Common-size statements normalize balance sheets and income statements and allow the analyst to more easily compare performance across firms and for a single firm over time.
- A vertical common-size balance sheet expresses all balance sheet accounts as a percentage of total assets.
- A vertical common-size income statement expresses all income statement items as a percentage of sales.
In addition to the comparison of financial data across firms and time, common-size analysis is appropriate for quickly viewing certain financial ratios. For example, the gross profit margin, operating profit margin, and net profit margin are all clearly indicated within a common-size income statement.
- Vertical common-size income statement ratios are especially useful in studying trends in costs and profit margins.
Vertical common-size income statement ratios = Income statement account/sales
- Balance sheet accounts can also be convened to common-size ratios by dividing each balance sheet item by total assets.
Vertical common-size balance-sheet ratios = balance sheet account/ total assets
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