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Common Size Balance Sheets & Financial Statements

Instructor: Darlisha Oliver

Darlisha has a Master of Science degree in Accounting

In business, it is necessary for one company to compare its financial performance to that of another company. Learn how common size financial statements are used to compare one company's performance to another.

Comparing Apples to Oranges

How would you compare an apple to an orange? Each have different qualities. How would you compare the financial performance of an airline company to that of an oil and gas company? Common size financial statements make it possible to compare these two companies to determine who performed better over a certain period.

Overview of Financial Statements

At the end of each period, companies prepare financial statements to display and analyze their financial performance for that period. There are three main financial statements: the balance sheet, income statement, and the cash flow statement. The balance sheet displays the company's financial position at a given time. Assets, liabilities, and equity are the components of the balance sheet. The income statement provides insight on revenues and expenses over a given period, and is often referred to as the profit and loss statement. The cash flow statement shows the change in cash from operating, investing, and financing activities over a period of time.

Common Size Financial Statements

Common size financial statements display each item as a percentage of some base item. All companies aren't the same size. One company may have more cash, inventory, or revenue than another company. This makes it hard to compare one company to the other by simply comparing standard financial statements. Companies use common size financial statements to compare their financial performance with other companies or measure internal performance from one quarter to another because each item is shown as a percentage of a line asset.

The Common Size Balance Sheet

In a common size balance sheet, each asset is displayed as a percentage of total assets, each liability as a percentage of total liabilities, and each equity item as a percentage of total equity. Take a look at the example of a common size balance sheet below:

ABC Company

Common Size Balance Sheet for the period ending December 31, 2015

CommonSizeBalanceSheet

Using the common size balance sheet, ABC Company could compare the items on its balance sheet to that of another company, even if the company is in a different industry. As you can see, ABC Company's cash balance was 23% of its total assets. If the common size balance sheet of DEF Company displays a cash balance of 15% of total assets, we can say that ABC Company does a better job at keeping cash available for business operations.

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