Common‐size analysis (also called vertical analysis) expresses each line item on a single year's financial statement as a percent of one line item, which is referred to as a base amount. The base amount for the balance sheet is usually total assets (which is the same number as total liabilities plus stockholders' equity), and for the income statement it is usually net sales or revenues. By comparing two or more years of common‐size statements, changes in the mixture of assets, liabilities, and equity become evident. On the income statement, changes in the mix of revenues and in the spending for different types of expenses can be identified. Show
A common‐size analysis for the latest two years of The Home Project Company is shown in the following example. To calculate the common‐size for the 20X1 balance sheet, each amount was divided by $114,538, the “total asset” amount. For the 20X0 balance sheet, the common‐size percentages
were calculated by dividing by $118,732, “total assets.” For the 20X1 income statement, each amount was divided by $129,000 the “sales, net” amount, and for the 20X0 income statement, each amount was divided by $97,000, the “sales, net” amount
 Common size analysis displays each line item of your financial statement as a percentage of a base figure to help you determine how your company is performing year over year, and compared to competitors. It also shows the impact of each line item on the overall revenue, cash flow or asset figures for your company. The importance of common size analysis lies in the power of percentages to help you gain a deeper understanding of your business, find out whether it’s growing profitably and compare it to the competition. You can use it to see how your business stacks up percentage-wise with another business, even if that business is substantially larger. All three of the primary financial statements — the income statement (or profit and loss statement), balance sheet and statement of cash flow — can be put through common size analysis, which are shown in the examples below. Common size analysis formulaAccounting software will typically run a common size financial analysis for you, but it's still a good idea to understand the calculations behind it. There are two different types of common size analysis: vertical and horizontal. The formula below is the starting point for both. Percentage of overall base figure = (line item / overall base figure) x 100 Vertical vs. horizontal common size analysisCommon size analysis can be done either vertically or horizontally. Here’s how the methods differ and when to use them. Common size vertical analysisCommon size vertical analysis lets you see how certain figures in your business compare with a selected figure in one given time period. For example, you might use it to see what percentage of your income is used to support each business expense. This tool is especially important if you’re using key performance indicators to measure your business’s performance and profitability. The approach lets you compare your business to your competitors’ businesses, regardless of size differences. Common size horizontal analysisCommon size horizontal analysis lets you see how certain figures in your business change from one year to the next to help you spot trends. With a common size horizontal analysis, you can easily see if, for example, your expenses increased as a percentage of revenue, stayed the same or decreased among different time periods. Decreased expenses as a percentage of revenue may indicate that your business is currently operating at a higher level of efficiency than in the past, whereas increased expenses as a percentage of revenue might mean that you lost some efficiency as your revenue grew. Common size income statement analysisTo perform a common size income statement analysis, you’ll compare every line on your profit and loss statement to your total revenue. In other words, net revenue will be the overall base figure on your common size analysis formula. Chances are, you already do at least a partial common size income statement analysis each month. Whenever you analyze your margins — gross profit, net profit or operating — you’re performing a common size analysis. But you can perform this analysis on your entire income statement, too. Doing so will help you see at a glance which expenses take up the largest percentage of your revenue. Common size income statement exampleThis common size income statement analysis is done on both a vertical and horizontal basis.
For each line item on this sample income statement, we've shown the percentage that it makes up of total revenue. If you just looked at numbers, it might seem like this company did better in 2022 because sales increased from $500,000 to $600,000. However, net income only accounted for 10% of 2022 revenue, whereas net income accounted for more than a quarter of 2021 revenue. The company should look for ways to cut costs and increase sales in order to boost profitability. Common size balance sheet analysisConducting a common size balance sheet analysis can let you quickly see how your assets and liabilities stack up. Ideally, you want a low liability-to-asset ratio, as this indicates you will be able to easily pay your business’s obligations. This low ratio is favorable especially if you’re applying for a business loan, since lenders want to be assured that you’re financially solvent enough to take on and repay additional debt. Common size balance sheets are similar to common size income statements. The only difference is that each line item on this accounting balance sheet is expressed as a percentage of total assets. Total assets are the overall base figure this time. Common size balance sheet example
The sample company is in a pretty good position. The current assets formula determines that the "total current assets," which are the total of all assets that can be converted to cash within one year, makes up 37% of the company's total assets. 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. Common size cash flow statement analysisAs with the common size income statement analysis, the common size cash flow statement analysis largely relies on total revenue as the base figure. Here, you’ll render items on your cash flow statement as a percentage of net revenue. This analysis lets you see how effectively you’re leveraging the cash in your business, beyond just dollars flowing into and out of your bank account. Common size cash flow statement example
The analysis shows that the sample company had a positive influx of cash from operating activities in 2022, but this was overshadowed by a bigger increase in expenditures on investment items. Ultimately, positive cash flow from financing activities left the business with a positive cash position of $13,000. That means the company might be too dependent on financing. In the future, the company can improve by decreasing investment expenditures and increasing revenue from operating activities. This article originally appeared on Fundera, a subsidiary of NerdWallet. What is the basis in common size income statement?Common Size Income Statement
This is one type of common size statement where the sales is taken as the base for all calculations. Therefore, the calculation of each line item will take into account the sales as a base, and each item will be expressed as a percentage of the sales.
What are the most common income statement items?The most common income statement items include:. Revenue/Sales. Sales Revenue is the company's revenue from sales or services, displayed at the very top of the statement. ... . Gross Profit. ... . General and Administrative (G&A) Expenses. ... . Depreciation & Amortization Expense. ... . Interest. ... . Income Taxes.. What item is used as the base for the income statement?For the income statement, net sales is the base. For the balance sheet, total assets is the base.
What is the common base in common size balance sheet?The common figure for a common size balance sheet analysis is total assets. Based on the accounting equation, this also equals total liabilities and shareholders' equity, making either term interchangeable in the analysis.
|
