Friday, September 6, 2019
Common Size Financial Statement Analysis Essay Example for Free
Common Size Financial Statement Analysis Essay When 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 SIZING In preparing common-size income statement, the following procedure is to be followed : â⬠¢Total sales revenue or total revenue is taken as hundred. â⬠¢Each item of cost or expenses is represented as a percentage of total revenue. â⬠¢Profit or loss also shown as a percentage of revenue. Similarly, balance sheet is common-sized as follows : â⬠¢Total of assets side or total of liability side is taken as hundred. â⬠¢Each item of asset is expressed as percentage of total asset total of capital and liabilities. â⬠¢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 ANALYSIS â⬠¢Inter-firm comparison becomes more meaningful when financial statement of the firms under comparison is common-sized. â⬠¢Common-size financial statement analysis is most suitable to evaluate the performance of a company over a period of time. â⬠¢It is useful in understanding the relative importance of different sources of financing. â⬠¢It helps the analyst to formulate hypothesis about the most efficient business model by means of effective inter-firm comparisons. â⬠¢Common-size financial analysis can be used to compare a companyââ¬â¢s financial data with industry norms or average. COMMON-SIZE FINANCIAL STATEMENT ANALYSIS When 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 SIZING In preparing common-size income statement, the following procedure is to be followed : â⬠¢Total sales revenue or total revenue is taken as hundred. â⬠¢Each item of cost or expenses is represented as a percentage of total revenue. â⬠¢Profit or loss also shown as a percentage of revenue. Similarly, balance sheet is common-sized as follows : â⬠¢Total of assets side or total of liability side is taken as hundred. â⬠¢Each item of asset is expressed as percentage of total asset total of capital and liabilities. â⬠¢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 ANALYSIS â⬠¢Inter-firm comparison becomes more meaningful when financial statement of the firms under comparison is common-sized. â⬠¢Common-size financial statement analysis is most suitable to evaluate the performance of a company over a period of time. â⬠¢It is useful in understanding the relative importance of different sources of financing. â⬠¢It helps the analyst to formulate hypothesis about the most efficient business model by means of effective inter-firm comparisons. â⬠¢Common-size financial analysis can be used to compare a companyââ¬â¢s financial data with industry norms or average.
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