Common Size Balance Sheet: Meaning, Objectives and Format of Common Size Balance Sheet

It also shows the impact of each line item on the overall revenue, cash flow or asset figures for your company. The same process would apply on the balance sheet but the base is total assets. The common-size percentages on the balance sheet explain how our assets are allocated OR how much of every dollar in assets we owe to others (liabilities) and to owners (equity).

how to common size a balance sheet

A common size financial statement shows each line item on a financial statement as a percentage of a base figure. Most commonly, this means that each revenue, expense, and profit line item on the income statement is presented as a percentage of net sales. In addition, each asset, liability, and shareholders’ equity line item on the balance sheet is expressed as a percentage of total assets. Although common-size balance sheets are most typically utilized by internal management, they also provide useful information to external parties, including independent auditors. The most valuable aspect of a common size balance sheet is that it supports ease of comparability. The common size balance sheet shows the makeup of a company’s various assets and liabilities through the presentation of percentages, in addition to absolute dollar values.

Common Size Ratio

In the case of XYZ, Inc., operating profit has dropped from 17% in Year 1 to 7.6% in Year 2. The cost of goods sold dropped, while both selling and administrative expenses and depreciation rose. The firm may have bought new fixed assets and/or sales commissions may have increased due to hiring new sales personnel. From this, it can be seen that Gross Profit remained the same at 100% of revenue. Research & Development did not change at 1%, Selling General & Administrative declined ever so slightly from 38% to 37% of revenues. Operating Expenses declined a whopping 18%, from 72% to 54% of revenues.

  • 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.
  • Let’s carry on with our analysis of ABC, in comparison to its competitor XYZ.
  • As you can see from Figure 13.6 “Common-Size Balance Sheet Analysis for “, the composition of assets, liabilities, and shareholders’ equity accounts changed from 2009 to 2010.
  • Second, the financial statements of competitors can be converted into the common size format, which makes them comparable to a company’s own financial statements.
  • It is not another type of income statement but is a tool used to analyze the income statement.
  • Common size analysis is an excellent tool to compare companies of different sizes or to compare different years of data for the same company, as in the example below.

ABC’s profitability may be lower, but its cash generation abilities cannot be questioned and so bankruptcy risk will be minimal and there will be no shortage of investors trying to get in on the action. And there is no reason ABC cannot reach XYZ’s labor costs over time, which would immediately drive profits up. First, the cost of goods sold (COGS) for the business firm has increased from Year 1 to Year 2. The COGS usually includes direct labor costs and the cost of direct materials used in production.

What Are the Ways Accounting Data Is Used to Make Business Decisions?

A common size balance sheet displays the numeric and relative values of all presented asset, liability, and equity line items. This format is useful for comparing the proportions of assets, liabilities, and equity between different companies, particularly as part of an industry analysis or an acquisition analysis. It is extremely useful to construct a common size balance sheet that itemizes the results as of the end of multiple time periods, in order to construct trend lines to ascertain changes over longer time periods. Common size analysis displays each line item of your financial statement as a percentage of a base figure to help you determine how your company is performing year over year, and compared to competitors.

Once converted to common-size percentages, however, we see that Coca-Cola outperforms PepsiCo in virtually every income statement category. Coca-Cola’s cost of goods sold is 36.1 percent of net sales compared to 45.9 percent at PepsiCo. Coca-Cola’s gross margin is 63.9 percent of net sales compared to 54.1 percent at PepsiCo. Coca-Cola’s operating income is 24.1 percent of sales compared to 14.4 percent at PepsiCo.

What Is a Common Size Balance Sheet?

A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. We believe everyone should be able to make financial decisions with confidence. Lastly, it is prepared for the assessment of the financial soundness of the organisation and to understand its financial strategy.

how to common size a balance sheet

Common Size Analysis, also known as Vertical Analysis, is used to analyze a company’s financial statement information. This method uses one line item on the statement as a base against which to evaluate all other items in the same statement. It is called common-size because it makes companies within an industry comparable irrespective of size. This is by using proportion rather than the actual numbers as the means of comparison.

If cash is $406,062 and total assets are $1,163,028, then the common size percentage is 35%. Depending on the company’s expectations, this can be noteworthy or unnoteworthy. If the company expected the cash to be 50% of holdings, then this serious deviation must be researched. If the company expected the cash to be 34%, then perhaps this is within the margin of error for their estimation, and nothing needs to be done about it. While evaluating the income statement, the analyst looks at the cost of goods sold compared to revenues and notices that this year it is 45% of revenue. Unless explained in the notes, this drastic change will merit a serious investigation.

What is expressing each item of a balance sheet as a percent an example of?

A) When all the figures in a balance sheet are stated as percentage of the total, it is termed as horizontal analysis. B) When financial statements of several years are analyzed, it is termed as vertical analysis.

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