A common size financial statement shows each line item on a financial statement as a percentage of a base figure. Most commonly, this means the following:
- Income statement. Each revenue, expense, and profit line item is presented as a percentage of net sales.
- Balance sheet. Each asset, liability, and shareholders' equity line item is expressed as a percentage of total assets.
The concept has two uses, which are:
- Time series analysis. The percentages for each line item are compared over a period of time, to discern trends that management can act upon. For example, an increase in the cost of goods sold percentage might call for changes in price points or more attention to supplier costs.
- Industry comparison. The financial statements of competitors can be converted into the common size format, which makes them comparable to a company's own financial statements. One can then determine how the cost structure or asset base of a competitor varies from the company's.