Common-size financial statements present the financial statement amounts as a percentage of a base number. For example, the common-size income statement will report the revenue and expense amounts as percentages of net sales. The common-size balance sheet will report each asset, liability, and owner equity amount as a percentage of total assets.
Common-size financial statements allow you to compare the financial statements of large companies with the financial statements of smaller companies, because you are comparing percentages instead of dollars. For example, a small retailer can compare her cost of goods sold (perhaps 78%) to a much larger retailer’s cost of goods sold (perhaps 80%). Similarly, one company’s inventory might be 33% (of total assets) while a competitor’s might be 28%.
Common-size financial statements are related to a technique known as vertical analysis.
