A common size statement presents financial statement items as a percentage of a total.
Common size statements are commonly used for the income statement and the balance sheet. A common size income statement presents each item on the income statement as a percentage of sales. A common size balance sheet presents each item on the balance sheet as a percentage of total assets and total liabilities and equity, respectively.
Common size statements are important analytical tools which allow managers and investors to compare the firm’s P&L and balance sheet against those of the firm’s prior years and against those of competitors.
To prepare a common size income statement, we divide each line item by total sales. For example, consider a firm with the following P&L information: Sales 1,000,000, COGS 750,000, Operating Expenses $200,000. From this information we can determine that COGS is 75% of sales, operating expense is 20% of sales, and operating income is 5% of sales. These percentages, of course, must sum to 100%.
To prepare a common size balance sheet, we divide each line item by total assets or total liabilities and equity. For example, consider a firm with the following balance sheet: Cash 50,000, Receivables 75,000, Inventory 25,000, Payables 30,000, Debt 25,000, Equity 95,000. From this information, we can determine that cash is 33% of assets, receivables are 50% of assets, and inventory is 17% of assets. We can also determine that payables are 20% of liabilities and equity, debt is 17% of liabilities and equity, and owner’s equity is 63% of liabilities and equity.