How To Calculate Common Size Income Statement

Finance > Common-Size Statements

Mutual Size Financial Statements

Mutual size ratios are used to compare financial statements of different-size companies, or of the aforementioned company over different periods. By expressing the items in proportion to some size-related measure, standardized financial statements can exist created, revealing trends and providing insight into how the dissimilar companies compare.

The common size ratio for each line on the fiscal statement is calculated as follows:

Common Size Ratio

Item of Interest

Reference Detail

For example, if the item of interest is inventory and information technology is referenced to total assets (as information technology unremarkably would be), the common size ratio would be:

Common Size Ratio for Inventory

Inventory

Full Assets

The ratios often are expressed equally percentages of the reference amount. Mutual size statements commonly are prepared for the income statement and balance sheet, expressing information as follows:

Income argument items - expressed as a percentage of full acquirement
Balance sail items - expressed as a percentage of full assets

The following example income statement shows both the dollar amounts and the common size ratios:

Common Size Income Statement

	Income Argument	Common-Size Income Statement

Revenue	70,134	100%
Price of Goods Sold	44,221	63.1%
Gross Profit	25,913	36.nine%
SG&A Expense	13,531	nineteen.3%
Operating Income	12,382	17.7%
Involvement Expense	2,862	4.1%
Provision for Taxes	3,766	5.4%
Net Income	five,754	8.2%

For the rest sheet, the common size percentages are referenced to the total avails. The following sample balance sail shows both the dollar amounts and the common size ratios:

Common Size Balance Sheet

	Residual Canvass	Mutual-Size Balance Sheet
Avails
Cash & Marketable Securities	6,029	15.1%
Accounts Receivable	14,378	36.0%
Inventory	17,136	42.9%
Total Current Assets	37,543	93.9%
Holding, Establish, & Equipment	2,442	six.1%
Total Avails	39,985	100%
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities	14,251	35.6%
Long-Term Debt	12,624	31.six%
Full Liabilities	26,875	67.2%
Shareholders' Disinterestedness	13,110	32.8%
Total Liabilities & Disinterestedness	39,985	100%

The above common size statements are prepared in a vertical analysis, referencing each line on the fiscal statement to a total value on the statement in a given period.

The ratios in common size statements tend to have less variation than the absolute values themselves, and trends in the ratios can reveal of import changes in the business organization. Historical comparisons can exist made in a time-series analysis to identify such trends.

Common size statements also tin be used to compare the firm to other firms.

Comparisons Between Companies (Cantankerous-Sectional Analysis)

Common size fiscal statements can exist used to compare multiple companies at the same point in time. A common-size analysis is especially useful when comparing companies of unlike sizes. Information technology oft is insightful to compare a firm to the best performing firm in its manufacture (benchmarking). A firm also can exist compared to its industry equally a whole. To compare to the industry, the ratios are calculated for each firm in the industry and an average for the industry is calculated. Comparative statements then may be constructed with the visitor of interest in i column and the manufacture averages in another. The effect is a quick overview of where the business firm stands in the industry with respect to key items on the financial statements.

Limitations

Equally with financial statements in general, the interpretation of common size statements is discipline to many of the limitations in the accounting data used to construct them. For example:

Different accounting policies may be used by dissimilar firms or within the same firm at different points in time. Adjustments should be made for such differences.
Different firms may use different bookkeeping calendars, so the accounting periods may not be directly comparable.

Finance > Common-Size Statements