Posted in Finance, Accounting and Economics Terms, Total Reads: 1400
Definition: Common Size Statements
Common Size Statements generally involve income statement and balance sheet. Income statement and Balance sheet becomes “common size” when their amounts (dollars or rupees) are written in terms of percentage.
A common base figure determines the structure of the common size statement and allocates the percentage of that figure to each item which is present on the document. The common size statement does not reflect the exact figures for each item, but a percentage.
The common size statement is used for comparing two different companies in terms of their financial structures and operation strategies. The application of percentage in the common size statements helps in comparing the company that which company generates more revenue, and brings the focus on how the revenue is utilized within each of the two businesses.
Common-size statement also helps in identifying the areas where the companies are utilizing their resources efficiently, as well as those areas where there is scope for improvement. Generally the companies utilize this format for quarterly, semi-annual, or annual reviews.
a) Let common-size balance sheet indicate all of the balance sheet amounts as a percentage of the "Total Assets" amount.
If Cash = $100,000 and Total Assets = $2,000,000,
Then Cash = 5% and Total Assets = 100%.
Suppose, Current Assets is also given as $400,000, then Current Assets = 20%.
After calculating all the balance sheet entries amount as a percentage of Total Assets, one can compares company's current asset percentage to other company’s or industry's percentage.
In this analysis, size of the company does not matter as all the values are indicated in terms of percentage and hence the term “Common – Size” is used.
b) Now, let common-size income statement show all of the income statement amounts as a percentage of net sales.
If Net sales = $20,000,000 and the cost of goods sold = $8,000,000,
Then, net sales = 100% and the cost of goods sold = 40%.
Suppose, SG&A expenses are also given as $1,000,000 SG&A expenses = 5%.