# Common-size Statement of Financial Position

## Vertical Common-size Balance Sheet / Statement of Financial Position

Vertical common-size balance sheet is prepared by dividing each element of statement of financial position to the total assets. Dividing by total assets or sum of total equity and total liabilities is the same. As according to accounting equation total assets are equal to capital + liability.

Vertical common size presentation of balance sheet present each item as a proportion of total assets. Presenting the balance sheet in this way will help user or analyst understand that how much each type of asset is part of total asset or in other words what is the share of each individual asset (inventory) or class of asset or type of asset (current asset) in total assets of the entity. The result will be in the form of percentages. For example if total inventory of entity is 30,000 and total assets are 750,000 then inventory is 4% of total assets. Continue to read for detailed example.

One thing to understand that vertical common size statement of financial position pertains to particular date and help understand the composition of asset, equity and liabilities at that day.

## Steps to prepare Vertical Common-size Balance Sheet

Consider the following statement of financial position as an illustration:

 PakAccountants Inc. Statement of Financial Position as at _______________ Non-current Assets Land 100,000 Building 200,000 Machinery 300,000 600,000 Current Assets Inventory 70,000 Accounts receivable 85,000 Cash 23,000 178,000 778,000 Shareholders’ equity 450,000 Long term liability 8% Debentures 170,000 Current liabilities Account payable 65,000 Tax payable 56,000 Accrued expenses 37,000 158,000 328,000 778,000

Step 1: Determine the total assets of the entity or the total sum of equity and liabilities of the entity. In our example it is 778,000.

Step 2: Calculate the quotient of each item of asset in the statement of financial position by dividing it over the amount determined in step 1. Once determined multiply the resultant with 100 to compute the percentage. For example cash in our example is 23,000 and dividing it over total asset gives 0.0295 (23,000 / 778,000). Multiply this result with 100 to get the percentage value i.e. 0.0295 x 100 = 2.95%

Step 3: Repeat the same process for equity and liability items as conducted on asset items to calculate percentage values for each item of equity and liability. For example debentures are 170,000 and dividing it over total of equity and liability (which is the same as total asset) 778,000 gives 0.219 (170,000 / 778,000). Multiply the resultant with 100 gives 21.9%

## Example Vertical Balance Sheet Analysis

Following will be the result of above three steps:

 PakAccountants Inc. Statement of Financial Position as at _______________ Non-current Assets Land 12.85% Building 25.71% Machinery 38.56% 77.12% Current Assets Inventory 9.00% Accounts receivable 10.93% Cash 2.96% 22.88% 100.00% Shareholders’ equity 57.84% Long term liability 8% Debentures 21.85% Current liabilities Account payable 8.35% Tax payable 7.20% Accrued expenses 4.76% 20.31% 42.16% 100.00%

Looking at common-size financial statement it is much easier to digest as compared the original above. In a hindsight one can understand what is the proportion of liabilities out of total funds available to the entity and how big the running operations are by looking at current asset as compared to total assets.

Vertical common-size analysis on balance sheet becomes much more meaningful when previous years’ common-size analysis is also present so that users and analysts can easily understand the changes in each item of the financial statements.

## Example Vertical Balance Sheet Analysis – Comparative Statement

 PakAccountants Inc. Statement of Financial Position 2014 2013 Non-current Assets Land 12.85% 13.58% Building 25.71% 22.35% Machinery 38.56% 40% Total non-current assets 77.12% 76.00% Current Assets Inventory 9.00% 7% Accounts receivable 10.93% 12% Cash 2.96% 5% Total current assets 22.88% 24% 100.00% 100.00% Shareholders’ equity 57.84% 65% Long term liability 8% Debentures 21.85% 15.97% Current liabilities Account payable 8.35% 6.21% Tax payable 7.20% 5.53% Accrued expenses 4.76% 7.29% Total current liabilities 20.31% 19.03% 100.00% 100.00%

With items expressed in percentages the comparison is much more easy as now each item explains the proportion in relation to the total and by taking figures and numbers out of the picture we have at least one thing less that can cause confusion or distraction in decision making. For example year 2014 has experienced significant decreased in equity which is not normal and should be investigated. Similarly the liquidity of the entity has worsened as compared to previous year therefore should be investigated for reasons.

These days common-size analysis is available in accounting software packages at the push of a button. Also spreadsheet software are widely used to make such analysis. For example Microsoft Excel is one famous software for this purpose.