Common Size Financial Statement

A common size financial statement is a financial statement that expresses all items in terms of a common base, such as a percentage of total assets or total revenue. This makes it easier to compare the financial statements of different companies or of the same company over time.

There are two main types of common size financial statements:

* **Horizontal common size financial statements** express each item as a percentage of the same item in the previous year. This makes it easy to see how the company's financial position has changed over time.
* **Vertical common size financial statements** express each item as a percentage of total assets or total revenue. This makes it easy to compare the relative importance of different items on the financial statements.

Common size financial statements are a valuable tool for financial analysis. They can be used to identify trends in a company's financial performance, compare the financial performance of different companies, and assess the financial health of a company.

Here is an example of a horizontal common size income statement:

| 2022 | 2021 | % Change |
|---|---|---|
| Revenue | $100,000 | $90,000 | 11% |
| Cost of Goods Sold | $60,000 | $55,000 | 9% |
| Gross Profit | $40,000 | $35,000 | 14% |
| Operating Expenses | $25,000 | $22,000 | 14% |
| Net Income | $15,000 | $13,000 | 15% |

This income statement shows that the company's revenue increased by 11% from 2021 to 2022. However, the company's cost of goods sold also increased by 9%, which resulted in a decrease in gross profit. The company's operating expenses also increased by 14%, which further reduced net income.

Here is an example of a vertical common size balance sheet:

| 2022 | 2021 | % Change |
|---|---|---|
| Assets | $100,000 | $90,000 | 11% |
| Cash | $10,000 | $12,000 | -16% |
| Accounts Receivable | $20,000 | $18,000 | 11% |
| Inventory | $30,000 | $25,000 | 20% |
| Property, Plant, and Equipment | $40,000 | $35,000 | 14% |
| Total Liabilities | $50,000 | $45,000 | 11% |
| Accounts Payable | $10,000 | $9,000 | 11% |
| Notes Payable | $20,000 | $18,000 | 11% |
| Long-Term Debt | $20,000 | $20,000 | 0% |
| Total Equity | $50,000 | $45,000 | 11% |

This balance sheet shows that the company's assets increased by 11% from 2021 to 2022. The company's cash decreased by 16%, while its accounts receivable and inventory increased by 11% and 20%, respectively. The company's property, plant, and equipment also increased by 14%.

The company's liabilities increased by 11% from 2021 to 2022. The company's accounts payable increased by 11%, while its notes payable and long-term debt remained the same. The company's equity also increased by 11%.

Common size financial statements are a valuable tool for financial analysis. They can be used to identify trends in a company's financial performance, compare the financial performance of different companies, and assess the financial health of a company.