Common Size Financial Statement Analysis

Topics: Balance sheet, Asset, Income statement Pages: 2 (545 words) Published: January 19, 2013
COMMON-SIZE FINANCIAL STATEMENT ANALYSIS
When all the items of a financial statement are expressed on a common basis, it is known as a common-size financial statement. Common-sizing of balance sheet is done generally by expressing its all items as a percentage of its total assets or total equities. Similarly, income statement is common-sized when its all items are expressed as percentage of total sales. PROCEDURE OF COMMON SIZING

In preparing common-size income statement, the following procedure is to be followed : •Total sales revenue or total revenue is taken as hundred. •Each item of cost or expenses is represented as a percentage of total revenue. •Profit or loss also shown as a percentage of revenue.

Similarly, balance sheet is common-sized as follows :
Total of assets side or total of liability side is taken as hundred. •Each item of asset is expressed as percentage of total asset total of capital and liabilities. •Each item of the liability side is also expressed as a percentage of total assets or total of capital and liabilities. USEFULNESS OF COMMON-SIZE FINANCIAL STATEMENT ANALYSIS

Inter-firm comparison becomes more meaningful when financial statement of the firms under comparison is common-sized. •Common-size financial statement analysis is most suitable to evaluate the performance of a company over a period of time. •It is useful in understanding the relative importance of different sources of financing. •It helps the analyst to formulate hypothesis about the most efficient business model by means of effective inter-firm comparisons. •Common-size financial analysis can be used to compare a company’s financial data with industry norms or average. COMMON-SIZE FINANCIAL STATEMENT ANALYSIS

When all the items of a financial statement are expressed on a common basis, it is known as a common-size financial statement. Common-sizing of balance sheet is done generally by expressing its all items as a percentage of its total assets or total...
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