Common-size Balance Sheet / Statement of Financial Position – Introduction
Common-size analysis helps express a certain item as a ratio or percentage in relation to specific base item. For example in income statement usually the base item is total revenue and in balance sheet the common base item in reference to which others are expressed or evaluated are assets.
Common-size analysis helps understand the impact and influence of each item of financial statement and its contribution to the resultant. For example common-size analysis on income statement can help us understand that how significant are administrative costs in relation to sales and how much of the revenue is consumed by administrative expenses alone.
Common-size analysis has two types:
- Horizontal analysis: In this analysis the change (increase or decrease) in each item is measured in percentage form by comparing each item with the previous period’s or base period’s corresponding figure.
- Vertical analysis: In this analysis each item is measured in relation to total assets in percentage form to understand the structure of assets, liability and equity of the entity.
This analysis is usually conducted on Statement of Financial Position, Income Statement and Statement of Cash flows.