Know About Common Size Statement, Its Definition, Analysis, Format with Examples
A common size statement simplifies financial analysis by expressing each line item as a percentage of a base value, like total sales or total assets. Also known as vertical analysis, it helps businesses, investors, and stakeholders easily identify trends, compare performance, and assess financial health.
This guide explains common size statements, their types (income statement and balance sheet), and how to prepare and use them effectively, making financial data more accessible and decision-making more informed.
What is a Common Size Statement?
A common size statement is a method of analyzing financial data by expressing each line item as a percentage of a base value for a specific period. This technique, also called vertical analysis, provides a clear view of how each component contributes to the overall picture.
For Example:
In a common-size income statement, each expense is shown as a percentage of total sales.
In a common-size balance sheet, assets and liabilities are expressed as percentages of their respective totals.
These statements are not ratios but simple percentage-based formats that help in comparing and understanding financial data.
Types of Common Size Statements
Common Size Income Statement
Base Value: Total sales.
Each expense or revenue item is calculated as a percentage of sales.
Uses:
Tracks whether profits are increasing in proportion to sales.
Identifies changes in costs of goods sold and operating expenses.
Highlights variations in retained earnings.
Allows comparison of income statements across periods or with competitors.
Example: If sales are ₹10,00,000 and the cost of goods sold is ₹6,00,000, the cost of goods sold is 60% of sales.
Common Size Balance Sheet
Base Value: Total assets or total liabilities.
Each item (e.g., inventory, loans) is expressed as a percentage of the total assets or liabilities.
Uses:
Compares financial structures of companies of different sizes.
Analyzes the proportion of assets funded by liabilities.
Example: If total assets are ₹5,00,000 and inventory is ₹1,00,000, inventory makes up 20% of total assets.
Common Size Statement Format
Steps to Prepare Common-Size Statements
For a Common Size Income Statement:
Identify total sales as the base amount (100%).
Divide each line item (e.g., expenses, profits) by the total sales.
Multiply the result by 100 to express it as a percentage.
For a Common Size Balance Sheet:
Take total assets or liabilities as the base value (100%).
Calculate each asset or liability as a percentage of the base value.
Benefits of Common Size Statements
Simplified Analysis: Makes financial data easy to interpret, even for non-financial stakeholders.
Comparison Across Periods: Helps track changes over time.
Benchmarking: Facilitates comparison with competitors or industry standards.
Investor Decision-Making: Provides insights for informed investment choices.
Limitations of Common Size Statements
These statements lack predefined standards for interpretation.
Companies affected by seasonal fluctuations may find the analysis misleading.
They don’t always provide deep insights into long-term trends.
Conclusion
Common size statements are a practical way to analyze financial statements by converting numbers into percentages, making it easier to spot trends and compare performance. While they simplify interpretation and aid decision-making, they should be used alongside other tools and metrics for a more comprehensive financial analysis.
FAQs on Common Size Statement: A Simplified Approach to Financial Analysis
1. What is a common-size statement?
A common size statement is a financial analysis tool where each line item is shown as a percentage of a base value, such as total sales or total assets.
2. What is a common-size income statement?
A common-size income statement is a type of financial statement where each item is expressed as a percentage of total sales, helping to analyse revenue and expense trends.
3. What is the common size statement format?
The common size statement format involves presenting financial data in percentage terms, with the base amount (e.g., total sales or total assets) set as 100%.
4. What is a common-size financial statement?
A common-size financial statement represents all items in the statement as a percentage of a common base value, aiding in better comparisons across periods or companies.
5. What is the common size statement formula?
The common size statement formula is:
(Specific Item Value / Base Value) × 100.
For example, in an income statement, each item is divided by total sales and multiplied by 100.
6. What is a common size statement also known as?
A common size statement is also known as vertical analysis because it analyses each item as a percentage of a base figure.
7. What is common size statement analysis?
Common size statement analysis involves studying financial data in percentage terms to understand trends, compare performance, and evaluate financial health.
8. What is a common-size statement example?
An example of a common size statement is an income statement where revenue is set as 100%, and all other items like expenses and profits are expressed as a percentage of revenue.
9. What are the advantages of a common-size statement?
The advantages of a common size statement include simplifying financial data, enabling easy comparisons, identifying trends, and providing insights into a company's performance.
10. What is the importance of a common-size statement?
The importance of a common size statement lies in its ability to provide a clear view of financial data, aiding stakeholders in making informed decisions and comparing performance across time or companies.
