Common Size Analysis Overview, Examples, How to Perform

Accounts within this segment are listed from top to bottom in order of their liquidity. They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot. The cash flow statement shows how a company generated and spent cash throughout a given timeframe. Most accounting common size balance sheet computer programs, including QuickBooks, Peachtree, and MAS 90, provide common-size analysis reports. You simply select the appropriate report format and financial statement date, and the system prints the report. Thus accountants using this type of software can focus more on analyzing common-size information than on preparing it.

These financial statements are prepared for internal purposes rather than for compliance with external stakeholder requirements. The current assets formula determines that the “total current assets,” which are the total of all assets that can be converted to cash within one year, makes up 37% of the company’s total assets. In contrast, current liabilities, which are debts due within one year, make up only 30% of the company’s total assets. Each line item on a balance sheet, statement of income, or statement of cash flows is divided by revenue or sales. You might be able to find them on the websites of companies that specialize in financial analysis.

  1. For this reason, the balance sheet should be compared with those of previous periods.
  2. Of the 49 cents remaining, almost 35 cents is used by operating
    expenses (selling, general and administrative), 1 cent by other and
    2 cents in interest.
  3. Although the balance sheet is an invaluable piece of information for investors and analysts, there are some drawbacks.
  4. By looking at this common size income statement, we can see that the company spent 10% of revenues on research and development and 3% on advertising.

Clear Lake Sporting Goods, for example, might compare their financial performance on their income statement to a key competitor, Charlie’s Camping World. Charlie is a much bigger retailer for outdoor gear, as Charlie has nearly seven times greater sales than Clear Lake. Common-size statements allow Clear Lake to compare their statements in a meaningful way (see Figure 5.26).

A common size balance sheet is set up with the same logic as the common size income statement. The balance sheet equation is assets equals liabilities plus stockholders’ equity. Common size balance sheet is the balance sheet that prepares by management to show both values of each item in assets, liabilities, and equity in currency (USD) and percentages (%) at the end of the accounting period. Using this statement, users could quickly see the percentage of each item, cash or account receivable, compared to total assets.

Although the information presented is useful to financial institutions and other lenders, a common size balance sheet is typically not required during the application for a loan. Seasonal fluctuations in a company’s business may render common size balance sheets unhelpful and misleading. If a company sells more during Christmas, the balance sheet percentages may be distorted. Other financial papers and information are necessary to understand the company’s financial situation comprehensively. A company could benchmark its financial position against that of a best-in-class company by using common size balance sheets to compare the relative amounts of their assets, liabilities, and equity. The balance sheet provides a snapshot overview of the firm’s assets, liabilities, and shareholders’ equity for the reporting period.

3: Common-Size Analysis of Financial Statements

Balance sheets and income statements may be prepared by taking the following information. You can compare and get results of different financial periods of the same company or other companies in the same industry. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Depending on the company, different parties may be responsible for preparing the balance sheet. For small privately-held businesses, the balance sheet might be prepared by the owner or by a company bookkeeper.

Cash flow Statement

Here, you’ll render items on your cash flow statement as a percentage of net revenue. This analysis lets you see how effectively you’re leveraging the cash in your business, beyond just dollars flowing into and out of your bank account. The income statement (also referred to as the profit and loss (P&L) statement) provides an overview of flows of sales, expenses, and net income during the reporting period. The income statement equation is sales minus expenses and adjustments equals net income. This is why the common size income statement defines all items as a percentage of sales.

Business in Action 13.2

Common-size financial statements facilitate the analysis of financial performance by converting each element of the statements to a percentage. This makes it easier to compare figures from one period to the next, compare departments within an organization, and compare the firm to other companies of any size as well as industry averages. On the income statement, analysts can see how much of sales revenue is spent on each type of expense. They can see this breakdown for each firm and compare how different firms function in terms of expenses, proportionally. They can also look at the percentage for each expense over time to see if they are spending more or less on certain areas of the business, such as research and development.

On the other hand, horizontal analysis refers to the analysis of specific line items and comparing them to a similar line item in the previous or subsequent financial period. Although common size analysis is not as detailed as trend analysis using ratios, it does provide a simple way for financial managers to analyze financial statements. If a company takes out a five-year, $4,000 loan from a bank, its assets (specifically, the cash account) will increase by $4,000. Its liabilities (specifically, the long-term debt account) will also increase by $4,000, balancing the two sides of the equation. If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholder equity.

A company has $8 million in total assets, $5 million in total liabilities, and $3 million in total equity. Therefore, along with reporting the dollar amount of cash, the common size financial statement includes a column that reports that cash represents 12.5% ($1 million divided by $8 million) of total assets. Common size balance sheets are not required under generally accepted accounting principles (GAAP), nor is the percentage information presented in these financial statements required by any regulatory agency.

All revenues the company generates in excess of its expenses will go into the shareholder equity account. These revenues will be balanced on the assets side, appearing as cash, investments, inventory, or other assets. Investors can get a sense of a company’s financial well-being by using a number of ratios that can be derived from a balance sheet, including the debt-to-equity ratio and the acid-test ratio, along with many others. The income statement and statement of cash flows also provide valuable context for assessing a company’s finances, as do any notes or addenda in an earnings report that might refer back to the balance sheet. Comparing the percentages of different balance sheet items helps identify potential areas of concern or weakness in a company’s financial position.

The balance sheet common size analysis mostly uses the total assets value as the base value. A financial manager or investor can use the common size analysis to see how a firm’s capital structure compares to rivals. They can make important observations by analyzing specific line items in relation to the total assets.

On the other hand,  it shows the same information as a percentage of total assets. This means that in a common size balance sheet, each line item is shown as a percentage of a company’s total assets, making it easier to compare organizations of different sizes and track changes within them. Meanwhile, a traditional balance sheet presents the actual dollar values of each item, which can be difficult to compare between companies or over time. Another distinction between the two types of balance sheets is that this balance sheet provides a clearer understanding of a company’s overall balance sheet structure. Due to this, it may be easier to see what proportion of a company’s assets are in cash versus inventory. Also, to understand how much of a company’s liabilities are in long-term debt versus accounts payable.

Income before taxes increased significantly from 28.6 percent in 2009 to 40.4 percent in 2010, again mainly due to a one-time gain of $4,978,000,000 in 2010. This caused net income to increase as well, from 22.0 percent in 2009 to 33.6 percent in 2010. In the expense category, cost of goods sold as a percent of net sales increased, as did other operating expenses, interest expense, and income tax expense.