In: Finance
All items in common-size income statement are scaled by except for per unit items. All items in common-size balance sheet are scaled by except for per unit items.
sales; total assets
sales; total equity
cost of good sold; total assets
cost of goods sold; total equity
A common size income statement is an income statement in which each line item is expressed as a percentage of the value of revenue or sales. It is used for vertical analysis, in which each line item in a financial statement is represented as a percentage of a base figure within the statement,
Common size financial statements help to analyze and compare a company's performance over several periods with varying sales figures. The common size percentages can be subsequently compared to those of competitors to determine how the company is performing relative to the industry.
Generally accepted accounting principles (GAAP) are based on consistency and comparability of financial statements. A common size income statement makes it easier to see what's driving a company’s profits. The common size percentages also help to show how each line item or component affects the financial position of the company. As a result, the financial statement user can more easily compare the financial performance to the company's peers.
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.
Common size financial statement analysis can also be applied to the balance sheet and the statement of cash flows.