Common Size Statement Definition – Constructing Common Size Statement

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Common Size Statement Definition, Advantages and Limitations

Common size statement Definition 

A statement that provides the vertical percentages or ratios for financing data without giving rupee value are known as common size statements.

The Companies Act allows the comparison of two years figures of a firm. Companies must show their profit and loss account and balance sheet with the corresponding figures for the previous year. However, sometimes the figures do not signify anything as the head of items are incomparable. For valid comparison, it is must that years of comparison are same.

Advantages of Common Size Statement

Common size analysis reveals the sources of capital and all other sources of funds and the distribution or application of the total funds in the asset of a business enterprise.

  • Comparison of common size statement over a number of years will clearly indicate the changing proportion of the various components of asset, liabilities, costs, net sales and profits.
  • Comparison of common size statement of two or more enterprises in the same industry or
    that of an enterprise with the industry as a whole will assist corporate evaluation and
    ranking.

Limitations of Common Size Statement

  • These statements show percentage of each item to total sum but do not show variations in the individual items from period to period.
  • Many see Common size statement as useless statement as there are no standards.

Constructing Common Size Statement

Common size statement requires conversion of individual figures to percentage for providing a common base.

  • In balance sheet, the total of assets or liabilities is assume to be equal to 100 and all the
    figures are expressed as percentage of this total.
  • In profit and loss account, sales figure is taken as 100 and all other figure are expressed
    as percentage of sales.

Illustration 1:  To understand common size statement definition, let’s discuss an example. Prepare a common size Income Statement from the following Income statement of M/S Toshi Traders and interpret the same.

Particulars31st December 200031st December 2001
Gross Sales 10,30,000 12,42,000
Less: Sales returns 30,000 42,000
 Net sales 10,00,000 12,00,000
Less: Cost of goods sold 6,00,000 6,60,000
Gross profit 4,00,000 5,40,000
Less: Operating Expenses
Administrative Expenses 85,000 1,14,000
Selling Expenses 2,00,000 1,93,200
Total operating expenses2,85,0003,07,200
 Income from operations 1,15,000 2,32,800
 Add: Non-operating Income 24,000 34,200
 Total Income 1,39,000 2,67,000
 Less: Non-operating expenses 36,000 53,280
 Net Profit 1,03,000 2,13,720

Solution:

COMMON SIZE INCOME STATEMENT

solution

Working Notes: Calculate percentage on the basis of net sales.

Interpretation:

  • Cost of goods sold has reduced by 5% in 2001. This is due to reduction in cost of raw material. As a result of reduction the gross profit has increased from 40% to 45%.
  • Operating expenses have been decreases to 25.60 % . While income from operation increases from 11.50% to 19.40%

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