Crafting Insightful Common Size Financial Statements- A Comprehensive Preparation Guide

How to Prepare Common Size Financial Statements

Understanding how to prepare common size financial statements is crucial for anyone analyzing financial data. Common size financial statements are a tool used to analyze financial performance by expressing each item on the income statement and balance sheet as a percentage of a base figure. This allows for easy comparison between companies of different sizes and industries. In this article, we will discuss the steps involved in preparing common size financial statements.

Step 1: Gather Financial Statements

The first step in preparing common size financial statements is to gather the necessary financial data. This includes the income statement, balance sheet, and statement of cash flows. Ensure that the financial statements are for the same period to compare them accurately.

Step 2: Identify the Base Figure

Next, determine the base figure against which you will express each item on the financial statements. For the income statement, the base figure is typically net sales or revenue. For the balance sheet, the base figure is often total assets or total liabilities and equity.

Step 3: Calculate Percentage for Each Item

For each item on the income statement and balance sheet, divide the amount by the base figure and multiply by 100 to get the percentage. For example, if net sales are $1,000,000 and cost of goods sold is $500,000, the cost of goods sold as a percentage of net sales is (500,000 / 1,000,000) 100 = 50%.

Step 4: Create Common Size Financial Statements

Once you have calculated the percentages for each item, create a new set of financial statements that displays each item as a percentage of the base figure. This can be done in a table format, with the income statement and balance sheet side by side.

Step 5: Analyze the Common Size Financial Statements

After preparing the common size financial statements, analyze the data to gain insights into the company’s financial performance. Look for trends, such as increasing or decreasing percentages over time, and compare the company’s financial performance to industry benchmarks.

Step 6: Use Common Size Financial Statements for Comparison

Common size financial statements are especially useful for comparing companies of different sizes and industries. By expressing financial data as percentages, you can easily identify strengths and weaknesses in a company’s financial performance.

In conclusion, preparing common size financial statements is a valuable skill for anyone analyzing financial data. By following these steps, you can gain a better understanding of a company’s financial performance and make more informed decisions.