Common Size Statements: UGC NET Commerce Motes & Study Material

A common size statement is a type of analysis and interpretation of the financial statement. It is also referred to as vertical analysis. This technique examines financial statements by considering each of the line items as a percentage of the base figure for that specific accounting period. Common Size Statements are a type of financial statement that state every line item as a percent of a base item, such as total revenue or total assets. This mode of financial comparison makes it easier to compare statements of varying size or industry by being able to spot trends, patterns, and issues. Common size statements provide a standardized way to assess the composition of various financial components, aiding investors, analysts, and management in making informed decisions about a company's financial health and performance.

Common size statements is a very vital topic to be studied for the commerce related exams such as the UGC-NET Commerce Examination.

In this article, the learners will be able to find about the following topics in detail:

• Common Size Statement Format
• Types of Common Size Statements
• Difference Between Comparative and Common Size Statement Format

What is Common Size Statement?

A Common Size Statement is a method of presenting financial statements where every line item is a percentage of a common base item on the same statement. This uniform format makes it easier to compare financial statements of varying sizes or firms so that there can be a better analysis of their composition and structure. Common size statements are a useful tool in analysis of both the income statement and the balance sheet.

Size statement is a budget report that illustrates every line item as a percent of a base amount. It makes it easy to analyze firms of different sizes. The firm applies this statement to allow for comparisons with a previous period or another firm.

Types of Common Size Statements

Common size statements are financial statements users utilize to compare the financial data of a firm by showing it each item in percentages. There are primarily two types of common size statements, the income statement and the balance sheet.

Common Size Income Statement

A typical size income statement reports all the units of revenues and expenses of a company as a percentage of the total revenues. This may allow you to easily see how much money is spent on things like salaries, rent, and raw materials. By this statement, you can gauge how much profit is earned by the company for each dollar taken in. It can offer a simple comparison of how different companies spend their money and make profits.

Common Size Balance Sheet

A size balance sheet will have each component of a company's assets, liabilities, and equity as a percentage of total assets. It is more of a theoretical concept of what part of the business it belongs to (equity) and what part it owes (liabilities). With percentages, it is simpler to compare a company's financial health with others. It might give a simple comparison of how different firms spend their expenditure and earn profits.

Difference Between Comparative and Common Size Statement Format

There are a lot of differences between comparative and common size statement format which have been discussed below. A comparative statement compares information over time, while a common size statement puts each item as a percentage in order to enable comparisons.

Common Size Statements are vital financial analysis tool, as they gives a simple and uniform format for showing the outline of the financial statements. By expressing each line item as a percentage of a common base, stakeholders gain insights into the relative importance of different components, enabling better comparisons between companies and facilitating the identification of trends or areas that require attention.

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