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
## What is the primary purpose of a common size financial statement?
- [x] To facilitate comparison across different sizes
- [ ] To show exact money figures
- [ ] To create a standardized report
- [ ] To find tax deductions
> **Explanation:** The main purpose is to allow for easy comparisons between companies of different sizes.
## Which common financial statement is NOT typically presented as a common size statement?
- [ ] Income Statement
- [ ] Cash Flow Statement
- [ ] Balance Sheet
- [x] Tax Return
> **Explanation:** A tax return is a distinct type of document and is not typically expressed in common size format.
## When comparing common size statements from different companies, what must be kept in mind?
- [ ] The names of the companies
- [ ] Their respective past performance
- [x] Possible differences in accounting methods
- [ ] The stock price at the time
> **Explanation:** Differences in accounting methods can significantly affect comparability between companies.
## If Company A has total revenues of $2,000,000 and $600,000 in expenses for its income statement common size statement, what percentage of revenues do the expenses represent?
- [x] 30%
- [ ] 25%
- [ ] 20%
- [ ] 35%
> **Explanation:** The calculation is ($600,000 / $2,000,000) * 100 = 30%.
## True or False: A common size financial statement is only useful for comparing companies within the same industry.
- [ ] True
- [x] False
> **Explanation:** Common size statements are useful for comparing companies across different industries as well.
## What does a common size statement primarily help analysts to do?
- [ ] Compute taxes
- [x] Make apples-to-apples comparisons
- [ ] Balance the books
- [ ] Juggle numbers
> **Explanation:** It's all about making clear comparisons to analyze profitability and operational efficiency.
## If a company has total liability of $500,000 and total assets of $1,000,000, what is the liability expressed as a common size percentage?
- [ ] 25%
- [ ] 50%
- [x] 50%
- [ ] 75%
> **Explanation:** Liability as common size percentage is calculated as ($500,000/$1,000,000) * 100 = 50%.
## Which of the following financial elements is often evaluated with a common size statement?
- [ ] Cure for boredom
- [ ] The number of employees
- [x] Operating expenses
- [ ] Dividend rates
> **Explanation:** Operating expenses are common topics in common size financial statements for analysis.
## In a common size income statement, how do you express the net income?
- [ ] As the total cash reserves
- [x] As a percentage of total revenues
- [ ] As the salary of the CEO
- [ ] As expenses subsidized
> **Explanation:** Net income is expressed as a percentage of total revenues to show profitability.
## Why might an analyst choose to use a common size statement instead of traditional numbers?
- [ ] They enjoy pie charts
- [x] For comparative analysis
- [ ] To confuse investors
- [ ] They forget how to do arithmetic
> **Explanation:** Common size statements offer a clear, comparative analysis instead of just raw numbers.
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! 🥚📊
