What are common-size financial statements?

The problem is that the cost of goods sold is a significant expense for both companies. Goldman Sachs has markedly decreased its expenses from 2020 to 2021, whereas Morgan Stanley did not. Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.

Common-size financial statements facilitate the analysis of financial performance by converting each element of the statements to a percentage. This makes it easier to compare figures from one period to the next, compare departments within an organization, and compare the firm to other companies of any size as well as industry averages. On the income statement, analysts can see how much of sales revenue is spent on each type of expense. They can see this breakdown for each firm and compare how different firms function in terms of expenses, proportionally. They can also look at the percentage for each expense over time to see if they are spending more or less on certain areas of the business, such as research and development. On the balance sheet, analysts commonly look to see the percentage of debt and equity to determine capital structure.

7 Common-Size Statements

By analyzing how a company’s financial results have changed over time, common size financial statements help investors spot trends that a standard financial statement may not uncover. The common size percentages help to highlight any consistency in the numbers over time–whether those trends are positive or negative. Large changes in the percentage of revenue as compared to the various expense categories over a given period could be a sign that the business model, sales performance, or manufacturing costs are changing.

• Income before taxes increased significantly from 28.6 percent in 2009 to 40.4 percent in 2010, again mainly due to a one-time gain of $4,978,000,000 in 2010.
• The common size percentages also help to show how each line item or component affects the financial position of the company.
• One year may result from an odd event, so a look at a few years may give a clearer picture of the situation.
• By expressing the items in proportion to some size-related measure, standardized financial statements can be created, revealing trends and providing insight into how the different companies compare.
• In the future, the company can improve by decreasing investment expenditures and increasing revenue from operating activities.

Therefore, Sporty Shoes should look at these areas to see if it is getting the best value for its money. Note that although we have compared just two years of data for Charlie and Clear Lake, it is more common to use several years of data to get a more https://simple-accounting.org/ robust view of long-term trends. Common size statements also can be used to compare the firm to other firms. Operating profit is one of the most important numbers you can analyze because it shows the health of the business firm’s core business.

Common Size Analysis

They can also quickly see the percentage of current versus noncurrent assets and liabilities. To create a common-size financial statement, you must first pull out your income statement and balance sheet. Drop in your raw data for a period of four years, then express that data as a percentage of sales for the income statement, or as a percentage of total assets for the balance sheet.

To calculate common-size analysis, you need to know the total amount for each item in the statement. For example, if you are calculating common-size analysis for a company’s balance sheet, you would need the total amount of assets, liabilities, and equity on the balance sheet. Once you have these totals, you can express each item as a percentage of the common base figure. The next point of the analysis is the company’s non-operating expenses, such as interest expense. The income statement does not tell us how much debt the company has, but since depreciation increased, it is reasonable to assume that the firm bought new fixed assets and used debt financing to do it.

Common size balance sheet example

In the prior year, the balance sheet reflected 55 percent debt and 45 percent equity. In the current year, that balance shifted to 60 percent debt and 40 percent equity. The firm did issue additional stock and showed an increase in retained earnings, both totaling a $10,000 increase in equity. However, the equity increase was much smaller than the total increase in liabilities of $40,000. Long-term debt increased by only $10,000 by issuing additional notes payable.

A common-size analysis is a financial statement analysis technique that converts all items on a financial statement to percentages of some base figure. This technique allows for comparisons of financial statement items across different companies and different time periods. A profit-volume analysis is a financial statement analysis technique that examines how changes in sales volume affect a company’s profits. This technique allows for the determination of how much a company must sell in order to break even and how much net profit the company makes for each unit of sales. Common-size analysis is a financial analysis technique that adjusts financial statement items from their original form to percentages of some base figure. This technique allows for easy comparison of financial statement items from different companies and different time periods.

The common-size percentages on the balance sheet explain how our assets are allocated OR how much of every dollar in assets we owe to others (liabilities) and to owners (equity). Many computerized accounting systems automatically calculate common-size percentages on financial statements. On the Clear Lake Sporting Goods’ common-size balance sheet, we see that current assets remained at 80 percent of total assets from the prior to current year (see Figure 5.25). While the balance https://simple-accounting.org/the-income-statement/ in the equipment account did change as a percentage of total assets, equipment remained the same at 20 percent. When you show the items on the income statement as a percentage of the sales figure, it makes it easier to compare the income and expenses and understand the financial position of the company. Common size analysis is an excellent tool to compare companies of different sizes or to compare different years of data for the same company, as in the example below.

In contrast, current liabilities, which are debts due within one year, make up only 30% of the company’s total assets. In addition, the company has more total assets than total liabilities. From this, it can be seen that Gross Profit remained the same at 100% of revenue. Research & Development did not change at 1%, Selling General & Administrative declined ever so slightly from 38% to 37% of revenues. Operating Expenses declined a whopping 18%, from 72% to 54% of revenues. Income after taxes went up from 21% to 36%, and Net Income from 20% to 36%.

Income before taxes increased significantly from 28.6 percent in 2009 to 40.4 percent in 2010, again mainly due to a one-time gain of $4,978,000,000 in 2010. This caused net income to increase as well, from 22.0 percent in 2009 to 33.6 percent in 2010. In the expense category, cost of goods sold as a percent of net sales increased, as did other operating expenses, interest expense, and income tax expense. Selling and administrative expenses increased from 36.7 percent in 2009 to 37.5 percent in 2010. Since we use net sales as the base on the income statement, it tells us how every dollar of net sales is spent by the company. For Synotech, Inc., approximately 51 cents of every sales dollar is used by cost of goods sold and 49 cents of every sales dollar is left in gross profit to cover remaining expenses.

On the other hand, the cost of goods sold has also increased, not just in absolute terms but also as a percentage of revenue. On the plus side, Sporty Shoes has reduced its selling, general and administrative expenses. This common size income statement analysis is done on both a vertical and horizontal basis.