Common-size Statements


 

The ratios often are expressed as percentages of the reference amount.Common size statements usually are prepared for the income statement and balance sheet, expressing information as follows: Income statement items - expressed as a percentage of total revenue, sales etc.

 

Common-size Balance Sheet

 

  Dec 31 2015 Dec 31 2014
Cash $60,000 100.000% $52,000 100.000%
Accounts Receivable 80,000 133.333% 198,000 380.769%
Marketable Securities 40,000 66.667% 60,000 115.385%
Inventories 360,000 600.000% 440,000 846.154%
Prepaids 7,000 11.667% 3,000 5.769%
  Total Current Assets 547,000 911.667% 753,000 1448.077%
Property, Plant, and Equipment, net 853,000 1421.667% 877,000 1686.538%
  Total Assets $1,400,000 2333.333% $1,630,000 3134.615%
         
Current Liabilities $160,000 266.667% $240,000 461.538%
Bonds Payable 400,000 666.667% 400,000 769.231%
Total Liabilities 560,000 933.333% 640,000 1230.769%
Common Equity 840,000 1400.000% 990,000 1903.846%
  Total Liabilities & Equity $1,400,000 2333.333% $1,630,000 3134.615%
         
         
         
Total Revenue 2015 60,000      
Total Revenue 2014 52,000      

 

Even by looking at the numbers we can predict that something has happened with the company over last year. If we look closely we see current assets have decreased mainly due to decrease in inventory and account receivables. Which might indicate at a lot of things maybe company has decided a leaner approach or they have sold of some part of their business, or company having a slow year etc. But numbers can't tell the answers they do help you raise important questions. Same is the case with current liabilities and shareholder's equity. 

By doing Common-size statement analysis we can identify areas where significant change has happen. Now the onus is on us to identify the reason behind it by asking questions.

 

Common-size Income Statement

 

  2015 2014
Sales $1,640,000 100.000% $1,574,000 100.000%
  Cost of Goods Sold 800,000 48.780% 725,000 46.061%
Gross Profit 840,000 51.220% 849,000 53.939%
Other Income 60,000 3.659% 50,000 3.177%
SG&A 500,000 30.488% 480,000 30.496%
Interest Expense 40,000 2.439% 25,000 1.588%
  Net Income $300,000 18.293% $344,000 21.855%
         
         
Sales 2015 1640000      
Sales 2014 1574000      
         

 

If we look at this income statement first thing we see is that net income has decreased from last year. But how has it happened, we can see sales have increased from last year, shouldn't it increase the net income as well. Well not necessarily, Although sales have increased so is the cost of raw materials. which has lead to decrease in profit. Company could have not been efficient enough or production incurred lot of wastage or it might have happened due to increase in price of raw material or change of vendor etc. There can be numerous possibilities and as I have always said assuming something is very dangerous. The correct approach in this case would be to seek more information to understand why it has happened.