Common size balance sheet

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What is a common size balance sheet?

A current-size balance sheet is a balance sheet that displays both the numerical value and the relative percentage of total assets, total liabilities, and equity accounts. Common size balance sheets are used by internal and external analysts and are not a generally accepted accounting principles (GAAP) reporting requirement.

Key points to remember

  • Common size balance sheets show numerical values ​​and their relative percentages for total assets, liabilities, and equity accounts.
  • This form of balance sheet is not required for reporting under generally accepted accounting principles (GAAP).
  • The advantages of common-size balance sheets are that they allow quick comparison between items against their total value, such as a single asset against the value of total assets.
  • Commonly sized balance sheets also allow internal and external stakeholders to analyze trend lines and see any major changes that may have occurred in the balance sheet.

Common size balance sheet

What is a common size balance sheet for?

A common sized balance sheet allows for quick analysis of each account’s relative percentage of assets, liabilities, and equity. Each asset item is compared to the value of the total asset. Similarly, any single liability is compared to the value of the total liability, and any equity account is compared to the value of the total equity. For this reason, each main account classification will equal 100%, as all smaller components will add up to the main account classification.

Common sized balance sheets are not required under generally accepted accounting principles, and the percentage information presented in these financial statements is not required by any regulatory body. Although the information presented is useful to financial institutions and other lenders, a common sized balance sheet is generally not required when applying for a loan.

Although commonly sized balance sheets are most often used by internal management, they also provide useful information to external parties, including independent auditors. The most valuable aspect of a common sized balance sheet is that it facilitates comparability. The Common Size Balance Sheet shows the composition of a company’s various assets and liabilities through the presentation of percentages, in addition to absolute dollar values. This allows the historical trend of various positions or categories to be compared quickly and provides a baseline for comparing two companies of different market capitalizations. Additionally, relative percentages can be compared across companies and industries.

Example of a common size balance sheet

A company has total assets of $8 million, total liabilities of $5 million, and total capital of $3 million. The company has $1 million in cash, which is part of its total assets. Here, cash represents $1 million of the $8 million in total assets. Therefore, in addition to reporting the dollar amount of cash, the common size financial statement includes a column that indicates that cash is 12.5% ​​($1 million divided by $8 million) of total assets.

The common size balance sheet first presents total assets in order of liquidity. Liquidity refers to how quickly an asset can be turned into cash without affecting its value. For this reason, the first line of the financial statement would show the cash account worth $1 million.

What is the Common Size Balance Sheet Formula?

The common size balance sheet formula takes a line item divided by the base amount multiplied by 100 for a given period.

For the balance sheet, items are usually divided by total assets. If Company A has $1,000 in cash and $5,000 in total assets, this would be shown in a separate column as 20% in a common size balance sheet.

In income statements, line items are most often divided by total revenue or total sales. If Company A had operating expenses of $2,000 and total revenues of $4,000, the operating expenses would be shown as 50%.

What is another name for common size analysis?

Common size analysis is used interchangeably with vertical analysis. This type of analysis is used to analyze a company’s financial statements to identify patterns, trend lines, and to compare a company to competitors. When numbers are expressed as a percentage of a whole, analysts can assess the contribution of each part relative to another.

What are the benefits of common size balance sheets?

Although common size balance sheets are not a requirement of generally accepted accounting principles (GAAP), they offer a number of advantages to internal and external parties. The main advantages are that they allow quick comparison between line items, identification of patterns, detection of significant changes in a company’s financial statements, comparison of companies of different sizes in the same industry and viewing the ratios of various line items as part of a company’s total assets or total revenue.

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