Let’s look at the common size vertical format balance sheet of Sundaram Pipes, Fittings and Motor Pumps. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.

Objective and Purposes of Common-Size Financial Statements

Many computerized accounting systems automatically calculate common-size percentages on financial statements. On the Clear Lake Sporting Goods’ common-size balance sheet, we see that current assets remained at 80 percent of total assets from the prior to current year (see Figure 5.25). While the balance in the equipment account did change as a percentage of total assets, equipment remained the same at 20 percent. It is convenient to build a common size balance sheet as it helps in building trend lines to discover the patterns over a specific period. In short, it is not just an upgraded variety of the balance sheet per se, but it also captures each single line item as a percentage of total assets, total liabilities and total equity besides the usual numeric value.

Real-World Example of a Common Size Income Statement

A common size balance sheet is a refined version of the balance sheet itself, but also includes each single line item as a percentage of total assets, liability and equity apart from the conventional numeric value. Many items in the cash flow statement can be stated as a percent of total sales, similar to an income statement analysis. This can give insight into several cash flow items, including capital expenditures (CapEx) as a percent of revenue. You can see that long-term debt averages around 34% of total assets over the two-year period, which is reasonable. Cash ranges between 5% and 8.5% of total assets and short-term debt accounts for about 5% of total assets over the two years.

To make comparisons of the business with other businesses irrespective of their relative size

As the common-size balance-sheet reports the assets first in the order of liquidity, the top entry would be of Cash worth $2 million. Apart from this, it would also report the composition of this cash as a percentage of total assets, i.e. 20% ($2 million divided by $10 million). On the debt and equity side of the balance sheet, however, there were a few percentage changes worth noting. In the prior year, the balance sheet reflected 55 percent debt and 45 percent equity. In the current year, that balance shifted to 60 percent debt and 40 percent equity. The firm did issue additional stock and showed an increase in retained earnings, both totaling a $10,000 increase in equity.

1. The cash flow statement provides an overview of the firm’s sources and uses of cash.
2. It also enables an analyst to compare companies of varied sizes irrespective of their size difference, which is in-built in the raw data.
3. Balance sheets and income statements may be prepared by taking the following information.
4. On the income statement, analysts can see how much of sales revenue is spent on each type of expense.
5. Additionally, the relative percentages may be compared across companies and industries.
6. It evaluates financial statements by expressing each line item as a percentage of the base amount for that period.
7. For Example, Company A has $10 million in total assets, $7 million in total liabilities and $3 million in total equity.

Note that although we have compared just two years of data for Charlie and Clear Lake, it is more common to use several years of data to get a more robust view of long-term trends. Download for FREE our Revenue in Excel template and visualize your financial data effectively. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. This way, you can get beneficial information for your business and identify the key areas where you can improve. IF AND Excel template demonstrating the use of IF&AND functions in Excel for logical analysis and decision-making. This is an open-access Excel template in XLSX format that will be useful for anyone who wants to work as an Accountant, Financial Analyst, or Finance Manager.

Income Statement

1. The cash flow statement in terms of total sales indicates that it generated an impressive level of operating cash flow, averaging 26.9% of sales over three years.
2. However, a quick glance at the balance sheet in the right hand percentage columns, shows that for most items the percentages are similar.
3. You can see that long-term debt averages around 34% of total assets over the two-year period, which is reasonable.
4. It is convenient to build a common size balance sheet as it helps in building trend lines to discover the patterns over a specific period.
5. The technique can be used to analyse the three primary financial statements, i.e., balance sheet, income statement and cash flow statement.

There is no mandatory format for a common size balance sheet, though percentages are nearly always placed to the right of the normal numerical results. If you are reporting balance sheet results as of the end of many periods, you may even dispense with numerical results entirely, in favor of just presenting the common size percentages. Likewise a similar process to that used above can be applied to compare two different businesses. For example, the common size balance sheets below are for two different businesses of differing sizes. Accordingly by producing a balance sheet at the end of each accounting period, it is possible to monitor changes in each line item over time. For example, the following shows the vertical common size analysis for two accounting periods.

The use of common-size statements facilitates vertical analysis of a company’s financial statements. While common size balance sheets are not a requirement of generally accepted accounting principles (GAAP), they offer a number of benefits to both internal and external parties. While most firms do not report their statements in common size format, it is beneficial for analysts to do so to compare two or more companies of differing size or different sectors of the economy. Formatting financial statements in this way reduces bias that can occur and allows for the analysis of a company over various periods.

For this reason, the top line of the financial statement would list the cash account with a value of $1 million. Common-size financial statements are the financial statements the company prepares by taking a base value for comparison and displaying the result in percentages. These financial statements are prepared for internal purposes rather than for compliance with external stakeholder requirements. Since we use net sales as the base on the income statement, it tells us how every dollar of net sales is spent by the company. For Synotech, Inc., approximately 51 cents of every sales dollar is used by cost of goods sold and 49 cents of every sales dollar is left in gross profit to cover remaining expenses. 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 common size balance sheet format interest.

All three of the primary financial statements can be put into a common-size format. Financial statements in dollar amounts can easily be converted to common-size statements using a spreadsheet. On the other hand, solvency refers to a company’s ability to meet its financial obligations over the longer term. As such, solvency emphasizes the company’s financial framework and its capacity to service long-term debts.

A Common-size Statement can be prepared for inter-firm and intra-firm comparisons or a Balance Sheet and Income Statement. An analysis of data in the table above reveals that property, plant, and equipment, at 53.6%, make up the lion’s share of the company’s assets. The company does not have much cash and cash equivalents (0.8%), and most of its debt is in the form of accounts payable (30.0%). Also, there is no working capital as current assets (20.0%) are less than current liabilities (30.0%).

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. In income statements, line items are most often divided by total revenues or total sales. If Company A had $2,000 in operating expenses and $4,000 in total revenues, the operating expenses would be presented as 50%. For Example, Company A has $10 million in total assets, $7 million in total liabilities and $3 million in total equity.

It’s important to add short-term and long-term debt together and compare this amount to the total cash on hand in the current assets section. This lets you know how much of a cash cushion is available or if a firm is dependent on the markets to refinance debt when it comes due. The effectiveness of cross-sectional financial ratio analysis can be constrained by variations in accounting practices. Furthermore, comparability can be hindered by the lack of uniformity in a company’s operational activities.

TallyPrime is a complete business management software to manage your business easily, faster, and efficiently. Lastly, it is prepared for the assessment of the financial soundness of the organisation and to understand its financial strategy. The basic objective of a Common-size Balance Sheet is to analyse the changes in the individual items of a Balance Sheet.