Definition§
A common size financial statement presents all items as a percentage of a common base figure, such as total sales revenue or total assets. This format facilitates the direct comparison of financial performance and position across different companies or periods by eliminating the effect of size.
Common Size Financial Statements vs Traditional Financial Statements§
| Feature | Common Size Financial Statements | Traditional Financial Statements |
|---|---|---|
| Format | Percentage of a common base figure | Absolute numerical figures |
| Purpose | Facilitates comparison across sizes | Sums up the financial performance |
| Use Cases | Comparing companies and periods | Reporting on specific financial data |
| Example Statement | Income statement percentages | Traditional income statement values |
Example of Common Size Statement§
For example, let’s say Company A has total sales revenue of $1,000,000 with various expenses:
| Expense | Amount ($) | Percentage of Sales ($) |
|---|---|---|
| Cost of Goods Sold | 400,000 | 40% |
| Selling Expenses | 150,000 | 15% |
| Administrative Expenses | 100,000 | 10% |
| Net Income | 350,000 | 35% |
Related Terms§
-
Income Statement: A financial statement that shows a company’s revenues and expenses during a specified period.
-
Balance Sheet: A statement that summarizes a company’s assets, liabilities, and equity at a specific point in time.
-
Cash Flow Statement: A report that shows how changes in balance sheet accounts and income affect cash and cash equivalents.
Inspirational & Humorous Insights§
- “Numbers are like people: tortured until they confess.” — Anonymous
- Fun Fact: The early use of common size statements dates back to the 19th century, when firms began standardizing reports—because comparing apples to oranges just wasn’t cutting it anymore!
Frequently Asked Questions§
Q1: What are the limitations of common size financial statements?
- While useful, they can be misleading if companies use different accounting methods or if industry standards vary widely.
Q2: Can common size financial statements be used for all industries?
- Yes! They can help in comparing financial performance across different industries, though one must also consider the industry specifics.
Q3: How do you prepare a common size financial statement?
- Divide each line item by the total (sales for an income statement, total assets for a balance sheet) and multiply by 100 to get the percentage.
Online Resources & Suggested Reading§
- Investopedia
- “Financial Statement Analysis” by K. R. Subramanyam
- “Financial Accounting” by Robert Libby, Patricia A. Libby
Test Your Knowledge: Common Size Financial Statements Quiz§
So remember: in the world of finance, don’t put all your eggs in one basket unless you’re counting the size of each entry first! 🥚📊
