How to Prepare a Common Size Statement Step-by-Step
A common size financial statement is a tool used in accounting to help analyze and compare financial data effectively. Unlike traditional financial statements that list figures in absolute numbers, common size statements express each item as a percentage of a chosen base figure. This approach makes it much easier to understand the composition and trends within the data, regardless of the company’s size or the time period considered.
What Is a Common Size Financial Statement?
In a common size financial statement, every entry is shown as a percentage of a central figure, such as total sales or total assets. This shifts the focus from the absolute numbers to the relation each item has with the total, allowing a clearer comparison between businesses or periods.
Common size statements are useful in comparing companies of different scales, operating in different industries, or reviewing performance across different years. They are most frequently prepared for the income statement, balance sheet, and sometimes the cash flow statement.
It is important to note that differences in accounting practices can influence these statements, so variations may exist depending on company-specific rules and methods.
Understanding Common Size Financial Statements
By using percentages instead of absolute numbers, common size statements allow you to quickly see which elements have the most impact on a company’s profits and where the majority of resources are utilized.
This analysis is valuable for drawing insights about cost structure, profit margins, and overall stability, and it simplifies comparisons with other companies or with the company’s own historical data.
For students of accounting and business, learning to prepare and interpret common size statements is a key skill for practical analysis and decision-making.
Steps to Prepare a Common Size Financial Statement
- Choose a base figure on the statement. For the income statement, this is usually total sales; for the balance sheet, it is total assets or total liabilities.
- Divide each item’s amount by the base figure.
- Multiply the result by 100 to convert it into a percentage.
- Present both the absolute value and the calculated percentage for each item.
Example of a Common Size Income Statement
| Item | Value (Base = 1.00) | Common Size (%) |
|---|---|---|
| Sales | 1.00 | 100% |
| Cost of Goods Sold | 0.50 | 50% |
| Taxes | 0.01 | 1% |
| Net Income | 0.49 | 49% |
In this example, sales are taken as the base (100%). All other entries are shown as a percentage of sales. This format immediately reveals that half of the revenue is spent on goods sold, while taxes and net income are 1% and 49% of sales, respectively.
Why Use Common Size Statements?
- They make it easier to compare companies of different sizes and operational models.
- They simplify the identification of trends, such as cost increases or profit margin fluctuations, over time.
- They help focus analysis on structure and proportion, not just overall amounts.
For anyone studying business or preparing for commerce-related exams, mastering common size statements enhances both academic performance and practical financial analysis skills.
Tips for Analyzing Common Size Financial Data
- Always use a consistent base figure for each statement (e.g., total sales for each income statement).
- Look for unusually high or low percentages, as they may indicate areas of concern or opportunity.
- Compare results with other companies in the same industry for context.
Practice Questions
- Prepare a common size income statement from any set of sales and expense figures provided to you.
- Compare two companies using their common size statements and discuss the key differences you find.
- Analyze which item in your company’s common size balance sheet occupies the highest percentage and explain what this means.
Next Steps
To deepen your understanding of this topic, review detailed examples and practice problems on other financial analysis tools available on our platform.
Working through these examples will make you more confident in preparing and interpreting common size statements in real exam or professional situations.
FAQs on Common Size Statements Explained for Commerce Students
1. What is a common size statement with example?
A common size statement presents each item in a financial statement as a percentage of a base figure. For example, in a common size income statement, all items (like cost of goods sold or net profit) are shown as a percentage of sales. This allows for easy comparison across periods or companies. For instance, if sales are ₹10,00,000 and cost of goods sold is ₹7,00,000, then COGS will be shown as 70% of sales in the common size statement.
2. What is the use of common size statement?
Common size statements help in comparing the financial performance and structure of different companies or the same company over different periods. Key uses include:
• Identifying financial trends and operational efficiency
• Highlighting structural composition (like proportion of expenses or profits)
• Facilitating easy comparisons, regardless of company size or time period
• Assisting in decision-making for stakeholders and analysts
3. How do you prepare a common size statement?
To prepare a common size statement:
1. Select the base figure (Total Sales for income statement, Total Assets or Total Liabilities for balance sheet).
2. Divide each item by the base figure.
3. Multiply by 100 to get the percentage.
4. Present both the actual amount and its percentage.
For example, if Cash is ₹1,00,000 and Total Assets are ₹5,00,000, then Cash = (₹1,00,000/₹5,00,000)×100 = 20%.
4. How is a common size statement different from a comparative statement?
Common size statements show each item as a percentage of a base (like sales or assets), focusing on structural analysis, while comparative statements display year-on-year changes in absolute figures and percentages, emphasizing trends and growth. Common size is best for structure comparison; comparative is best for trend analysis.
5. What are the main formulas used in common size statements?
The key formulas are:
• Common Size Income Statement: (Item Amount / Net Sales) × 100
• Common Size Balance Sheet: (Item Amount / Total Assets or Liabilities) × 100
These formulas help express each item as a percentage of the base figure for effective analysis.
6. What does common size percentage indicate?
A common size percentage indicates the relative size of each item compared to its base figure in the statement. For example, if Operating Expenses are 10% of Sales, this reveals the share of expenses in total revenue, helping identify areas of strength or concern.
7. What are the advantages of using common size statements?
Advantages of common size statements:
• Easy comparison of different-sized companies or years
• Identification of patterns and structural changes
• Simplifies complex financial data using percentages
• Useful for quick analysis during exams and decision-making
8. Can common size analysis be used for both balance sheet and income statement?
Yes, common size analysis can be applied to both the income statement (each item as a % of sales) and the balance sheet (each item as a % of total assets or liabilities). This analysis enhances comparability and reveals underlying financial patterns.
9. What are common errors students make in preparing common size statements?
Common errors include:
• Not using the correct base figure (e.g., using total income instead of sales or total assets)
• Misplacing items between statement categories
• Calculating percentages incorrectly
• Ignoring the need to present both actual and percentage values
10. How are common size statements relevant for exams?
Common size statements are frequently tested in board and competitive exams, such as CBSE, ISC, and B.Com. They assess understanding of financial analysis, comparison skills, and proper application of accounting formulas, making them crucial for scoring well in commerce examinations.
11. What is vertical analysis in the context of common size statements?
Vertical analysis is another term for preparing common size statements. It refers to analyzing each item in a financial statement as a percentage of a selected base, allowing users to evaluate internal structure and relationships within the statement for a single period.
12. Where can I practice common size statement questions with solutions?
You can practice common size statement questions with solutions by using Vedantu’s live classes, sample papers, and chapterwise notes. These resources follow the current syllabus and provide both conceptual and practical practice for strong exam preparation.
