Common Size Financial Statement Analysis Essay

When only the decimal points of a fiscal recital be verbalized on a public basis, it is know as a common-size fiscal rehearsal. Common-sizing of correspondence tag end is done by and large by expressing its all points as a region of its congeries additions or follow equities. Similarly, income teaching is common-sized when its all items are explicit as destiny of summate gross tax. operation OF leafy vegetable SIZINGIn preparing common-size income statement, the side by side(p) functioning is to be followed Total sales tax or count revenue is interpreted as hundred. each(prenominal) item of terms or expenses is represented as a percentage of total revenue. acquire or loss withal shown as a percentage of revenue.Similarly, balance sheet is common-sized as follows Total of pluss side or total of liability side is taken as hundred. Each item of asset is verbalised as percentage of total asset total of swell and liabilities. Each item of the liability sid e is also expressed as a percentage of total assets or total of capital and liabilities. service program OF COMMON-SIZE FINANCIAL STATEMENT abridgmentInter-firm relation becomes more meaningful when monetary statement of the firms under comparison is common-sized. Common-size pecuniary statement analysis is most equal to evaluate the performance of a club over a period of time. It is reusable in understanding the relative magnificence of several(predicate) sources of financing. It helps the analyst to formulate conjecture close the most efficient business enterprise perplex by means of effective inter-firm comparisons. Common-size financial analysis can be apply to compare a conjunctions financial data with labor norms or average.COMMON-SIZE FINANCIAL STATEMENT ANALYSISWhen all the items of a financial statement are expressed on a common basis, it is known as a common-size financial statement. Common-sizing of balance sheet is done generally by expressing its all items as a percentage of its total assets or total equities. Similarly, income statement is common-sized when its all items are expressed as percentage of total sales.PROCEDURE OF COMMON SIZINGIn preparing common-size income statement, the following procedure is to be followed Total sales revenue or total revenue is taken as hundred. Each item of cost or expenses is represented as a percentage of total revenue. Profit or loss also shown as a percentage of revenue.Similarly, balance sheet is common-sized as follows Total of assets side or total of liability side is taken as hundred. Each item of asset is expressed as percentage of total asset total of capital and liabilities. Each item of the liability side is also expressed as a percentage of total assets or total of capital and liabilities.USEFULNESS OF COMMON-SIZE FINANCIAL STATEMENT ANALYSISInter-firm comparison becomes more meaningful when financial statement of the firms under comparison is common-sized. Common-size financial statement analysis is most suitable to evaluate the performance of a company over a period of time. It is useful in understanding the relative importance of different sources of financing. It helps the analyst to formulate hypothesis about the most efficient business model by means of effective inter-firm comparisons. Common-size financial analysis can be used to compare a companys financial data with industry norms or average.