In this post, we will be talking about common size financial statements. Now, what are common size financial statements?
These are the statements that demonstrate the relationship of multiple items of a financial statement with a common item by expressing each item as a percentage of that common item. The figures of these statements are shown as percentages of total assets total liabilities and total sales correspondingly.
This analysis is also known as vertical analysis, now going on to the aspects of common sight statement a common sight statement analysis demonstrates the relationship of each component to the total. It is used for vertical financial analysis and comparison of two company firms or two years of financial data. Absolute statistics from the financial statement are tough to compare but when converted and expressed as % of any common item it becomes more meaningful to relate.
Why Common Size Statements Are Used?
A common size statement is a tool of financial statement analysis. Common statements include the balance sheet, and income statements are shown in analytical percentages. In common size statements, the various figure is shown as a percentage of total assets, total sales, and total liabilities.
Total assets are taken as 100%, and different assets are expressed as a percentage of the total assets. Similarly, total liabilities are taken as 100%, and different liabilities are expressed as a percentage of the total liabilities.
There are two types of common size statements:
- Common-size Balances Sheet
- Common Size Income Statement