Common Size Financial Statement: Definition and Example

Balance sheets, income statements, and cash flow statements are examples of common size financial statements. A common size financial statement displays items as a percentage of a common base figure, total sales revenue, for example. This type of financial statement allows for easy analysis between companies, or between periods, for the same company.

• In rare cases, however, when expenses exceed revenue, the percentage would top 100%.
• Selling and administrative expenses increased from 36.7 percent in 2009 to 37.5 percent in 2010.
• If you’re interested in finding out more about how to create a common-size income statement, then get in touch with the financial experts at GoCardless.
• 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.
• Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined.

Coca-Cola’s gross margin is 63.9 percent of net sales compared to 54.1 percent at PepsiCo. Coca-Cola’s operating income is 24.1 percent of sales compared to 14.4 percent at PepsiCo. Figure 13.8 “Comparison of Common-Size Gross Margin and Operating Income for ” compares common-size gross margin and operating income for Coca-Cola and PepsiCo. You can use it to see how your business stacks up percentage-wise with another business, even if that business is substantially larger.

Why Is Common Size Analysis Important?

Common size analysis, also referred as vertical analysis, is a tool that financial managers use to analyze financial statements. It evaluates financial statements by expressing each line item as a percentage of a base amount for that period. The analysis helps to understand the impact of each item in the financial statements and its contribution to the resulting figure. Common size financial statements compare the performance of a company over periods of time. The information can be compared to competitors to see how well it is performing.

• A company could use common size analysis to identify changes in its own balances between years or it could compare its results to that of its competitors.
• This type of financial statement makes it simpler for analysts to evaluate the profitability of a company over time.
• A common-size income statement is used to complete what is known as vertical analysis, which is when line items on a financial statement are compared to other line items, generally listed as a percentage.
• If the company expected the cash to be 50% of holdings, then this serious deviation must be researched.
• Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.
• Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments.
• You simply select the appropriate report format and financial statement date, and the system prints the report.

Download our free course flowchart to determine which best aligns with your goals. Learning how to read and understand an income statement can enable you to make more informed decisions about a company, whether it’s your own, your employer, or a potential investment. In addition to helping you determine your company’s current financial health, this understanding can help you predict future opportunities, decide on business strategy, and create meaningful goals for your team. All non-owner Common Size Income Statement Definition changes in equity (i.e., comprehensive income) shall be presented either in the statement of comprehensive income or in a separate income statement and a statement of comprehensive income. Components of comprehensive income may not be presented in the statement of changes in equity. After revision to IAS 1 in 2003, the Standard is now using profit or loss for the year rather than net profit or loss or net income as the descriptive term for the bottom line of the income statement.

Advantages of a Common Size Income Statement

This means line items on income statements are stated in percentages of gross sales, instead of in exact amounts of money, such as dollars. A common size financial statement is a specific type of statement that outlines and presents items as a percentage of a common base figure. The process of creating a common size financial statement is often referred to as a vertical analysis or a common-size analysis. A common size income statement is an income statement in which each line item is reported as a percentage of net sales.

Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. Recall that a key benefit of common-size analysis is comparing the firm’s performance to the industry. Expressing the figures on the income statement and balance sheet as percentages rather than raw dollar figures allows for comparison to other companies regardless of size differences. A common-size analysis of the income statement will compare all line items in the statement to total sales. It will then take that information and compare it to previous, comparable reporting periods and to those on competitors’ income statements to determine whether the results were positive developments or negative.

How a Common-Size Income Statement Works

The single-step format is useful for getting a snapshot of your company’s profitability, and not much else, which is why it’s not as common as the multi-step income statement. But if you’re looking for a super simple financial report to calculate your company’s financial performance, single-step is the way to go. Small businesses typically start producing income statements when a bank or investor wants to review the financial performance of their business to see how profitable they are. 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.

Any significant movements in the financials across several years can help investors decide whether to invest in the company. The main difference is that a common size balance sheet lists line items as a percentage of total assets, liability, and equity, which is different from the normal numerical value. One version of the common size cash flow statement expresses all line items as a percentage of total cash flow. Also known as profit and loss (P&L) statements, income statements summarize all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions. Income statements are often shared as quarterly and annual reports, showing financial trends and comparisons over time. Charitable organizations that are required to publish financial statements do not produce an income statement.

A common-size income statement measures ratios—the ratio of expenses to revenue or sales, for example, or the ratio of net income to revenue. Cost ratios measure the proportion of a company’s revenue to cover expenses, while profit ratios—typically called profit margins—measure the amount of revenue left after expenses. While XYZ may take satisfaction from this vertical analysis and favorable comparison, ABC decides to review its income statements for the past three years through horizontal analysis. It hopes to better understand why its profit margins are lower than XYZ’s.

This type of analysis eliminates differences that could exist due to size. Notice that PepsiCo has the highest net sales at $57,838,000,000 versus Coca-Cola at $35,119,000,000. Once converted to common-size percentages, however, we see that Coca-Cola outperforms PepsiCo in virtually every income statement category. Coca-Cola’s cost of goods sold is 36.1 percent of net sales compared to 45.9 percent at PepsiCo.

Depending on the company’s expectations, this can be noteworthy or unnoteworthy. If the company expected the cash to be 50% of holdings, then this serious deviation must be researched. If the company expected the cash to be 34%, then perhaps this is within the margin of error for their estimation, and nothing needs to be done about it. Common size analysis can be conducted in two ways, i.e., vertical analysis and horizontal analysis. Vertical analysis refers to the analysis of specific line items in relation to a base item within the same financial period. For example, in the balance sheet, we can assess the proportion of inventory by dividing the inventory line using total assets as the base item.