What is the financial statement of common size?

A common size financial statement is created a document to make it easier to compare different financial accounts. This is achieved by setting numbers as a percentage rather than raw numbers. The baseline used for the percentage will depend on the type of financial statements evaluated. With income statements, each item is listed as a percentage of the total return. With balance sheets, each item is listed as a percentage of total assets. A smaller company may have revenues of $ 20,000, the cost of $ 5,000, and thus a profit of $ 15,000. At first glance, larger society seems to be doing better because it achieves greater profit. However, the financial statement of common size comparing both companies will show that any smaller compos has actually been more successful.

In a common statement in common size, the data of each company would be reworked in comparison with its income. This means that the first company would have an income at 100%,Pros to 75%and profit at 25%. The second company would have 100%income, 25%costs and profit to 75%. This method makes it easier to see that the other company is proportionally more advantageous or has done better work in maintaining costs under control. The performance of the company that is better is still on the attitude of the analyst, but using the financial statements of the common size makes it easier to compare different elements of business business.

There are some potential disadvantages for using a financial statement of common size. One of them is that it can present the appearance of a fairer comparison between different societies, but is still subject to normal reduction of drought comparisons. This includes companies using different accounting periods and companies using different accounting methods. There will also be problems in comparing companies from different industries, because what is considered to be a good ratio between different items in a financial statement may vary. For exampleEducational income margin for costs than a luxury car manufacturer, instead of its profits.

The financial statement of common size is not only used to compare companies. Instead, this could be used for accounts from the same company at different times. This may be common for a company analysis that has gone through rapid growth. It makes it easier to emphasize problems such as increasing turnover and profits of society, but is experiencing a decline in efficiency in the way it uses its assets.