What are the Common size statements?

Common size financial statements are a type of financial analysis tool that expresses each line item on a financial statement as a percentage of a base amount. This base amount is typically total revenue for the income statement and total assets for the balance sheet. Common size statements allow for the standardization and comparison of financial data across different companies, industries, or time periods, making it easier to identify trends, patterns, and relationships.

Here's how common size statements are prepared for the income statement and balance sheet:

Common Size Income Statement:
Each line item on the income statement is expressed as a percentage of total revenue.
This allows for the analysis of the composition of revenue and expenses relative to total revenue.
Common size income statements help identify the relative proportion of each expense category, such as cost of goods sold, operating expenses, and taxes, as well as the overall profitability of the company.
Common Size Balance Sheet:
Each line item on the balance sheet is expressed as a percentage of total assets.
This allows for the analysis of the composition of assets, liabilities, and equity relative to total assets.
Common size balance sheets help identify the relative proportion of different asset and liability categories, such as current assets, property, plant, and equipment, current liabilities, long-term debt, and shareholders' equity.
By expressing financial data as percentages of a common base, common size statements facilitate comparisons between companies of different sizes or within the same company over time. They highlight the relative importance of different financial components and provide insights into the company's financial structure, operating efficiency, and profitability drivers.

Common size statements are particularly useful for financial analysts, investors, and stakeholders interested in understanding the underlying composition of a company's financial statements and evaluating its performance relative to industry peers or benchmarks. They complement other financial analysis tools and techniques and can enhance decision-making processes related to investment, lending, strategic planning, and performance evaluation.