For example, the common-size income statement will report the revenue and expense amounts as percentages of net sales. The common-size balance sheet will report each asset, liability, and owner equity amount as a percentage of total assets. Common size balance sheets are similar to income statement examples. The only difference is that each line item on this accounting balance sheet is expressed as a percentage of total assets. Although a common size analysis can be conducted on any of the primary financial statements, most small business owners will benefit most from a common size income statement analysis. Your accounting software probably already has a common size analysis profit and loss statement as part of its standard reports feature. If it doesn’t, though, you can still export your data to Excel and run the analysis yourself.

It is important to add short-term and long-term debt together and compare this amount to the total cash on hand in the current assets section. This lets you know how much of a cash cushion is available or if a firm is dependent on the markets to refinance debt when it comes due. The common size percentages help to show how each line item or component affects the financial position of the company. On the other hand, the cost of goods sold has also increased, not just in absolute terms but also as a percentage of revenue. On the plus side, Sporty Shoes has reduced its selling, general and administrative expenses. For instance, in the above set of figures, the common-size income statement format makes it clear that the company is spending 50% of its sales revenue on producing goods.

Advantages of Common Size Income Statement Analysis

As we can see, gross margin is 50%, operating margin is 40%, and the net profit margin is 32%–the common size income statement figures. On the Clear Lake Sporting Goods’ common-size balance sheet, we see that current assets remained at 80 percent of total assets from the prior to current year (see Figure 5.25). While the balance in the equipment account did change as a percentage of total assets, equipment remained the same at 20 percent. However, financial statements may not provide all the information an investor or company leader needs.

• He is also the editor of Sales & Marketing Management, a website that focuses on B2B sales and marketing.
• For example, the common-size income statement will report the revenue and expense amounts as percentages of net sales.
• A common-size income statement can help company leaders and investors determine what is driving profits or dragging on them.
• In the liabilities section, we can deduce that accounts payable represent 15%, salaries 10%, long-term debt 30%, and shareholder’s equity 40% of the total liabilities and stockholder’s equity.
• Investopedia requires writers to use primary sources to support their work.

Many computerized accounting systems automatically calculate common-size percentages on financial statements. In general, managers prefer expenses as a percent of net sales to decrease over time, and profit figures as a percent of net sales to increase over time.

Common Size Financial Statement – Explained

Because these items are calculated as a percentage of sales, they help indicate how much the company uses them to generate overall revenue. She is an expert in personal finance and taxes, and earned her Master of Science in Accounting at University of Central Florida. Comparing these two income statements reveals two significant red flags. The real value of a common-size income statement comes when you can compare it to other income statements.

All three of the primary financial statements—the income statement , balance sheet and statement of cash flow—can be put through common size analysis. On the other hand, horizontal analysis refers to the analysis of specific line items and comparing them to a similar line item in the previous or subsequent https://www.bookstime.com/ financial period. Although common size analysis is not as detailed as trend analysis using ratios, it does provide a simple way for financial managers to analyze financial statements. It’s important to note that the common size calculation is the same as calculating a company’s margins.