm’s performance. Since it has all its dollar amounts in the form of a percentage, it is also called a one hundred percent statement.
From an investor point of view, a common size financial statement is very helpful as it lets the investor identify any drastic abnormal change (rapid increase or decrease) in a firm’s performance. It can also help a company comparing its performance over time periods and thus decide upon a strategy for further growth.
However there are certain limitations to the common size financial statements as well. Firms in comparison can use different accounting policies as well as different accounting calendars for reporting their financial statements. Thus these should be adjusted for while creating a common size financial statement.
Common Size Income statement
Income Statement (Original)
Income Statement(Common Size)
Cost of Goods Sold
$65,000/$80,000 = 81.3%
$15,000/$80,000 = 18.7%
Selling and General Expenses
$6,000/$80,000 = 7.5%
$9,000/$80,000 = 11.25%
$1,200/$80,000 = 1.5%
$7,800/$80,000 = 9.75%
Above is an example of a common size income statement, where each dollar amount is expressed as a percentage of revenues.