Common size financial statement definition
/What is a Common Size Financial Statement?
A common size financial statement shows each line item on a financial statement as a percentage of a base figure. Most commonly, this means that each revenue, expense, and profit line item on the income statement is presented as a percentage of net sales. In addition, each asset, liability, and shareholders’ equity line item on the balance sheet is expressed as a percentage of total assets. Finally, all line items in the cash flow from operations section of the statement of cash flows are expressed as a percentage of the total cash flow from operations, while the line items in the cash flows from investing activities section are expressed as a percentage of the total cash flow from investing activities. The line items in the cash flows from financing section are expressed as a percentage of the total cash flow from financing activities.
Common Size Balance Sheet
A common size balance sheet is a financial statement where each line item is expressed as a percentage of total assets, rather than showing only dollar amounts. This format allows easier comparison across companies of different sizes or within the same company over time. Assets, liabilities, and equity are all scaled to highlight their relative proportions in the financial structure. By standardizing values, it helps analysts quickly identify trends, structural shifts, and areas of financial strength or risk.
A sample common size balance sheet appears in the following exhibit, with the percentage presentation indicated within a red box.
How to Use Common Size Financial Statements
The common size financial statement concept has two uses. First, 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. Second, the financial statements of competitors can be converted into the common size format, which makes them comparable to a company's own financial statements. You can then determine how the cost structure or asset base of a competitor varies from the company's.
Common Size Financial Statement FAQs
What errors can occur when preparing common size statements?
Errors include using the wrong base amount, mixing gross and net sales, applying inconsistent formulas between periods, misclassifying line items, omitting subtotals, and comparing companies with different accounting policies. Balance sheet errors often involve using total liabilities or equity instead of total assets as the percentage base.
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