A common-size balance sheet is an alternative form of the traditional balance sheet that uses percentages instead of dollar amounts. It helps business owners, investors and bankers compare companies of different sizes without revealing actual dollar amounts. In the short term, a company’s executives can compare the firm’s percentages to the industry’s average percentages. They can also use the common-size balance sheet’s information to review their long-term assets and liabilities, and address any significant changes.

Accordingly, before taking any actions based on such information, we encourage you to consult with the appropriate professionals. We do not provide any legal, tax, personal financial planning, or investment advice. CFO Perspective, LLC assumes no responsibility for errors or omissions in the contents on the site.

FAQs About Common Size Financial Statement

The common size balance sheet calculator allows for two balance sheets to be entered so that comparisons can be made. The use of the common size balance sheet as a comparison tool is discussed more fully common size balance sheet formula in our common size balance sheet tutorial. This graph starts with interest income as a percentage of assets, which is then reduced by interest expense. That’s followed by noninterest income, which includes the service fees and overdraft charges everyone hates. That’s followed by the provision for loan losses and realized security losses to arrive at a pre-tax net operating income as a percentage of assets.

She has also held editing roles at LearnVest, a personal finance startup, and its parent company, Northwestern Mutual. Billie Anne is a freelance writer who has also been a bookkeeper since before the turn of the century. She is a QuickBooks Online ProAdvisor, LivePlan Expert Advisor, FreshBooks Certified Partner and a Mastery Level Certified Profit First Professional. She is also a guide for the Profit First Professionals organization. In 2012, she started Pocket Protector Bookkeeping, a virtual bookkeeping and managerial accounting service for small businesses.

Can I use common-size balance sheet analysis for personal finance?

They can also quickly see the percentage of current versus noncurrent assets and liabilities. Financial statements that show only percentages and no absolute dollar amounts are common-size statements. All percentage figures in a common-size balance sheet are percentages of total assets while all the items in a common-size income statement are percentages of net sales. The use of common-size statements facilitates vertical analysis of a company’s financial statements.

• However, the equity increase was much smaller than the total increase in liabilities of $40,000.
• It’s worth noting that if two companies are using different accounting methods the comparisons might not be accurate.
• Expressing these figures as percentages of total assets, current assets constitute 30%, long-term investments represent 20%, and PP&E accounts for 50%.
• This common size income statement analysis is done on both a vertical and horizontal basis.

Common Size Income Statement Format & Formula

Another commonly cited ratio is net income as a percentage of revenue. Of course, owners aren’t paid with income; they receive their distributions in cash. Let’s say a company looks at its inventory levels and determines there is no way to reduce them. They then compare themselves to a peer and find that their peer operates with a much lower level of inventory as a percentage of assets or revenue. ” So, the search for efficiencies and improved performance begins again.

What Is the Main Purpose of Common-Size Financial Statements?

If you’re applying for an SBA 7(a) loan over $350,000, for instance, you’ll need to include one. Create a new balance sheet using these percentages instead of the dollar amounts. In the heading, substitute Common-Size Balance Sheet for Balance Sheet. Alternatively, you can add another column to the traditional balance sheet and include these percentages.

8: Common-Size Statements

Charlie is a much bigger retailer for outdoor gear, as Charlie has nearly seven times greater sales than Clear Lake. Common-size statements allow Clear Lake to compare their statements in a meaningful way (see Figure 5.26). Notice that Clear Lake spends 50 percent of its sales on cost of goods sold while Charlie spends 59 percent.

Limitations on Typical Size of Financial Statements

Note that although we have compared just two years of data for Charlie and Clear Lake, it is more common to use several years of data to get a more robust view of long-term trends. The goodwill level on a balance sheet also helps indicate the extent to which a company has relied on acquisitions for growth. Limitations include a lack of context on absolute values, inability to reflect industry norms, and minimal insight into non-operational factors. This table shows how each element contributes to the company’s revenue structure, aiding in quick assessments.

This tool is especially important if you’re using key performance indicators to measure your business’s performance and profitability. The approach lets you compare your business to your competitors’ businesses, regardless of size differences. A cash flow report reveals how cash moves into and out of the company and gives information on the sources and use of cash. Cash flows from firms’ investments, daily operations and financing are the subsections in the flow statement.

Now that you have covered the basic financial statements and a little bit about how they are used, where do we find them? In this next section we will explore the requirements for what needs to be reported, when, and to whom. Although they are not required under generally accepted accounting principles, some companies choose to release common-size data in addition to dollar figures. Companies in other industries may show their product mix analyses using a base number of total revenue or equity.

On a common size balance sheet, assets are expressed as a percentage of total assets, providing clarity on their composition. This section typically includes current assets, such as cash, accounts receivable, and inventory, as well as non-current assets like property, plant, and equipment (PP&E) and intangible assets. Common-size financial statements are financial statements that present all items as percentages of a common base figure, such as total assets or total revenue. Liabilities are obligations a company must settle, typically through asset transfers or services.

The Common-Size Analysis of Financial Statements

• It also allows you to view a horizontal perspective over a period such as the three years that were analyzed in our example.
• The company should look for ways to cut costs and increase sales in order to boost profitability.
• Peer groups within an industry are often grouped by their revenue amounts.
• These financial statements are prepared for internal purposes rather than for compliance with external stakeholder requirements.

The power of revenue as a base number carries from the income statement to the statement of cash flows. An important ratio in this common-size statement is the $100 gross profit divided by the base revenue of $300, which equals 33%. That ratio is better known as the “gross margin” or the “gross profit margin.” For many companies and industries, it’s one of the most important performance ratios. This shows how some line items on common-size statements are referenced more often than others, but each line divided by the base amount tells part of a story.

A common-size balance sheet provides the basis for calculating various financial ratios. The same process would apply on the balance sheet but the base is total assets. The common-size percentages on the balance sheet explain how our assets are allocated OR how much of every dollar in assets we owe to others (liabilities) and to owners (equity). Many computerized accounting systems automatically calculate common-size percentages on financial statements. The method of common-size analysis is perfect for analysing three financial statements and these include a balance sheet, cash flow statements and income statements.