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Understanding Common Size Balance Sheet: How to create one

A common size balance sheet is necessary for analyzing the financial health of businesses. This allows for easy comparison of the financials of companies of different sizes, as it standardizes the presentation of the data. Learn details about a common-size balance sheet in this article by Viindoo Enterprise Management Software.  

What is a common size balance sheet?

A common size balance sheet is a financial statement that is used to analyze a company's financial position by presenting its assets, liabilities, and equity as a percentage of its total assets. It is an important tool for investors, analysts, and management teams to identify trends, evaluate financial performance, and make strategic decisions.

What is a common size balance sheet

What is a common-size balance sheet

Structure of the common-size balance sheet

To understand what is a common size balance sheet, it is important first to understand the basic structure of a balance sheet. A balance sheet in accounting is a snapshot of a company's financial position at a given point in time. It lists the company's assets, liabilities, and equity, and the total of the assets must equal the total of the liabilities and equity.

  • Assets are anything of value that a company owns, including cash, accounts receivable, inventory, property, and equipment. 
  • Liabilities are amounts owed to others, such as loans, accounts payable, and taxes. 
  • Equity represents the residual value of the assets after all liabilities have been paid off.

A common-size balance sheet takes the amounts listed on a traditional balance sheet and converts them into percentages of the total assets. For example, if a company has $100,000 in assets and $70,000 in liabilities, its common-size balance sheet would show liabilities as 70% of assets.

Structure of a common size balance sheet

Structure of a common-size balance sheet

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Why use common-size balance sheets?

The main advantage of a common-size balance sheet is that it allows for easy comparison of companies of different sizes. A company with $10 million in assets might look very different from a company with $1 billion in assets when looking at a traditional balance sheet. However, when the data are presented as percentages of total assets, it is easier to compare the two companies and identify trends.

Common size balance sheets have several advantages

Common-size balance sheets have several advantages

Another advantage of a balance sheet is that it can help identify areas of a company's financial position that may need attention. For example, if a company's inventory is a high percentage of its total assets, it may indicate that the company is not turning over its inventory quickly enough, which could lead to cash flow problems. Similarly, if a company has a high percentage of debt in relation to its assets, it may be over-leveraged and at risk of financial distress.

Using this balance sheet can also help investors and analysts identify trends over time. By comparing common-size balance sheets from multiple periods, stakeholders can see how a company's financial position has changed and identify areas of strength or weakness.

Example of a Common Size Balance Sheet

Calculating this balance sheet is a straightforward process. First, the total assets of the company are determined. Then, each item on the balance sheet is expressed as a percentage of the total assets. This is done by dividing each line item by the total assets and multiplying by 100.

Example of common size balance sheet calculation

Example of common-size balance sheet calculation

Here is a common size balance sheet example. In this case, a company has the following balance sheet:

Assets
                Cash: $50,000
                Accounts Receivable: $100,000
                Inventory: $150,000
                Prepaid Expenses: $10,000
                Property, Plant, and Equipment: $300,000
                                                                                       Total Assets: $610,000
Liabilities and Equity
                 Liabilities and Equity
                 Accounts Payable: $75,000
                 Accrued Expenses: $15,000
                 Notes Payable: $50,000
                 Long-Term Debt: $200,000
                 Common Stock: $100,000
                 Retained Earnings: $170,000
Total Liabilities and Equity: $610,000

Applying the common size balance sheet formula, we would divide each line item by the total assets and multiply by 100. The resulting common-size balance sheet would look like this:

Assets
                Cash: 8.20%
                Accounts Receivable: 16.39%
                Inventory: 24.59%
                Prepaid Expenses: 1.64%
                Property, Plant, and Equipment: 49.18%
                                                                                       Total Assets: 100%
Liabilities and Equity
                 Accounts Payable: 12.30%
                 Accrued Expenses: 2.46% 
                 Notes Payable: 8.20%
                 Long-Term Debt: 32.79%
                 Common Stock: 16.39%
                 Retained Earnings: 27.87%
Total Liabilities and Equity: 100%

From this common-size balance sheet, we can see that property, plant, and equipment account for the largest percentage of assets at 49.18%, followed by inventory at 24.59%. This suggests that the company may have a significant investment in fixed assets and inventory, which could impact its ability to quickly respond to changes in market demand.

We can also see that long-term debt represents the largest percentage of liabilities and equity at 32.79%. This suggests that the company has a significant amount of debt, which could impact its financial stability and ability to generate profits.

By analyzing the trends in common-size balance sheets over time, stakeholders can gain insights into the financial health of the company and make informed decisions about its future prospects.

common size balance sheet help get valuable insights into a financial position of a business

This balance sheet help get valuable insights into a financial position of a business

FAQ​

What is the common size balance formula?

Common size percentages = (Amount / Base amount) x 100.

In common size Balance Sheet , total of assets and liabilities is assumed to be equal to 100.

To determine common-size percentages, you can use the formula: (Amount / Base amount) multiplied by 100. It's important to note that when calculating common-size percentages, the base is total assets for the balance sheet and net sales for the income statement.

Common-size financial statements display all financial items as percentages of a base value. On the other hand, comparative financial statements present financial data for multiple years in parallel. This data can be presented in absolute values, percentages, or a combination of both.

In conclusion, a common size balance sheet is a powerful tool for analyzing a company's financial health. By analyzing trends in the common-size balance sheet over time, stakeholders can gain valuable insights into a company's financial position and make informed decisions about its future prospects. Hopefully, this article by Viindoo gives readers meaningful information about this concept.

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Understanding Common Size Balance Sheet: How to create one
Viindoo Technology Joint Stock Company, Trinh Thi Ngoc Anh March 31, 2023

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