Financial statements reveal the financial credibility of a company. A financial statement, which expresses the different values in form of percentage is called a Common size financial statement.
A common size financial statement helps in comparing two companies, which differ in size. Two components of the common size financial statement are:
- Balance sheet
- Income statement
When both these components are clubbed together, a common size financial statement is obtained.
Features of a Common size Financial Statement
A common size financial statement consists of various amounts expressed as percentage.
For example, if cash of a particular company is calculated to be USD$50,000. In the common size financial statement, it will be represented as 5%. If the total assets of a company is found to be USD$2,000,000, it will appear as 200% in the common size financial statement.
Similarly, if the current liabilities of a company is found to be USD$150,000, it will appear as 15%. The numbers obtained in the income statement will appear in form of percentage.
Advantages of the Common size Financial Statement:
One advantage of having the various amounts expressed in percentage is, the percentage assets of any company can be compared to another company or to other companies in the industry.
The size of the companies being compared, is not important. The companies being compared may be small or big. Hence, it is termed as common size. Since size of the company does not matter, it removes any kind of bias, while comparing companies. Analyzing the operational activities of comparing companies can also be obtained.
Changes in different values pertaining to company’s performance can also be ascertained during a particular period. For example, if one wishes to know how the cost of goods sold over a span of time has changed, the common size financial statement can be helpful.
A common size financial statement is used for predicting future trends and analyzing prevailing trends in the industry.
There are certain guidelines followed in preparing this type of a financial statement.