Common Size Analysis

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  • Topic: Balance sheet, Generally Accepted Accounting Principles, Income statement
  • Pages : 2 (667 words )
  • Download(s) : 187
  • Published : July 30, 2007
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Common-Size Analysis
When comparing financial statements, it is often necessary to compare successive years' statements of the same company or statements from companies of various sizes. Ordinary financial statements can make it difficult to recognize trends or spot disproportionate categories since the figures make it difficult to tell how much a category has changed in relation to the other categories. Common-size statements solve this problem by valuing all categories in relation to a base figure. "We use common-size financial statements to reveal changes in the relative importance of each financial statement item. All individual amounts in common-size statements are redefined in terms of common-size percents" (Larson, Wild, & Chiappetta, 2004, p.681). The items on the balance sheet are described as a proportion of total assets and the items on the income statement are described as a proportion of net sales. This makes year over year changes or disproportionate categories more evident.

In order to make financial decisions regarding Kudler Fine Foods, it is essential to compare their financial health to other companies within the gourmet grocery industry. Whole Foods Market, Inc. owns and operates 145 gourmet grocery stores throughout the United States. Their proven track record of success makes them an ideal candidate for financial statement comparison. Since Kudler and Whole Foods are significantly different in size, common size financial statements will be necessary to find relevant differences.

When comparing the two companies' balance sheets, several differences are apparent. The first is the large discrepancy in both cash and total current assets. Kudler's cash account makes up 53.5% of their total assets while Whole Foods cash account is only 13.9%. Furthermore, Kudler's total current assets are 73.7% of their total assets while Whole Foods' total current assets are only 30.4%. Such large differences prompt further investigation as large amounts of...
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