What are Common Size Financial Statements?

//What are Common Size Financial Statements?
What are Common Size Financial Statements? 2017-10-01T07:49:19+00:00

Definition: A common-size financial statement is a financial report that presents all numbers as a percentage of a base number. This way all of the amounts on the financial statements can be compared to one another in relation to a base number.

In other words, all of the accounts are shown as a percentage of their sum. The common-size statement formula equals the analysis amount divided by the base amount times 100.

Example

On the balance sheet, individual asset accounts are shown as a percentage of total assets. For example, cash is shown as a percentage of total assets. Using our formula, if total assets were $100,000 and cash was $5,000, the common-size percentage would be 5 percent.

Likewise, the current asset total is also shown as a percentage of total assets. Liability and equity accounts are presented in the same way.

The income statement can also be shown in common-size format. Typically the net sales number is used as the base on the income statement for both income and expense accounts. This means that all of the income and expense accounts are comparable because they are listed as percentages of the number.

Common size financial statements help external and internal users analyze keep ratios and understand significant changes in a company’s financial position year over year. For example, if rent expense continues to increase 5 to 10 percent of net sales every year, there could be two problems. Either sales are falling year over year or rent is being more expensive. Neither implies a good long-term outlook for the company.

What Does Common-Sized Financial Statement Mean?

Investors and creditors can use this information to compare different companies’ financial statements. Since the common-size approach calculates percentages based on the raw numbers, large and small companies can be compared based on their performance.

Likewise, managers can analyze the percentages and changes in each account year over year and develop a strategy to improve the operations.