Introduction
Common size statement is a financial statement that presents all the figures as percentages of a base figure. This allows for easy comparison and analysis of financial data across different time periods and companies.
Benefits of Common Size Statements
1. Comparison: Common size statements help in comparing financial data of different companies and industries.
2. Analysis: It makes analysis easier as it highlights trends and patterns in financial data over time.
3. Decision Making: Managers can make informed decisions based on the analysis of common size statements.
How to Prepare a Common Size Statement
To prepare a common size statement, divide each item in the financial statement by a base figure. For example, in an income statement, every item is divided by total revenue. In a balance sheet, each item is divided by total assets.
Example
Let’s take an example of a common size income statement. If a company has total revenue of $1,000, and cost of goods sold is $400, the common size percentage for cost of goods sold would be 40% ($400 divided by $1,000).
Case Study
Company A and Company B both operate in the same industry. By preparing common size statements, Company A finds that its selling expenses are 15% of revenue, while Company B’s selling expenses are 20% of revenue. This analysis helps Company A identify areas for cost reduction.
Statistics
According to a survey, 90% of companies use common size statements for financial analysis and decision making.
