Brief Definition
Common-size statements are financial reports that present information in a standardized format, making it easier to compare and analyze data. In these statements, each line item is shown as a percentage of a base amount, such as total assets or total sales. This allows for a better understanding of the proportions and trends within the financial statements. Common-size statements help in comparing companies of different sizes or industries, identifying areas of strength or weakness, and making informed decisions. They provide a standardized way to analyze financial information and spot patterns or changes over time.
Further Explanation
Common-size statements, also known as common-size financial statements, are financial reports that present financial information in a standardized format, allowing for easy comparison and analysis. In common-size statements, each line item is expressed as a percentage of a chosen base amount.
The base amount used in common-size statements can vary. It is typically either total assets for balance sheets or total sales/revenue for income statements. By expressing each line item as a percentage of the base amount, it provides a relative picture of the composition and proportions of different elements within the financial statement.
Common-size statements make it easier to identify trends, patterns, and variations in financial data across different periods or companies. They help in comparing the financial performance and structure of companies of different sizes or industries.
For example, in a common-size balance sheet, each asset and liability item is expressed as a percentage of total assets, which allows for better understanding of the asset composition, debt levels, and other financial ratios. In a common-size income statement, each revenue and expense item is expressed as a percentage of total sales, enabling analysis of the relative significance of different revenue sources or expense categories.
By using common-size statements, analysts can identify areas of strength or weakness, assess the impact of changes in financial ratios over time, and make more informed investment or managerial decisions. It provides a standardized framework for financial analysis and facilitates comparisons within and across industries.