Common size financial statements compare the performance of a company over periods of time. The information can be compared to competitors to see how well it is performing. Within each section, there will be additional information that outlines the business activity for each source and use. One of the most common versions of the common size cash flow statement will express any and all line items as a percentage of total cash flow.

Common Size Financial Statement: Definition, Overview & Formula

With a common size horizontal analysis, you can easily see if, for example, your expenses increased as a percentage of revenue, stayed the same or decreased among different time periods. You would do this for each of the other line items to determine the common size income statement figures. There is no mandatory format for a common size balance sheet, though percentages are nearly always placed to the right of the normal numerical results.

Cash Flow Statement

A financial manager or investor can use the common size analysis to see how a firm’s capital structure compares to rivals. They can make important observations by analyzing specific line items in relation to the total assets. Based on the accounting equation, this also equals total liabilities and shareholders’ equity, making either term interchangeable in the analysis. It’s also possible to use total liabilities to indicate where a company’s obligations lie and whether it’s being conservative or risky in managing its debts.

1. One of the biggest benefits is that it provides investors with information to see changes in the financial statement of a company.
2. Similarly the comparison could equally be done between the business and a competitor in the same industry or with industry averages, thereby highlighting any differences in operation which may need correcting.
3. The order of presentation of this balance sheet is the same as the one used for a normal balance sheet, where assets are listed first, then liabilities, and then equity.
4. The most valuable aspect of a common size balance sheet is that it supports ease of comparability.
5. A vertical common-size balance sheet is a financial statement that expresses each item as a percentage of total assets.

Why Is Common Size Analysis Important?

The key benefit of a common-size analysis is that it allows for a vertical analysis by line item over a single period, such as quarterly or annually. It also allows you to view a horizontal perspective over a period such as the three years that were analyzed in our example. Share repurchase activity as a percentage of total sales in each of the three years was minimal or non-existent. Common-size Statements are accounting statements expressed in percentage of some base rather than rupees. For instance, it can be seen that there is a relative decrease in the long-term investments from 2016 to 2018, while the current liabilities have witnessed an uptrend during the same period. An analyst can further deep dive to determine the reason behind the same to make a more meaningful insight.

Doing so will help you see at a glance which expenses take up the largest percentage of your revenue. Let’s say that you’re looking into the line items on an income statement for a company. The items include selling and general administrative expenses, taxes, revenue, cost of goods sold, and net income. It can also highlight the expense items that provide a company a competitive advantage over another.

Even though common size analysis doesn’t provide as much detail, it can still be effective in analyzing financial statements. The cash flow statement provides an overview of the firm’s sources and uses of cash. The cash flow statement is divided among cash flows from operations, cash flows from investing, and cash flows from financing. Each section provides additional information about the sources and uses of cash in each business activity.

Common Size Financial Statement: Definition and Example

XYZ has stability and better profitability, so seemingly it may be a better long-term alternative. ExcelDemy is a place where you can learn Excel, and get solutions to your Excel & Excel common size balance sheet format VBA-related problems, Data Analysis with Excel, etc. We provide tips, how to guide, provide online training, and also provide Excel solutions to your business problems. Cell C6 represents a cell of the Category column, and cell $C$14 refers to the cell of Total Assets. The basic objective of a Common-size Balance Sheet is to analyse the changes in the individual items of a Balance Sheet.