What are common-size financial statements?
Common-size financial statements usually involve the balance sheet and the income statement. These two financial statements become “common-size” when their dollar amounts are expressed in percentages.
For example, a common-size balance sheet will report all of the balance sheet amounts as a percentage of the “Total Assets” amount. If Cash was $80,000 and Total Assets were $1,000,000 then Cash will appear as 8% and Total Assets will appear as 100%. If the Current Assets were $350,000 they will appear as 35%. If Current Liabilities were $180,000 then on the common-size statement they will appear as 18%. By having all of the balance sheet amounts as a percentage of Total Assets, you can compare your company’s current asset percentage (and all other line items) to your industry’s percentage or to any other company’s percentages. It doesn’t matter if the other company is larger or smaller than your company, because all amounts are in percentages of Total Assets. Hence, the name “common-size.”
A common-size income statement will show all of the income statement amounts as a percentage of net sales. If net sales are $10,000,000 and the cost of goods sold is $7,800,000, the common-size income statement will report net sales as 100% and the cost of goods sold as 78%. If SG&A expenses are $1,300,000 they will appear as 13%. Having the income statement in percentages of net sales allows you to compare your company’s SG&A expenses and its gross profit to your industry percentages and to other companies regardless of size.
For more discussion on common-size financial statements and for additional information on financial analysis see Financial Ratios.
About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years. He is the creator and author of all the content found on AccountingCoach.com. You can read 1,500 testimonials praising his ability to explain accounting in a way that anybody can understand.
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