Common size financial statements, also known as vertical analysis, are a type of financial statement that expresses each financial item as a percentage of a base amount. The base amount used in common size statements is typically total assets for the balance sheet and net sales for the income statement.
The purpose of common size financial statements is to provide a way to compare the financial data of different companies or the same company over different time periods. By expressing each financial item as a percentage of a base amount, users can easily see the relative size of each item and how it contributes to the overall financial picture of the organization.
Common size financial statements are useful for financial analysis and decision-making. They can help identify trends in the composition of an organization’s financial data and highlight areas where changes may be needed. Common size statements are often presented in a tabular form, with columns for each financial item and rows for each period being compared.
Common Size Financial Statements Process
The process of creating common size financial statements involves the following steps:
- Gather financial data: The first step in creating common size financial statements is to gather the financial data from the company’s financial statements, including the balance sheet and income statement. The data should be accurate and up-to-date.
- Calculate percentages: Once the financial data has been gathered, the next step is to calculate the percentages for each line item. For a common size balance sheet, each asset and liability account is expressed as a percentage of total assets. For a common size income statement, each revenue and expense account is expressed as a percentage of net sales.
- Create the statement: After calculating the percentages, the next step is to create the common size financial statement. This can be done using spreadsheet software, financial analysis software, or online tools. The statement should be clearly labeled and easy to read.
- Analyze the statement: Once the common size financial statement has been created, the final step is to analyze the data. Users can use the statement to identify trends and patterns in the financial data, compare the company’s financial position and performance to other companies in the industry, and make informed decisions based on the information presented.
Common Size Financial Statements Types
There are two types of common size financial statements: common size balance sheets and common size income statements.
- Common size balance sheet: In this type of statement, each line item in the balance sheet is expressed as a percentage of total assets. This allows users to see the relative size of each asset and liability account and how they contribute to the overall financial position of the company.
- Common size income statement: In this type of statement, each line item in the income statement is expressed as a percentage of net sales. This allows users to see the relative size of each revenue and expense account and how they contribute to the overall profitability of the company.
Common Size Financial Statements Tools
There are several tools that can be used to create common size financial statements:
- Spreadsheet software: Spreadsheet software such as Microsoft Excel or Google Sheets can be used to create common size financial statements. Users can input the financial data and use formulas to calculate the percentages and create the statement.
- Financial analysis software: There are various financial analysis software programs available that can create common size financial statements. These programs often have features that allow users to import financial data from other sources and create the statement automatically.
- Online tools: There are several online tools available that can create common size financial statements. These tools often require users to input the financial data manually, but they can be useful for small businesses or individuals who don’t have access to spreadsheet or financial analysis software.
Here’s an example of a common size balance sheet:
|Cash and cash equivalents||20.0%||15.0%|
|Property, plant, and equipment||30.0%||35.0%|
|Other non-current assets||5.0%||5.0%|
|Liabilities and Equity|
|Other current liabilities||5.0%||5.0%|
|Other non-current liabilities||10.0%||15.0%|
|Total liabilities and equity||100.0%||100.0%|
Common Size Financial Statements Benefit
Common size financial statements offer several benefits to users, including:
- Standardized view of financial data: By expressing financial data as percentages, common size financial statements provide a standardized view of a company’s financial position and performance. This makes it easier to compare companies of different sizes or industries, and to analyze trends over time.
- Identification of key trends and patterns: Common size financial statements make it easier to identify key trends and patterns in a company’s financial data. Users can quickly see which accounts are growing or shrinking as a percentage of total assets or net sales, which can help identify areas of opportunity or concern.
- Facilitation of decision-making: By providing a clear and consistent view of a company’s financial data, common size financial statements can facilitate decision-making. Users can use the statements to identify areas where changes may be needed, or to evaluate the impact of different strategic options.
- Communication of financial information: Common size financial statements can be a useful tool for communicating financial information to stakeholders such as investors, lenders, and other external parties. The standardized format makes it easier for stakeholders to understand the company’s financial position and performance, and to compare it to other companies in the industry.