What is a Common Size Financial Statement?
For carrying out their financial analysis of a company, stakeholders need its financial statements to collect useful information concerning the company. A common size financial statement provides everything in the form of percentages. Items in the balances sheet are given as a percentage of assets whereas items pertaining to income statement are offered as sales percentages.
Comparative financial statements contain monetary data for a number of consecutive years alongside. Facts and figures could be offered as percentages, in absolute values or both.
1. Vertical Common-Size Statements
This kind of financial statement is a kind of common size financial statement which states all values as a percentage of the base value of the same year. Vertical common statements are most helpful in case of income statements. Generally, the amount of entire sales is taken as a base value (100 %.) Assorted expenses like the amount of merchandize sold, expenses towards advertising, administrative expenses etc are shown as a percentage of entire sales.
Vertical analysis, when used in conjunction with balance sheet, tells us the relationship between different items (like liabilities, assets and equity) and the sum of total assets.
Since analysis is carried from top to down, such financial statements are known as vertical financial statements.
2. Horizontal Common-Size Statements
A common size financial statement that conveys values over a number of years as a percentage of the base value for a specific base year is called horizontal common size statement. . Horizontal statements prove helpful while comparing data of balance sheet and income statement to assess the changes that took place over the years. Since data analysis is carried along the rows of statements these are known as horizontal statements.
3. Comparative Financial Statements
Comparative financial statements, also known as year to year statements may use either absolute amounts or percentages to facilitate significant analysis. This kind of analysis provides an outlook of percentage changes and absolute changes. You can’t work out any changes in the absence of a base figure or calculate any important changes when you have one figure while the corresponding one is positive.
You’ll find common-size financial statements of great help for comparing fiscal data of different companies, especially of companies engaged in different kinds of industries. That is because it becomes rather difficult to say if a figure is too high or low or normal because of the differences created in financial statements due use of different currencies by various companies and their sizes. Common size financial statements, being standardized, enable us to make effective comparisons.