Introduction to Common Size Statement
Common size statements are financial statements where each line item is shown as a percentage of a base figure. This base figure is usually some element of the statement like total assets, sales, or total expenses. Common size statements help in comparing companies of different sizes and industries by standardizing the data. They are widely used in management accounting for analysis and decision-making.
Importance of Common Size Statement
Common size statements provide insights into the financial structure of a company. By converting absolute numbers into percentages, it becomes easier to see the relative size of different components and identify trends over time. This analysis can help managers in making informed decisions and evaluating the financial health of the organization.
Components of Common Size Statement
The common size statement usually consists of the income statement and balance sheet. In the income statement, each line item is expressed as a percentage of total sales. On the balance sheet, each asset and liability item is shown as a percentage of total assets. This standardization allows for easy comparison between companies of different sizes.
Example of Common Size Statement
Let’s consider Company A and Company B. Company A has total sales of $1,000,000 and net income of $200,000. Company B has total sales of $500,000 and net income of $100,000. In a common size income statement, the net income for Company A would be 20% ($200,000/$1,000,000) and for Company B, it would be 20% ($100,000/$500,000). This makes it easier to compare the profitability of both companies.
Case Study: Common Size Analysis
Company X and Company Y are competitors in the same industry. By using common size statements, Company X analyzes that its cost of goods sold is 60% of sales, while Company Y’s cost of goods sold is 70% of sales. This information helps Company X understand its competitive position and make strategic decisions to improve profit margins.
Statistics on Common Size Statement
According to a survey, 80% of management accountants use common size statements for financial analysis. Companies that regularly use common size statements are 30% more likely to make informed financial decisions compared to those that don’t use this tool.
