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Analysis of Financial Statements — Part 2: Common-size Statements and Interpretation

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Lesson

Common-size statements

Part 2 — every item as a percentage of a base: the common-size statement of profit and loss and the common-size balance sheet.

In this lesson you will

Explain common-size statements and the base used in each
Prepare a common-size statement of profit and loss and a common-size balance sheet
Round to two decimals so that every column totals 100.00
Interpret comparative and common-size statements, including comparisons between firms

Part 2 at a glance

Concept

What is a common-size statement?

Also called vertical (static) analysis.
Shows the make-up of a statement and allows comparison of firms of different sizes.

Percentages are rounded to two decimals.
Statement	Base taken as 100	Each item shown as
Common-size statement of profit and loss	Revenue from operations of the year	Item ÷ revenue from operations × 100
Common-size balance sheet	Balance sheet total (assets = equity and liabilities)	Item ÷ balance sheet total × 100

Concept

Format: common-size statement of profit and loss

Other income is also a percentage of revenue from operations, so total income can exceed 100.

Format of a common-size statement of profit and loss: amounts for both years and each line as a percentage of revenue from operations, with revenue at one hundred and total income above one hundred when there is other income
Particulars	Amount: earlier year	Amount: later year	% of revenue: earlier	% of revenue: later
I. Revenue from Operations	…	…	100.00	100.00
II. Add: Other Income	…	…	share	share
III. Total Income	…	…	above 100 if there is other income	…
IV. Expenses (each head and total)	…	…	share of revenue	share of revenue
V. Profit before Tax, VI. Tax, VII. Profit after Tax	…	…	share of revenue	share of revenue