What Is a Common Size Balance Sheet?
A common size balance sheet is a balance sheet that displays both the numeric value and relative percentage for total assets, total liabilities, and equity accounts. Common size balance sheets are used by internal and external analysts and are not a reporting requirement of generally accepted accounting principles (GAAP).
- Common size balance sheets show numeric values and their relative percentages for total assets, liabilities, and equity accounts.
- This form of balance sheet is not required for generally accepted accounting principles (GAAP) reporting.
- The advantages of common size balance sheets are that they allow for quick comparison across line items against their total value, such as a single asset compared to the value of total assets.
- Common size balance sheets also allow internal and external stakeholders to analyze trend lines and see any major changes that may have occurred in the balance sheet.
Common Size Balance Sheet
What Is the Purpose of a Common Size Balance Sheet?
A common size balance sheet allows for the relative percentage of each asset, liability, and equity account to be quickly analyzed. Any single asset line item is compared to the value of total assets. Likewise, any single liability is compared to the value of total liabilities, and any equity account is compared to the value of total equity. For this reason, each major classification of account will equal 100%, as all smaller components will add up to the major account classification.
Common size balance sheets are not required under generally accepted accounting principles, nor is the percentage information presented in these financial statements required by any regulatory agency. Although the information presented is useful to financial institutions and other lenders, a common size balance sheet is typically not required during the application for a loan.
Although common-size balance sheets are most typically utilized by internal management, they also provide useful information to external parties, including independent auditors. The most valuable aspect of a common size balance sheet is that it supports ease of comparability. The common size balance sheet shows the makeup of a company's various assets and liabilities through the presentation of percentages, in addition to absolute dollar values. This affords the ability to quickly compare the historical trend of various line items or categories and provides a baseline for comparison of two firms of different market capitalizations. Additionally, the relative percentages may be compared across companies and industries.
Example of a Common Size Balance Sheet
A company has $8 million in total assets, $5 million in total liabilities, and $3 million in total equity. The company has $1 million in cash, which is part of its total assets. Here, the cash represents $1 million of the $8 million in total assets. Therefore, along with reporting the dollar amount of cash, the common size financial statement includes a column that reports that cash represents 12.5% ($1 million divided by $8 million) of total assets.
The common size balance sheet reports the total assets first in order of liquidity. Liquidity refers to how quickly an asset can be turned into cash without affecting its value. For this reason, the top line of the financial statement would list the cash account with a value of $1 million.
What Is the Common Size Balance Sheet Formula?
The common size balance sheet formula takes a line item divided by the base amount times 100 for a given period.
For the balance sheet, line items are typically divided by total assets. If Company A has $1,000 in cash and $5,000 in total assets this would be presented in a separate column as 20% in a common size balance sheet.
In income statements, line items are most often divided by total revenues or total sales. If Company A had $2,000 in operating expenses and $4,000 in total revenues, the operating expenses would be presented as 50%.
What Is Another Name for Common Size Analysis?
Common size analysis is used interchangeably with vertical analysis. This type of analysis is used to analyze a company's financial statements to identify patterns, trend lines, and compare a company against competitors. When figures are expressed as a percentage of a whole, analysts can assess how each part contributes relative to another.
What Are the Advantages of Common Size Balance Sheets?
While common size balance sheets are not a requirement of generally accepted accounting principles (GAAP), they offer a number of benefits to both internal and external parties. The main benefits are that they allow for quick comparison across line items, identifying patterns, spotting significant changes in a company's financial statement, comparing different sized companies in the same industry, and seeing the ratios of various line items as part of the total assets or total revenue of a company.