Common Size Financial Statement Analysis Essay

When either the facts of a monetary statement be uttered on a common basis, it is known as a common-size pecuniary statement. Common-sizing of relaxation sheet is done generally by expressing its all periods as a dowry of its come up summations or wide equities. Similarly, income statement is common-sized when its all items are verbalized as function of constitutional gross taxation.PROCEDURE OF third estate surfaceIn preparing common-size income statement, the following procedure is to be followed Total sales revenue or total revenue is taken as hundred. individually item of cost or expenses is represented as a percentage of total revenue. Profit or loss also shown as a percentage of revenue.Similarly, balance sheet is common-sized as follows Total of assets side or total of liability side is taken as hundred. Each item of asset is expressed as percentage of total asset total of outstanding and liabilities. Each item of the liability side is also expressed as a pe rcentage of total assets or total of majuscule and liabilities. value OF COMMON-SIZE FINANCIAL STATEMENT compendInter-firm comparison becomes more meaningful when financial statement of the firms under comparison is common-sized. Common-size financial statement summary is roughly suitable to evaluate the performance of a company all over a period of time. It is useful in understanding the relative splendour of divers(prenominal) sources of financing. It helps the analyst to formulate hypothesis about the most expeditious commercial enterprise model by means of effective inter-firm comparisons. Common-size financial summary potful be used to compare a companys financial data with industry norms or average.COMMON-SIZE FINANCIAL STATEMENT ANALYSISWhen all the items of a financial statement are expressed on a common basis, it is known as a common-size financial statement. Common-sizing of balance sheet is done generally by expressing its all items as a percentage of its tota l assets or total equities. Similarly, income statement is common-sized when its all items are expressed as percentage of total sales.PROCEDURE OF COMMON SIZINGIn preparing common-size income statement, the following procedure is to be followed Total sales revenue or total revenue is taken as hundred. Each item of cost or expenses is represented as a percentage of total revenue. Profit or loss also shown as a percentage of revenue.Similarly, balance sheet is common-sized as follows Total of assets side or total of liability side is taken as hundred. Each item of asset is expressed as percentage of total asset total of capital and liabilities. Each item of the liability side is also expressed as a percentage of total assets or total of capital and liabilities.USEFULNESS OF COMMON-SIZE FINANCIAL STATEMENT ANALYSISInter-firm comparison becomes more meaningful when financial statement of the firms under comparison is common-sized. Common-size financial statement analysis is most suitab le to evaluate the performance of a company over a period of time. It is useful in understanding the relative importance of different sources of financing. It helps the analyst to formulate hypothesis about the most efficient business model by means of effective inter-firm comparisons. Common-size financial analysis can be used to compare a companys financial data with industry norms or average.