Define: Common Size Financial Statement

A common size financial statement is a type of financial statement that presents all items as a percentage of a base figure, typically total assets or total revenue. This allows for easier comparison of financial data across different companies or time periods. It is commonly used in financial analysis and reporting to identify trends and make informed business decisions.

A common-size financial statement presents items as percentages of a common base figure, such as total sales revenue. This format facilitates straightforward comparisons between companies or across different time periods for the same company. However, comparisons may be less accurate if companies use varying accounting methods.

Key points about common-size financial statements include:

• Entries are expressed as percentages of a common base figure rather than as absolute numerical values.
• Analysts can use common size statements to compare companies of different sizes, operating in diverse industries, or over different time periods on a consistent basis.
• Common-size financial statements typically cover the income statement, balance sheet, and cash flow statement.

While most firms do not typically report their financial statements in common-size format, analysts find it beneficial to convert statements into this format for comparing companies of varying sizes or different sectors within the economy. Presenting financial data in a common size format helps mitigate biases and enables consistent analysis of a company over different time periods. For example, it reveals the percentage of sales attributed to the cost of goods sold and how this ratio has evolved over time.

Common-size financial statements standardise all figures on a comparable basis, such as a percentage of sales or assets. Each financial statement (income statement, balance sheet, and cash flow statement) follows slightly different conventions for normalising figures for analysis. This approach enhances comparability and facilitates meaningful insights into financial performance across companies and time periods.

Common Size Balance Sheet Statement

The balance sheet presents a snapshot of a firm’s assets, liabilities, and shareholders’ equity for a specific reporting period. Similar to the common-size income statement, a common-size balance sheet is structured using a standardised approach. The fundamental equation of the balance sheet is assets equalling liabilities plus stockholders’ equity.

In a common-size balance sheet, each line item is represented as a percentage of total assets. Alternatively, another version of the common size balance sheet displays asset line items as a percentage of total assets, liabilities as a percentage of total liabilities, and stockholders’ equity as a percentage of total stockholders’ equity. This formatting allows for a more comprehensive analysis of the composition and proportions of assets, liabilities, and equity relative to the overall financial position of the company.

Common Size Cash Flow Statement

The cash flow statement offers insights into a firm’s cash sources and applications. It is segmented into cash flows from operations, investing activities, and financing activities, providing details on cash movements within each business area.

In a common-size cash flow statement, one approach presents all line items as percentages of total cash flow. Another widely used version expresses cash flows in relation to total operational cash flow for items within cash flows from operations, total investing cash flows for activities related to investing, and total financing cash flows for activities related to financing. This format facilitates a comparative analysis of the composition and magnitude of cash flows across different business activities, aiding in the evaluation of a company’s financial performance and liquidity.

Common Size Income Statement

The income statement, also known as the profit and loss (P&L) statement, summarises the revenues, expenses, and net income generated during a specific reporting period. The income statement equation is sales minus expenses and adjustments, resulting in net income.

In the context of a common-size income statement, all items on the income statement are presented as a percentage of sales. This standardised format allows for a proportional analysis of each line item relative to the company’s revenue.

While the term “common size” is most commonly associated with the income statement, similar approaches can also be applied to the balance sheet and the cash flow statement. A common-size balance sheet presents each line item as a percentage of total assets, while a common-size cash flow statement expresses cash flows as percentages of total cash flow.

Using common-size statements facilitates comparative analysis and provides insights into the composition and relationships of financial statement items, aiding in financial analysis and decision-making.

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This glossary post was last updated: 28th April 2024.