Common size statements are also known as ‘Vertical analysis’. Financial statements, when read with absolute figures, can be misleading. Therefore, a vertical analysis of financial information is done by considering the percentage form. The balance sheet items are compared:
- To the total assets in terms of percentage by taking the total assets as 100.
- To the total liabilities in terms of percentage by taking the total liabilities as 100.
Therefore the whole Balance Sheet is converted into percentage form. And such converted Balance Sheet is known as Common-Size Balance Sheet. Similarly profit & loss items are compared:
- To the total incomes in terms of percentage by taking the total incomes as 100.
- To the total expenses in terms of percentage by taking the total expenses as 100.
Therefore the whole Profit & loss account is converted into percentage form. And such converted profit & loss account is known as Common-Size Profit & Loss account. As the numbers are brought to a common base, the percentage can be easily compared with the results of corresponding percentages of the previous year or of some other firms.
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