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Common Size Balance Sheet
Common Size Balance Sheet Overview
A common size balance sheet presents not only the standard information contained in a balance sheet, but also a column that notes the same information as a percentage of the total assets (for asset line items) or as a percentage of total liabilities and shareholders' equity (for liability or shareholders' equity line items).
It is extremely useful to construct a common size balance sheet that itemizes the results as of the end of multiple time periods, so that you can construct trend lines to ascertain changes over longer time periods. The common size balance sheet is also useful for comparing the proportions of assets, liabilities, and equity between different companies, particularly as part of an industry analysis or an acquisition analysis.
For example, if you were comparing the common size balance sheet of your company to that of a potential acquiree, and the acquiree had 40% of its assets invested in accounts receivable versus 20% for your company, that may indicate that aggressive collection activities could reduce the acquiree's receivables if your company were to acquire it.
Another possible use of this format is within a benchmarking study. 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. Any significant differences would trigger a detailed review of the reasons for the differences, which may lead to the implementation of best practices to bring the financial position of the company into alignment with that of the best-in-class company.
The common size balance sheet is not required under GAAP or IFRS. However, being a useful document for analysis purposes, it is commonly distributed within a company for review by management.
There is no mandatory format for a common size balance sheet, though percentages are nearly always placed to the right of the normal numerical results. If you are reporting balance sheet results as of the end of many periods, you may even dispense with numerical results entirely, in favor of just presenting the common size percentages.
Common Size Balance Sheet Example
Here is an example of a common size balance sheet that contains the balance sheet as of the end of a company's fiscal year for each of the past two years, with common size percentages to the right:
ABC International
Statement of Financial Position
| ($) as of 12/31/20X2 |
($) as of 12/31/20X1 |
(%) as of 12/31/20X2 |
(%) as of 12/31/20X1 |
|
| Current assets | ||||
| Cash | $1,200 | $900 | 7.6% | 7.1% |
| Accounts receivable | 4,800 | 3,600 | 30.4% | 28.3% |
| Inventory | 3,600 | 2,700 | 22.8% | 21.3% |
| Total current assets | $9,600 | $7,200 | 60.8% | 56.7% |
| Total fixed assets | 6,200 | 5,500 | 39.2% | 43.3% |
| Total Assets | $15,800 | $12,700 | 100.0% | 100.0% |
| Current liabilities | ||||
| Accounts payable | $2,400 | $1,800 | 15.2% | 14.2% |
| Accrued expenses | 480 | 360 | 3.0% | 2.8% |
| Short-term debt | 800 | 600 | 5.1% | 4.7% |
| Total current liabilities | $3,680 | $2,760 | 23.3% | 21.7% |
| Long-term debt | 9,020 | 7,740 | 57.1% | 60.9% |
| Total liabilities | 12,700 | 10,500 | 80.4% | 82.7% |
| Shareholders’ equity | 3,100 | 2,200 | 19.6% | 17.3% |
| Total liabilities and equity | $15,800 | $12,700 | 100.0% | 100.0% |
Related Topics
Balance sheet overview
Classified balance sheet
Comparative balance sheet
What is a vertical balance sheet?
Where do accruals appear on the balance sheet?