Common Size Financial Statement

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Common-Size Financial Statement

A common-size financial statement converts dollar amounts on standard financial statements into percentages of a single base figure. This standardization makes it easier to compare companies of different sizes, compare performance across time, and identify what drives profitability.

How it works

  • Choose a base figure:
  • Income statement: base = sales (revenue).
  • Balance sheet: base = total assets (most common).
  • Cash flow statement: base = total cash flow or the subtotal for each section (operating, investing, financing).
  • Divide each line item by the base and express the result as a percentage.
  • Example: COGS ÷ Sales = COGS as a percentage of sales.

Why use common-size statements

  • Enables “apples-to-apples” comparisons across companies and periods.
  • Reveals cost structure and margin drivers (e.g., what percent of sales is COGS, SG&A, taxes).
  • Highlights trends in asset composition, leverage, and cash-flow sources/uses.
  • Useful for benchmarking against peers or industry averages.

Types and conventions

  • Income statement: All line items expressed as a percentage of sales (revenue).
  • Balance sheet:
  • Most common: express all items as a percentage of total assets.
  • Alternative: present assets as % of total assets, liabilities as % of total liabilities, and equity as % of total equity (less common).
  • Cash flow statement:
  • Option 1: express every line as a percentage of total cash flow.
  • Option 2 (more common): express items in each section as a percentage of that section’s subtotal (e.g., operating items as % of cash from operations).

Simple example (income statement)

Company figures:
– Sales: $100,000
– Cost of goods sold (COGS): $50,000
– Taxes: $1,000
– Net income: $49,000

Common-size income statement (each line as % of sales):
– Sales: 100%
– COGS: 50% (50,000 ÷ 100,000)
– Taxes: 1% (1,000 ÷ 100,000)
– Net income: 49% (49,000 ÷ 100,000)

How to create a common-size statement (step-by-step)

  1. Select the financial statement and appropriate base figure.
  2. For each line item, divide the dollar amount by the base.
  3. Multiply the result by 100 to express as a percentage.
  4. Review for trends and compare to peers or previous periods.

Limitations and cautions

  • Results can be affected by different accounting policies (e.g., inventory methods, depreciation, revenue recognition).
  • Percentages provide structure but not absolute scale—high margins on small revenue may not indicate strong financial position.
  • Use alongside other ratio analyses and absolute-dollar review for a complete picture.

Key takeaways

  • Common-size statements standardize financial data as percentages, simplifying comparisons across companies and time.
  • They are most commonly applied to the income statement (as % of sales) and the balance sheet (as % of total assets).
  • Useful for identifying cost drivers and structural changes, but should be interpreted with awareness of accounting differences and context.