Unlocking Insights with Common Size Financial Statements
A common size financial statement displays items as a percentage of a common base figure, such as total sales revenue. This type of statement facilitates easy comparisons between companies of varying sizes or between different periods for the same company. However, discrepancies in accounting methods can affect the accuracy of such comparisons.
Key Takeaways
- A common size financial statement displays entries as a percentage of a common base figure rather than as absolute numerical figures.
- These statements allow analysts to compare companies of different sizes or across different industries and time periods in an apples-to-apples manner.
- Common size financial statements often include the income statement, balance sheet, and cash flow statement.
Understanding Common Size Financial Statements
Most firms do not report their statements in a common size format, but analysts find it advantageous to do so for comparing companies of different sizes or sectors. Formatting statements this way eliminates bias and allows for analysis over various periods. This format reveals, for example, the percentage of sales that cost of goods sold represents, and how it changes over time. Generally, common size statements include the income statement, balance sheet, and cash flow statement.
Common Size Balance Sheet Statement
The balance sheet offers an overview of the firm’s assets, liabilities, and shareholders’ equity for the period. A common size balance sheet aligns with the logic of the common size income statement. The equation, assets equal liabilities plus stockholders’ equity, is paramount. This representation can also break down figures within their respective categories as percentages of their totals, thereby offering different viewpoints.
Common Size Cash Flow Statement
The cash flow statement outlines the firm’s cash sources and uses. It divides into cash flows from operations, investing, and financing. It can appear as a percentage of total cash flow, or use sub-totals for operations, investing activities, and financing sections, making it easier to digest.
Common Size Income Statement
The income statement (also known as the profit and loss statement) shows flows of sales, expenses, and net income over the reporting period. Items are most commonly denoted as percentages of sales. This ‘common size’ concept easily translates across other financial statements too.
Real-World Example of a Common Size Income Statement
For example, let’s consider a company with gross sales of $100,000, a cost of goods sold of $50,000, taxes of $1,000, and net income of $49,000. The breakdown would read:
| Description | Percentage |
|---|---|
| Sales | 1.00 |
| Cost of goods sold | 0.50 |
| Taxes | 0.01 |
| Net Income | 0.49 |
Glossary of Terms
- Income Statement: A financial report summarizing revenues, costs, and expenses during a specific period.
- Balance Sheet: A financial statement that provides a snapshot of what the company owns (assets) and owes (liabilities), and shareholders’ equity at a specific point in time.
- Cash Flow Statement: A report that shows the company’s inflows and outflows of cash.
- Cost of Goods Sold (COGS): The direct costs attributable to the production of goods sold in the company.
- Net Income: The total profit of the company after all expenses and taxes have been deducted from revenues.
- Liabilities: The company’s debts or financial obligations.
- Assets: Resources owned by the company that have economic value.
Related Terms: Income Statement, Balance Sheet, Cash Flow Statement, Cost of Goods Sold (COGS), Net Income, Liabilities, Assets.
