When all the items of a financial statement are expressed on a common basis, it is known as a common-size financial statement. Common-sizing of balance sheet is done generally by expressing its all items as a percentage of its total assets or total equities. Similarly, income statement is common-sized when its all items are expressed as percentage of total sales.
PROCEDURE OF COMMON SIZING
In preparing common-size income statement, the following procedure is to be followed :
• Total sales revenue or total revenue is taken as hundred.
• Each item of cost or expenses is represented as a percentage of total revenue.
• Profit or loss also shown as a percentage of revenue.
Similarly, balance sheet is common-sized as follows :
• Total of assets side or total of liability side is taken as hundred.
• Each item of asset is expressed as percentage of total asset total of capital and liabilities.
• Each item of the liability side is also expressed as a percentage of total assets or total of capital and liabilities.
USEFULNESS OF COMMON-SIZE FINANCIAL STATEMENT ANALYSIS
• Inter-firm comparison becomes more meaningful when financial statement of the firms under comparison is common-sized.
• Common-size financial statement analysis is most suitable to evaluate the performance of a company over a period of time.
• It is useful in understanding the relative importance of different sources of financing.
• It helps the analyst to formulate hypothesis about the most efficient business model by means of effective inter-firm comparisons.
• Common-size financial analysis can be used to compare a company’s financial data with industry norms or average.
COMMON-SIZE FINANCIAL STATEMENT ANALYSIS
When all the items of a financial statement are expressed on a common basis, it is known as a common-size financial statement. Common-sizing of balance sheet is done generally by expressing its all items as a percentage of its total assets